PLR 1131028: VEBA may cover former spouses and limited impermissible benefits

Plain-English summary

The IRS ruled that a jointly administered employee-benefit fund could provide health coverage to former spouses who qualify as dependents under the tax rules. The fund could also provide health benefits to former spouses who were not dependents without losing its section 501(c)(9) exemption, provided those impermissible benefits remained at three percent or less of all benefits paid in the plan year. The fund had to include the fair market value of coverage for nondependent former spouses in the applicable members’ or employees’ gross income. The ruling was based on the fund’s representations about separate accounting and the amount of impermissible benefits.

Ruling snapshot

• Question: May the VEBA provide benefits to former spouses, including limited benefits to nondependent former spouses, without jeopardizing its exemption?
• Outcome: approved
• Key authorities: IRC §§ 104(a)(3), 105, 106, 152, and 501(c)(9); Treas. Reg. §§ 1.106-1 and 1.501(c)(9)-3.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201131028 Contact Person:
Release Date: 8/5/2011
Date: May 12, 2011 Identification Number:

UIL: 501.09-00 Telephone Number:
501.09 -01
Employer Identification Number:

Legend:
Fund =

Union =

Dear

This is in reply to your letter of July 8, 2008 submitted on behalf of Trust,
requesting a ruling concerning whether providing benefits to the former spouses of its
participants will adversely affect Trust’s exemption under section 501(c)(9) of the
Internal Revenue Code (the “Code”).

The Fund is a jointly trusted multi-employer, fringe benefit fund established by
the Union, and signatory Employers, for the purpose of providing insurance benefits
under section 501(c)(9) of the Code.

The Fund currently provides medical, hospital, surgical benefits, prescription drug
coverage, accidental death and related insurance, life insurance, disability, vision,
dental, legal services and supplemental accident benefits to the Union’s members and
eligible dependents.

The Fund was established as a part of a larger scheme of providing a fringe
benefit package to the Union’s members. The Fund would like to assist its participants
by continuing to provide health care coverage to their spouses, even after divorce,
through the related insurance fund. The trustees approved a motion to allow court-
ordered continuation coverage for ex-spouses to be maintained under the eligible
participant's account. The coverage is to be provided only to the participant's ex-
spouse if that participant was ordered to pay for coverage under the terms of a qualified
divorce judgment. The coverage will be provided for whatever period is specified in the

judgment, unless the former spouse remarries.

The Fund represents that it will maintain separate accounting for health benefits
and group life insurance benefits. The Fund also represents that the fair market value
of the health coverage for former spouses will be included in the participant's gross
income.

RULINGS REQUESTED

1. The Fund meets the tax-exempt requirements of section 501(c)(9) of
   the Code if it provides permissible benefits, without limitation, to former
   spouses who are dependents within the meaning of section 152 of the
   Code and section 1.501(c)(9)-3(a) of the regulations.

2. The Fund’s tax-exempt status under section 501(c)(9) of the Code will
   not be jeopardized if impermissible benefits are provided to former
   spouses who are not dependents within the meaning of section 152 of
   the Code and section 1.501(c)(9)-3(a) of the regulations, as long as the
   total amount of impermissible benefits is three percent or less of the
   total of all benefits paid to all beneficiaries of the Fund in the plan year.

LAW

Section 104(a)(3) of the Code provides that, except in the case of amounts
attributable to (and not in excess of) deductions allowed under section 213 (relating to
medical expenses) for any prior taxable year, gross income does not include amounts
received through accident or health insurance (or through an arrangement having the
effect of accident or health insurance) for personal injuries or sickness (other than
amounts received by an employee, to the extent such amounts (A) are attributable to
contributions by the employer which were not included in the gross income of the
employee, or (B) are paid by the employer).

Section 105(a) of the Code provides that, except as otherwise provided in section
105, amounts received by an employee through accident or health insurance for
personal injuries or sickness shall be included in the gross income to the extent such
amounts (1) are attributable to contributions by the employer which were not includable
in the gross income of the employee, or (2) paid by the employer.

