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ARTICLE · 12 MARCH 2004

IRS Issues Ruling on Retiree Medical Funding

McDermott Will & Emery
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A recent private letter ruling from the Internal Revenue Service (IRS) permits the use of a tax-effective method for funding retiree medical obligations.

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By Amy M. Gordon, Susan M. Nash and Karen A. Simonsen

A recent private letter ruling from the Internal Revenue Service (IRS) permits the use of a tax-effective method for funding retiree medical obligations. Due to the escalating costs of retiree medical obligations, many employers are searching for better ways to fund their obligations. Employers often fund retiree medical obligations through a trust known as a voluntary employees’ beneficiary association (VEBA). Employer contributions to a VEBA are deductible under the Internal Revenue Code (Code), subject to certain limitations. However, a VEBA can generate taxable income for the employer and the VEBA itself. The ruling provides a method for avoiding these unfavorable tax results.

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