1. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 What is it? A type of fund into which employers make deposits that will be used to provide specified employee benefits in the future

2. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 When is it indicated? When employer wants to: –Provide benefit security for all covered employees by placing funding amounts in a trust that is for the exclusive benefit of employees and beyond reach of company creditors –Accelerate deductibility of employee benefit costs by pre- funding, where permissible

3. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 Advantages Can use certain employer-funded whole life insurance policies to fund death benefit (however, DOL and some state regulators may challenge this practice) Use of irrevocable trust enhances benefit security for individual employees

4. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Disadvantages Installation and administration of VEBA can be complex and costly With multiple-employer plan, employer loses some control over plan design, investments, and tax consequences Careful plan design needed to avoid overfunding and potential loss of funding intended for owner- employees

5. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 VEBA Design Issues: Who Must be covered? In general: –Must cover more than one employee –Best to cover all employees; excluding employees makes plan subject to overlapping, complex, unclear rules designed to prevent discrimination –Each plan funded through a VEBA may have its own coverage requirements with various consequences for failing to have broad coverage –Plans providing disproportionate share of benefits to owner- employee will generally not be tax-exempt

6. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 VEBA Design Issues: What kinds of benefits can be provided? Permitted VEBA benefits: –Life insurance before and after retirement –Other survivor benefits –Sick and accident benefits –Other benefits (e.g. vacation, recreation, some severance benefits, unemployment and job training benefits and disaster benefits)

7. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 VEBA Design Issues: What kinds of benefits can be provided? Prohibited VEBA benefits: –Savings, retirement, or deferred compensation plans –Coverage of expenses not related to maintenance of employee’s earning power (e.g. commuting expenses, accident or homeowner’s insurance covering property damage)

8. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 VEBA Design Issues: What kinds of benefits can be provided? Any plan funded through a VEBA must comply with: –Nondiscrimination rules for that specific plan –VEBA benefit nondiscrimination rules of Section 505 (e.g., Section 505(b)(7) limits compensation used in plan’s benefit formula to $245,000, as indexed, for 2009)

9. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Tax Implications: Taxation of Employees Generally the same as without a 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. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 Tax Implications: Taxation of Employees If VEBA includes a life insurance (death benefit) plan: –Value of life insurance protection is taxable (measured by Table 2001 rates or other applicable measure) –For group term plan under Section 79 rules, cost of first $50,000 of protection is tax free to employee; amounts above $50M are taxed at Table 2001 rates –Group term life proceeds are income tax free to beneficiaries –Unclear whether whole life policies are entirely income tax free or taxed as if under qualified plan –Life insurance held by VEBA can be kept out of participant’s estate

11. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Tax Implications: Taxation of the VEBA Income from VEBA exempt from regular income tax if requirements of Section 501(c)(9) and Section 505 are met Must notify IRS to obtain treatment as tax-exempt VEBA VEBA income set aside for benefits and administration in excess of Section 419A account limits is subject to taxation as “unrelated business taxable income” (UBTI)

12. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 Tax Implications: Taxation of the VEBA UBTI rules apply even if VEBA is part of a 10-or-more employer plan under Section 419A(f)(6) Funding with life insurance or tax-free investment vehicles can eliminate or minimize UBTI exposure.

13. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 Tax Implications: Employer’s Deduction Generally, an employer can deduct actuarially reasonable contributions to fund benefits through the VEBA Deductions typically subject to same limits as if provided directly

14. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 ERISA and Other Requirements ERISA treatment of benefits through VEBA is same as treatment of any individual benefit plan funded by other means Use of VEBA does not create or change requirements otherwise applicable to the benefit plan

15. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 True or False? 1.A VEBA can be set up as either a trust or a corporation. 2.Installation and administration of a VEBA is relatively simple and inexpensive. 3.VEBAs are often used to fund benefits for just highly compensated employees. 4.A savings plan is a permitted VEBA benefit.

16. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 True or False? 5.Vacation and recreation benefits are permitted VEBA benefits. 6.Whole life or other cash value life insurance products can be used to fund a death benefit in a VEBA. 7.Use of a VEBA reduces the number of ERISA requirements that must be met.

17. VEBA Welfare Benefit Trust Chapter 59 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 Discussion Question What is a 419(f)(6) plan and its relationship to a VEBA?