Funding employee benefits through VEBA


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Funding Employee Benefits through VEBA

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Funding employee benefits through VEBA

  1. 1. Funding Benefits through VEBADr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt) Professor 1
  2. 2. What is VEBA?Purpose:VEBA is Voluntary Employees’ Beneficiary AssociationA tax-exempt trust to fund life, health, accident or other benefits to its membersGenerally employers make deposits into VEBA trust to provide specified employee benefits in futureBoth employers and employees can start VEBATax Status:Funds held and interests earned by trust are generally not taxable though benefits paid may be sometimes taxableEmployers’ contributions can be tax deductible 2
  3. 3. When VEBA is used?When employer wants : To provide benefit security for all covered employees by placing funding amounts in a trust To ensure benefits to employees, those are beyond reach of company creditors To accelerate deductibility of employee benefit costs by pre-funding, where permissible 3
  4. 4. Advantages of VEBACan use certain employer-funded whole life insurance policies to fund death benefitUse of irrevocable trust enhances benefit security for individual employees 4
  5. 5. Disadvantages of VEBAInstallation and administration of VEBA can be complex and costlyWith multiple-employer plan, employer loses control over plan design, investments & tax consequencesCareful plan design needed to avoid overfunding & potential loss of funding intended for owner-employees 5
  6. 6. Who Must be Covered?Must cover more than one employeeBest to cover all employeesEach plan funded through VEBA may have its own coverage requirementsPlans providing disproportionate share of benefits to owner-employee will generally not be tax-exempt 6
  7. 7. Kinds of Benefits ProvidedLife insurance before and after retirementSurvivor benefitsSick and accident benefitsOther benefits- vacation- recreation- severance benefits- unemployment and job training benefits and- disaster benefits 7
  8. 8. Kinds of Benefits Can Not Be Provided Savings, retirement, or deferred compensation plans Coverage of expenses not related to maintenance of employee’s earning power - commuting expenses, - accident or homeowner’s insurance covering property damage 8
  9. 9. VEBA Must ComplyNondiscrimination rules for that specific planNondiscrimination rules limits VEBA benefit to $245,000 9
  10. 10. Taxation of EmployeesGenerally same as without VEBAPremium payments or funding deposits usually not taxable to employeeBenefits payable to employee or beneficiaries usually subject to same tax treatment as if they were paid directly by employer 10
  11. 11. Taxation of EmployeesIf VEBA includes life insurance plan: Value of life insurance protection is taxable For group term plan, cost of first $50,000 of protection is tax free to employee Amounts above $50,000 are taxed Group term life proceeds income tax free to beneficiaries Life insurance held by VEBA can be kept out of participant’s estate 11
  12. 12. Taxation of VEBAIncome from VEBA exempt from regular income tax if requirements of rules are metMust notify IRS to obtain treatment as tax-exempt VEBAVEBA income set aside for benefits & administration in excess of limits, is subject to taxation as “unrelated business taxable income” (UBTI) 12
  13. 13. Taxation of VEBAUBTI rules apply even if VEBA is part of a 10-or- more employer planFunding with life insurance or tax-free investment vehicles can eliminate or minimize UBTI exposure 13
  14. 14. Employer’s DeductionEmployer can deduct reasonable contributions to fund benefits through VEBADeductions typically subject to same limits as if provided directly 14
  15. 15. ERISA and VEBA Benefits• Employee Retirement Income Security Act (ERISA) treatmentof benefits through VEBA is same as treatment of any individualbenefit plan funded by other means• Use of VEBA does not create or change requirements otherwiseapplicable to benefit plan 15
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