No UBIT on Amounts Designated to Pay VEBA Benefits

In a recent private letter ruling, PLR 201501014 (Oct. 6, 2014), the Internal Revenue Service addressed the unrelated business income tax (UBIT) impact on certain income earned on assets received by a voluntary employees' beneficiary association (VEBA).  A VEBA is a mutual association of employees providing certain specified benefits to its members or their designated beneficiaries.  In this ruling, the VEBA also constituted a separate welfare benefit fund under a collective bargaining agreement and would receive retirement funding account (RFA) assets from another plan to provide retiree health benefits for its members.

As tax-exempt entities, VEBAs must pay tax on their unrelated business income.¹

Special Rules

However, special rules apply in calculating the amount of VEBA income subject to UBIT.²   Any unrelated business income that the VEBA sets aside for the payment of life, sick, accident or other benefits remains exempt from income, but only to the extent necessary to pay such benefits.³   As a result, any excess accumulated income beyond this amount will incur UBIT.⁴

Welfare Benefit Funds

Under yet another exception, VEBAs may set aside as exempt, without limitation, amounts held in welfare benefit funds and maintained pursuant to a collective bargaining agreement.⁵  Until the Treasury provides otherwise in final regulations, the IRS concluded that the UBTI exemption limits for paying employee benefits didn’t apply to the welfare benefit funds held by the VEBA.   Accordingly, the income generated by the transferred RFA assets wouldn’t trigger UBIT.

Endnotes

1. Internal Revenue Code Section 511.   
2. IRC Section 512(a)(3)(A). 
3. IRC Section 512(a)(3)(B)(ii).
4. IRC Section 512(a)(3)(E)(i).
5. Treasury Regulations Section 1.419A-2T, Q& A 1. 

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