Part Five

Q: Can an employer concurrently maintain a tax-qualified plan and a VEBA plan?

Yes. VEBA plans are not tax-qualified plans. Hence, employers may maintain pension and profit-sharing plans as well as VEBA plans concurrently

Q: Is a VEBA subject to regulations regarding discrimination?

Yes. IRC Section 505, which contains general non discrimination requirements, applies to VEBAs. The amount and types of benefits have to be provided uniformly to all employees, based upon a fixed multiple of compensation, thus eliminating discrimination in favor of highly compensated employees. Tax courts have established that it is the use of a consistent multiple of salary and not the cost of the benefit that satisfies the non discrimination requirements.

Q: What is the Employee Retirement Income Security Act (ERISA)?

The 1974 Employee Retirement Income Security Act (ERISA) is a law designed to protect participants in pension and employee welfare benefit plans. ERISA regulations set standards for mandatory benefit vesting schedules, fixed minimum funding, conduct of plan administration and handling of plan assets, required disclosure of plan information, and a system for paying pension benefits. VEBA benefits are protected by ERISA, which basically means that they cannot be touched by creditors, lawsuits, bankruptcy, IRS liens, EPA claims, etc.

Q: How does ERISA apply to VEBAs?

VEBA’s are considered to be employee welfare benefit plans. Therefore, it is subject to the ERISAs Fiduciary Responsibility, Disclosure and Reporting, and Administration and Enforcement section of Title 1, Part B. The fiduciary is subject to ERISA fiduciary standards and enforcement provisions. If the plan provides a health and welfare benefit, it will have to annually file 5500 series forms (Return/Report of Employee Benefit Plan). A summary plan description must be provided to plan participants and the United States Department of Labor as well.

Many experts agree that ERISA's participation and vesting standards aren’t applicable to a VEBA because it is by definition neither a pension, retirement, nor a deferred compensation plan. ERISA's minimum funding standards should not apply based on the same theory and because contributions, such as profit sharing, are not mandatory.

Q: Is a VEBA a non-qualified plan?

No. A non-qualified plan is also known as a pension or deferred compensation plan which is set up only for key individuals. Under a non-qualified plan, employers are not entitled to deductions for contributions until an employee who is receiving benefits has to take them into income. Under a qualified plan, contributions are currently deductible, and the employee does not have a tax consequence until he receives the benefits. The guidelines for VEBA contributions and benefits are similar to the rules governing qualified plans.

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