Magazine article The CPA Journal

Voluntary Employee's Beneficiary Associations

Magazine article The CPA Journal

Voluntary Employee's Beneficiary Associations

Article excerpt

The familiar problem! Your client owns a very profitable company (a doctor, dentist, manufacturer, etc.). After pension and business expense deductions, the Federal taxes are still large. As his or her advisor, what can you recommend to reduce your client's taxes?

Benefits of a VEBA

Imagine a program that allows large, flexible, tax deductible contributions that accumulate and compound tax deferred. Distributions at any age are without penalties regardless of the amount. Assets are protected from the claims of creditors. There are income and estate tax-free survivor benefits. The program is fully insured, and, by a favorable letter of determination, IRS has granted a tax exemption to the 501 (C) (9) trust.

The program can also acquire tax deductible life insurance, provide funds to pay estate taxes, and provide tax deductible educational benefits for children.

The above describes some of the benefits of a VEBA.

What Is a VEBA?

A VEBA (Voluntary Employee's Beneficiary Association) is a tax-exempt organization that is described in IRC section 501 (C) (9) and has received a tax exemption letter from the IRS. The VEBA usually provides for the payment of life, accident, sickness, and other benefits to the participants in the VEBA or their dependents or beneficiaries. A VEBA is a trust, generally having a bank as its trustee. The earnings of the VEBA trust are tax exempt during the period of time that the fund is accumulating. By joining an existing multiple employer VEBA, the employer gains the advantage of using a VEBA that has been preapproved by the IRS with a favorable letter of determination.

A VEBA can be established by almost any business for the benefit of its employees, including owner-employees. An employer with one employee (even a spouse) can have a VEBA.

A VEBA cannot provide retirement or deferred compensation benefits, so it is not subject to the rules for qualified retirement plans. It is subject to many ERISA rules. The distribution can be taken from a VEBA prior to age 59 1/2without penalties, and you do not have to take distribution at age 70 1/2. You can contribute and deduct much more than $30,000 per year. In 1992, the U.S. tax court allowed a physician to deduct contributions in excess of $400,000 in a single year, and over $1,100,000 for a three-year period for a two-person VEBA (Schneider vs. Commissioner). Dr. Joel Schneider had one employee. Plan benefits attributable to Dr. Schneider exceeded 95% of the aggregate benefits. The benefits included life and disability benefits and an education benefit for Dr. Schneider's three children. (His employee had no children. …

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