What Is a Voluntary Employees’ Beneficiary Association (VEBA) Plan?

What Is a Voluntary Employees’ Beneficiary Association (VEBA) Plan?

Let me explain what a VEBA plan is: it's a tax-exempt trust that employers or groups of employees set up to handle eligible medical expenses for members, their dependents, or designated beneficiaries. You should know these are usually funded by the employer and fall under Internal Revenue Code Section 501(c)(9).

In these plans, employee contributions might be required or not, based on the company's setup, but you can't make individual elections. To join, you have to be covered by an employer-sponsored health plan, and the company must follow IRS rules for establishing and running the VEBA.

Key Takeaways

Here's what you need to grasp: a VEBA is a tax-exempt trust, often employer-funded, to assist with employees' medical expenses. These programs aren't as popular now, but some employers still provide them. Remember, employers need an IRS letter of determination for the plan to qualify for tax purposes. VEBAs follow some ERISA rules but aren't qualified retirement plans.

How a VEBA Plan Works

VEBAs let employers offer benefits if they meet specific requirements: it has to be a voluntary employee association, provide payments for life, sick, accident, or similar benefits to members, dependents, or beneficiaries, and use earnings only for administration and benefits, not for private gain.

These plans cover various benefits, with eligible medical expenses defined by the IRS, and each plan decides what to include and when to pay out. They're under some ERISA aspects but not retirement plans. Beneficiaries are employees, dependents, or designated ones, and benefits typically stop when you leave the company or union.

Be aware that not all VEBAs are identical—some cover current expenses, others only vision and dental, or just post-employment medical costs.

Taxation of VEBA Plans

For taxation, employers must get an IRS determination letter to qualify the plan under federal tax law; it's a welfare benefit plan, tax-exempt under Section 501(c)(9). Employer contributions are tax-deductible without limits, but benefits to employees might be taxable depending on the type.

Unlike 401(k) or 403(b) plans, VEBA withdrawals before age 59½ aren't taxable, and you don't have to start withdrawals at age 72.

Cashing Out of a VEBA

Funds in a VEBA grow tax-free, and there are no penalties for distributions used on qualified medical expenses like co-pays, deductibles, dental, vision, or even post-retirement health premiums—these are outlined in IRC Section 213(d). You can use the money while working or save it for retirement.

If you don't spend the money in a year, it rolls over to the next, so it's not a use-it-or-lose-it setup like an FSA.

Types of VEBA Plans

A VEBA can operate as a health reimbursement arrangement (HRA). For instance, a post-deductible VEBA reimburses vision and dental until you hit your deductible, then other medical expenses. A limited VEBA covers only medical and vision, while a post-employment one is for after you retire or leave.

When paired with an HSA, VEBA funds are restricted to dental and vision until the deductible is met.

Who Is Eligible for a VEBA?

To be eligible, your employer has to offer a VEBA, and you must be an active employee covered by their health insurance plan.

Is a VEBA an HRA?

HRAs let employers reimburse medical expenses, with rollovers and investment growth. By that, yes, a VEBA can be seen as a type of HRA.

What Is the Difference Between a VEBA and an HSA?

HSAs are for saving on qualified medical expenses tax-free, tied to high-deductible plans. The key difference is funding: VEBAs are mostly employer-funded, while HSAs can take both employer and employee contributions.

Can I Have a VEBA and an HSA?

Yes, if your employer offers both, you can have them. Just understand the rules on contributions, withdrawals, and taxes to maximize benefits.

The Bottom Line

In summary, a VEBA is a trust under IRC Section 501(c)(9) that aids in covering medical expenses, premiums, deductibles, and more. It provides tax advantages and security, and though less common now, some companies still use them.