501(c)(9) organizations, also known as Voluntary Employees’ Beneficiary Associations (VEBAs), offer a unique way for employers to provide their employees with valuable life, health, and accident benefits while enjoying tax advantages.
By establishing a VEBA, companies can create a tax-exempt fund to cover eligible medical expenses for their workforce, even into retirement.
Setting up and maintaining a 501(c)(9) organization involves navigating complex IRS regulations and understanding the various types of VEBAs available. In this comprehensive guide, we'll explore the requirements, benefits, and step-by-step process of forming a 501(c)(9) organization to help you determine if it's the right choice for your company and employees.
Table of Contents
What is a 501(c)(9) Voluntary Employees’ Beneficiary Association?
What are the Requirements to Secure 501(c)(9) Status?
Different Types of Voluntary Employees’ Beneficiary Associations
How Does a 501(c)(9) Organization Work?
7 Steps to Obtain a 501(c)(9) Status
Should You Start a 501(c)(9) Organization?
Final Words on 501(c)(9) Organizations
FAQs on Voluntary Employees Beneficiary Associations
What is a 501(c)(9) Voluntary Employees’ Beneficiary Association?
A 501(c)(9) Voluntary Employees’ Beneficiary Association (VEBA) is a tax-exempt entity that provides funding for life, sick, and accident benefits to members and their dependents.
VEBAs are established by affiliated employers or employee groups, and their funds are tax-free when used to cover eligible medical expenses. The IRS outlines specific requirements for these organizations to maintain their tax-exempt status under section 501(c)(9).
VEBA members share an "employment-related common bond" through a shared employer, coverage under a collective bargaining agreement, or membership in an international labor union.
Note: Participation in a VEBA is not automatic or mandatory for employees based on their employment. Instead, an employee group, such as all tenured employees of a company, can decide if they want to be part of the VEBA. If they approve, participation becomes mandatory for each person in that group.
While the company manages the VEBA, unions usually take charge of its administration. Some notable examples of 501(c)(9) or VEBA organizations include:
- A&T Union Welfare Benefit Trust
- Wells Fargo & Company Employee Benefit Trust
- Wal-Mart Stores Inc. Associate Health & Welfare Trust
- National Rural Electric Cooperative
- United States Steel Corporation Represented Retirees Benefit Trust
What are the Requirements to Secure 501(c)(9) Organization Status?
To qualify as a VEBA under the IRS 501(c)(9) section, an organization has to fulfill the following requirements:
- It should be a voluntary association of employees.
- The organization must provide payment of life, accident, sickness, or other similar benefits to members, their designated beneficiaries, or dependents. All of its operations must be dedicated to providing such benefits.
- Its net earnings must not benefit any private shareholder or individual other than through the payment of the aforementioned benefits.
Different Types of Voluntary Employees’ Beneficiary Associations
Besides life, sickness, and accident benefits, VEBAs can offer recreational expenses, child care, employee assistance programs, and severance benefits.
The eligible medical expenses that your organization will offer depend on the type of VEBA plan:
- General-Purpose VEBA: Covers eligible expenses listed in IRS Publication 502.
- Post-Deductible VEBA: Limited to dental and vision expenses until employees meet their health insurance deductible.
- Limited VEBA: Limited to only vision and dental expenses.
- Post-Employment VEBA: Payments can be made from this plan only when the employee is retired or leaves the organization.
How Does a 501(c)(9) Organization Work?
VEBA organizations function like other account-based plans related to healthcare. It covers retiree insurance premiums and helps members pay for qualified expenses during their employment.
Employers engaged must select or create a VEBA plan and get it approved by the IRS. They can set limits on expenses eligible for reimbursement under their plan. They must carefully review the plan description and check for restrictions before requesting reimbursement.
Here are some other ways for VEBAs to acquire funds:
- Unused time off, either annually or when an employee leaves the company.
- Funds from future pay raises.
- Mandatory employee contributions.
- Early retirement incentives.
