VEBAs: Possibilities For Employee Benefit Funding

Overview

VEBAs, or "voluntary employee beneficiary associations," are arrangements which include a trust established to fund certain benefit plans of the employer; usually the trust is referred to as a "VEBA." Employers segregate assets used to fund employee benefits for a number of reasons -- to set aside or earmark funds from the employer’s general assets, to satisfy obligations to a union, to generate tax benefits from prefunding, or to create an offsetting asset for an employer’s liability. In addition to the perceived advantages of segregation of funds in a trust, when a VEBA is used for this purpose, the income earned by these trusts can grow tax-free if the VEBA meets certain requirements of the Internal Revenue Code ("Code"). However, as discussed below, this tax-free growth is not permitted in all circumstances (VEBAs funding retiree medical benefits do not enjoy this advantage) and the Code’s conditions for entitlement to tax-free growth may not be consistent with the