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.


Veba Health Care: Examination Guidelines - Organizational Requiremen...

Veba Health Care: Examination Guidelines - Organizational Requiremen...: 4.76.18.3.1.1 (06-21-2002) 1. Review the trust agreement, or other organizational document, and obtain answers to the following question...

Captive Insurance but Be Careful. Lance Wallach, expert witness.

Most business owners want to: build wealth and maximize the value of what is left behind for heirs; protect their wealth to insure that what they have spent a lifetime building isn’t eaten away by taxes, inflation and/or the cost of medical care; distribute their wealth so that their loved ones may be taken care of, and see to it that their assets and possessions go where they want them to go in the time frame they want this to happen. This is the essence of estate planning.

Eventually the business owner leaves the business. If a family member or employee can buy the established business, planning needs to be done years in advance for the best possible results.

If an outside buyer is desired, the company should be positioned so that, if a favorable opportunity arises or an unfortunate event occurs, the company is completely ready for transition. In other words, the business should be ready for sale versus up for sale.

Determining the value of a business is an art. There are no fixed rules, just general guidelines. All characteristics of the business must be considered. The value, however, is ultimately what a buyer will pay considering all relevant circumstances and bargaining at arms length. This is referred to as the fair market value.

Non-cash Payment

Today’s would-be sellers are seeing attractive purchase prices offered in currencies other than cash. The purchase might be part cash, and the remainder an unsecured promissory note. But cash is the only sure thing.

Should the business falter, the remainder of the purchase price may evaporate or become subject to litigation. A sale to the highest bidder is not always the most appropriate sale.

Make Plans for the Future

Most small business owners are so busy running the company they fail to plan for the eventual transfer of the business. By not planning, they jeopardize the futures of the business and, possibly, of his or her family. We are often consulted at this time, but, at this point, it is almost too late to help.

Succession and estate planning involves various questions of tax, law and business planning. The business owner(s) should make the final decisions after being provided with various types of information. If planning is done early, the process is not difficult and the results are maximized. No one plans to fail, but many fail to plan.

How to Use a Captive Insurer to Save Money

Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up insurance companies to provide coverage when they think outside insurers are charging too much or coverage is simply unavailable. A small company can also use this as a tax reduction strategy, with the ability to get money back tax free.

Often, they are starting what is called “a captive insurance company”— an insurer founded to write coverage for the company, companies, or people who founded it.

Here’s how a captive insurer usually works. The parent business creates a captive so that it has a self-funded option for buying insurance, whereby the parent business provides the reserves to back the policies. The company then either retains that risk or pays reinsurers to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.

In the event of a loss, the business pays claims from its captive, or the reinsurer pays the captive. A captive insurance company would be an insurance subsidiary that is owned by its parent(s).

The Better Way for Large Tax Deductions

There are a number of significant advantages that may be obtained through sharing a large captive (“Group Captive”) with other companies. The most important is that you can significantly decrease the cost of insurance for your insureds, as compared to a standalone captive, through this arrangement. The second advantage is that Group Captives do not require any capital commitment.

By sharing a large captive you only pay a pro rata fee to cover all General and Administrative expenses of the insurance company. The cost for administration is very low per insured as compared to forming and operating a traditional stand alone captive insurance company. By renting a large captive, loans to its insureds (your company) can be legally made. So you can make a tax deductible contribution, and then take back money tax free. Sharing a large captive requires no significant financial commitment beyond the payment of premiums.

Operation of a standalone captive insurance company may not achieve similar cost saving results that a small business could obtain through sharing a large captive. More importantly, group captives require little or no maintenance by the insureds, and can be implemented in a fraction of the time as compared to stand-alone captives.

If you do this correctly, you can reduce insurance costs and obtain a large tax deduction, with the ability to get money back tax free.

Business Succession with a Captive, Be Careful - Slippery Rock Gazette February 17, 2008
Business Succession Planning; Facilitating the Sale of the Business How captive insurers can reduce taxes and insurance costs By Lance Wallach, Industry Consultant.

As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.

The information provided herein is not intended as legal, accounting, financial, or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.





Voluntary Employee Benefit Association (VEBA) Trusts meet requirements to file both Form 5500 and Form 990

 This requirement to file two returns made me question why other collectively-bargained benefit plans, such as the Pension, Annuity Funds, as well as 403(b) or 401(k) plans, are only required to file a Form 5500. In our practice, VEBA Trusts are used in connection with multiemployer Health and Welfare Plans. The difference between these plans is the Internal Revenue Service Code Sections under which the trusts are organized. While both are nontaxable trusts, there are differences between the code sections that regulate them.