7 Steps to Obtain a 501(c)(9) Status
Step 1: Understand the Requirements of 501(c)(9)
Step 2: Create a Benefits List
Step 4: Obtain a Letter of Determination
Step 5: Create a Detailed Plan
Step 6: Communicate Your Plan to Employees
Step 7: Ensure Ongoing Compliance
1. Understand the Requirements of 501(c)(9)
Before starting a 501(c)(9) VEBA, ensure your organization meets the eligibility criteria outlined above. Familiarize yourself with these requirements to lay a strong foundation for your VEBA.
2. Create a Benefits List
Determine the specific benefits your VEBA will cover before establishing your 501(c)(9) organization. These may include health benefits, severance pay, disability benefits, and life insurance. Clearly outline these benefits in your plan to ensure transparency and understanding among your members.
3. Form a VEBA Committee
Establish a committee of voluntary employee representatives to oversee the VEBA's operations. This committee will be responsible for making decisions related to the VEBA's management, ensuring it operates in the best interests of its members.
4. Obtain a Letter of Determination
To make your organization legitimate and secure tax exemption, you must obtain a letter of determination from the IRS. You’ll also be required to submit your benefits plan. The IRS will evaluate your plan and approve your application if you meet its requirements and conditions.
Fill out Form 1024 to secure a tax-exempt status and verify that the organization’s primary purpose is to benefit the member and the member’s dependent.
5. Create a Detailed Plan
After filing the necessary forms, create a detailed plan outlining your VEBA guidelines to make it simple for members to participate and secure benefits. You must focus on documenting:
- Eligibility criteria for members
- Types of benefits provided
- Funding sources
- Administration procedures
- Claims and appeals processes
6. Communicate Your Plan to Employees
Share the details about your VEBA with employees, encouraging them to enroll and seek relief from medical expenses during the course of their employment and, in some cases, after retiring.
7. Ensure Ongoing Compliance
Review your VEBA's activities regularly to ensure compliance with IRS regulations. Ensure employees are paid only for IRS-eligible medical expenses.
File required tax forms, such as Form 990, Form 5500, and possibly Form 990-T, to maintain your tax-exempt status and avoid penalties.
Should You Start a 501(c)(9) Organization?
Pros of 501(c)(9) VEBAs
- Tax Benefit:
Employer contributions to VEBAs are tax-deductible, and the funds grow tax-free. This optimizes employers' tax liability while providing employees with tax-free access to money for qualified medical expenses.
- Flexibility:
VEBAs allow employers to customize the benefits offered under the plan. Various VEBA plans cover a range of benefits, such as dental, medical, and post-retirement health insurance.
- Quick Fund Access:
Employees can withdraw VEBA funds anytime for medical expenses. Unused funds roll over to the next year, unlike Flexible Spending Accounts (FSAs), which have a use-it-or-lose-it policy.
- Attracts Employees:
VEBAs help employers attract and retain talent by offering appealing benefits packages. This can give employers a competitive edge in the job market.
Disadvantages of 501(c)(9) VEBAs
- Expensive:
Setting up and maintaining a VEBA requires significant funds. These contributions can strain an employer's cash flow and potentially impact other areas of the business.
- Irrevocable Contributions:
Once employers contribute funds to a VEBA, they can’t withdraw them. This lack of flexibility can be a drawback for some organizations.
- Complex Regulations:
VEBAs are subject to numerous IRS rules. Employers must exercise caution when reimbursing employee medical expenses to avoid losing their tax-exempt status.
- Participation Requirements:
Some VEBAs have minimum employee participation requirements, which can be challenging for smaller organizations to meet.
Final Words on 501(c)(9) Organizations
A 501(c)(9) VEBA provides a tax-efficient way for employers to offer valuable benefits to their employees. While establishing a VEBA involves careful planning and adherence to regulations, the benefits for both employers and employees make it a valuable option to consider.
As you start or grow your 501(c)(9) nonprofit, choosing Zeffy, a 100% free platform for nonprofits can simplify the management of your organization, helping you focus on what matters most—providing the best possible support to your employees.
FAQs on Voluntary Employees Beneficiary Associations
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