IRS rules a VEBA may offer members whole life insurance as a permissible "life benefit"

Plain-English summary

A voluntary employees' beneficiary association (VEBA) is a member-funded organization, tax-exempt under section 501(c)(9), that pays life, sick, accident, and similar benefits to its members. This VEBA, which is funded entirely by member contributions with no employer money, already offered group term life insurance and wanted to add group whole life insurance, with the VEBA holding the group contract and members paying premiums with their own after-tax funds. It asked the IRS to confirm that whole life insurance counts as a permissible "life benefit" under section 501(c)(9). The IRS agreed: because the VEBA is an "employee-funded association" and the regulations define a life benefit to include a life insurance contract provided by such an association to a member, the proposed whole life coverage is a permissible life benefit. The IRS cautioned that it was not ruling on whether payments under the arrangement qualify as amounts under a "life insurance contract" under sections 101(a) and 7702. The ruling matters because it lets the VEBA broaden the coverage it offers members without jeopardizing its exempt status.

Ruling snapshot

• Question: Does whole life insurance offered by a member-funded VEBA constitute a permissible "life benefit" under section 501(c)(9)?
• Outcome: approved
• Key authorities: IRC § 501(c)(9); Treas. Reg. §§ 1.501(c)(9)-3(a), (b), 1.501(c)(9)-6(b)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202039003                                              Third Party Communication: None
Release Date: 9/25/2020                                        Date of Communication: Not Applicable
Index Number: 501.09-00, 501.09-01
                                                               Person To Contact:
---------------------------------                              -------------------- ,ID No. -----------------
------------------------------------------------------------   Telephone Number:
----------------------------                                   --------------------
-----------------------                                        Refer Reply To:
------------------------------------                           CC:EEE:EB:HW
                                                               PLR-121286-19
                                                               Date:
                                                               June 26, 2020




Legend:

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

Year 1 = -------

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

This responds to your letter, dated September 6, 2019, supplemented by
correspondence dated March 5, 2020, May 28, 2020, and June 10, 2020, requesting a
ruling that the proposed provision of whole life insurance will constitute a permissible
“life benefit” under section 501(c)(9) of the Internal Revenue Code (“Code”).

FACTS

Taxpayer was formed in Year 1 by ----------------------------------. Taxpayer provides
benefits to its members who are ------------------------------------------------------------------------.
Taxpayer represents that it has periodically received determination letters from the
Internal Revenue Service that it is a voluntary employees’ beneficiary association
(“VEBA”) under section 501(c)(9) of the Code. Taxpayer represents that it only receives
contributions from its members and that there are no employer contributions to
Taxpayer. Among the benefits that Taxpayer currently provides to its members is group
term life insurance.

Taxpayer proposes to offer group whole life insurance to its members in addition to the
group term life insurance currently provided. Taxpayer represents that the VEBA would
be the holder of a group insurance contract issued by a third-party insurance carrier.
Members would select the amount of desired coverage, pay premiums based on their
age, coverage amounts, and health status, and designate the beneficiary or
beneficiaries. Individual members would have all rights to cash values under the
insurance policy and Taxpayer would not hold any cash values from purchases of the
PLR-121286-19                                 2

whole life insurance. Taxpayer represents that members will pay for premiums for the
whole life insurance with their own funds on an after-tax basis, and they will receive no
contributions or other subsidies for these premiums from any employer, union, or any
other person.

RULING REQUESTED

Taxpayer requests a ruling that the provision of whole life insurance to its members will
constitute a permissible “life benefit” under section 501(c)(9) of the Code.

LAW

Section 501(c)(9) provides for the exemption from federal income tax of an organization
that provides for the payment of life, sick, accident, or other benefits to the members of
the association or their dependents or designated beneficiaries, if no part of the net
earnings of the association inures (other than through such payments) to the benefit of
any private shareholder or individual.

Treas. Reg. § 1.501(c)(9)-3(a) provides, in relevant part, that the life, sick, accident, or
other benefits provided by a VEBA must be payable to its members, their dependents,
or their designated beneficiaries. Life, sick, accident, or other benefits may take the form
of cash or noncash benefits. A VEBA 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 a VEBA 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.

Treas. Reg. § 1.501(c)(9)-3(b) provides, in relevant part, that the term life benefits
means a benefit payable by reason of the death of a member or dependent. A life
benefit may be provided directly or through insurance. It generally must consist of
current protection, but also may include a right to convert to individual coverage on
termination of eligibility for coverage through the association, or a permanent benefit as
defined in, and subject to the conditions in, the regulations under section 79. A life
benefit also includes the benefit provided under any life insurance contract purchased
directly from an employee-funded association by a member or provided by such an
association to a member.

Treas. Reg. § 1.501(c)(9)-6(b) provides that the availability of any statutory exclusion
from gross income with respect to contributions to, or the payment of benefits from, an
organization described in section 501(c)(9) is determined by the statutory provision
conferring the exclusion, and the regulations and rulings thereunder, not by whether an
individual is eligible for membership in the organization or by the permissibility of the
benefit paid.

ANALYSIS AND CONCLUSION
PLR-121286-19                                 3

Taxpayer represents that it only receives contributions from its members and that it
receives no employer contributions. Taxpayer further represents that members will pay
for premiums for the whole life insurance with their own funds on an after-tax basis, and
they will receive no contributions or other subsidies for these premiums from any
employer, union, or any other person. Taxpayer represents that the VEBA would be the
holder of a group insurance contract issued by a third-party insurance carrier.
Accordingly, based on these representations and other information and representations
provided by Taxpayer, we conclude that Taxpayer is an employee-funded association
within the meaning of Treas. Reg. § 1.501(c)(9)-3(b). Because a life benefit includes a
life insurance contract provided by an employee-funded association to a member, we
conclude that the whole life insurance proposed to be provided to members by
Taxpayer will constitute a permissible “life benefit” under section 501(c)(9) of the Code
and the Treasury Regulations thereunder.

This ruling does not address whether amounts received under an arrangement with an
entity that is not regulated as an insurance company are treated as amounts received
under a “life insurance contract” within the meaning of sections 101(a) and 7702 of the
Code.

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal tax consequences to Taxpayer or to members of Taxpayer under any other
provision of the Code or Treasury Regulations.

This ruling is directed only to the party requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or citied as precedent.

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the request for this ruling, it is subject to verification on examination.


                                          Sincerely,



                                          Denise Trujillo
                                          Branch Chief
                                          Health & Welfare Branch
                                          Office of Associate Chief Counsel
                                          Employee Benefits, Exempt Organizations, and
                                          Employment Taxes



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