What is a Voluntary Employees Beneficiary Association Plan - VEBA
A voluntary employees' beneficiary association (VEBA) plan is a type of tax-exempt trust used by its members and eligible dependents to pay for eligible medical expenses. The plan is funded by an employer and does not require contributions from employees.
However, employees must be covered by an employer-sponsored health plan to be eligible for VEBA membership.
BREAKING DOWN Voluntary Employees Beneficiary Association Plan - VEBA
VEBA rules state that employers must first obtain a letter of determination from the Internal Revenue Service (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 (ERISA); however, they are not considered to be qualified retirement plans. Unlike in 401(k) or 403(b) plans, for example, participant withdrawals from a VEBA are not taxable if made before age 59.5. Withdrawals from a VEBA are not required to begin at age 70.5.
VEBA plans are considered to be welfare benefit plans under federal tax law and are tax-exempt under Section 501(c)(9) of the Internal Revenue Code. Employer contributions made to a VEBA plan are tax-deductible and have no limit. Funds in a VEBA grow tax-free and there are no tax penalties levied upon employees or VEBA members who take distributions from a VEBA for qualified medical expenses which often include copays, coinsurance and deductibles as well as dental and vision payments. These expenses are defined in section 213(d) of the Internal Revenue Code. Members can also use VEBA plans to fund post-retirement health insurance premiums.
How Does a VEBA Plan Work?
Even though these accounts are usually used as savings vehicles to fund health care expenses in retirement, employees can use money from their VEBAs to pay for qualified medical expenses while working. If account holders don't use money in their VEBA plans for a given year, that amount rolls over to the next year's balance.
A Post Deductible VEBA, for example, is designed to reimburse vision and dental expenses until a member meets his or her health plan deductible. After the deductible is met, members can be reimbursed for non-health plan related medical expenses. A Limited VEBA, however, can reimburse only medical and vision expenses. Meanwhile, money in a Post Employment VEBA can be used only after an individual has retired or left employment with the VEBA's sponsor.
When a VEBA plan is paired with a Health Savings Account (HSA), VEBA dollars will be limited toward eligible dental and vision expenses until individuals meet their medical health plan deductibles.