VEBA could offset member contributions against promissory notes

Plain-English summary

A voluntary employees' beneficiary association had required extra contributions from participating employers when first-year premiums were insufficient to meet a state minimum fund balance. Many of those contributions were documented by interest-free promissory notes payable by the VEBA to the contributing members. Once adequately funded, the VEBA proposed extinguishing the notes over five years by crediting their amounts against future member contributions. Members would receive no cash, and officers, shareholders, and highly paid employees would receive no disproportionate benefits. The IRS ruled that the arrangement would not create prohibited private inurement under Section 501(c)(9), while expressing no opinion on the tax consequences to the contributing members.

Ruling snapshot

• Question: Would offsetting future member contributions against the VEBA's promissory notes cause prohibited inurement?
• Outcome: Approved, no prohibited inurement.
• Key authorities: IRC § 501(c)(9); Treas. Reg. §§ 1.501(c)(9)-1, -3, and -4.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201817008 Third Party Communication: None
Release Date: 4/27/2018 Date of Communication: Not Applicable
Index Number: 501.09-00
Person To Contact:
------------------------------ ---------------------
------------------------------------------------------------ Telephone Number:
--------------------------- ----------------------
----------------------------------------- Refer Reply To:
------------------------------ CC:TEGE:EB:HW
PLR-124480-17
Date:
January 19, 2018

Legend:

Taxpayer = -----------------------------------------------------------------------------------------------------

Plan = -----------------------------------------------------------------------------------------------------------

State X = ----------

Date X = ----------------------

Date Y = --------------------------

$X = ----------------

Dear --------------------:

This responds to your letter, dated ---------------------, requesting a ruling that the
proposed transaction described below will not result in prohibited inurement under
section 501(c)(9) of the Internal Revenue Code (“Code”).

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 Code, effective Date
Y. Taxpayer is an association that provides medical benefits to employees of its
participating members. Taxpayer sponsors Plan. Taxpayer represents that it is also a
PLR-124480-17 2

multiple employer welfare arrangement (“MEWA”) under the Employee Retirement
Income Security Act of 1974 and must comply with State X Non-Profit MEWA Act.

Taxpayer represents that it is required under the laws of State X to maintain a fund
balance of $X at all times. Taxpayer further represents that, in its first year of operation,
premiums it collected from its members were insufficient to maintain the required fund
balance, and, as required under the laws of State X, it assessed additional contributions
from its members. Taxpayer represents that a substantial portion of the additional
contributions was memorialized by interest-free promissory notes, with Taxpayer as
issuer and the members as payees.

Taxpayer is now adequately funded. For members that were assessed additional
contributions, as described in the preceding paragraph, Taxpayer proposes to
extinguish the promissory notes over a five-year period by applying the amount of the
notes to the contributions that the members otherwise would be required to pay to
Taxpayer. Taxpayer represents that members will not receive any funds from Taxpayer,
and that there will be no disproportionate benefits to officers, shareholders, or other
highly paid employees of members.

RULING REQUESTED

Taxpayer has requested a ruling that the proposed transaction, extinguishing the
promissory notes over a five-year period by applying the amount of the notes to the
contributions that the members otherwise would be required to pay to Taxpayer, will not
result in prohibited inurement under section 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.

Treas. Reg. § 1.501(c)(9)-1 provides that for an organization to be described in section
501(c)(9) of the Code, 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
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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
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

Based on the information submitted by Taxpayer, we conclude that the proposed
transaction, extinguishing the promissory notes over a five-year period by applying the
amount of the notes to the contributions that the members otherwise would be required
to pay to Taxpayer, will not result in prohibited inurement to a private shareholder or
individual other than through the payment of permissible benefits as described in Treas.
Reg. § 1.501(c)(9)-3. Accordingly, the proposed transaction will not result in prohibited
inurement under section 501(c)(9) of the Code.

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 member who made contributions to Taxpayer.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.
PLR-124480-17 4

The rulings contained in this letter are based upon information and representations
submitted by 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,



                                  Kevin Knopf
                                  Senior Technician Reviewer
                                  Health & Welfare Branch
                                  Office of Associate Chief Counsel
                                  (Tax Exempt & Government Entities)