Examination Guidelines - Organizational Requirements

4.76.18.3.1.1 (06-21-2002)

1. Review the trust agreement, or other organizational document, and obtain answers to the following questions:
A. Is the VEBA a separate legal entity?
B. What provision is made for the distribution of remaining assets upon termination of the VEBA?
C. Who controls the VEBA?
D. What is the employment related common bond?
E. What are the eligibility requirements?
F. What benefits are provided?
2. Review the summary plan description for consistency with the plan document as well as any additional limitations on eligibility or benefits.
4.76.18.3.2 (06-21-2002) Activities
1. Substantially all of an IRC section 501(c)(9) organization's operations must be in furtherance of providing permissible benefits.
2. A VEBA may provide some nonqualifying benefits, but it will not qualify for exemption if it systematically and knowingly provides nonqualifying benefits of more than a de minimus amount.
4.76.18.3.2.1 (06-21-2002) Examination Guidelines - Activities
1. Review the minute book to obtain a general overview of the VEBA's activities. Note any comments regarding benefits, loans, reimbursements, and other items, which raise questions as to the association's activities.
2. Interview the trustee and or the plan administrator to identify any changes in the operations of the VEBA since it received exemption. Ask specifically for:
A. Any amendments to the plan or trust.
B. Current summary plan description.
C. Any rulings received subsequent to exemption.
D. Copies of Forms 5500 filed by the employer.
3. Review any contracts with insurance companies that provide benefits to members to,ensure:
A. The insurance policy is in the name of the VEBA and not the name of the employer, and
B. Only permitted benefits are provided.
4. Review any other contracts to which the VEBA is a party, such as contracts for administrative services. Look for:
A. Reasonableness of compensation and other contract terms (such as length).
B. Indications of contracts with related parties.
4.76.18.3.3 (06-21-2002) Membership
1. Membership in a VEBA is generally restricted to employees with an employment related common bond.
2. An employment related common bond can be:
A. A common employer;
B. Coverage under a collective bargaining agreement;
C. A labor union affiliation;
D. Employees of the VEBA or union whose members are members of the VEBA.
4.76.18.3.3.1 (06-21-2002) Examination Guidelines-Membership
1. Review membership records and enrollment forms to verify that:
A. Membership is voluntary.
B. 90% of the members are employees.
C. Members share the employment related common bond specified in the organizing documents.
D. Non-employee members (if any) must share an employment related bond with employee members.
4.76.18.3.4 (06-21-2002) Benefits
1. See IRM 7.25.9 for a discussion of permissible and impermissible VEBA benefits.
4.76.18.3.4.1 (06-21-2002) Examination Guidelines-Benefits
1. Review the plan and trust documents to determine if there are:
A. Otherwise impermissible benefits disguised as permissible benefits. The most common example is severance benefits that may be payable upon retirement or upon voluntary termination by the employee. Such benefits may be similar to pension benefits, deferred compensation arrangements, or savings plans.
B. Benefits funded at least in part by employee contributions when individual accounts are maintained. Such benefits may be similar to the "savings arrangement" described in Treas. Regs. section 1.501(c)(9)-3(g).
C. Individual accounts are maintained and funded at least in part by employer contributions. If amounts in the account are vested with respect to the employee with no possibility of forfeiture, the benefits may be similar to a pension or deferred compensation arrangement.
D. Benefits added to the plan since the VEBA received exemption.
2. Review brochures, forms, etc., relating to life, sick, accident, or other benefits to determine:
• Type of benefits
• Eligibility requirements
• Designated beneficiaries
4.76.18.3.5 (06-21-2002) Discrimination
1. IRC section 505(b) requires IRC section 501(c)(9) organizations that are not collectively bargained to meet nondiscrimination requirements (unless some other Code section provides nondiscrimination rules for a particular type of benefit.)
2. The nondiscrimination requirements were enacted to ensure that highly compensated employees are not favored over other employees.
3. In general, plans must be nondiscriminatory as to both eligibility and benefits. Both tests must be satisfied or the VEBA will not be exempt.
4. Only discrimination in favor of highly compensated employees is prohibited; differences in benefits among non-highly compensated employees are irrelevant.
5. IRM section 7.25.9 describes the applicability of nondiscrimination rules. This subsection specifies the information needed to perform a discrimination test analysis.
4.76.18.3.5.1 (06-21-2002) Discrimination Test Guidelines
1. To test a plan for discrimination, you will need a complete employee census, which includes, for each employee:
A. Name,
B. Annual compensation,
C. Length of service,
D. Whether full-time or part-time,
E. Whether an officer or shareholder of the employer,
F. Any employee contributions required,
G. Any other information, which may affect eligibility for benefits, e.g. job classification or location.
2. For plans providing group-term life insurance subject to the rules of IRC section 79, identify the key employees, as defined in IRC section 416(i).
