The Wagner Law Group
Wagner Law Group, A Professional Corporation, is a nationally
recognized ERISA & employee benefits, estate planning,
employment, labor & human resources practice.
in 1996, The Wagner Law Group has 22 attorneys engaged
exclusively in employee benefits, estate planning and
employment law. Six of our attorneys are AV rated by
Martindale-Hubbell as having very high to preeminent legal abilities
and ethical standards. The firm is among the largest ERISA boutiques
in the country. Our practice is national in scope, with clients in
more than 40 states and several foreign countries.
Wagner Law Group
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February 11, 2016
Health and Welfare Law
IRS Issues Guidance on
released guidance to address when assets held in a voluntary employee
beneficiary association ("VEBA") to fund one type of
welfare benefit are reallocated to fund other benefits under the
Background. The Internal Revenue Code allows employers
to prefund certain welfare benefits through VEBAs as long as they
follow certain rules and stay within specified funding limits.
To ensure that employers follow applicable funding limits, the Code
subjects excess VEBA assets to unrelated business income tax
("UBIT"). Thus, employers often try spend down VEBA
surpluses, including reallocating excess VEBA assets to fund other
are also subject to a 100% excise tax on VEBA assets that
revert to, or are used for the benefit of, the employer.
previously issued a number of private letter rulings
("PLRs") confirming that the 100% excise tax does not apply
to a transfer of benefits funds and liabilities between VEBAs.
However, these earlier PLRs also explain that:
amounts contributed to a VEBA for one type of benefit to
subsequently fund another type of benefit may trigger the
"tax benefit" rule if the new use is fundamentally
inconsistent with the original use.
(NOTE: Under the tax
benefit rule, a taxpayer who received a tax benefit from a deduction
in an earlier tax year generally must recognize income in a later
year if an event occurs that is fundamentally inconsistent with the
premise of the initial deduction.)
reallocation of VEBA assets may be deemed a
"reversion," thereby subjecting the employer to the
100% excise tax on the amount used to fund the new
IRS has released two PLRs regarding VEBA funds that were originally
intended to pay for retiree health benefits but will now be
reallocated to provide health benefits for active employees.
An employer sponsoring a VEBA will segregate the reallocated amount
in a separate subpart of the trust to pay active employees' health
benefits. While the employer acknowledged that it would be
required to recognize the reallocated amount as income under the tax
benefit rule, it asked IRS to confirm that the reallocation would not
result in a reversion subject to the 100% excise tax.
In response, IRS ruled that:
- The tax
benefit rule would apply because the employer had deducted the
contributions for retiree medical benefits and that making those
amounts available to fund benefits for active employees was
fundamentally inconsistent with the premise for the
- Using VEBA
assets to provide health benefits to active employees would not
make the employer liable for the reversion excise tax because no
portion of the VEBA would revert to the employer.
An employer that sponsored a VEBA which exclusively provided retiree
medical benefits wanted to amend the trust to also provide active
employees' health benefits and thereby spend down excess
assets. The employer requested the IRS to rule that the
amendment and reallocation of assets for health benefits for active
employees would not result in a "prohibited inurement,"
which otherwise could disqualify the VEBA. (NOTE: Under
the Code, there can be no inurement to any private shareholder or
individual resulting from the operation of the VEBA.)
IRS ruled that the reallocation would neither
result in a prohibited inurement to the employer nor cause the trust
to fail to be a VEBA.
Takeaway for Employers. In view of the rulings provided in the
PLRs, employers that have previously considered reallocating VEBA
assets to fund other permissible benefits should take a fresh look at
the issue. Employers interested in using this strategy,
however, should keep in mind the following:
PLRs may only be relied upon by the recipient.
ERISA-covered benefit plans, all affected benefits generally
must be provided under the same ERISA plan (and the plan needs
to permit reallocation) to satisfy ERISA's exclusive benefit
- Although, in
the first PLR, the employer must recognize income under the tax
benefit rule, this same amount may be deducted from the
employer's income when it is used to fund active employees'
The PLRs are available at:
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