Voluntary Employees Beneficiary Association Plan

Posted on by user

Voluntary Employees’ Beneficiary Association (VEBA) Plan

Key takeaways

  • A VEBA is a tax-exempt trust (IRC §501(c)(9)) created to pay for eligible medical and similar benefits for employees, dependents, or designated beneficiaries.
  • VEBAs are typically employer-funded; employee contributions are uncommon and individual elections are generally not allowed.
  • Employers must obtain an IRS letter of determination for a plan to qualify as a VEBA.
  • VEBAs are treated as welfare benefit plans for tax purposes and are subject to some ERISA provisions, but they are not qualified retirement plans.

What is a VEBA?

A Voluntary Employees’ Beneficiary Association (VEBA) is a trust established by an employer (or a group of employees) to provide life, sick, accident, health, or similar benefits to members, their dependents, or designated beneficiaries. Plans are governed by Internal Revenue Code §501(c)(9) and must follow IRS rules for formation and maintenance.

How VEBAs work

  • Membership must consist of employees (and their dependents or designated beneficiaries).
  • Funds and earnings in the trust must be used solely to administer and pay participant benefits—no private inurement to individuals or shareholders.
  • Plans define which IRS-qualified medical expenses are eligible and set the timing and conditions for reimbursements. Coverage can vary widely between plans.
  • Benefits typically end when an employee leaves the sponsoring employer or union, unless the plan specifically allows post-employment use.

Taxation and compliance

  • VEBAs are tax-exempt trusts under IRC §501(c)(9).
  • Employer contributions to a VEBA are generally tax-deductible and are not subject to a statutory contribution limit.
  • Distributions for qualified medical expenses are typically tax-free to participants; however, taxability can vary by benefit type.
  • VEBAs are subject to some ERISA rules but are not qualified retirement plans (they do not follow 401(k)/403(b) rules).
  • Employers should obtain a letter of determination from the IRS to confirm VEBA status for federal tax purposes.

Distributions and use of funds

  • VEBA funds grow tax-free within the trust.
  • Qualified medical expenses (commonly defined under IRC §213(d)) include co-pays, coinsurance, deductibles, dental and vision costs, and in many plans, post-retirement health insurance premiums.
  • VEBAs are not “use-it-or-lose-it” accounts—unused balances typically roll over from year to year.
  • Unlike many retirement plans, VEBA distributions are not subject to age‑59½ penalties and are not required to begin at a specified age.

Types of VEBA plans

  • Post-deductible VEBA: Reimburses vision and dental until a health plan deductible is met; after that, it may cover additional medical expenses.
  • Limited VEBA: Restricts reimbursements to medical and vision expenses only.
  • Post-employment VEBA: Funds are available only after an employee retires or leaves employment.
  • VEBA paired with an HSA: VEBA dollars may be limited to dental and vision until the medical deductible is met; coordination rules depend on plan design.

Eligibility and relationships to HRAs and HSAs

  • Eligibility requires an employer-offered VEBA and active coverage under the employer’s health plan.
  • A VEBA can operate similarly to a Health Reimbursement Arrangement (HRA) in that it reimburses medical expenses and may allow rollovers.
  • Unlike Health Savings Accounts (HSAs), which can be funded by employers and employees and are tied to high-deductible health plans, VEBAs are most often employer-funded.
  • It is possible to have both a VEBA and an HSA if your employer’s plan permits it; account rules and tax implications should be reviewed to optimize benefit use.

Important considerations

  • VEBA plan designs vary considerably—some reimburse current expenses, others focus on dental/vision, and some only pay after employment ends. Review plan documents carefully to understand coverage, reimbursement rules, and any limitations.
  • Because VEBAs involve plan-level rules and tax implications, employers commonly consult tax and benefits counsel when establishing and administering these trusts.

Bottom line

A VEBA is a tax‑advantaged, employer-established trust that funds eligible medical and related benefits for employees and beneficiaries. While less common today than other accounts, VEBAs can provide flexible, rollover-friendly support for current and post-retirement medical costs, with favorable tax treatment when structured and administered according to IRS rules.