In the face of growing healthcare costs, many employers have struggled to stay afloat. To offset the staggering expenses associated with traditional group health plans, some companies found support with more flexible health benefit options, such as a voluntary employees’ beneficiary association (VEBA).
A VEBA plan is a great way to help your employees save money on various benefits and out-of-pocket expenses during employment and retirement. While not as common as they once were, many employers still offer VEBAs, so it’s important to be aware of their advantages and pitfalls.
In this article, we’ll go over the basics of a VEBA, including what they cover, and how they work. We'll also discuss VEBA account types, their pros and cons, and how they differ from traditional health reimbursement arrangements (HRAs).
What is a VEBA?
A voluntary employee beneficiary association (VEBA) is a tax-exempt trust fund mainly for retirees established by an employer or a group of employees to pay for eligible medical expenses and other benefits to its members, their dependents, or beneficiaries.
VEBAs are common within specific industries, particularly steel, utilities, telecommunications, schools, and car manufacturers. A company will usually manage a VEBA trust, but occasionally, a union will take charge of the account.
An employee group, such as all tenured employees in a company, can decide if they want to participate in the VEBA. If their employee group is approved, participation is mandatory for everyone in that group.
According to the IRS, a VEBA plan must meet the following requirements:
- It must be a voluntary association of employees.
- The organization must provide for the payment of life, sick, accident, or other similar benefits to members or their dependents or designated beneficiaries. All operations must be devoted to this purpose.
- VEBA earnings must be used solely for the administration and payment of participant benefits and may not be used for the advantage of any private individual or shareholder.
Employees can only be eligible for a VEBA, if they’re covered by your employer-sponsored health plan. There are no VEBA contribution limits and contributions are tax-deductible. The funds that grow are tax-free, and there are no tax penalties for a VEBA participant who withdraws from the account.
What does a VEBA cover?
VEBAs can cover a wide range of benefits. The eligible expenses your VEBA will cover will depend on which type of VEBA you choose to offer (more on that in the next section).
In addition to the aforementioned life, sick, or accident benefits, other benefits include those that are similar to life, sick, or accident benefits, such as a recreational expense, employee assistance program, child care, and severance benefit.
Employers can establish limits on which expenses can or can’t be reimbursed under a VEBA. So eligible employees should review the summary plan description for any restrictions before making a reimbursement request.
How does a VEBA work?
The way a VEBA functions is similar to other account-based health plans. Even though VEBAs are mainly for retiree health benefits, members can use money from their account to pay for qualified expenses during employment. Unlike a flexible spending account (FSA), unspent VEBA assets account rolls over from year to year.
In terms of contributions, only the employer contributes to the VEBA in most cases. But there are other options to contribute to a VEBA if you want more possibilities.
Ways to fund a VEBA account are with:
- Employer contributions
- Mandatory employee contributions
- Unused time off or vacation cash-outs, either annually, when an employee quits, or upon retirement
- Some or all of a future pay raise
- Early retirement incentives
Like a health savings account (HSA), the money in a VEBA account stays with the employee forever. This is crucial if your employees want to invest a portion of the funds for long-term growth.
For example, once a standard VEBA account has a balance of $1,000, an employee can open a VEBA investment account and transfer any additional funding into it. With an investment account, employees can invest toward their retirement and add to their gross income with their choice of mutual funds.
What types of VEBA accounts are there?
When offering a VEBA, there are several different types of plans to choose from. Each one allows your employees to purchase different expenses, so you’ll want to choose the one that includes the things your employees care about most.
The types of VEBA accounts are:
- General-purpose – Eligible expenses according to IRS Publication 502.
- Post-deductible VEBA – Limited to vision and dental expenses until the health plan deductible is met.
- Limited VEBA – Limited to vision and dental expenses only.
- Post-employment VEBA – Payments can only be made from this account when the employee has retired or left employment.
The pros of a VEBA
There are many advantages to a VEBA account. Employees save money with VEBA plans because they pay no taxes on employer contributions, accrued interest, and withdrawals.
They also provide security for workers because they don’t need to worry about losing benefits if they get laid off, retire, or if the company goes out of business.
