Preserves VEBA exemption and avoids UBTI for health benefit subaccount

Plain-English summary

A voluntary employees' beneficiary association funded retiree health benefits for collectively bargained employees. It proposed transferring assets once to a new internal subaccount that would pay health benefits for active union employees and their dependents. The IRS ruled that these are permissible VEBA benefits and that the transfer would not cause prohibited private inurement, so the association would retain its exemption under section 501(c)(9). Because the assets would remain within the same association, the transfer itself also would not generate unrelated business taxable income under sections 511 and 512.

Ruling snapshot

• Question: Would an internal transfer to a subaccount for active union employee health benefits jeopardize the VEBA's exemption or create unrelated business taxable income?
• Outcome: Approved on both issues.
• Key authorities: IRC §§ 419A, 501(c)(9), 511, and 512; Treas. Reg. §§ 1.419A-2T and 1.501(c)(9)-1 through -4

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201833013 Third Party Communication: None
Release Date: 8/17/2018 Date of Communication: Not Applicable
Index Number: 501.09-03, 512.09-03
Person To Contact:
--------------------------------- -----------------
-------------------------- Telephone Number:
---------------------------------------------------- ----------------------
------------------------------------------------------------ Refer Reply To:
--------- CC:TEGE:EB:HW
-------------------------------- PLR-135080-17
--------------------------------- Date:
May 10, 2018

Legend

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

Company = -----------------------

Date 1 = --------------------

Date 2 = ---------------------------

Plan A = -------------------------------------------------------

Plan B = -------------------------------------

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

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

This responds to your representative’s letter, dated October 31, 2017, and later
correspondence, requesting a ruling as to the federal tax consequences under sections
501(c)(9), 511, and 512 of the Internal Revenue Code (“Code”) of a proposed transfer of
assets from Taxpayer, currently a separate welfare benefit fund under a collective
bargaining agreement as described in section 419A(f)(5), to a newly established
subaccount within Taxpayer, to be used to provide for the payment of health benefits for
active collectively bargained employees.

FACTS
PLR-135080-17 2

Taxpayer is a voluntary employees’ beneficiary association (“VEBA”) under section
501(c)(9). Taxpayer received a determination letter dated Date 1, stating that it is a
VEBA under section 501(c)(9). Taxpayer represents that it is a separate welfare benefit
fund under a collective bargaining agreement within the meaning of section 419A(f)(5).
Taxpayer provides for the payment of postretirement health benefits under Plan A to
collectively bargained employees who retire from Company.

Taxpayer represents that at all times since its establishment, and at all times after the
transfer of assets to the subaccount within it, Taxpayer has been and will continue to
be, a separate welfare benefit fund under a collective bargaining agreement within the
meaning of section 419A(f)(5) and section 1.419A-2T of the Income Tax Regulations
(“Regulations”).

Taxpayer represents that all amendments made to it in conjunction with this ruling will
be effective prospectively and will apply only with respect to health benefits newly
payable on a prospective basis (for example, no reimbursement will be made with
respect to claims for medical expenses that have already been incurred).

Company provides health benefits under Plan B to active employees who are covered
by a collective bargaining agreement (“Union Employees”) and their eligible
dependents. Union Employees are currently not eligible employees under the terms of
Taxpayer or of any other VEBA.

The proposed transaction is a one-time transfer of $X to a subaccount within Taxpayer,
where the assets in the subaccount will be used to provide for the payment of health
benefits under Plan B to Union Employees.

Taxpayer represents that it will be amended to require a one-time transfer of assets to a
subaccount within Taxpayer, and that the transfer will be completed by Date 2.
Taxpayer represents that it will take approximately three years to exhaust the
transferred assets by providing for the payment of Union Employees’ health benefits
claims under Plan B.

RULINGS REQUESTED

Taxpayer requests the following rulings:

(1) The proposed transfer of assets to the subaccount within Taxpayer will not
adversely affect the Taxpayer’s tax exempt status under section 501(c)(9) of the
Code.

(2) The proposed transfer of assets will not result in unrelated business taxable
income (“UBTI”) under sections 511 and 512.
PLR-135080-17 3

LAW

Section 419A(f)(5)(A) of the Code provides that no account limits shall apply in the case
of a qualified asset account under a separate welfare benefit fund under a collective
bargaining agreement.

