The law, prior to the Tax Reform Act of 1969, (TRA–69) required that 85 percent or more of the income of VEBAs be derived from amounts collected from members and, as added with retroactive effect by the Revenue Act of 1942, amounts contributed by employers.

Also, prior to the enactment of the Tax Reform Act, old IRC 501(c)(10) (section 101(19) of the Internal Revenue Code of 1939) provided for the exemption of voluntary beneficiary associations composed exclusively of Federal officers and employees. See H.R. Rep. No. 855, 87th Cong. 1939–2 C.B. 504 at 508. The exemption requirements under old IRC 501(c)(10) were identical to IRC 501(c)(9) except there was no 85 percent test and membership was restricted to Federal officers and employees.

Final regulations under IRC 501(c)(9) were published in the Federal Register on January 7, 1981 (T.D. 7750).

As a result of these restrictions, some tax practitioners began recommending that employers use VEBAs and other nonpension employee benefit organizations in order to obtain tax sheltering advantages similar to those that had existed with pension plans before 1982, but with fewer restrictions.

In this legislation, IRC 505 established new nondiscrimination rules and mandatory filing requirements for organizations described in IRC 501(c)(9), effective for taxable years beginning after December 31, 1984.

IRC 419 and IRC 419A provide for limits on deductibility of employer contributions to VEBA’s and to other welfare benefit plans, effective for contributions made after December 31, 1985.

IRC 512(a)(3)(E) subjects income derived from contributions exceeding the account limit of IRC 419A to tax under IRC 511.

IRC 4976 provides for an excise tax on disqualified benefits of VEBA’s and other welfare benefit plans.

In the Tax Reform Act of 1986 (Public Law 99–514), Congress enacted IRC 89, which provided new eligibility and benefit requirements applicable to medical benefits and group-term life insurance benefits as well as to certain other benefits at the election of the employer. IRC 89 was retroactively repealed by section 202(a) P.L. 101–140 (1989).

A full description of the benefits available to the participants must accompany the Form 1024, showing for each benefit the amount, duration, eligibility requirements, and the circumstances that will cause payment of the benefit. This information may be contained in a "plan document" , or in the creating document of the entity, such as the trust agreement or articles of incorporation.

For benefits provided through policies of insurance, all such policies must be included. Where individual policies are provided to the participants, typical examples of the policies issued to participants are acceptable, provided that they adequately describe all forms of insurance available to participants.

If an insurance policy has cash value, it must be owned in the name of the IRC 501(c)(9) organization.

IRC 501(c)(9) applicants that were organized on or before July 18, 1984, must apply before February 4, 1987. An organization organized after July 18, 1984, must apply for exemption within 15 months from the end of the month in which the organization was organized, or by February 4, 1987, whichever is later.

An organization that files a timely notice and that otherwise meets the requirements of IRC 501(c)(9), will have its exemption recognized retroactively to the date it was organized. However, an organization that does not file a timely notice will not be recognized as exempt before the date on which its notice was filed.

An organization that files a late notice may be granted an extension of time pursuant to Reg. 301.9100–1. Rev. Proc. 92–85, 1992–2 C.B. 490, sets forth the information and representations that must be furnished by the organization and some factors that will be taken into consideration in determining whether such an extension will be granted.

If the notice filed by the organization within the required time is substantially complete, and the additional information requested by the Service to complete the notice is furnished within the time allowed by the Service, the original notice will be considered timely.

Although the restriction of Reg. 1.501(c)(9)–2(a)(1) limiting multiple employer trusts to the same geographic locale was ruled invalid in Water Quality Employees’ Benefit Corp. v. U.S., 795 F. 2d 1303 (7th Cir. 1986), the Service believes that the holding is in error. A final resolution of this question awaits further litigation.

Reg. 1.501(c)(9)–2(d) of the regulations provides for a three-state safe harbor. An area is considered a single geographic locale if it does not exceed the boundaries of three contiguous states.

The three-state safe harbor includes three states which share a land or river border with at least one of the others, such as South Carolina, North Carolina, and Virginia. Also, Alaska and Hawaii are considered contiguous to California, Oregon, and Washington for purpose of these regulations.

