Ask the Experts!
Here’s the question of the day.
Question: My client asked me about implementing a VEBA. How does that work?
Answer: A VEBA is not a separate benefit plan, but is a way for an employer to set aside money for benefits. The acronym VEBA stands for Voluntary Employee Benefit Association. The VEBA itself is a kind of fund—usually in a trust—that is the conduit for funding employee benefits.
The main reason that life insurance professionals have advocated VEBAs is because, they argue, VEBAs coupled with certain IRS Code provisions allow permanent life insurance to be purchased by a business on a tax deductible basis without the premium being included in the participants’ taxable income.
VEBA plans are highly technical, complex and, from our perspective, tax risky. In many cases, VEBAs have been paired with Section 419 planning to achieve the desired income tax results. The IRS has effectively outlawed Section 419 plans funded with permanent life insurance.
In addition to the tax risk, an employer implementing a VEBA must be willing to pay the administrative costs associated with setting up and maintaining a VEBA trust.
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