What is a VEBA? What It Stands For, How It Works, and Its Benefits

As healthcare costs keep going up, more people and families are finding it harder to afford medical expenses. This is a long-term problem that affects both personal finances and overall well-being. A study by the Kaiser Family Foundation found that healthcare costs are increasing faster than wages, making it tough for employees to handle these expenses on their own. To help with this, many employers are offering strong health benefit plans. These benefits not only help employees but also make companies more appealing to job seekers.

In fact, a survey by Glassdoor showed that health insurance is one of the top benefits people look for when applying for jobs. One of the best options out there is the Voluntary Employees’ Beneficiary Association (VEBA), which offers great financial support for employees.

What is a VEBA?

A Voluntary Employees’ Beneficiary Association (VEBA) is a benefit plan where employers set up a tax-free trust to help employees with medical and other expenses. Governed by IRS rules, VEBAs are designed to provide financial assistance for things like healthcare costs, life insurance, and accidents for employees and their families.

How Does a VEBA Work?

VEBAs work a lot like other health benefit plans but have some unique features:

• Funding: Usually, the employer puts all the money into the VEBA. There are no limits on how much they can contribute.
• Eligibility: Employees need to be part of an employer-sponsored health plan to join.
• Tax Benefits: The money put into and taken out of a VEBA for eligible expenses is tax-free. This makes VEBAs very attractive.
• Investment: Employees can invest VEBA funds to grow their savings, similar to Health Savings Accounts (HSAs).

What Does VEBA Cover?

VEBAs can cover various expenses, depending on the plan:

• Medical Expenses: Like doctor visits, medications, and surgeries.
• Life and Accident Benefits: Coverage for life insurance, sick leave, and accident-related costs.
• Other Benefits: Some plans also cover child care, recreational expenses, and severance benefits.
• Retirement Benefits: Including Medicare premiums and other health-related costs after retirement.

Types of VEBA Accounts

• General-purpose VEBA: Covers a wide range of expenses listed by the IRS.
• Post-deductible VEBA: Covers vision and dental expenses until you meet your health insurance deductible.
• Limited VEBA: Only covers dental and vision expenses.
• Post-employment VEBA: Can only be used after you retire or leave the company.

Employers can choose the best plan that offers comprehensive and valuable benefits to their employees by being aware of these various types.

Pros and Cons of VEBA

Pros of VEBA

1. Tax Benefits: You get triple-tax benefits. Money put in, earned, and taken out for eligible expenses is all tax-free.
2. Financial Security: VEBAs provide a steady source of funds for medical and other benefits, even after retirement.
3. Flexibility: Employers can customize the benefits to cover a wide range of expenses beyond just medical care.
4. Investment: Employees can invest their VEBA funds, allowing them to grow over time, like Health Savings Accounts (HSAs).
5. Comprehensive Coverage: VEBAs can cover various expenses, from medical costs to life insurance and even things like child care and recreation.

Cons of VEBA

1. Complex Regulations: Setting up and managing a VEBA involves complicated IRS rules, which can be time-consuming and costly.
2. High Administrative Costs: It can be expensive to set up and manage a VEBA.
3. Benefit Design Limits: There might be restrictions on how flexible you can be with the benefits offered.
4. Inflexibility for Employees: Once a group joins a VEBA, individual employees can’t opt out.
5. Excise Tax Risk: If VEBA assets go back to the employer, they face a 100% excise tax.

Advantages Over Other Healthcare Benefit Plans

Compared to Health Reimbursement Arrangements (HRAs)

• Expense Coverage: HRAs mainly cover medical expenses, while VEBAs can cover a wider range of benefits, including life insurance and recreation.
• Portability: VEBA accounts stay with employees even if they leave the company, unlike HRA funds, which usually stay with the employer.
• Investment Growth: VEBA funds can be invested for tax-free growth, which you can’t do with HRAs.

Compared to Health Savings Accounts (HSAs)

• Employer Contributions: Employers fund 100% of VEBA contributions, while HSAs can also include employee contributions.
• Broader Use: VEBAs can cover more types of expenses than HSAs, like life and accident benefits and some non-medical costs.
• No Contribution Limits: Unlike HSAs, which have yearly limits set by the IRS, VEBAs don’t have such restrictions, giving employers more flexibility.

VEBA Benefits and Considerations

In summary, VEBAs provide excellent tax benefits, financial security, and flexible coverage, making them a valuable choice for both employers and employees. They offer various benefits that help ease the financial load of healthcare costs and improve overall well-being. However, setting up and managing a VEBA can be complex and costly.

For employers ready to handle these challenges, VEBAs can be a fantastic way to support their staff and attract top talent. As healthcare costs keep rising, offering comprehensive benefits through a VEBA can make a big difference for employees and their families.