A. The dollar amount specified in IRC section 415(b)(1)(A) is indexed for inflation, and is published annually in a notice in the Internal Revenue Bulletin. Effective January 1, 2002 the IRC section 415(b)(1)(A) amount is $160,000. The IRC section 415(c)(1)(A) amount was increased to $40,000.
B. Key employees must be either officers or shareholders of the employer; high compensation alone is not enough.
3. For plans providing self-funded medical coverage subject to the rules of IRC section 105(h), identify the highly compensated employees, as defined in IRC section 105(h). Note that:
A. The definition includes the highest paid 25% of all employees. Therefore, an employer will always have some highly compensated employees.
4.76.18.3.6 (06-21-2002) Recordkeeping
1. VEBAs must maintain records indicating the:
A. Amount contributed by each member and contributing employer,
B. Amount and type of benefits paid to or on behalf of each member.
4.76.18.3.6.1 (06-21-2002) Examination Guidelines-Recordkeeping
1. Analyze the cash receipts journal and related supporting documents to determine whether the records show the amount contributed by each member and employer.
2. Analyze the cash disbursements journal and supporting documents to determine whether the records show the amount and type of benefits paid to or on behalf of each member.
4.76.18.4 (06-21-2002) Specific Examination Guidelines
1. The following subsections provide additional examination techniques that apply to:
• Multiple employer plans.
• Collectively bargained plans
• Limited membership plans
4.76.18.4.1 (06-21-2002) Multiple Employer Plans
1. Multiple employer plan participants are employees of unaffiliated employers engaged in the same line of business " in the same geographic locale" who also share an employment-related common bond.
2. See IRM section 7.25.9 for the definitions of multiple employer plans and "geographic locale."
4.76.18.4.1.1 (06-21-2002) Examination Guidelines-Multiple Employer Plans
1. Analyze the VEBA's records with respect to the participating employers to determine:
A. Whether the employment related common bond specified in the plan and trust documents actually exists;
B. The form of legal organization of the participating employers. If some are partnerships or sole proprietorship, the VEBA as a whole may have difficulty meeting the 90% test, as partners and sole proprietors are not employees for purposes of this test;
C. Whether each employer, tested individually, complies with the discrimination rules,
D. Whether membership is truly voluntary with respect to benefits that are at least in part employee funded, as insurers may require 100% participation in the case of small employers.
2. Secure copies of any brochures or similar documents used to market the VEBA to participating employers.
3. Determine what happens to plan assets if an employer terminates participation. If there is any possibility of any assets reverting to the employer, or its employees, consider the applicability of the examination techniques of limited membership VEBAs.
4.76.18.4.2 (06-21-2002) Collectively Bargained Plans
1. Collectively bargained plans or agreements are negotiated between two parties, employers and workers , labor organizations, associations of employees, unions, etc., and usually pertain to wages, working conditions, benefits, etc.
4.76.18.4.2.1 (06-21-2002) Examination Guidelines-Collectively Bargained Plans
1. Review the collectively bargained agreements to determine whether this is a:
A. Legitimate union; and
B. A bona fide collective bargaining agreement.
2. Signs, which may indicate a sham union or lack of a bona fide collective bargaining agreement, include:
A. A substantial degree of employer control retained, such as the ability to unilaterally terminate the collective bargaining agreement or any of its significant provisions,
B. Participation of a large number of small employers in many industries,
C. Promotional materials directed toward employers,
D. Union membership which includes executives or business owners, see IRC section 7701(a)(46),
E. A union that is not affiliated with other labor organizations, such as the AFL-CIO.
3. Determine whether the VEBA's benefits were actually the subject of the bargaining process. If the actual benefits provided are not specified in the agreement, it is questionable whether the benefits were the subject of good faith bargaining and the various rules and exceptions for collectively bargained plans will not apply.
4.76.18.4.3 (06-21-2002) Limited Membership VEBAs
1. See IRM section 7.25.9 for a discussion of the legal issues arising in cases where a dominant share of the benefits is payable to the individuals who exercise effective control over the VEBA. The examiner should keep in mind that:
A. These issues arise only in cases where a small, closely held corporation is providing self-funded benefits or whole-life benefits,
B. Similar issues are sometimes present in multiple employer plans where most of the participating employers are very small (fewer than twenty employees) and are closely held corporations such as professional corporations.
4.76.18.4.3.1 (06-21-2002) Examination Guidelines-Limited Membership VEBAs
1. Review the VEBA's records to establish the number of actual participants.
2. Determine whether any benefits are self-funded or create an asset that could be disposed of upon termination, as is the case with whole-life insurance policies.
