PLR 1221030: IRS approves a VEBA's expansion to state government employees

Plain-English summary

The IRS ruled that a voluntary employees' beneficiary association could expand its eligible membership from public-school employees to employees of any governmental unit in the same state without losing its tax-exempt status under IRC § 501(c)(9). The IRS concluded that the current and prospective members shared an employment-related common bond because their employers were governmental units in the same geographic area. The IRS also found that the association's board structure satisfied the membership-control requirement while a majority of members were represented by the sponsoring union. The ruling matters to VEBAs considering broader coverage for public-sector employees.

Ruling snapshot

• Question: Would expanding VEBA membership to employees of any state governmental unit adversely affect its § 501(c)(9) exemption?
• Outcome: Approved
• Key authorities: IRC § 501(c)(9); Treas. Reg. §§ 1.501(c)(9)-2(a)(1) and 1.501(c)(9)-2(c)(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: 201221030 Contact Person:

Release Date: 5/25/2012

Date: March 1, 2012 Identification Number:
XXXXKKXX Telephone Number:

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XXXXXKX Employer Identification Number:

Uniform Issue List

501.09-00
501.09-02
501.09-04

Legend:

Union
Association

Corporation
State

Dear

This is in response to your letter dated June 14, 2010 requesting rulings as to the Federal tax
consequences of the proposed transactions under § 501(c)(9) of the Internal Revenue Code
(Code) and applicable regulations.

FACTS:

You are exempt under § 501(a) and described as a § 501(c)(9) Voluntary Employees’
Beneficiary Association (“Plan”). You are managed by a board of trustees, 11 in number, all
appointed by Union’s directors.

You state that you were created by Union, a labor organization exempt from taxation under §
501(c)(5), whose members consists of employees of State’s public schools. Your tax-exempt
purpose is to provide health insurance, life insurance, disability insurance, and other benefits

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permitted under § 501(c)(9).

Your trust document (“Trust”) provides that members to whom you provide benefits consist of
“members of Union” and “employees of certain employers”. Pursuant to the Trust, these
“members of Union” consist of an individual who is a member of (i) Union or one of its affiliated
local associations of employees or (ii) a local association of employees that is affiliated with a
state association holding membership in Association. While the “employees of certain
employers” pursuant to the Trust consist of employers who are:

a. “Any school district which has executed a collective bargaining agreement with a local
association [teacher’s union affiliate affiliated with [Union] or other state teacher's union
affiliated with the [Association] which requires contributions to be made, on behalf of its
Employees to this Trust Fund”.

b. “Any school district, which has executed a collective bargaining agreement with any
union, which requires contributions to be made on behalf of any of its employees to this
Trust Fund”.

c. “Any school district, which, pursuant to agreement, is required to make payroll
deductions for the payment of contributions to the Trust”.

As a result, you provide benefits to school-district employees that consist of employees covered
under various collective bargaining agreements and employees not covered by a collective
bargaining agreement. You represent that for “school-district employees who are not members
of a collective bargaining unit (e.g., school principals and other administrators, support-staff
members, custodians, bus drivers), the district unilaterally (or by contract with employees
individually) determines what benefits the district will provide to the employees.” Thus, an
employee need not be covered under a collective bargaining agreement to participate in the
Plan.

At various times, and with the approval of the Internal Revenue Service (“Service”), you
amended the Trust and changed how you operate. Such changes, among others, include (a)
you expanded your membership beyond State to include three other states all connected by
geographical boundary (though, presently and since 1985, you represent that you no longer
permit membership outside State) and (b) you created a wholly-owned subsidiary, Corporation,
to write insurance policies on your behalf in order to avoid any conflict with any state insurance
requirement.

Recently, you amended the Trust and expanded your membership to include employees of any
governmental unit in State. Pursuant to the Trust, these governmental units include any State
“unit of government including but not limited to the state, each state agency, and any county,
city, village, town, school district, technical college district, other governmental unit, or
instrumentality of two or more units of government.” Thus, your prospective members will
consist primarily of employees of non-school governmental units in State.

The employees of these non-school governmental units of State will become your members
gradually “(as the various non-school governmental units agree in collective bargaining to

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provide [your] benefits to their employees) . . . .”

Other than your Trust document, you state that you will not to amend Union’s bylaws and
constitution because there is no reason to amend them. However, you represent that Union is
still a labor organization whose members consists and will always consist of only employees of
State public schools. Thus, Union will not become a labor organization for the employees of all
State’s governmental units.