Section 105(b) of the Code provides that, except in the case of amounts
attributable to (and not in excess of) deductions allowed under section 213 (relating to
medical expenses) for any prior taxable year, gross income does not include the
amounts referred to in subsection (a) if such amounts are paid, directly or indirectly, to

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the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical
care (as defined in section 213(d)) of the taxpayer, his spouse, and his dependents (as
defined in section 152).

Coverage under an accident or health plan for personal injuries or sickness
incurred by individuals other than the employee, his or her spouse, or his or her
dependents, as defined in section 152, is not excludable from the employee’s gross
income under section 106. In addition, reimbursements received by the employee
through an employer-provided accident or health plan are not excludable from the
employee’s gross income under section 105(b) unless the reimbursements are for
medical expenses incurred by the employee, his or her spouse, or his or her
dependents, as defined in section 152. However, reimbursements that are not
excludable under section 105(b) may be excludable under section 104(a)(3) if they are
attributable to employer contributions that were included in the employee's gross
income.

Section 106 of the Code provides that an accident or health plan is an
arrangement for the payment of amounts to employees in the event of personal injuries
or sickness.

Section 1.106-1 of the regulations provides that the gross income of an employee
does not include contributions which his employer makes to an accident or health plan
for compensation (through insurance or otherwise) to the employee for personal injuries
or sickness incurred by him, his spouse, or his dependents, as defined in section 152.

Section 501(c)(9) of the Code provides that the organizations exempt from
income tax under section 501 (a) of the Code include a voluntary employees’ beneficiary
association (VEBA) providing for the payment of life, sick, accident or other benefits to
the members of such association or their dependents or designated beneficiaries, if no
part of the net earnings of such association inures (other than through such payments)
to the benefit of any private shareholder or individual.

Section 1.501(c)(9)-3(a) of the regulations provides that, for purposes of section
501(c)(9) of the Code, dependent means the member's spouse; any child of the
member or the member’s spouse who is a minor or a student; any other minor child
residing with the member; and any other individual who an association, relying on
information furnished to it by a member, in good faith believes is a person described in
section 152(a) of the Code. It also provides that the life, sick, accident or other benefits
provided by a VEBA must be payable to its members, their dependents, or their
designated beneficiaries and that a VEBA is not operated for the purpose of providing
life, sick, accident, or other benefits unless substantially all of its operations are in
furtherance of the provision of such benefits. Further, an organization is not described
in section 501(c)(9) if it systematically and knowingly provides benefits (of more than a

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de minimis amount) that are not permitted by paragraphs (b), (c), (d), or (e) of this
section.

Sections 1.501(c)(9)-3(b) through (e) of the regulations detail the types of
benefits that a tax-exempt VEBA may provide as well as who is eligible to receive the
benefits. These benefits include life, sick and accident, and certain other benefits
(“permissible benefits”).

Section 1.501(c)(9)-3(b) defines a life benefit as a benefit (including a burial
benefit or a wreath) payable by reason of the death of a member or dependent.

Section 1.501(c)(9)-3(c) defines sick and accident benefits to mean amounts
furnished to or on behalf of a member or a member’s dependents in the event of illness
or personal injury to a member or dependent.

Section 1.501(c)(9)-3(d) provides that the term other benefits includes only
benefits that are similar to life, sick, or accident benefits. A benefit is similar to a life,
sick, or accident benefit if:

(1) It is intended to safeguard or improve the health of a member or a member's
dependents, or

(2) It protects against a contingency that interrupts or impairs a member's
earning power.

Section 1.509(c)(9)-3(f) provides examples of nonqualifying benefits, which are
benefits not described in paragraphs (d) or (e) as being other benefits.

Section 152(a) provides in general that the term “dependent” means; (1) a
qualifying child, or (2) a qualifying relative.

ANALYSIS
Ruling One

The issue is whether Fund may maintain its tax exempt status under section
501(c)(9) of the Code if it provides health benefits to ex-spouses under a judgment of
divorce who meet the definition of dependent under section 152(a) of the Code and
section 1.501(c)(9)-3 of the regulations.501(c)(9) of the Code.