Form 990 filing requirements

Form 990 filing is due on the 15th day of the 5th month after the plan year end. Two 90-day extensions can be obtained by filing Form 8868. The latest due date for the Form 990 is the 15th day of the 11th month after the year end.
  • Nonprofit organizations organized under the Internal Revenue Code Section 501, meeting certain asset and revenue criteria, are required to file the Form 990 annually. VEBA Trusts are tax exempt under IRC § 501(c)(9). This is different from multiemployer Pension and Annuity plans which are commonly organized under IRC § 400 series. As a result, multiemployer Pension and Annuity Plans are not required to file a Form 990. The Form 990’s focus is the entity’s purpose, mission, programs and finances. The filing of the Form 990 ensures that a VEBA Trust’s assets are efficiently managed for the purpose of providing benefits to the plan’s participants.
  • IRC § 501(c)(9) provides a broad definition of benefits which range from common health benefits to emergency loans in times of disaster. One of the limits that IRC § 501(c)(9) places on VEBAs is that 90% or more of the members must be employees with a common bond (employees in the same line of business in the same geographic area), unless the members are subject to a collective bargaining agreement. Multiemployer plans create VEBA Trusts to provide health benefits granted in collective bargaining agreements. The Internal Revenue Service has placed this limitation on VEBAs to ensure businesses do not use this form of organization in place of a bona fide insurance organization which would be separately regulated. Additionally, at least 90% of members are required to be employees, with up to 10% of members who are not employees being related to the members of the VEBA, such as in an employer capacity. Some of our multiemployer Health and Welfare plan clients allow participating employers to cover the company’s non-union office employees.

Form 5500 filing requirements

Form 5500 is due on the last day of the 7th month following the plan’s year end and can be extended for two and a half months by filing Form 5558.
  • Form 5500 is a joint effort of the Department of Labor, Pension Benefit Guaranty Corporation, and the Internal Revenue Service. The Form 5500’s purpose is to report information regarding compliance with the Employee Retirement Income Security Act (ERISA). VEBA Trusts are subject to ERISA because their purpose is the provision of health benefits to participants. As a result, VEBA Trusts with over 100 participants are required to file the Form 5500. Multiemployer Health and Welfare plans commonly have over 100 participants, and generally require the filing of Form 5500.The core purpose of ERISA is to ensure plans provide the benefits as promised to participants including a detailed reporting of insurance companies utilized. In addition, Form 5500 requires the reporting of professional fees paid out of plan assets for services rendered to the plan. These disclosure requirements have a significant impact on multiemployer Health and Welfare Plans because these plans commonly use plan assets to pay for service providers such as fund consultants, legal counsel, investment managers, third party administrators, and audit fees. The goal of the Form 5500 is to ensure the trust is well managed for the benefit of the participants.

Forms 990 and 5500 serve separate, but equally important purposes. These forms provide the Internal Revenue Service and Secretary of Labor the information necessary to oversee VEBA Trusts.

Increased IRS Enforcement Tax Shelters

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IRS to Audit Sea Nine VEBA Participating Employers. Lance Wallach, expert witness.

The IRS may be auditing many more participating employers in the coming months.

In recent months, I have received phone calls from participants in the Sea Nine VEBA and have learned that the IRS may be auditing many more participating employers in the coming months. To better assist current Sea Nine clients and those that are now or may be under audit in the future, my associates who are CPAs, tax attys and former IRS employees will continue to help with the Sea Nine VEBA victims and others in 419 412i captive insurance and section 79 scams and answer the following:

• What is the IRS’s position with respect to the Sea Nine VEBA,419 captive insurance and section 79 scams?

• What will be the likely result of my audit?

• What if I don't agree with my audit results?

• What are other participants doing with respect to the audits?

• Will the IRS impose interest and penalties?

• What is a “listed transaction” ?

• What is Form 8886, and what are the penalties for failing to file Form 8886?

• Will I be responsible even if I relied on my tax advisor?

• What recourse do I have against those that promoted and sold the Sea Nine VEBA?

As an expert witness Lance Wallach's side has never lost a case. People need to be careful of 419 Welfare Benefit Plans, 412i plans, Section 79 plans and Captive Insurance Plans. Most of these plans are sold by insurance agents. If you are in an abusive, listed or similar transaction plan you need to file under IRS 6707a. The participant files form 8886, and the salesmen or accountant who signs the tax returns files form 8918 if they got paid over $10,000. They are called Material Advisors and face a minimum $100,000 fine. Some plans are offshore which could involve FBAR or OVDI filings. If you have money overseas you probably need to file for IRS tax amnesty. If you want to reduce the tax we suggest that you first file and then opt out. For more information Google Lance Wallach.

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.