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What is a VEBA health plan?

Hand writing FAQ on chalkboard
A brief overview...
  • VEBA Health Plan is a Health Reimbursement Arrangement
  • Employees can be current, or past employees, or other group associates
  • Members can use tax-free dollars to pay out-of-pocket medical expenses
  • The IRS approves VEBA plans as section 501(c) (9) entities
  • The Affordable Care Act limited VEBA plans to meet standards for qualified health insurance plans

Consumer-directed health plans and account-based financing arrangements were widely used methods for many employers. They used them to enhance employee income and benefits before the Affordable Care Act. VEBA, or Volunteer Employee Benefit Association, plans were well suited for organized labor units and public employees.

These programs were sometimes generous but often did not provide complete health insurance coverage. The Affordable Care Act requires some employers to offer or provide a consistent level of health coverage for its employees.

VEBA is a Versatile Tool

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The VEBA health Plan reimburses employees or group members for medical expenses. The VEBA requires an employer contribution, the creation of a trust or naming a trustee to oversee the funds, and operating within the bounds of laws.

It can no longer stand alone due to the Affordable Care Act and other regulations for taxes, and employee retirement assets. The VEBA plan can combine with other types of HSA, Flexible Spending Accounts, and health insurance plans.

The Powers of the Trust

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In its most common form, the VEBA is run by a trust. The trust takes ownership of the funds, and take the monies off the employer’s books. The trust operates the VEBA account for the benefit of the employees. In most cases, the trust has trustees who are not the employer.

The trust can substantiate claims for reimbursement and operate the trust on a day-to-day basis. The below listed items describe the typical powers of a VEBA trust.

  • The trust can assign money to individual employee accounts within the trust
  • The trust administers the fund and confirms claims
  • The trust can pay interest or earnings on the funds to individual employee accounts
  • The trust takes legal ownership, the VEBA Account is off the employer’s books

Duties of the Trust

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The VEBA trust is a legal entity that must pass review by the IRS for the Sec. 501(c)(9) certification and the ERISA authorities. The structure requires planning and documentation. It is particularly well-suited for public employee bargaining units.

There are complex tax issues when applied to private employment. The trust incurs administration fees for operating the account and managing third-party claims. The trust protects the funds from creditors.

There is a significant expense for trust management and continuous oversight. The absence of bank or other funds management fees balances the trust fees and charges.

VEBA HRA and Obamacare

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The use of a Health Reimbursement Arrangement does not relieve the employer of its duties under the health insurance laws. The VEBA is popular for public employees because the earnings are not taxable, and it is an excellent choice for bargaining unit employees.

The employer can sponsor a companion health plan. All qualified plans have the ACA minimum value standards. They are written into every health plan. All employer -sponsored health plans used with a VEBA must provide the below-listed reform elements.

  • Essential health benefits
  • Essential benefits with no annual limits
  • Preventive care without cost sharing

VEBA Controls Employer Costs

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A VEBA health plan provides funds for members to use to pay health and medical expenses. VEBA is a way for employers to continue funding generous workplace programs while shifting some of the costs to employees.

To maintain a VEBA, the employer must fund the program and provide group health insurance for the current employees. The goal of a VEBA is to increase employee responsibility for health care spending while reducing overall costs.

Rather than offer an array of services and hope that employees choose wisely, the VEBA funds employees with a built-in cost saving limit. The below-listed items describe the main elements of the VEBA.

  • Tax advantaged funds’
  • Account-based health plan
  • Limited employer contribution
  • Employee control over spending

VEBA Works Like a Health Savings Account

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Once the employer contributes the funds, the money changes owners and goes to the employee as owner; the trust must be certified under Sec. 501 (c )(9). Unused funds can roll over into the next yearly cycle. The funds are tax-free deposits; they remain tax-free and can be used without penalty at any time.

For example, the funds must go to the employee if he or she leaves or be spent down. VEBA health plans offer a great way to use tax-free contributions to pay medical expenses. It is better oriented towards public employees and bargaining units.

