Asset transfer from overfunded VEBA preserves exempt status

Plain-English summary

Two voluntary employees' beneficiary associations had been funded entirely by employers to provide welfare benefits for different categories of employees. One VEBA transferred its obligations for inactive and retired employees in one category to the other trust, leaving the transferring VEBA overfunded and the receiving trust underfunded by the same redacted amount. The overfunded VEBA proposed transferring the excess assets and represented that no beneficiary would receive fewer or lower-quality benefits. The IRS found that both organizations would continue using substantially all operations to provide permissible life, health, accident, and related benefits. Because the transfer did not violate the VEBA requirements or create prohibited private inurement, it would not adversely affect the transferor's § 501(c)(9) status. The ruling did not address tax consequences for contributing employers.

Ruling snapshot

• Question: Would an overfunded VEBA's transfer of excess assets to another VEBA after a related transfer of benefit obligations harm its exempt status?
• Outcome: Approved, exempt status preserved
• Key authorities: IRC §§ 501(a) and 501(c)(9); Treas. Reg. §§ 1.501(c)(9)-1 and 1.501(c)(9)-4(a)

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Contact Person:
Number: 201450028
Release Date: 12/12/2014 Identification Number:

Telephone Number:

Date: September 16, 2014
Taxpayer Identification Number:

U.I.L.: 501.09-00

Legend:

Trust =

Category P Employees =
Category C Employees =
x =

Dear

We have considered your ruling request dated October 3, 2013, concerning the tax
consequences under § 501(c)(9) of the Internal Revenue Code of the proposed transfer of $x
from you to Trust.

Facts:

Trust was established to provide benefits to active and recently retired Category P Employees.
You were established to provide benefits to inactive vested Category P Employees, retired
Category P Employees, and active and inactive vested Category C Employees. Both you and
Trust were recognized by the Internal Revenue Service as organizations described as voluntary
employees’ beneficiary associations (“VEBAs”) under § 501(c)(9).

You have represented that all of your assets and the assets in Trust were contributed by the
employers of Category P and C Employees, and no contributions were made by a beneficiary of
either you or Trust. You ceased to have an obligation to provide benefits for inactive vested and
retired Category P Employees, and this obligation was placed on Trust. As a consequence, the
only benefit provided by you is life insurance for active and inactive vested Category C
Employees. Before this change, the obligation of Trust was limited to providing medical, dental,
prescription drug, life insurance and accidental death and dismemberment insurance benefits
for active and recently retired Category P Employees. The purpose of the transfer was to
consolidate the obligation to provide welfare benefits to active and retired Category P
Employees, and only Category P Employees, under a single trust — Trust. Certain of the benefit
programs provided through Trust are administered pursuant to a collective bargaining
agreement.

You have represented that as a result of the transfer of the obligation to provide welfare benefits
for retired Category P Employees from you to Trust, you have assets in excess of your needs
for the foreseeable future. You propose to transfer $x of these excess assets to Trust. You
have also represented that if this proposed transfer of assets is approved and implemented, no
beneficiary will suffer a decrease in the quality or quantity of benefits as a result.

Ruling Requested:

The proposed transfer of assets will not adversely affect your tax-exempt status under
§ 501(c)(9).

Law:

Section 501(a) of the Code exempts from federal income tax those organizations described in
§ 501(c).

Section 501(c)(9) describes VEBAs as providing for the payment of life, sick, accident, or other
benefits to the members of such associations 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 summarizes the requirements to be met in order to qualify as a tax
exempt organization described in § 501(c)(9) as follows:

(a) The organization is an employees’ organization;

(b) Membership in the organization is voluntary;

(c) The organization provides for the payment of life, sick, accident, or other benefits to
its members or their dependents or designated beneficiaries and substantially all of
its operations are in furtherance of providing such benefits; and,

(d) No part of the net earnings of the organization inures, other than by payment of the
benefits referred to in in paragraph (c) of this section, to the benefit of any private
shareholder or individual.

Treas. Reg. § 1.501(c)(9)-4(a) restates the prohibited inurement rule contained in I.R.C.

§ 501(c)(9) and provides that no part of the net earnings of a VEBA may inure to the benefit of
any private shareholder or individual other than through the payment of permissible benefits
(benefits described in Treas. Reg. § 1.501(c)(9)-3). Whether prohibited inurement has occurred
is a question to be determined with regard to all the facts and circumstances.

Analysis:

Section 1.501(c)(9)-1 of the Treasury Regulations summarizes the four requirements for an
organization to meet in order to qualify as a tax-exempt organization under § 501(a) and to be
described as a VEBA under § 501(c)(9). These four requirements are as follows: (a) The
organization is an employees’ organization; (b) Membership in the organization is voluntary; (c)
The organization provides for the payment of life, sick, accident, or other benefits to its
members or their dependents or designated beneficiaries and substantially all of its operations
are in furtherance of providing such benefits; and, (d) No part of the net earnings of the
organization inures, other than by payment of the benefits referred to in in paragraph (c) of this
section, to the benefit of any private shareholder or individual. The proposed transfer described
above does not violate any of these four requirements.

Both you and Trust have been recognized as exempt under § 501(a) because you both meet
the requirements of VEBAs as described under § 501(c)(9). The obligation to provide life
insurance benefits for inactive vested Category P Employees or medical benefits for retired
Category P Employees was transferred from you to Trust. Also as a result of this transfer, you
are “over funded” by $x and Trust is “under funded” by $x. The proposed transaction is to
transfer $x from you to Trust to be used to provide welfare benefits to active and retired
Category P Employees. Although you will now only provide benefits to Category C Employees
and Trust will now only provide benefits to Category P Employees, you have represented that
no beneficiary of either you or Trust will suffer a decrease in the quality or quantity of benefits as
a result of this transaction. As such, both you and Trust will continue to provide for the payment
of life, sick, accident, or other benefits to members or their dependents or designated
beneficiaries and substantially all of both your operations are in furtherance of providing such
benefits.

Conclusion:

Based on the foregoing and the representations provided, the proposed transfer of assets will
not adversely affect your tax-exempt status 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. Section 6110(k)(3) provides
that it may not be used or cited by others as precedent. Specifically, this ruling does not
address tax consequences with respect to any employer who contributed to you.

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,

Michael Seto
Manager, EO Technical

Enclosure
Notice 437