Voluntary Employees’ Beneficiary Association Plan (VEBA)

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 typically funded by an employer. While the popularity of VEBAs has waned, there are companies that continue to offer them.

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.

How VEBA Plans Work

VEBAs allow employers to provide benefits to employees on the condition that they follow certain guidelines. For instance, 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. 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 59½. Withdrawals from a VEBA are not required to begin at 72 years of age.

Beneficiaries must be employees, their dependents, or their designated beneficiaries. 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 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).

Important

To qualify under IRS rules, a VEBA’s mission must be centered on providing whatever benefits to beneficiaries (i.e., employees) are designated by the association.

Special Considerations

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.

Health Savings Accounts (HSAs) offer triple tax benefits in the form of tax-deductible contributions, tax-deferred growth, and tax-free withdrawals when funds are used to pay for qualified medical expenses.

Voluntary Employees’ Beneficiary Association FAQs

What’s a VEBA plan?

A voluntary employees’ beneficiary association (VEBA) plan is a type of tax-exempt trust that employers can offer to help employees with the cost of medical care. These plans are typically funded by the employer and governed under Internal Revenue Code Section 501(c)(9).

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 to participate in a VEBA.

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.