A VEBA may expand its membership to all former employees without losing its tax exemption

Plain-English summary

A voluntary employees' beneficiary association (VEBA) is a tax-exempt group under section 501(c)(9) that pays life, sick, accident, or similar benefits to its employee-members. This VEBA, funded only by member contributions with no employer money, wanted to amend its by-laws to open membership to all former employees of the employer, whether or not they had been members while working and whether or not they are retired annuitants. It asked the IRS whether that expansion is allowed. The rules require a VEBA's members to share an employment-related common bond defined by objective standards, and the regulations say a person still counts as an "employee" even after leaving by retirement, disability, or layoff. Applying those rules, the IRS concluded the proposed expansion to all former employees is permissible under section 501(c)(9) and the related regulation. In short, adding former employees does not break the employment-related common bond that a VEBA must maintain, so the group can broaden its membership and keep its exemption.

Ruling snapshot

• Question: May a VEBA amend its by-laws to expand membership to all former employees and remain exempt under section 501(c)(9)?
• Outcome: Approved (the expansion is permissible)
• Key authorities: IRC § 501(c)(9); Treas. Reg. § 1.501(c)(9)-2(a), (b)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202236004                                              Third Party Communication: None
Release Date: 9/9/2022                                         Date of Communication: Not Applicable
Index Number: 501.09-00, 501.09-04
                                                               Person To Contact:
--------------------------------------                         ------------------------------, ID No. ------------
-----------------------------                                  Telephone Number:
------------------------------------------------------------   -------------------
---------------                                                Refer Reply To:
---------------------                                          CC:EEE:EB:HW
------------------------------                                 PLR-124841-21
                                                               Date:
                                                               June 6, 2022




Legend

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

Year 1 = -------


Dear ----------------,

This responds to your letter, dated November 17, 2021, and subsequent
correspondence dated April 20, 2022, requesting a ruling that the proposed amendment
to Taxpayer's by-laws to expand its membership to include all former employees is
permissible under section 501(c)(9) of the Internal Revenue Code ("Code").

FACTS

Taxpayer was formed in Year 1 by --------------------employees. Taxpayer represents that
it has periodically received determinations 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.

Section 3.01a of Taxpayer's by-laws provides that membership is open to the following
individuals: "individuals who are currently employed by the ----------------------- as defined
in Section 3.01b; former -----------------------employees who are retired annuitants; ---------
----------------------- employees -----------------------------; and spouses and surviving
spouses. Eligibility for membership is limited to United States citizens."

Section 3.01b of Taxpayer's by-laws defines "------------------------Employee" as "all
appointed and elected officers and employees -------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------."

Taxpayer proposes to amend its by-laws to expand the scope of eligible members to
include all former -----------------------employees.

RULING REQUESTED

Taxpayer requests a ruling that the Taxpayer's proposal to expand its eligible
membership to include all former employees of the ------------------------—regardless of
whether such former employees were members of Taxpayer while in active service or
are retired annuitants—is permissible under section 501(c)(9) of the Code and Treas.
Reg. § 1.501(c)(9)-2(a).

LAW

Section 501(c)(9) of the Code 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)-2(a)(1) provides, in relevant part, that the membership of an
organization described in section 501(c)(9) of the Code must consist of individuals who
become entitled to participate by reason of their being employees and whose eligibility
for membership is defined by reference to objective standards that constitute an
employment-related common bond among such individuals.

Treas. Reg. § 1.501(c)(9)-2(b) provides that whether an individual is an "employee" is
determined by reference to the legal and bona fide relationship of employer and
employee. The term employee includes an individual who became entitled to
membership in the association by reason of being or having been an employee. Thus,
an individual who would otherwise qualify under this paragraph will continue to qualify
as an employee even though such individual is on leave of absence, works temporarily
for another employer or as an independent contractor, or has been terminated by
reason of retirement, disability, or layoff.

ANALYSIS AND CONCLUSION

Based on the foregoing, we conclude that Taxpayer's proposal to expand its eligible
membership to include all former employees of the ----------------------—regardless of
whether such former employees were members of Taxpayer while in active service or
are retired annuitants—is permissible under section 501(c)(9) of the Code and Treas.
Reg. § 1.501(c)(9)-2(a).

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 cited 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.

The ruling contained in this letter is based upon information and representations
submitted by your authorized representatives and accompanied by a penalties of
perjury statement executed by an appropriate party, as specified in Rev. Proc. 2022-1,
2022-1 IRB 1, § 7.01(16)(b). This office has not verified any of the material submitted in
support of the request for ruling, and such material is subject to verification on
examination. This office will revoke or modify a letter ruling and apply the revocation
retroactively if there has been a misstatement or omission of controlling facts; the facts
at the time of the transaction are materially different from the controlling facts on which
the ruling was based; or, in the case of a transaction involving a continuing action or
series of actions, the controlling facts change during the course of the transaction. See
Rev. Proc. 2022-1, § 11.05.


                                          Sincerely,




                                          Dara Alderman, Senior Counsel
                                          Health & Welfare Branch, Office of Associate
                                          Chief Counsel
                                          Employee Benefits, Exempt Organizations, and
                                          Employment Taxes




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