practice economics
Should You Be in a VEBA?
These plans are complex, but offer a wide range of benefits.

What the heck is a VEBA?

A VEBA is a voluntary employees' beneficiary association, which:

• is a tax-exempt organization authorized by Section 501(c)(9) of the Internal Revenue Code
• has a determination letter from the Internal Revenue Service
• can provide for the payment of a wide range of benefits to members of the VEBA or their dependents or designated beneficiaries.

Should You Have A VEBA?

You should consider a VEBA if you want to:

• deduct large amounts of tax-deferred income every year over and above your current retirement plan contributions
• achieve financial security without paying estate or income taxes
• protect your assets from creditors' claims.

"True" VEBAs And "Fake" VEBAs

A true VEBA plan must have an IRS letter determination. Don't be fooled by fake VEBAs. A fake VEBA is a trust that looks like a VEBA and is often promoted as a "Section 419 Plan" or a "Welfare Benefit Plan," although some may even be called a VEBA. A fake VEBA has only a lawyer's and/or an accountant's opinion letter as to its status and doesn't have an IRS letter determination.

How VEBAs Work

Your ophthalmology practice can establish its own VEBA although that can be an expensive and time-consuming process. The simplest way to obtain VEBA benefits is for your practice to join an existing multiple-employer VEBA that's already received an IRS determination letter.

Typically, a VEBA is set up as a trust using a bank as its trustee, and usually offers life and accident insurance and medical benefits to its members, their dependents and their beneficiaries. A VEBA can also provide post-retirement medical insurance, long-term care insurance, educational benefits, severance pay, medical expense reimbursements, and salary continuation benefits. It can't provide deferred compensation or retirement benefits. VEBA benefits can be structured to favor the practice's physician-owners.

The practice can tax deduct its contributions to the VEBA in amounts greatly exceeding those available to qualified retirement plans. The contributed funds grow tax deferred within the VEBA.

Termination distributions can be made before age 59 without any early distribution penalty. Also, distributions need not begin when the ophthalmologist reaches age 70. With proper planning, life insurance benefits can pass to your family free of both income and estate taxes.

Upon a VEBAs termination, all plan assets are distributed to the active participants as of the termination date. Former employees don't vest and part-time employees and those with less than 3 years' service can usually be excluded. Distributions of funds from a terminated VEBA are made according to length of service and average salary. To top it all off, VEBA assets are protected from all creditors, including spouses in divorce cases.

They're Worth Exploring

Although VEBAs are a flexible and potent type of benefit plan, they're complex and most advisors haven't bothered to get up to speed on them. VEBAs aren't a simple matter and they may not fit the needs of every ophthalmology practice. But when the circumstances are right, the benefits to the ophthalmologist-owners of a practice can be startling.

Mark E. Kropiewnicki, J.D., LL.M., is a principal consultant with The Health Care Group, Inc., and a principal and president of Health Care Law Associates, P.C., in Plymouth Meeting, Pa. He regularly advises physicians and practices on their contracting matters and business law obligations. He can be reached at (800) 473-0032.