A Retirement Healthcare Subsidy Option for Law Enforcement Officers
Voluntary employees’ beneficiary association (VEBA) plans are typically funded by employers and used for paying a number of benefits (life, sick, accident, etc.) to members and their dependents or designated beneficiaries. Because the balance in a VEBA accrues over time, these accounts are often used to cover healthcare expenses in retirement. In order to be eligible for a VEBA plan, one must also be covered by employer-sponsored health insurance.
Typically VEBAs are managed by a company, but unions occasionally take control of their administration. An employee group within a company, such as tenured employees, can decide if it wants to participate. If the employee group is approved, participation is mandatory for all members of that group.
What are the requirements of a VEBA?
In order to qualify as a VEBA under Internal Revenue Code section 501(c)(9), an organization must meet the following IRS requirements:
- It must be a voluntary association of employees.
- The organization must provide for payment of life, sick, accident, or other similar benefits to members or their dependents or designated beneficiaries, and substantially all its operations are for this purpose.
- Its earnings may not inure to the benefit of any private individual or shareholder other than through the payment of benefits described in (2) above.1
Contributions to VEBAs are tax deductible and grow tax free, and there are no penalties for withdrawing from the account. There are also no limits on how much can be contributed.
How does a VEBA plan work?
VEBA plans are typically used by retirees to pay for healthcare expenses; however, they can also be used by members to pay for qualified expenses while they’re still employed. In most cases, only the employer contributes to the VEBA, but some accounts allow funding from:
- Mandatory employee contributions
- Funds from future pay raises
- Early retirement incentives
- Unused time off, either annually or when an employee leaves the company
Unlike flexible spendings accounts (FSAs), a VEBA plan’s balance rolls over from year to year and stays with the employee forever, even when changing employers.
Pros and cons of a VEBA plan
As with many healthcare savings vehicles, there are both pros and cons to participating in a VEBA.
Pros:
- It’s a tax-efficient way to save for qualified expenses
- Contributions don’t count against pension plan contribution limits
- You have flexibility to withdraw funds at any time
- Employers can choose what benefits are paid by the plan
- Employee groups can opt in
- Accounts can be transferred to designated beneficiaries if an employee dies without a surviving spouse or dependents
Cons:
- There are complex IRS regulations and plan design limitations
- Setup, administration and reporting requirements can be costly
- Employees who are part of a group that joins the VEBA are required to participate
- There’s a 100% excise tax on VEBA assets that revert to the employer
While VEBA plans provide a tax-advantaged way to save for retirement healthcare expenses, they also come with challenges and unique complexities. If your law enforcement employee group is considering opting in to a VEBA, it’s wise to consider all the pros and cons before making a decision.
At Creative Planning, we specialize in helping law enforcement officers navigate complex financial decisions. If you’d like help planning for healthcare expenses in retirement, or with any other financial matter, please schedule a call with a member of our team.
