Part Two: the history of VEBAs from the mid-1980's to the present

In the early-1990s, when the IRS challenged 419A(f)(6) multiple employer VEBA deductions, U.S. tax courts denied some taxpayers' VEBA deductions, while other taxpayers' deductions were upheld. Some of the cases upheld deductions totaling more than one million dollars. By the late 1990s, the tax courts had established a clear middle ground for 419A(f)(6) VEBAs. Today, a good advisor is able to provide a 419A(f)(6) VEBA compliant with the law and structured entirely on substantial legal authority. However, the final regulations were issued by the IRS in July 2003, and they make it impossible to comply with their interpretation of the law.

By the year 2002, multiple employer VEBAs had again become very badly abused, with numerous VEBAs draining billions of dollars in tax money. The VEBAs promised unlimited tax deductions and through various scams (usually involving a "special" life insurance policy) the VEBAs delivered the money, tax free, back to the taxpayer. The new 2003 regulations now make it so that the use of life insurance, with the exception of term policies, illegal in a multiple employer VEBA. Both the law and the courts are clear. The IRS cannot enforce the regulations, but they have cooled the use of sham VEBAs. (The sham artists have now begun concentrating on Section 412(I) retirement plans which, until now, have been a nice, clean retirement tax tool offering $100,000s in annual deductions.)

The 1994 law seemed to say that deductions in single employer VEBAs were limited to the cost of the benefit in the year when the benefit was delivered. To put it simply, a large life insurance policy could be purchased, but its cost wasn't deductible until the employee died and the benefit was delivered. A case which involved Wells Fargo changed that interpretation. The court stated that Wells Fargo could deduct the cost of the life insurance which was gradually liquidated over the working life of the employee. This would make a single employer VEBA powerful, because he would be able to deduct $100k's every year.

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