It would not be economically feasible to establish one or more VEBAs to cover employees of employers engaged in the same line of business in fewer than three states and still be able to offer VEBA membership to all employees of employers in the covered states, and

Employment characteristics in that line of business, population characteristics, or other regional factors support the particular states included.

Eligibility for benefits may be restricted by objective conditions relating to the type or amount of benefits offered. Any objective criteria used to restrict eligibility for membership or benefits may not be selected or administered in a manner that limits membership or benefits to officers, shareholders, or highly compensated employees of an employer contributing to or otherwise funding the employees’ association.

In the case of an employer-funded organization, a provision that excludes or effectively excludes certain employees, who are members of another organization or are covered by a different plan funded by the employer, to the extent that such other organization or plan offers similar benefits on comparable terms, will be considered a reasonable restriction.

The provision of life benefits in amounts that are a uniform percentage of the compensation received by the individual whose life is covered will be considered a reasonable restriction. (See Regs. 1.501(c)(9) –2(a)(2)(ii) for other examples of reasonable restrictions).

each class of benefits under the plan is provided under a classification of employees that is set forth in the plan and that does not discriminate in favor of highly compensated individuals; and

the benefits do not discriminate in favor of highly compensated individuals.

employees with less than three years of service,

employees under the age of 21,

seasonal and less than half-time employees,

employees covered by a collective bargaining agreement, and,

certain nonresident alien employees.

were five percent owners;

had compensation from the employer in excess of $75,000 (adjusted for inflation);

were in the top twenty percent of employees in compensation and had compensation in excess of $50,000 (adjusted for inflation); or

were officers of the employer and received compensation in excess of 50 percent of the amount in effect under IRC 415(b)(1)(A) (adjusted for inflation) for the taxable year (or preceding year).

was a 5-percent owner at any time during the year or preceding year, or

(i) had compensation from the employer in excess of $80,000 (adjusted for inflation); and (ii) if the employer elects the application of this clause for such preceding year, was in the top paid group of employees for such preceding year. The top-paid group consists of the top 20 percent of employees ranked on the basis of compensation paid during the year.

Inflation adjustments for the above compensation levels are published annually in the Internal Revenue Bulletin. For example, see Notice 96–55, 1996–47 I.R.B. 7, for 1997 adjustments.

Group term life insurance benefits under IRC 79;

Self-insured medical benefits under IRC 105;

Qualified group legal service plan benefits under IRC 120;

Educational assistance benefits under IRC 127; and

Dependent care assistance benefits under IRC 129.

Life benefits, accidental death and dismemberment benefits, severance benefits, disability benefits, supplemental unemployment compensation benefits, or other income replacement benefits may be offered as a uniform percentage of total compensation, or of the basic or regular rate of compensation, of the employees covered by the plan.

the benefit offered to each highly compensated individual does not bear a larger ratio to that individual’s compensation than the average benefit offered to lower paid employees bears to their average compensation;

no employee receives a benefit the amount of which is based upon a level of compensation that exceeds $150,000 (adjusted for inflation) for plan years beginning after December 31, 1993, or that exceeds $200,000 (adjusted for inflation) for plan years beginning before January 1, 1994;

the terms and conditions for eligibility are nondiscriminatory; and

in the case of supplemental unemployment compensation benefits, the applicable specific nondiscrimination rules are followed.

An income replacement benefit that is offered only to highly compensated individuals, or that is in any way offered upon more favorable terms to highly compensated individuals than to lower paid employees (except as provided as no more than a uniform percentage of compensation), will not meet the nondiscrimination safe harbor even if another type of benefit is offered exclusively to lower paid employees.

A plan that offers a particular benefit under terms that favor employee classifications that contain a significantly greater than proportionate percentage of highly compensated individuals, when compared to the total number of participants in the plan, will not meet the nondiscrimination safe harbor.

An income replacement benefit is not normally considered to be offered at a uniform percentage of compensation for purposes of the nondiscrimination safe harbor if the percentage of compensation upon which the benefit is based increases with the participant’s length of service with the employer. However, if highly compensated individuals are not disproportionately represented in the groups with the longest period(s) of service, the benefit may nevertheless be provided under a formula that takes years of service into consideration.

