In the face of growing healthcare costs, some employers have looked for unique ways to help their employees with their medical expenses. To offset these costs, some companies have found flexible health benefit options, such as a voluntary employees’ beneficiary association (VEBA), to be helpful.
A VEBA plan is a great way to help your employees save money on various expenses during employment and retirement. While not as common as they once were, many employers still offer VEBAs, so knowing their advantages and pitfalls is essential.
In this article, we’ll review the basics of a VEBA, including what they cover, how they work, their pros and cons, and how they differ from other reimbursement health plans.
What is a VEBA?
A voluntary employee beneficiary association (VEBA) is a tax-exempt trust established by an employer or a group of employees to pay for eligible medical expenses and other benefits for 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 IRS1, a VEBA must meet the following requirements:
- It must be a voluntary association of employees.
- The association must devote a substantial part of its operations toward the payment of life, sick, accident, or other similar benefits to its members, their dependents, or designated beneficiaries. All operations must be devoted to this purpose.
- VEBA earnings must be used solely to administer and pay participant benefits. They may not be used for the advantage of any private individual or shareholder.
Employees can only be eligible for a VEBA if they participate in 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 covers depends on which type of VEBA you offer.
In addition to life, sick, and accident benefits, other benefits that can be included are recreational expenses, employee assistance programs, child care, and severance benefits.
Employers can establish limits on which expenses are eligible for reimbursement under a VEBA. So, eligible employees should review the summary plan description for any restrictions before requesting reimbursement.
How does a VEBA work?
The way a VEBA functions is similar to other account-based health plans. In many cases, VEBAs are created to cover the health benefits of retirees only, but can be used to pay for employees’ qualified expenses during employment. Unlike those in a flexible spending account (FSA), unspent VEBA assets roll over from year to year.
In terms of contributions, only the employer typically contributes to a VEBA. But there are other ways to contribute to a VEBA if you want more options.
You can fund a VEBA account 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 through mutual funds.
What types of VEBA accounts are there?
When offering a VEBA, there are several different types of plans to choose from. Each plan allows your employees to purchase different expenses, so you’ll want to select the one that includes the items your employees care about most.
The four types of VEBA accounts are:
- General-purpose VEBA: This account covers eligible expenses listed in IRS Publication 502
- Post-deductible VEBA: This plan is limited to vision and dental expenses until employees meet their health insurance deductible
- Limited VEBA: This account is limited to only vision and dental expenses
- Post-employment VEBA: Payments can only be made from this account when the employee has retired or otherwise 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 the following:
- 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
- The plan can cover spouses and eligible dependents
- 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.
A few potential downsides of a VEBA include the following:
- The setup and administrative expenses, as well as the reporting regulations, can be costly and difficult
- There are plan design limitations, so it’s not entirely flexible
- Per Internal Revenue Code 49763, 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 HRAs?
While many people consider a VEBA a type of health reimbursement arrangement (HRA), they actually differ. An HRA is an employer-funded health employee benefit used to reimburse employees for qualified out-of-pocket medical expenses and sometimes 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.
Unlike VEBAs, HRAs only reimburse employees for healthcare expenses, and not all 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
Unlike a VEBA, QSEHRAs have annual contribution limits set by the IRS. They also have no opt-in or opt-out capabilities. You must offer the QSEHRA to all your W-2 full-time employees—although they can choose not to use their allowance if they wish. Additionally, QSEHRAs are for active employees, meaning retired employees are ineligible.
All QSEHRA reimbursements are free of payroll taxes for the organization and its employees. Reimbursements can be free of income tax for employees with health insurance that provides minimum essential coverage (MEC). Employees without MEC can receive QSEHRA reimbursements. However, the amount they receive will be subject to income taxes.
Individual coverage HRA
An individual coverage HRA (ICHRA) is for all company sizes and works similarly to the QSEHRA but with greater flexibility. Employees participating in the ICHRA must have individual health insurance. There are no contribution limits, so employers can contribute as much or as 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. This is a significant advantage because if the employee has premium tax credits and the ICHRA is considered unaffordable, they can collect their tax credits by opting out of the ICHRA to save more money on their health insurance premiums. However, if the ICHRA is considered affordable, they won’t be able to opt-out in favor of tax credits.
Lastly, employers leveraging ICHRAs can 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 more 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 only works with group health insurance. Therefore, only employees enrolled in the company’s group policy can participate in the integrated HRA.
Employers often choose a GCHRA to offset the high deductibles associated with a high-deductible health plan (HDHP). Like 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—whether with a high or low deductible.
Employees can use their GCHRA allowance to pay for their deductibles, copays, and other out-of-pocket medical expenses that the insurance plan doesn’t fully cover. You can’t reimburse employees for premiums with a GCHRA.
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 being able to require 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 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.
This article was originally published on March 30, 2022. It was last updated on May 26, 2023.