Voluntary Employees' Beneficiary Associations (or VEBAs for short) are used by employers to provide health, life, disability, education and other benefits for their employees. They are part of the general tax law called welfare benefit plans. They also provide IRS-approved tax-planning and major tax-saving opportunities, and they can give you some of the best asset protection and tax sheltering legally available.

The IRS never likes to see taxpayers avoid paying taxes. Congress, on the other hand, legislates tax laws that the IRS must follow. Congress wants to encourage employers to provide benefits for employees. V.E.B.A.s are part of the tax law, and have been since 1928. They were commonly used as tax shelters prior to 1984. The Deficit Reduction Act of 1984 curbed the effectiveness of VEBAs in generating unlimited deductions, but Congress did leave two exceptions in the code for unlimited deductions and a recent court case made it clear huge tax deductions can be achieved through the use of a very simple single employer plan.

Using accepted tax planning techniques backed by substantial legal authority, VEBAs can still provide excellent tax planning and asset protection. With the increased tax rates, the VEBA is the preferred tax shelter tool for tax planning and asset protection for the next decade. Congress and the tax courts have an ongoing battle with the IRS. The IRS takes away options and the courts and Congress give them back to taxpayers using Section 419.

July 2003 regulations apply only to multiple employer VEBAs under section 419A(f)(6). Mutliple employer VEBAs are still legal and very powerful tax tools.

You can use a single employer VEBA defined under 419A(c)(2). Single employer VEBAs don't have the controversy surrounding them that multiple employer VEBAs do. In fact, single employer VEBAs were reaffirmed and "blessed" by the Wells Fargo case which was decided in February 2003. If your CPAs say you cannot use a VEBA, just have them read the court's opinion in Wells Fargo. The $30+ million tax deduction Wells Fargo enjoyed is hard to argue with.

VEBAs can help you by giving you the best tax shelter and asset protection available. Money in a VEBA is safer than money offshore. Because the money is in a company-held welfare benefit plan, you don't own the money and neither does the company. It is in trust for you, protected under ERISA laws. Consequently creditors, tax liens, ex-spouses, lawsuit-happy attorneys, or anyone else you can imagine cannot touch money placed in a VEBA.

V.E.B.A.s also offer great tax advantages. Money placed in a them is given an immediate tax deduction, it grows tax-free, and is distributed without taxes in the event of death. This makes a VEBA one of the best estate planning tools and tax shelters available for building family wealth.

No. Many V.E.B.A.s are really nothing more than tax shams. VEBAs have been abused in the past, and continue to be abused today. The IRS final regulations for 419A(f)(6) in July 2003 were an attempt to shut down the shams. The regulations will not hold up in court when they are challenged, but they have put a damper on both the legitimate use of multiple employer VEBAs under section 419A(f)(6) and the shams. However, a properly structured V.E.B.A. is one of the most powerful tools for tax reduction, asset protection, financial planning and wealth accumulation.

In response to demands from workers' associations, the IRS code was amended to make voluntary employees' beneficiary associations (VEBAs), which are a form of welfare benefit plan, tax exempt entities and allow employers to provide benefits for their employees. Welfare benefit plans had been around for a long time, but the VEBA now gave an employer the opportunity to fund its employees' benefits through the association and make all of its contributions to the association tax deductible.

In the 1970s and early 1980s the VEBA became a popular tool for tax reduction and asset protection among the wealthy. VEBAs were used to buying benefits in the form of luxury cars, yachts, jets, islands, etc. The cost was written off entirely as a VEBA benefit.

The story goes something like this. One of the higher-ups of the IRS was on the dock at a California marina. He noticed a beautiful, enormous yacht gliding by. On the back of the yacht, he noticed the name of the craft, "My VEBA." This brought home the excesses that VEBAs were being used for. In 1984, with IRS encouragement, Congress passed the Deficit Reduction Act, part of which limited the use of VEBAs.

The 1984 laws limited the amount of deductions an employer could take for benefits supplied through VEBAs. With many other tax shelter options still available, taxpayers and advisors ignored the VEBA, including the two exceptions Congress had intentionally left that would allow unlimited deductions. Those exceptions are found in 419A(f)(5) and 419A(f)(6). The IRS never followed COngress' direction to issued regulation giving taxpayers guidance as to how the 1984 laws should be interpreted. Without IRS guidance, taxpayers were left to interpret and work through the tax courts to learn what a post-1984 VEBA could and couldn't do.

Single employer VEBAs are simple, but until the 2003 Wells Fargo case, they were thought to yield only limited tax deductions. Multiple employer VEBAs under 419A(f)(6) are more complex, but they were the obvious exception to the limited deduction rules put in place by the 1994 laws. Advisors concentrated their efforts on developing court cases associated with 419A(f)(6) VEBAs.

During the 1990s, when 419A(f)(6) multiple employer VEBA deductions were challenged by the IRS, the tax court denied some taxpayers' VEBA deductions, but some taxpayers' deductions were upheld. Some of the cases upheld deductions of hundreds of thousands of dollars in a year and over one million dollars in total. By the late 1990s, the tax courts clearly established the middle ground for 419A(f)(6) VEBAs. Today good advisors can provide a 419A(f)(6) VEBA that complies with law and that is structured entirely on substantial legal authority. However, final regulations were issued by the IRS in July 2003 and they make it impossible to comply with their interpretation of the law.

Multiple employer VEBAs had become very badly abused by 2002. Numerous VEBAs were draining billions of dollars in tax money. The VEBAs promised unlimited tax deductions and through various scams (usually a "special" life insurance policy, such as were used in the Neonatology case) the VEBAs delivered the money back to the taxpayer tax free. The regulations make it so that the use of life insurance, other than term policies, is illegal in a multiple employer VEBA. The law is clear. The courts are clear. The IRS cannot enforce the regulations. But they have cooled the use of sham VEBAs. Actually, the shammers have started to concentrate on Section 412(i) retirement plans, which until now has been a nice, clean retirement tax tool that offers $100,000s in annual deductions.

The 1994 law seemed to say that deductions in single employer VEBAs were limited to teh cost of the benefit in the year in which the benefit was delivered. Simplistically put, a large life insurance policy could be purchased, but its cost wasn't deductable until the employee died and the benefit was delivered. The Wells Fargo case changed that interpretation. The court said Wells Fargo could deduct the cost of the life insurance amortized over the working life of the employee. This makes a single employer VEBA powerful. You can deduct $100k's every year.