Section 152(a) of the Code defines the term “dependent” to include, among
others, any of the following individuals over half of whose support, for the calendar year
in which the taxable year of the taxpayer begins, was received from the taxpayer: sons

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and daughters; stepsons and stepdaughters; nieces and nephews; aunts and uncles; in-
laws; and an individual (other than the spouse) who, for the taxable year, has as his/her
principal place of abode the home of the taxpayer and is a member of the taxpayer's
household. Section 1.501(c)(9)-3(a) of the regulations allows a tax-exempt VEBA to
provide permissible benefits to individuals “who an association, relying on information
furnished to it by a member, in good faith believes is a person described in section
152(a) of the Code.”

Fund may provide permissible benefits to former spouses who meet the definition
of dependent set forth in section 152(a) of the Code. Section 501(c)(9) regulations
require Fund to obtain information to determine whether former spouses meet the
definition of dependent. Under these circumstances, Fund does not jeopardize its tax-
exempt status under section 501(c)(9) of the Code by providing permissible benefits to
former spouses who meet the definition of dependent set forth in section 152(a) of the
Code and as dependents within the meaning of section 1.501(c)(9)-3(a) of the
regulations. Any permissible benefits provided to dependents are not “impermissible”
benefits described in section 1.501(c)(9)-3(a) of the regulations.

Ruling Two:

The issue is whether Fund may provide impermissible benefits to non-dependent
former spouses pursuant to a judgment of divorce without adversely affecting Fund’s
tax-exempt status under section 501(c)(9) of the Code.

Section 1.501(c)(9)-3(a) of the regulations allows an exempt VEBA to provide a
de minimis amount of benefits that are not permitted by paragraphs (b), (c), (d), or (e) of
section 1.501(c)(9)-3(a). The Fund describes the amount of benefits it will provide to
former spouses of participants as de minimis. The Fund represents that the total
amount of impermissible benefits it will provide in a plan year, including health benefits
to non-dependent former spouses, will not exceed three percent of the total of all
benefits it provides in the plan year to all beneficiaries of the Fund. Under these facts,
Fund providing impermissible benefits of three percent or less of the total of all benefits
provided by Fund in a plan year will not adversely affect the tax-exempt status of the
Fund under section 501(c)(9) of the Code.

RULINGS

Based on the information submitted, representations made, and the authorities cited
above, we conclude as follows:

1. The Fund meets the tax-exempt requirements of section 501(c)(9) of the
   Code if it provides permissible benefits, without limitation, to domestic
   partners who are dependents within the meaning of section 152 of the Code

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and section 1.501(c)(9)-3(a) of the regulations.

2. The Fund may provide benefits to former spouses who are not dependents
   within the meaning of section 152 of the Code and section 1.501(c)(9)-3(a) of
   the regulations without adversely affecting Fund’s tax-exempt status under
   section 501(c)(9) of the Code provided the total amount of impermissible
   benefits provided by the Fund in a plan year is three percent or less of the
   total of all benefits provided by the Fund in the plan year to all beneficiaries.
   In addition, the Fund will, in accordance with applicable law, include in the
   gross income of members or employees the fair market value of the health
   coverage for former spouses who are not dependents of the participants or
   employees.

This ruling will be made available for public inspection under section 6110 of the
Code after certain deletions of identifying information are made. For details, see
enclosed Notice 437, Notice of Intention to Disclose. A copy of this ruling with deletions
that we intend to make available for public inspection is attached to Notice 437. If you
disagree with our proposed deletions, you should follow the instructions in Notice 437.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of
the Code provides that it may not be used or cited by others as precedent.

This ruling is based on the facts as they were presented and on the understanding that
there will be no material changes in these facts. This ruling does not address the
applicability of any section of the Code or regulations to the facts submitted other than
with respect to the sections described. Because it could help resolve questions
concerning your federal income tax status, this ruling should be kept in your permanent
records.

If you have any questions about this ruling, please contact the person whose
name and telephone number are shown in the heading of this letter.

In accordance with the Power of Attorney currently on file with the Internal
Revenue Service, we are sending a copy of this letter to your authorized representative.

Sincerely,

Theodore Lieber
Manager, Exempt Organizations
Technical Group 3

Enclosure
Notice 437