Section 1.419-1T, Q&A-2(a), of the Regulations provides that section 419 of the Code
generally applies to contributions paid or accrued with respect to a welfare benefit fund
after December 31, 1985, in taxable years of employers ending after that date.

Section 1.419-2T, Q&A-1, of the Regulations provides that neither contributions to nor
reserves of a collectively bargained welfare benefit fund shall be treated as exceeding
the otherwise applicable limits of section 419(b), 419A(b), or 512(a)(3)(E) of the Code
until the earlier of: (i) The date upon which the last of the collective bargaining
agreements relating to the fund in effect on the date of issuance of final regulations
concerning such limits terminates, or (ii) the date three years after the issuance of final
regulations.

Section 1.419A-2T, Q&A-2, of the Regulations states:

   (1) 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.

   (2) 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
   the employee representatives and one or more employers, and if such
   agreement between employee representatives and one or more employers
   satisfies Code section 7701(a)(46). 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.

   (3) In the case of a collectively bargained welfare benefit fund, only the portion of
   the fund (as determined under allocation rules to be provided by the
   Commissioner) attributable to employees covered by a collective bargaining

PLR-135080-17 4

   agreement, and from which benefits for such employees are provided, is
   considered to be maintained pursuant to a collective bargaining agreement.

   (4) Notwithstanding the preceding paragraphs and pending the issuance of
   regulations setting account limits for collectively bargained welfare 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.”

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.

Section 1.501(c)(9)-1 of the Regulations 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.

Section 1.501(c)(9)-3(a) of the Regulations 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.

Section 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.

Section 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 section 1.501(c)(9)-3. Whether
PLR-135080-17 5

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.

Section 511 of the Code imposes a tax on the unrelated business taxable income (as
defined in section 512) of organizations described in section 501(c)(9).

Section 512(a)(3)(A) provides that, in the case of an organization described in
section 501(c)(9), the term “unrelated business taxable income” means the gross
income (excluding any exempt function income), less the deductions allowed by
Chapter 1 which are directly connected with the production of the gross income
(excluding exempt function income), both computed with modifications.

Section 512(a)(3)(B)(ii) provides that, in the case of an organization described in
section 501(c)(9), “exempt function income” includes all income (other than an amount
equal to the gross income derived from any unrelated trade or business regularly
carried on by such organization computed as if the organization were subject to section
512(a)(1)), which is set-aside to provide for the payment of life, sick, accident, or other
benefits, including reasonable costs of administration directly connected with its exempt
purpose.

Section 512(a)(3)(E)(i) provides that in general, in the case of an organization described
in section 501(c)(9), a set-aside for any purpose specified in section 512(a)(3)(B)(ii) may
be taken into account under subparagraph (B) only to the extent that it does not result in
an amount of assets set aside for such purpose in excess of the account limit
determined under section 419A (without regard to subsection (f)(6) thereof) for the
taxable year (not taking into account any reserve described in section 419A(c)(2)(A) for
post-retirement medical benefits).

ANALYSIS AND CONCLUSION

The health benefits provided by Taxpayer, including those to be provided through the
subaccount, are permissible benefits under section 1.501(c)(9)-3(a) of the Regulations
and Taxpayer’s operations are in furtherance of the provision of such benefits.

Based on the information submitted by Taxpayer, we conclude that the transfer of
assets to a subaccount within Taxpayer will not result in prohibited inurement to a
private shareholder or individual other than through the payment of permissible VEBA
benefits to employees and retirees as described in section 1.501(c)(9)-3. Accordingly,
the transfer of assets to a subaccount within Taxpayer will not result in prohibited
inurement under section 501(c)(9) of the Code.

The assets transferred from Taxpayer to the subaccount within Taxpayer remain within
Taxpayer. Accordingly, that transfer will not, in and of itself, result in UBTI.
PLR-135080-17 6

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 Company.

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 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.

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.

We assume, without expressing an opinion, for purposes of this ruling, that Taxpayer
has authority to complete the transaction described and that the transaction can
otherwise be effectuated and does not fail to meet the requirements of other applicable
federal and state law.

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.

                                  Sincerely,



                                  Janet A. Laufer
                                  Senior Technician Reviewer, Health and Welfare
                                  (Employee Benefits)
                                  (Tax Exempt & Government Entities)

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