Other pros of a VEBA include:
- Members can withdraw funds from their VEBA at any time
- Flexibility for employers to specify what benefits are paid under the plan
- Employee groups may choose if they want to participate
- The accounts are portable and aren’t dependent on employment
- Spouse and eligible dependents are covered in the plan
- Accounts can be transferred to a designated beneficiary as a death benefit if an employee passes away with no surviving spouse or dependents
- Contributions don’t count against pension plan contribution limits
The cons of a VEBA
VEBAs may seem simple at first, however, their regulations can leave employers in a whirlwind of confusion. This can be problematic because understanding the rules is necessary to take full advantage of the VEBA’s benefits.
Downsides of a VEBA include:
- Set up, administration, and reporting regulations can be difficult and costly
- There are plan design limitations, so it’s not entirely flexible
- Per an internal revenue code, there is a 100% excise tax on any VEBA assets reverting to the employer
- Individual employees of a group that joins a VEBA may not opt-out of the plan
How are VEBAs different from traditional HRAs?
While many people consider a VEBA a type of health reimbursement arrangement (HRA), they do differ. An HRA is an employer-funded health employee benefit used to reimburse employees for out-of-pocket medical expenses and health insurance premiums.
The employer simply sets a budget-friendly allowance that employees can use on qualified medical expenses and reimburses them when they submit proof of eligible expenses.
But unlike VEBAs, HRAs only reimburse employees for healthcare expenses, and not all of them are attached to a group health plan. Also, since they’re an arrangement, not an account, the funds stay with the employer when the employee leaves the company.
There are three common types of HRAs to compare to a VEBA—each with similarities and differences. Let’s go over them in the following sections.
Qualified small employer HRA
A qualified small employer HRA (QSEHRA) is for employers with fewer than 50 full-time equivalent (FTE) employees. Classified as a stand-alone HRA, this health benefit plan can’t be used with group health insurance.
Unlike a VEBA, QSEHRAs have annual contribution limits set by the IRS. They also have no opt-in or opt-out capabilities. All W-2 employees must be offered the QSEHRA—although they can choose not to use their allowance if they wish.
Individual coverage HRA
An individual coverage HRA (ICHRA) is for all company sizes and works similar to the QSEHRA, with greater flexibility. Like the QSEHRA, it’s also a stand-alone HRA, so it can only be used with individual health insurance. But with the ICHRA, there are no contribution limits, so employers can contribute as much or little as their budget allows.
A significant difference to the VEBA is that an ICHRA allows individuals to opt-in or opt-out of the benefit, even if their employer offered them the benefit. This is a great option because if the employee has premium tax credits, they can collect them by opting out of the ICHRA to save more money on their health insurance premiums.
Lastly, ICRHAs have the ability to set employee classes. So instead of letting your employee groups decide if they want to participate in your VEBA, you can set different allowance amounts for different employee classes for a better customized experience if they opt into the ICHRA.
The integrated HRA, also known as a group coverage HRA (GCHRA), is also for employers of all sizes, but it works in conjunction with group health insurance. Therefore, only employees enrolled in the company’s group policy can participate in the integrated HRA.
In many cases, employers offer a GCHRA to offset the high deductibles associated with a high-deductible health plan (HDHP). Similar to an HSA, employers use an HDHP to save money on premiums, so the GCHRA acts as a way to bridge the gap. However, you can use a GCHRA with any group health insurance plan.
GCHRA funds are used to pay for employees' deductibles, copays, and other out-of-pocket medical expenses that the insurance plan doesn’t fully cover.
While it doesn’t have the opt-in or out feature like the ICHRA, an integrated HRA does allow employers to set employee classes for more personalization. It also has cost-saving capabilities, such as requiring an explanation of benefits or setting a deductible or copay amount.
VEBAs are tax-advantaged and can help your employees and their families with healthcare expenses long into retirement, but their complexities and cost limitations can be tough to stomach.
An HRA is a budget-friendly and straightforward reimbursement benefit for your employees to save on medical expenses while you save on taxes and upfront costs. If you think a stand-alone or integrated HRA is the best choice for your organization, schedule a call with a PeopleKeep personalized benefits advisor, and we’ll get you started right away.