An employee benefit plan you've probably not heard of.

• Author: Wallach, Lance

Although they have been in existence since 1928, Voluntary Employees Beneficiary Associations (VEBA) are not well known or understood. VEBAs allow an employer that joins to receive a current tax deduction while putting away funds that are not currently needed, and can be especially helpful for small private companies.

A VEBA allows the employer a great deal of latitude in choosing plan benefits. Contributions are tax-deductible and funds grow tax-deferred. VEBAs have no penalties for early distributions, and life benefits can pass to the employee's family free of income, estate and gift taxes. A VEBA can be designed so that the benefits paid are not subject to estate taxes because participants have no "incidents of ownership" in the assets, including life insurance contracts held under the VEBA.

Protected from Creditors

VEBA assets are protected from the claims of creditors, the amounts in which contributions are made can be flexible and benefits are highly favorable to the business owners, with no vesting for employees. Additionally, a VEBA can supplement or enhance buy/sell and stock-redemption agreements, or solve retained earnings problems.

Almost any business can establish a VEBA for its employees, including owner-employees. An employer with one employee (including a spouse) can establish one. A VEBA is a tax-exempt organization, as described under IRC Section 501 (c)(9), and would receive a tax exemption letter from the IRS. An employer can also join an existing multi employer VEBA.

Moreover, an employer can maintain both a retirement plan and a VEBA. VEBAs typically provide for the payment of life insurance, accident insurance, sickness, and other benefits to the members of the VEBA or their dependents and beneficiaries. VEBA trust earnings are tax-exempt while the trust is accumulating funds.

A VEBA is well-suited to a business that:

* is highly profitable;

* can no longer fund its retirement plan because it is overfunded or because there is no benefit to the owner-employees;

* has owners that would like to protect assets from their creditors; and

* has owner-employees that would like to reduce their estate tax exposure.

In most cases, a VEBA is set up as a trust, with a bank as the trustee. Some trusts look like VEBAs but are not because the sponsor has not taken the additional, costly, step of filing the trust with the IRS under IRC Section...