What Is a Voluntary Employees’ Beneficiary Association Plan (VEBA)?
A voluntary employees’ beneficiary association (VEBA) plan is a tax-exempt trust set up by employers or a group of employees to cover the eligible medical expenses of its members, their dependents, or designated beneficiaries. These plans are typically funded by the employer and governed under Internal Revenue Code Section 501(c)(9).
Employee contributions may or may not be mandatory depending on the company plan, although individual elections are not permitted. However, employees must be covered by an employer-sponsored health plan to be eligible for VEBA membership. Additionally, the company must observe rules established by the Internal Revenue Service (IRS) for creating and maintaining a VEBA.
- A voluntary employees’ beneficiary association (VEBA) plan is a tax-exempt trust typically funded by an employer to help employees pay for eligible medical expenses.
- This type of employee benefit program has waned in popularity over the years, though some employers still offer them.
- 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.
How Does a VEBA Plan Work?
VEBAs allow employers to provide benefits to employees on the condition that they abide by the following requirements:
- Be a voluntary association of employees
- Provide for payment of life, sick, accident, or other similar benefits to members or their dependents or designated beneficiaries
- Earnings must be used solely for the administration and payment of participant benefits and not line the pockets of private individuals or shareholders.
VEBAs can cover a wide range of benefits. Eligible medical expenses are determined by the IRS and each plan can vary in what it covers from this list and when payouts are made.
VEBAs are subject to some aspects of the Employee Retirement Income Security Act (ERISA); however, they are not considered to be qualified retirement plans. As mentioned above, beneficiaries must be employees, their dependents, or their designated beneficiaries. And VEBA benefits normally end when the employee leaves the company or labor union with which the VEBA is associated.
Not every VEBA plan is the same. Some may be available for current eligible expenses. Others, meanwhile, may only reimburse vision and dental costs or just cover medical costs incurred after you leave the job or retire.
Taxation of VEBA Plans
VEBA rules state that employers must first obtain a letter of determination from the IRS for their plan to be considered a VEBA for federal income tax purposes. These 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. However, benefits paid out to employees may, or may not, be taxable, depending on the type of benefit.
Unlike in 401(k) or 403(b) plans, for example, participant withdrawals from a VEBA are not taxable if made before age 59½. Withdrawals from a VEBA are not required to begin at 72 years of age.
Cashing Out of a VEBA
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 co-pays, co-insurance, 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.
Even though these accounts are usually used as savings vehicles to fund healthcare 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, then that amount rolls over to the next year’s balance. That means a VEBA is not a use-it-or-lose-it plan, unlike a Flexible Spending Account (FSA).
A VEBA is not a use-it-or-lose-it plan: if account holders don’t use money in their plans for a given year, then that amount rolls over to the next year’s balance.
Types of VEBA Plans
A VEBA can also act as a type of health reimbursement arrangement (HRA).
A post-deductible VEBA, for example, is designed to reimburse vision and dental expenses until a member meets their 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.
Who Is Eligible for a VEBA?
To be eligible for a VEBA plan, your employer must offer one. Also, you must be an active employee and be covered by your employer’s health insurance plan.
Is a VEBA an HRA?
Health reimbursement arrangements (HRAs) allow employers to reimburse employees for certain medical expenses. Employees can roll over contributions year to year while investing contributions for growth. Under that definition, a VEBA can be considered a type of HRA.
What Is the Difference Between a VEBA and an HSA?
Health Savings Accounts (HSAs) allow you to save for qualified medical expenses on a tax-advantaged basis. These accounts are associated with high-deductible health plans. The main difference between a VEBA and an HSA is how they’re funded. VEBAs are funded only by the employer in most cases, while HSAs can be funded with employer and employee contributions.
Can I have a VEBA and an HSA?
Yes, depending on the options offered by your employer, it is possible to have both a VEBA and an HSA. If you have both, it’s important to understand the rules for contributions, withdrawals, and taxation to ensure that you’re making the most of these benefits.
The Bottom Line
A VEBA plan is a trust fund governed under Internal Revenue Code Section 501(c)(9) that helps employees cover the cost of certain medical expenses, insurance premiums, health insurance deductibles, and so on. These plans can be very advantageous, offering tax benefits and security for workers, and, despite waning in popularity, there are companies out there that continue to offer them.