VEBA may add non-union employees of member organizations

Plain-English summary

A voluntary employees’ beneficiary association asked whether it could add non-union common-law employees of member organizations to its health-benefit plan. The IRS concluded that the proposed participants shared an employment-related common bond with existing union-covered participants because they worked for member organizations in the same industry and geographic area. The addition would not jeopardize the VEBA’s tax-exempt status as long as at least 90% of participants remained covered by the collective bargaining agreement. The ruling applies only to the stated facts and representations.

Ruling snapshot

• Question: May the VEBA add non-union employees of member organizations without losing its IRC § 501(c)(9) exemption?
• Outcome: Approved
• Key authorities: IRC § 501(c)(9); Treas. Reg. §§ 1.501(c)(9)-2, 1.501(c)(9)-3, 1.419A, Q&A-2

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201415008
Release Date: 4/11/2014
Date: January 17, 2014

Contact Person:

Identification Number:

Uniform Issue List:

501.00-00 Telephone Number:
501.09-00

501.09-02 Employer Identification Number:
501.09-04

Legend:

Date 1 =

League =

Industry =

Members =

Tri-state Area =

Union =

Workers =

Dear :

We have considered your ruling request dated Date 1 and subsequent amendments, requesting
a ruling that the inclusion of certain employees will not adversely affect your status as a tax-
exempt Trust under Internal Revenue Code (“I.R.C.”) § 501(c)(9).

FACTS

You are a trust, tax-exempt under § 501(c)(9). You fund a voluntary employees’ beneficiary
association plan (“VEBA”).

You state that you currently provide health coverage to participants, who are covered under
collective bargaining agreements (“CBA”), and employed in the Industry.

You propose to add as new participants (“Proposed Participants”) to VEBA. Proposed
Participants consist of employees of Members. Members are members of League. You state
that Proposed Participants “all share an employment-related common bond with respect to the
individuals otherwise covered by the Fund’.

You state that Proposed Participants “consist solely of common law employees who: (1) are not
subject to the terms of a collective bargaining agreement (“CBA”) entered into with the (Union);
(2) are employed by organizations whose principals are full or lifetime members of the [League]
who are otherwise bound to a CBA with [Union] when employing [Workers]; (3) who work for

[League] located only in the [Tri-state Area].” You state that in other words, the Proposed
Participants “will be all non-union common law employees of eligible League organization. They

• will not include self-employed individuals, sole proprietors, partners, LLC members or any other
  individuals who are not common law employees of eligible [League] members. “

As a result, Proposed Participants, consist of employees of Members who are not covered
under a collective bargaining agreement (Members already has some employees covered under
the CBA who are present participants of the VEBA).

Last, you represent that the Proposed Participants will consist only of employees of Members
who work in the Tri-state Area. You will monitor closely the non-union participants of VEBA to
ensure that, at all times at least 90% of the VEBA’s participants are covered by a CBA with
Union in accordance with § 1.419A-2T, Q&A-2.

RULING REQUESTED
You requested the following ruling:

That the inclusion of the Proposed Participants located in the Tri-state Area will not adversely
impact your exempt status as a VEBA under § 501(c)(9).

LAW

I.R.C. § 501(a) provides that an organization described in subsection (c) or (d) or section 401(a)
shall be exempt from taxation under this subtitle (IRC Sections 1 et seq.) unless such exemption
is denied under §§ 502 or 503.

I.R.C. § 501(c)(9) provides that organizations exempt from income tax under section 501(a)
include a 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.

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
or their dependents, and substantially all of its operations must be in furtherance of providing
such benefits; and no part of the net earnings of the organization can inure (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. Employees of a labor union also will be considered to share
an employment-related common bond with members of the union, and employees of an
association will be considered to share an employment-related common bond with members of
the association. 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. Exemption will not
be denied merely because the membership of an association includes some individuals who are
not employees (within the meaning of paragraph (b) of this section), provided that such
individuals share an employment-related bond with the employee-members. Such individuals
may include, for example, the proprietor of a business whose employees are members of the
association. For purposes of the preceding two sentences, an association will be considered to
be composed of employees if 90 percent of the total membership of the association on one day
of each quarter of the association's taxable year consists of employees (within the meaning of
paragraph (b) of this section).

Treas. Reg. § 1.501(c)(9)-2(c)(1) provides, generally, that to be described in section 501(c)(9),
there must be an entity, such as a corporation or trust established under applicable local law,
having an existence independent of the member-employees or their employer.

Treas. Reg. § 1.501(c)(9)-2(c)(2) provides that generally, membership in an association is
voluntary if an affirmative act is required on the part of an employee to become a member rather
than the designation as a member due to employee status. However, an association shall be
considered voluntary although membership is required of all employees, provided that the
employees do not incur a detriment as a result of membership in the association.

Treas. Reg. § 1.501(c)(9)-2(c)(3) provides that a VEBA must be controlled by its membership;
by independent trustee(s); or by trustees or other fiduciaries at least some of whom are
designated by, or on behalf of, the membership.

Treas. Reg. § 1.501(c)(9)-3(a) 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.

Treas. Reg. § 1.501(c)(9)-3(b) through (g) detail the types of benefits that a tax-exempt VEBA
may provide and who is eligible to receive the benefits.

Treas. Reg. § 1.501(c)(9)-3(c) provides that the term “sick and accident benefits” means
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.

