A VEBA termination amendment preserved its prior exemption

Plain-English summary

A tax-exempt voluntary employees' beneficiary association planned to amend its trust agreement, terminate, and transfer its assets to a section 115 trust that would fund retiree health benefits. The VEBA represented that, before the amendment and termination, all of its assets would be used only for permissible VEBA benefits. Section 501(c)(9) requires substantially all operations to provide permitted benefits and bars private inurement other than through those benefits. Because no net earnings would benefit a private person before the amendment except through permissible benefit payments, the IRS ruled that the amendment would not cause the VEBA to fail section 501(c)(9) before the amendment date. The ruling did not address consequences to the public retirement system, its retirement plans, or the receiving trust.

Ruling snapshot

• Question: Would amending the VEBA trust to terminate and transfer its assets cause loss of section 501(c)(9) status before the amendment?
• Outcome: Approved, the prior exemption would be preserved
• Key authorities: IRC § 501(c)(9); Treas. Reg. §§ 1.501(c)(9)-3 and 1.501(c)(9)-4

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201625004                                              Third Party Communication: None
Release Date: 6/17/2016                                        Date of Communication: Not Applicable
Index Number: 501.09-00, 501.09-03
                                                               Person To Contact:
----------------------                                         -------------------------
------------------------------------------------------------   Telephone Number:
----------------                                               ----------------------
------------------------------                                 Refer Reply To:
--------------------------------------------                   CC:TEGE:EB:HW
                                                               PLR-131574-15

                                                               Date: March 11, 2016




LEGEND

Taxpayer          =        ---------------------------------------------------------------------------

State             =        -------

HRA Plan          =        ------------------------------------------------------------------------
                           ------------------------------------------------

Health Plan =              ------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------

System            =        --------------------------------------------------------------

Trust B           =        ------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
                           ---------------------------------

Date X            =        ---------------------------

Month Y           =        -------------------


Dear --------------:

This responds to your letter of September 25, 2015, and subsequent correspondence,
requesting a ruling regarding the tax consequences of an amendment to Taxpayer’s
trust agreement to terminate and transfer its assets to Trust B. Taxpayer requests a
ruling that the amendment will not cause Taxpayer to fail to meet the requirements of
PLR-131574-15                                2

section 501(c)(9) of the Internal Revenue Code (Code) prior to the date of the
amendment.


FACTS

Taxpayer is a trust that received a letter from the Internal Revenue Service, dated Date
X, stating that it is exempt from Federal income tax as a voluntary employees’
beneficiary association (VEBA) under section 501(c)(9) of the Code. System is an
instrumentality of State that was established to provide retirement benefits for State’s
public employees. System currently operates three retirement plans for public
employees: a defined benefit plan (Plan A), a defined benefit plan which elements of a
defined contribution plan (Plan B), and a defined contribution plan (Plan C). System
provides retiree health benefits to eligible retirees in Plan A and Plan B through section
401(h) accounts, and beginning in Month Y, through Trust B, which you represent is a
section 115 trust, the income of which is excludable from gross income under section
115(1) of the Code. System also provides retiree health benefits under Health Plan and
through Taxpayer to eligible retirees in Plan C.

System is terminating its current health plans for retirees in Plan A and Plan B and
creating a new health reimbursement arrangement (HRA Plan). Taxpayer is terminating
and transferring its assets to Trust B. Following the transfer, Health Plan will be funded
solely through Trust B. Taxpayer represents that prior to Taxpayer’s trust agreement
amendment and Taxpayer’s termination, Taxpayer’s assets will be solely used to
provide permissible VEBA benefits.

RULING REQUESTED

The amendment of Taxpayer’s trust agreement to terminate Taxpayer and transfer its
assets to Trust B will not cause Taxpayer to fail to meet the requirements of section
501(c)(9) prior to the date of the amendment.

LAW

Section 501(a) of the Code provides an exemption from federal income tax for a
voluntary employees’ beneficiary association providing for the payment of life, sick,
accident or other benefits to its members or their dependents or designated
beneficiaries, if no part of net earnings of such association inures (other than through
such payments) to the benefit of any private shareholder or individual.

Section 1.501(c)(9)-3(a) of the Income Tax Regulations provides that the life, sick,
accident, or other benefits provided by a voluntary employees' beneficiary association
must be payable to its members, their dependents, or their designated beneficiaries.
PLR-131574-15                                  3

Life, sick, accident, or other benefits may take the form of cash or noncash benefits. A
voluntary employees' beneficiary association is not operated for the purpose of

providing life, sick, accident, or other benefits unless substantially all of its operations
are in furtherance of the provision of such benefits. Further, an organization is not
described in this section if it systematically and knowingly provides benefits (of more
than a de minimis amount) that are not permitted by paragraphs (b), (c), (d), or (e) of
this section.

Section 1.501(c)(9)-3(c) provides, in pertinent part, that the term “sick and accident
benefits” means amounts furnished to or on behalf of a member or a member's
dependents in the event of illness or personal injury to a member or dependent. Such
benefits may be provided through reimbursement to a member or a member's
dependents for amounts expended because of illness or personal injury, or through the
payment of premiums to a medical benefit or health insurance program.

Section 1.501(c)(9)-4(a) provides, in pertinent part, that no part of the net earnings of an
employees' association may inure to the benefit of any private shareholder or individual
other than through the payment of benefits permitted by section 1.501(c)(9)-3. Whether
prohibited inurement has occurred is a question to be determined with regard to all of
the facts and circumstances, taking into account the guidelines set forth in the
regulations.

ANALYSIS AND CONCLUSION

Prior to the amendment of Taxpayer’s trust agreement to terminate Taxpayer and
transfer its assets to Trust B, no net earnings will inure to the benefit of any private
shareholder or individual other than through the payment of permitted VEBA benefits.
Accordingly, the proposed amendment does not cause Taxpayer to fail to meet the
requirements of section 501(c)(9) of the Code prior to the date of the amendment.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Specifically, it does not
address the tax consequences of the described transactions to System, the retirement
plans operated by System, or Trust B. Section 6110(k)(3) of the Code provides that it
may not be used or cited as precedent.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
PLR-131574-15                               4

by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                         Sincerely,



                                         Janet A. Laufer
                                         Senior Technician Reviewer
                                         Health & Welfare Branch
                                         Office of Associate Chief Counsel
                                         (Tax Exempt & Government Entities)