Changing Times Call for Changing VEBA Rules, Firm Says

August 18, 2021

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2021-28)
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Guidance Plan Recommendation — Notice 2021-28

Dear Sir/Madam:

We would appreciate your considering the following recommendation for the 2021-22 Priority Guidance Plan.

The Treasury regulations governing “voluntary employees' beneficiary associations” (“VEBAs”) were published over 40 years ago. Since that time, evolving employment and family leave laws have recognized that an employee's dependents may include a variety of persons in extended family relationships who may or may not be tax “dependents.” This letter briefly summarizes the subject and recommends a change to modernize the VEBA rules to accommodate these expanded family relationships in certain respects.

This recommendation has taken on added urgency since we initially submitted it two years ago. In this regard, the COVID-19 pandemic has underscored the importance of individuals maintaining adequate life insurance to protect their extended family members. VEBAs provide a valuable source of economical life insurance coverage to meet these needs, but the current rules unduly restrict access to the coverage.

Current VEBA Rules

The current VEBA rules provide as follows:

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. For purposes of section 501(c)(9), dependent means the member's spouse; any child of the member or the member's spouse who is a minor or a student (within the meaning of section 151(e)(4)); any other minor child residing with the member; and any other individual who an association, relying on information furnished to it by a member, in good faith believes is a person described in section 152(a). Treas. Reg. § 1.501(c)(9)-3(a).¹

The VEBA rules defining permissible benefits include (1) “life benefits” payable by reason of the death of a member or dependent (and include a life insurance contract purchased by a member from an employee-funded VEBA), (2) sick and accident benefits furnished in the event of illness or personal injury to a member or dependent, and (3) “other benefits” that are similar to life, sick or accident benefits. Broadly speaking, the latter encompasses an array of benefits that are intended to safeguard or improve the health of a member or his dependents, or that “protects against a contingency that interrupts or impairs a member's earning power.” Treas. Reg. § 1.501(c)(9)-3(d).

Explanation of Proposal

Well-established VEBAs offering life insurance and other (non-sick and accident) benefits to members would like to expand their potential beneficiaries to include various persons who are closely associated with their members, but do not fit the narrow definitions of spouse, child who is a minor or student (under Code section 151(e)(4) (now moved to Code section 152(f)(2)), a minor child residing with the member, or dependent under Code section 152(a).

The membership of these VEBAs may be smaller than in the past as a result of higher rates of retirement, reduced employer payrolls and other employment and demographic trends — trends which accelerated during and since the COVID-19 pandemic. Expanding VEBAs to include additional categories of beneficiaries eligible to purchase coverage can help stabilize insurance premiums and improve the VEBA's overall financial health. In this regard, allowing a larger group of persons to purchase life insurance or similar benefits is appropriate as long as such persons bear a reasonable relationship to the member. And, importantly, when a member's survivors have been provided for, the member may continue to work without using his or her own resources, or taking extended leave, to assist the survivors.

The Family and Medical Leave Act of 1993 (“FMLA”) recognizes spouses and children of an employee as persons for whom an employee should be granted leave to provide care, and also specifically includes an employee's parents.

Similarly, in the last 10 years or so, there has been a steady expansion of the categories of persons who, while not “dependents” of an employee, are deemed to have relationships that would justify an employee's taking time off from work to care for them. Indeed, our research establishes that more than 50 state and local jurisdictions have adopted their own criteria for this purpose.

We believe the Office of Personnel Management (“OPM”) rules provide a particularly useful model for modernizing the VEBA rules to recognize expanded familial relationships. 5 CFR § 630.201. These OPM rules treat the following persons as “family members” of an employee:

• spouse and his/her parents;

• sons and daughters and their spouses/domestic partners;

• parents and their spouses/domestic partners;

• brothers and sisters and their spouses/domestic partners;

• grandparents and grandchildren and their spouses/domestic partners;

• domestic partner and his/her parents; and

• any individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship.

Allowing persons in any of the above classes to purchase life insurance, disability or other non-sick and accident VEBA benefits would help such persons provide income to care for themselves and their survivors, thus relieving the employee VEBA member of the potential burden, which could interrupt or impair the member's earning power.

Benefits of Proposal

Being able to serve a broader — but still reasonably limited — membership would benefit affected VEBAs in several ways. First, it would help compensate for reduced VEBA membership rolls resulting from smaller active workforces. Second, it would diversify the risks of the VEBA populations by including purchasers in various age groups. Third, the proposal would facilitate compliance by VEBAs who sometimes allow participation by one of the above categories of family members (e.g., domestic partners of members) in reliance on the ambiguous “de minimis” concept reflected in numerous private letter rulings and indirectly under the current rules. See, e.g., PLR 201415011 (3% of total benefits paid during plan year); PLR 200537036 (3% of individuals covered); see also Treas. Reg. § 1.501(c)(9)-3(a) (last sentence).

Finally, the proposal would help IRS administer the rules, too, by providing clear guidance on who may purchase life, disability and “other” benefits through VEBAs — without opening up all VEBA benefits and without extending VEBA membership to an overly broad segment of the population.

Additional Comments Responsive to Notice 2021-28

We respectfully submit this proposal meets the relevant criteria listed in Notice 2021-28.

• We are recommending a limited update of the 40-year old VEBA rules that would affect numerous taxpayers and reduce burdens on VEBAs and the IRS.

• The guidance would be well-defined and would promote uniformity among affected VEBAs, consistent with sound tax administration.

• The guidance focuses on updating regulations to bring them more in line with evolving family leave and similar laws and helping to meet challenges such as those presented by the COVID-19 pandemic.

* * *

In summary, we believe an update of his particular segment of the VEBA rules is long overdue and meets the criteria set forth in Notice 2021-28. We would greatly appreciate your considering this subject and trust that our late submission will not preclude consideration.

Sincerely,

Louis T. Mazawey

Kathryn Bjornstad Amin
GROOM LAW GROUP
Washington, DC