Last, you state that presently Union appoints every trustee on your board. You plan to have
Union continue to appoint these trustees, at least until a majority of your members consists of
persons whom Union does not represent (employees of State governmental units other than
State public school employees). You represent that if required under § 501(c)(9), you will
amend the Trust to provide for non-members of Union to be represented on your board.

RULINGS REQUESTED:
Based on the above facts, you requested the following ruling:

That the expansion of your eligible members to include employees of any State unit of
government (not just the employees of State public schools) will not adversely affect your
tax-exempt status as an organization described under § 501(c)(9).

LAW:

Section 501(c)(9) provides for the exemption from federal income tax of voluntary employees’
beneficiary associations 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.

Former § 501(c)(10), prior to the Tax Reform Act of 1969, exempted voluntary employees’
beneficiary associations providing for the payment of life, sick, accident, or other benefits to the
members of such association or their dependents or their designated beneficiaries, if-

(A) admission to membership in such association is limited to individuals who are
officers or employees of the United States Government, and

(B) no part of the net earnings of such association inures (other than through such
payments) to the benefit of any private shareholder or individual.

As an example of a VEBA under former § 501(c)(10), Rev. Rul. 64-258 involved an organization
whose membership consisted of active-duty members of the U.S. Armed Forces within certain
pay grades.

The General Explanation of the Tax Reform Act of 1969, JCS-16-70 (Dec. 3, 1970), explained
the repeal:

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Under prior law, a voluntary employees' beneficiary association (exempt under sec.
501(c)(9)) providing life, sickness, accident and other benefits to members must have
derived 85 percent or more of its income from its members. With the imposition of the
tax on unrelated business income on organizations in this category (and also the
investment income tax referred to subsequently), Congress concluded that the 85
percent income test was no longer necessary. As a result, the tax-exempt status of
voluntary employees' beneficiary associations will not depend on whether or not they
meet the 85 percent test. This accords with the treatment of associations whose
members are United States Government employees (sec. 501(c)(10) under prior law).
For this reason, there is no substantive difference remaining between these two
provisions and the Act combines these two categories.

Treas. Reg. § 1.501(c)(9)-1 provides that for an organization to be described in § 501(c)(9), it
must be an employees’ association; membership in the association must be voluntary; the
organization must provide for the payment of life, sick, accident, or other benefits to its
members; and there can be no inurement (other than by payment of permitted benefits) to the
benefit of any private shareholder or individual.

Treas. Reg. § 1.501(c)(9)-2(a)(1) provides that the membership of an organization described in
§ 501(c)(9) must consist of individuals who become entitled to participate by reason of their
being employees and whose eligibility for membership is defined by reference to objective
standards that constitute an employment-related common bond among such individuals.
Typically, those eligible for membership in an organization described in section 501(c)(9) are
defined by reference to a common employer (or affiliated employers), to coverage under one or
more collective bargaining agreements (with respect to benefits provided by reason of such
agreement(s)), to membership in a labor union, or to membership in one or more locals of a
national or international labor union. For example, membership in an association might be open
to all employees of a particular employer, or to employees in specified job classifications
working for certain employers at specified locations and who are entitled to benefits by reason
of one or more collective bargaining agreements. In addition, employees of one or more
employers engaged in the same line of business in the same geographic locale will be
considered to share an employment-related bond for purposes of an organization through which
their employers provide benefits. Whether a group of individuals is defined by reference to a
permissible standard or standards is a question to be determined with regard to all the facts and
circumstances, taking into account the guidelines set forth in this paragraph.

Treas. Reg. § 1.501(c)(9)-2(c)(3) provides that an organization described in § 501(c)(9) must be
controlled (i) by its membership, (ii) by independent trustee(s) (such as a bank), or (iii) by
trustees or other fiduciaries at least some of whom are designated by, or on behalf of, the
membership. Whether control by or on behalf of the membership exists is a question to be
determined with regard to all of the facts and circumstances, but generally such control will be
deemed to be present when the membership (either directly or through its representative)
elects, appoints or otherwise designates a person or persons to serve as chief operating
officer(s), administrator(s), or trustee(s) of the organization.

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National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472 (1979) concluded that
the “same line of business” means “either an entire industry” or “all components of an industry
within a geographic area”.

