What is a 'Voluntary Employees Beneficiary Association Plan - VEBA'
A voluntary employees beneficiary association plan (VEBA) is a tax-free post-retirement medical expense account used by retirees and their eligible dependents to pay for any eligible medical expenses. The plan is funded by the amount of unused sick leave that an employee has at the time of retirement, which is contributed by the employer into the plan. The benefit of this plan is the amount of sick leave left at retirement is paid out in full to the plan and is not subject to tax, which would reduce the amount one would receive.
BREAKING DOWN 'Voluntary Employees Beneficiary Association Plan - VEBA'
VEBA plans are considered to be welfare benefit plans under federal tax law and are tax-exempt under Section 501c9 of the Internal Revenue Code. Contributions to a VEBA are therefore tax-deductible and the funds grow tax-deferred. There are no tax penalties for early distributions from the VEBA, and assets are protected from creditors.
Employers must first obtain a letter of determination from the IRS for their plan to be considered a VEBA for federal income tax purposes. VEBAs are subject to some aspects of the Employee Retirement Income Security Act of 1974 (ERISA); however, they are not considered to be qualified retirement plans. For example, unlike 401(k) or 403(b) plans, participant withdrawals from a VEBA are not taxable if made before age 59.5 And withdrawals from a VEBA are not required to begin at age 70.5.