The tax-free contributions can earn interest and income while in the VEBA accounts. The profits are also tax-free. Members can use VEBA funds at any time and any age without penalty.

Technical Requirements for VEBA Health Plans

The owner must be the employee group, and either they or a trustee must operate the association. The trustee can be a bank or other accommodation party. It cannot be the employer.

The bank cannot be an earmarked employer account. The association must have its legal existence as an independent organization. They need separate Employer Identification Number.

Membership Requirements

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The essential premise of membership is that it is voluntary. It cannot be part of a job; it must be a free choice. The membership anchor can be employment or a common thread of an employer. This could include current, past, retirees, or even future employment.

It could include locations where employees of more than one employer gathered. The loose idea of an employee is essentially a common theme that connects the employees.

Nondiscriminatory and Voluntary

A VEBA health Plan can put funds where a consumer needs them most: into their hands when there are unpaid medical bills. The key to a successful VEBA plan is the tax-free contributions and withdrawals without penalty. Participation must be voluntary and no one in the unit may be excluded or treated unfairly.

Comparison shopping is the best way to find the right fit in health insurance coverage for the individual or family situation. Comparison shopping can focus on the costs and features that matter most to the customer.

Election of Benefits

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The offer of healthcare reimbursement arrangement or such as a VEBA Health Plan means that the employees may not get subsidies from the Obamacare Marketplace. The cannot collect both a reimbursement and subsidy for a Marketplace plan. VEBA can work with HSA and other accounts. VEBA can stack or act as secondary to other accounts.

Some employers freeze VEBA until an employee’s retirement. Flexibility is the key. VEBA can accomplish many objectives because one can use it in many ways for health insurance, including deductibles, costs, and premiums.

Types of Spending Assistance and Reimbursement

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The below-listed descriptions cover the essentials of account based, employee-controlled health plans.

Health Savings Account or HSA is a privileged savings account; under Obamacare, it must go with a plan that has high deductibles, high out-of-pocket limit, and a low premium. The employee uses his or her funds as tax-advantaged contributions to the Health Savings Account.

The funds may be used for medical expenses without tax or penalty. Unused funds rollover to the next year. Obamacare sets limits on the amounts of contribution per year. The interest and earnings on the deposits are tax-free.

Health Reimbursement Arrangements are employer contributions to a trust or employee operated organization to pay medical expenses. VEBA plans are HRAs.

The funds become the property of the employee immediately upon deposit to his or her account. Unused funds roll over and grow with interest or investment. All funds and spending from this arrangement are tax-free.

Flexible Spending Accounts are specialized employee savings accounts. The purpose of the flexible spending account is to give the employee funds and control over the funds to pay medical expenses. Employers can contribute to the FSA, and they can pay up to the actual limit.

Employees can use the funds for medical expenses other than their healthcare plan premiums. The expenses include children under age 27, spouse, and other dependents.

Employees can use the FSA for non-health-premium medical care expenses incurred by the employee, or the employee’s spouse, dependents, and any children who, as of the end of the taxable year, have not attained age 27.

Impact of GASB Statement 45

The Government Accounting Standards Board issued Statement 45 which call for stating future obligations. The rule requires setting funds for the future contribution to the employee health plan. This caused changes for those firms that used a current accounting method and did not want tax responsibility for the employee future funding.

The VEBA Trust can be forward funded since the trust mechanism removes the money from the employer’s books. A VEBA Trust does not create any liability for loss, creditor actions, and other risks that could diminish the fund.

The Role of VEBA in Health Insurance

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VEBA accounts have a long history as a benefit paying for medical expenses during employment and into retirement. They are popular today among organized labor units and government agencies.

GASB Statement 45 and the Affordable Care Act have made VEBA plans useful as a flexible tool for group coverage; VEBA works with other health savings accounts and health plans.

VEBA plans reduce employer costs and give employees more control over health spending. Comparison shopping is an excellent way to get the best out of Marketplace and major medical plans paired to go with the VEBA plan.

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