4.76.18.5 (06-21-2002) Unrelated Business Taxable Income
1. IRC section 512(a)(3) provides special rules for determining the unrelated business taxable income of IRC section 501(c)(9) organizations.
2. See IRM section 7.25.9 for the definition of unrelated business income in the case of organizations which are VEBAs.
3. Generally, a VEBA is taxed on income from an unrelated trade or business that is regularly carried on under IRC section 513 or 514 in the same manner as other exempt organizations.
4.76.18.5.1 (06-21-2002) Examination Guidelines-Unrelated Business Taxable Income
1. Review the organization's activities, cash receipts books, cash disbursement books, and balance sheet accounts to determine if the organization has any unrelated business taxable income.
2. Distinguish carefully between:
A. Investment income, which can be set aside.
B. Income from an unrelated trade or business that is regularly carried on, which cannot be set aside.
3. If the VEBA has investment income:
A. Identify total trust assets at the end of the taxable year, other than buildings and similar capital items.
B. Determine the IRC 419(A)(c) account limit, which is the sum of the possible reserves for benefits specified in IRC 419A(c).
Note:
The amount is "0" with respect to benefits not listed in IRC 419A(c), such as child care, or vacation benefits, or any benefits to the extent funded by premium payments to commercial insurers. Also, for purposes of determining unrelated business income, the amount is "0" with respect to any post-retirement medical reserve described in IRC 419A(c)(2)(A).
C. If the IRC 419A(c) account limit, equals or exceeds total assets, stop. The VEBA has no liability for tax on its investment income.
D. If assets exceed the IRC 419A(c) account limit, determine the amount of the difference.
E. Compare investment income to excess assets. Tax is imposed on the lesser of the two amounts.
4. Request an explanation of the calculation of any amounts identified as a reserve for incurred but unpaid claims.
5. If any amount is claimed as a reserve for post-retirement medical or life insurance benefits, verify that funds are actually being held for that purpose and not expended currently for active employees.
6. If there is unrelated business income, analyze the overhead, administrative and other expenses and review the basis for allocation of the expenditures.
4.76.18.6 (06-21-2002) Required Compliance Checks
1. Many of the benefits received by members of a VEBA are excluded from the gross income of the recipient if they meet certain requirements:
• Health and accident plans under IRC section 105
• Compensation for injuries under IRC section 104
• Certain death benefits under IRC section 101
• Employer contributions to accident and health plans under IRC section 106
• Certain educational assistance benefits under IRC section 127
2. The examiner is not normally responsible for determining whether an employer is correctly reporting, for employment tax purposes, payments made to VEBAs. Cases indicating that employer problems exist should be referred to EO Classification on form 5666, TE/GE information report, if warranted.
Example:
You may discover that an employer is treating payments to a VEBA as being made solely to an accident or health plan under IRC section 106 when in reality these payments are also payments for a severance benefits plan. Since the employer is required to allocate the portion of the payment on account of the health plan (because the employer is required to withhold on the portion allocable to the severance plan), the information should be referred to EO Classification.
3. The examiner is responsible for determining whether IRC section 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 also the reporting requirements of IRC section 6041 in the case of other taxable benefits.
4. If a benefit is taxable, it will either be:
A. Wages subject to income tax withholding, FICA and FUTA, and reported on Forms W-2 and W-3. See IRC section 3401 and regulations thereunder, or
B. Subject to the information return requirements of IRC section 6041. Generally, payments by an IRC section 501(c)(9) organization in excess of $600 constituting taxable benefits (other than wages) must be reported on Forms 1096 and 1099. See Treas. Regs. 1.6041-1(a)(2).
4.76.18.6.1 (06-21-2002) Examination Guidelines-Required Filing Checks
1. In addition to the general guidelines for required filing checks detailed in IRM section 4.75.4, the examiner will:
A. Review the plan document to determine the nature of the benefits provided.
B. Review benefit disbursement accounts, correspondence and other supporting documents to determine whether any benefits other than those detailed in the plan document are being paid.
C. Determine whether the benefits are taxable for FICA, FUTA or income tax purposes.
D. Determine whether taxable benefits, if any, were correctly reported on Forms W-2, W-3, 940, 941 or 1099.
E. Determine if the payments made by the employer are deductible on the employer's income tax return.
2. If taxable benefits were not correctly reported, the examiner will:
A. Consider expanding the scope of the examination to include the employment tax returns,
B. Secure delinquent information returns if applicable, and
C. Consider whether discrepancy adjustments should be made.
3. If the payments made by the employer are not deductible, the examiner will inspect the employer's income tax return to determine whether the benefits were deducted. If the examiner cannot make this determination by inspecting the employer's income tax return or determines the benefits were deducted incorrectly, the examiner will prepare a referral to be forwarded to EO Classification on Form 5666, TE/GE Information Report, if warranted.