In Hall, et al.v. Maine Mun. Employees Health Trust, 93 F. Supp. 2d 73 (2000), although the
case pertains to a different issue, the court noted and accepted the Service conclusion that
participants/employers of a VEBA were in the same line of business, hence shared an
employment-related common bond, and as such, merited tax-exempt status as an organization
described under § 501(c)(9). In Hall, et al., the members of the VEBA were municipal
government and nonprofit organization employers in Maine performing municipal functions. The
court agreed with the Service and noted in a footnote that, “Because all of the participants in the
VEBA are in the same line of business, the VEBA qualifies under the Internal Revenue Code as
a voluntary employees’ beneficiary association. See 26 U.S.C. § 501(c)(9)... .”

ANALYSIS:

You have requested a ruling on whether your expansion of your membership to include
employees of any governmental unit in and of State will adversely affect your tax-exempt status
as an organization described under § 501(c)(9).

Under Treas. Reg. § 1.501(c)(9)-2(a)(1), membership in an organization described under §
501(c)(9) must consist of individuals who become entitled to participate by reason of their being
employees and whose eligibility for membership is defined by reference to objective standards
that constitute an employment-related common bond among such individuals. Treas. Reg. §
1.501(c)(9)-2(a)(1) also provides that employees of one or more employers engaged in the
same line of business in the same geographic locale will be considered to share an
employment-related bond for purposes of an organization through which their employers
provide benefits.

You propose to expand your membership to include employees of any unit of government in
and of State. Your present members consist of members of Union, which consists of teachers,
teachers’ organizations and education-support professionals who are all employees of State’s
public schools.

The employees whom you now seek to include, as members of your Plan, must be employees
of any unit of government of State. You have expanded the defined term “Employer” to mean
not only the public school districts, but also as “any State unit of government including but not
limited to the state, each state agency, and any county, city, village, town, school district,
technical college district, other governmental unit, or instrumentality of two or more units of
government.” Thus, your present members and your prospective members will all be
employees of governmental units in and of State.

We find a dearth of precedent specifically addressing lines of business for government
employees for purposes of § 501(c)(9). We note, however, the potentially broad class of federal
employee membership for former 501(c)(10) organizations, the merger of this exemption

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provision into § 501(c)(9), and Congress’s reasoning in doing so. These considerations suggest
that the class of state and local government employees in State is a permissible line of business
of employees.

Therefore, as required under Treas. Reg. § 1.501(c)(9)-2(a)(1), the employers of your present
and prospective members are engaged in the same line of business (governmental units
employers) and are also located in the same geographical locale (all within State). See National
Muffler Dealers Association, Inc. v. United States, 440 U.S. 472 (1979). As your present and
prospective members’ employers are engaged in the same line of business in the same
geographical locale, your present and prospective members share an employment-related
common bond for purposes of meeting the membership requirement of § 501(c)(9). See Hall, et
al. v. Maine Mun. Employees Health Trust, 93 F. Supp. 2d 73 (2000).

Next, regarding how you will be controlled, under Treas. Reg. § 1.501(c)(9)-2(c)(3), whether
control by or on behalf of the membership exists is a question to be determined with regard to
all of the facts and circumstances, but generally such control will be deemed to be present when
the membership (either directly or through its representative) elects, appoints or otherwise
designates a person or persons to serve as chief operating officer(s), administrator(s), or
trustee(s) of the organization, or by trustees at least some of whom are designated by or on
behalf of the membership. Further, Treas. Reg. § 1.501(c)(9)-2(c)(3) provides that a plan will be
considered to be controlled by its membership if it is controlled by one or more trustees
designated pursuant to a collective bargaining agreement (whether or not the bargaining agent
of the represented employees bargained for and obtained the right to participate in selecting the
trustees).

Thus, to continue to meet the requirement of § 501(c)(9), your board must be representative of
your members. We find that your current board structure meets this requirement as long as a
majority of your members are represented by Union.

RULINGS:
Based on the information submitted, we rule as follows:
The expansion of your eligible members to include employees of any State unit of

government (not just the employees of State public schools) will not adversely affect your
tax-exempt status as an organization described under § 501(c)(9) of the Code.

This ruling will be made available for public inspection under § 6110 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.

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This ruling is directed only to the organization that requested it. Section 6110(k)(3) 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 Service, we are sending a
copy of this letter to your authorized representative.

Sincerely,

Theodore R. Lieber
Manager, Exempt Organizations
Technical Group 3

Enclosure
Notice 437