Treas. Reg. § 1.501(c)(9)-4(a) provides that no part of the net earnings of an employees’
association may inure to the benefit of any private shareholder or individual other than through
the payment of benefits permitted by § 1.501(c)(9)-3.

Treas. Reg. § 1-419A,Q&A-2(1) provides that for purposes of Q&A-1, a collectively bargained
welfare benefit fund is a welfare benefit fund that is maintained pursuant to an agreement which
the Secretary of Labor determines to be a collective bargaining agreement and which meets the
requirements of the Secretary of the Treasury as set forth in paragraph 2 below.

Treas. Reg. § 1-419A,Q&A-2(2) provides that notwithstanding a determination by the Secretary
of Labor that an agreement is a collective bargaining agreement, a welfare benefit fund is
considered to be maintained pursuant to a collective bargaining agreement only if the benefits
provided through the fund were the subject of arms-length negotiations between employee
representatives and one or more employers, and if such agreement between employee
representatives and one or more employers satisfies section 7701(a)(46) of the Code.
Moreover, the circumstances surrounding a collective bargaining agreement must evidence
good faith bargaining between adverse parties over the welfare benefits to be provided through
the fund. Finally, a welfare benefit fund is not considered to be maintained pursuant to a
collective bargaining agreement unless at least 50 percent of the employees eligible to receive
benefits under the fund are covered by the collective bargaining agreement.

Treas. Reg. § 1-419A,Q&A-2(4) provides that notwithstanding the preceding paragraphs and
pending the issuance of regulations setting account limits for collectively bargained welfare
benefit funds, a welfare benefit fund will not be treated as a collectively bargained welfare
benefit fund for purposes of Q&A-1 if and when, after July 1, 1985, the number of employees
who are not covered by a collective bargaining agreement and are eligible to receive benefits
under the fund increases by reason of an amendment, merger, or other action of the employer
or the fund. In addition, pending the issuance of such regulations, for purposes of applying the
50 percent test of paragraph (2) to a welfare benefit fund that is not in existence on July 1, 1985,
"90 percent” shall be substituted for "50 percent".

ANALYSIS

You seek to add to VEBA’s membership Proposed Participants who work only in the Tri-state
Area. Section 501(a) exempts from taxation, in pertinent part, organizations described in §
501(c). Section 501(c)(9) describes VEBAs as providing payment of life, sick, accident or other
benefits to their members.

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)
includes among others to coverage under one or more collective bargaining agreements (with
respect to benefits provided by reason of such agreement(s)).

You were established pursuant to a CBA between the League and Union for the purpose of
providing health coverage to participants employed in Industry. Under Treas. Reg. §
1.501(c)(9)-2(a)(1), employees covered under a collective bargaining agreement share an
employment-related common bond and are deemed as employees.

Further, exemption will not be denied merely because the membership of an association
includes some individuals who are not employees (within the meaning of paragraph (b) of this
section), provided that such individuals share an employment-related bond with the employee-
members. See Treas. Reg. § 1.501(c)(9)-2(a)(1), Thus, although Proposed Participants are not
deemed as employee because they are not covered under a CBA for the purpose of Treas.
Reg. § 1.501(c)(9)-2(a)(1), they still share an employment-related common bond with present
participants of VEBA (CBA covered employees) because both are employees of Members.

Further, an association will be considered to be composed of employees if 90 percent of the
total membership of the association on one day of each quarter of the association's taxable year
consists of employees (within the meaning of paragraph (b) of this section). See Treas. Reg. §
1.501(c)(9)-2(a)(1), Therefore, because 90% of total membership of VEBA on one day of each
quarter of VEBA’s taxable year must compose of participants who qualify as employees within
the meaning of Treas. Reg. § 1.501(c)(9)-2(a)(1), the addition of Proposed Participants who are
not covered under the CBA and who work only in the Tri-state Area to participate in VEBA will
not jeopardize your tax-exempt status as an organization described under § 501(c)(9).

You represent that at all times at least 90% of the individuals covered by VEBA are covered by
a CBA in accordance with § 1.419A-2T, Q&A-2. Under Treas. Reg. § 1-419A,Q&A-2(4), a
welfare benefit fund will not be treated as a collectively bargained welfare benefit fund for
purposes of Q&A-1 if and when, after July 1, 1985, the number of employees who are not
covered by a collective bargaining agreement and are eligible to receive benefits under the fund
increases by reason of an amendment, merger, or other action of the employer or the fund. In
addition, pending the issuance of such regulations, for purposes of applying the 50 percent test
of paragraph (2) to a welfare benefit fund that is not in existence on July 1, 1985, "90 percent"
shall be substituted for "50 percent". Thus, to continue to meet the employment-related common
bond requirement based as a collective bargaining agreement veba as provided under Treas.
Reg. § 1.501(c)(9)-2(a)(1), 90% of your participants must consist of employees covered under
the Union CBA.

RULING:

Based on the information submitted, representations made, and the authorities cited above, we
conclude that the inclusion of employees of Members of the League located in the Tri-state
Area not covered in the CBA with Union will not adversely impact your exempt status as a
VEBA under § 501(c)(9).

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.

This ruling is directed only to the organization that requested it. I.R.C. § 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 Internal Revenue Service, we
are sending a copy of this letter to your authorized representative.

Sincerely,

Ronald Shoemaker
Manager, Exempt Organizations
Technical Group 2

Enclosure
Notice 437