VEBA may fund health benefits for active employees

Plain-English summary

A voluntary employees' beneficiary association held trust assets for retirees' health benefits. It proposed amending its trust agreement to add active employees as eligible participants and to segregate $X for their health benefits. The IRS concluded that providing those benefits would not cause prohibited inurement because section 501(c)(9) and its regulations permit a VEBA to pay health benefits to employees. The amendment therefore would not cost the association its exempt status. The ruling did not address tax consequences for employers that contributed to the trust.

Ruling snapshot

• Question: Would using a segregated portion of a VEBA trust for active-employee health benefits cause prohibited inurement or loss of section 501(c)(9) status?
• Outcome: Approved; the amendment would not cause prohibited inurement or loss of VEBA status
• Key authorities: IRC § 501(c)(9); Treas. Reg. §§ 1.501(c)(9)-1, -3, and -4

Full text (IRS public release)

Internal Revenue Service

Number: 201532037
Release Date: 8/7/2015

Index Number: 501.09-00

Department of the Treasury
Washington, DC 20224

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact:

Telephone Number:

Refer Reply To:
CC:TEGE:EB:HW
PLR-T-103517-15

Date:
April 08, 2015

Legend:

Taxpayer =
Company =
Plan =
Date X =
Date Y =
$X =

Dear :

This responds to your letter dated April 25, 2014, and subsequent correspondence,
requesting a ruling regarding the tax consequences of an amendment to the trust
agreement establishing Taxpayer (“Trust Agreement”). The amendment would permit
some of Taxpayer's assets, now dedicated to post-retirement health benefits, to be
used to provide health benefits to active employees.

FACTS

Taxpayer received a determination letter, dated Date X, stating that it is a voluntary
employees’ beneficiary association under section 501(c)(9) of the Internal Revenue
Code (Code). Taxpayer is a trust that holds assets used to provide post-retirement
health benefits under Plan to eligible employees who retire from Taxpayer. Taxpayer
and Plan were established on Date Y. Trust Agreement will be amended to include

PLR-T-103517-15 2

active employees of Company as an additional class of participants entitled to receive
health benefits under Plan. The amendment will provide that $X of Trust will be
segregated in a separate subpart of Trust to be used exclusively to provide health
benefits to active employees of Taxpayer.

RULING REQUESTED

Taxpayer has requested a ruling that the amendment of Trust Agreement and the use of
Taxpayer's assets to provide health benefits to active employees will not result in
prohibited inurement to Taxpayer within the meaning of section 501(c)(9) of the Code
and will not cause Taxpayer to fail to be an organization described in section 501(c)(9).

LAW

Section 501(c)(9) of the Code 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.

Treas. Reg. § 1.501(c)(9)-1 provides that for an organization to be described in
section 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)-3(a) provides that the life, sick, accident, or other benefits
provided by a voluntary employees’ beneficiary association must be payable to its
members, their dependents, or their designated beneficiaries. Life, sick, accident, or
other benefits may take the form of cash or noncash benefits. A voluntary employees’
beneficiary association 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 this section if it
systematically and knowingly provides benefits (of more than a de minimis amount) that
are not permitted by paragraphs (b), (c), (d), or (e) of this section.

Treas. Reg. § 1.501(c)(9)-3(c) provides, in pertinent part, 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. Such
benefits may be provided through reimbursement to a member or a member's
dependents for amounts expended because of illness or personal injury, or through the
payment of premiums to a medical benefit or health insurance program. Sick and
accident benefits may be provided directly by an association to or on behalf of members
and their dependents, or may be provided indirectly by an association through the

PLR-T-103517-15 3

payment of premiums or fees to an insurance company, medical clinic, or other program
under which members and their dependents are entitled to medical services or to other
sick and accident benefits.

Treas. Reg. § 1.501(c)(9)-4(a) provides, in pertinent part, 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 Treas.
Reg. § 1.501(c)(9)-3. Whether prohibited inurement has occurred is a question to be
determined with regard to all of the facts and circumstances, taking into account the
guidelines set forth in the regulations.

ANALYSIS AND CONCLUSION

From the information provided, it does not appear that the amendment of Trust
Agreement and the use of Taxpayer's assets to provide health benefits to active
employees will result in prohibited inurement to a private shareholder or individual other
than through the payment of health benefits to employees. As described in Treas. Reg.
§ 1.501(c)(9)-3, an organization described in section 501(c)(9) may provide health
benefits to employees. Accordingly, the transaction will not cause Taxpayer to fail to be
an organization described in section 501(c)(9).

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Specifically, this ruling does not address tax consequences of the described
transaction to any employer who made contributions to Taxpayer.

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

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

Sincerely,

Janet A. Laufer

Senior Technician Reviewer

Health & Welfare Branch

Office of Associate Chief Counsel
(Tax Exempt & Government Entities)