Certain employees may be excluded from consideration for purposes of the nondiscrimination safe harbor. Those employees that may be excluded are those listed in IRM 7.25.9.3.4.4.

To illustrate this rule, the following chart sets forth an employer’s work force where a particular benefit is offered in 1997 only to managers and drivers who are over 21 years of age and who have at least one year of service with the employer.

Because employees under 21 years of age and with less than 1 year of service may be excluded from consideration, the work force that must be taken into consideration in this example is comprised only of the drivers, managers, and other employees who are over 21 and have at least one year of service. In this case, the number of highly compensated individuals eligible to receive the benefit (17) when compared to the total number of highly compensated employees not excluded from consideration (18), yields a ratio of 17/18, or 94.4%. The number of eligible lower paid employees (45), when compared to the total number of lower paid employees not excluded from consideration (82), yields a ratio of 45/82 or 54.9%. Because the ratio of eligible highly compensated individuals to the total number of nonexcludable highly compensated individuals (94.4%) exceeds the comparable ratio of lower paid eligible employees to nonexcludable lower paid individuals (54.9%), the plan does not meet the nondiscrimination safe harbor with respect to the benefit.

A VEBA may provide to a participant in a group life insurance contract a certificate of eligibility for individual coverage without evidence of insurability on termination of the member’s relationship with the association.

"Life benefits" generally include any "permanent benefit" provided in the manner prescribed in the regulations under IRC 79. This is relevant to employer-funded organizations and permits, to the extent provided in the regulations under IRC 79, the provision of permanent benefits, the cost of which is required to be included currently in the gross income of the employee.

A VEBA that is funded with employee, rather than employer, contributions generally may offer "life benefits" that involve permanent protection. Where permanent benefits are allowed, cash surrender and policy loan benefits are permitted as these are commonly provided in permanent life insurance contracts.

It is intended to safeguard or improve the health of a member or a member’s dependents, or

It protects against a contingency that interrupts or impairs a member’s earning power.

The regulations permit benefits in the form of temporary living expense loans at times of disaster, such as fire or flood, but do not allow such organizations to provide loans to members in the ordinary course of a banking or financing business.

The regulations provide that job readjustment allowances may be paid as an example of a benefit provided to protect against a contingency which interrupts earning power, as it allows a worker to bridge the period between jobs without the loss of income.

Supplemental unemployment compensation benefits are permitted and are defined in IRC 501(c)(17)(D)(i).

Permissible severance benefits are defined by reference to 29 CFR 2510.3–2(b), a regulatory labor provision which distinguishes a severance pay plan from a pension plan for purposes of Title I of ERISA. General guidelines include a maximum amount of payment not to exceed twice the employee’s most recent annual compensation, payment being completed within two years after the termination of employment, and payments not directly or indirectly contingent upon retirement.

The regulations permit these benefits "except to the extent otherwise provided" in the regulations. This resolves the apparent inconsistency of pension benefits that are allowed under section 302(c)(5) but which are expressly prohibited in Reg. 1.501(c)(9)–3.

The benefits must be provided "in the manner permitted" by section 302. This includes the establishment of a trust by the employees representative (i.e. labor union), the existence of a written collective bargaining agreement, employer-representation in the administration of the organization, etc.

Significant benefits allowed are the provision of educational benefits to members’ dependents and personal legal service benefits.

A trust formed as part of a qualified group legal services plan or plans cannot be exempt under IRC 501(c)(20) for taxable years beginning after June 30, 1992. An existing 501(c)(20) organization would be taxable unless it can qualify for recognition of exemption under IRC 501(c)(9). An organization that has already received a determination or ruling letter from the Service recognizing its exemption under IRC 501(c)(20) is not subject to the 15 month notification required by IRC 505(c). An organization, or trust, that has previously notified the Service of its claim to exemption by filing Form 1024, is not required under section 505(c) to renotify the Service. Accordingly, an organization that is exempt under IRC 501(c)(20) can, if it otherwise qualifies, request a ruling or determination modifying its exemption from IRC 501(c)(20) to IRC 501(c)(9) effective July 1, 1992.

Benefits similar to those provided by a pension, stock bonus or profit-sharing plan; see Lima Surgical Associates v. U.S., 944 F.2d 885 (Fed. Cir. 1991);

Deferred compensation benefits, defined as being payable by reason of passage of time rather than as the result of an unanticipated event;

Property and malpractice insurance;

Loans (other than loans at times of disaster);

Savings plans (See Example (2) of Regs. 1.501(c)(9)–3(g)); and

Commuting expenses.

In Rev. Rul. 67–351, 1967–2 C.B. 86, a vacation plan was established for employees pursuant to a collective bargaining agreement. The employer funded the plan and each employee’s interest in the plan was fully vested and nonforfeitable from the time the money was paid by the employer. The amounts were required to be paid to employees 16 months after the end of the fiscal year in which they were paid to the trust. The revenue ruling held that the employer contributions were realized by the employee when paid by the employer.

However, in Rev. Rul. 57–316, 1957–2 C.B. 626, vacation plan contributions by an employer were held not to be realized by the employee at the time the money was paid by the employer where the trustees of the IRC 501(c)(9) organization had "control" of the payment of the vacation benefit under IRC 3401(d). In this case the IRC 501(c)(9) organization is responsible for withholding at the time of payment to the employee.

In Rev. Rul. 77–347, 1977–2 C.B. 363, supplemental unemployment compensation benefits were "realized" by employees in the year of receipt. Employees did not receive the benefits until employment was terminated because of permanent discontinuance of the company’s business, acquisition by another company, etc. See also Rev. Rul. 70–51, 1970–1 C.B. 192.

Generally, vacation benefits constitute wages under Regs. 31.3401(a)–1(b)(3), except as noted above, as do supplemental unemployment compensation payments.

Dismissal or severance payments generally constitute wages (Regs. 31.3401(a)–1(b)(4)). If a benefit is taxable when the employer pays it, and the benefit is in the form of wages, the employer is responsible for withholding, FICA and FUTA. If the benefit is taxable when the IRC 501(c)(9) organization pays it, the organization is responsible for the reporting and any other requirements.

However, an IRC 501(c)(9) organization may be responsible for income tax withholding, while the employer is directly responsible for FICA and FUTA taxes. (See Rev. Rul. 57–316, 1957–2 C.B. 625.) Under Reg. 31.3504–1 the IRC 501(c)(9) organization may receive authorization to pay over FICA and FUTA taxes on behalf of the employer. (See Rev. Rul. 70–51, 1970–1, C.B. 192, and Rev. Proc. 68–21, 1968–1 C.B. 817.)

Exempt Organizations specialists are responsible for determining whether IRC 501(c)(9) organizations are meeting their responsibilities with respect to income tax withholding, FICA and FUTA, and reporting on W–2s and W–3s in the case of wages, and the reporting requirements of IRC 6041 in the case of other taxable benefits.

The term "welfare benefit fund" is defined in IRC 419(e) to include plans through which an employer provides benefits (other than pension and other deferred compensation benefits described in IRC 419(e)(2)) to employees. Welfare benefit funds include employer-funded organizations described in IRC 501(c)(7), IRC 501(c)(9), IRC 501(c)(17) and IRC 501(c)(20), in addition to nonexempt employer-funded organizations.

The employer’s qualified direct cost for the taxable year. The employer’s qualified direct cost is the aggregate amount (including administrative expenses) that would have been allowable as a deduction to a cash-basis employer directly providing benefits to employees. For these purposes, a benefit is treated as provided only in the year the benefit is includible in the gross income of the employee (or would be includible but for a provision of the Code.)

The employer’s additions to qualified asset accounts described in IRC 419A (as limited by IRC 419A(b)) for the taxable year.

In establishing the allowable deduction under IRC 419, the employer’s qualified cost is reduced by the fund’s "after tax income." "After tax income" is the fund’s gross income, reduced by any income taxes paid and by expenses directly connected with the production of gross income. Gross income does not include employer contributions, but does include employee contributions. The effect of these rules is to reduce otherwise allowable employer deductions by the amount of net investment income of the fund and by the amount of employee contributions to the fund.

Employer contributions in excess of the IRC 419 deductibility limits are carried forward to succeeding taxable years.