ACA Will Lead To Continued Decline In VEBAs

In recent years, employers have been using voluntary employee beneficiary associations (VEBAs) to provide retiree health coverage. However, due to retiree coverage provisions available through the Patient Protection and Affordable Care Act (ACA), the number of VEBAs is likely to decline as employers shift pre-65 retirees to coverage through the health insurance exchanges. This is the contention of the Pension Research Council (PRC) in the recent report, What’s Next for VEBAs? The Impact of Declining Employer-Provided Health Care Coverage and the Affordable Care Act.

Background. VEBAs are tax-exempt organizations set up to pay for employee health and welfare benefits. To set up a qualified VEBA, four requirements must be met: (1) the organization must be an employees’ association; (2) membership in the association is voluntary; (3) the organization provides for the payment of life, sickness, accident, or other benefits to its members or to their dependents or designated beneficiaries, and substantially all of its operations are in furtherance of providing such benefits; and (4) no part of the net earnings of the organization may inure, other than by the payment of benefits, directly or indirectly to any shareholder or private individual. According to the PRC, in 2013, 6,884 organizations filed tax returns as VEBAs with the IRS. This has declined from more than 15,000 in 1993.

Stand-alone VEBAs have become an attractive option for companies to provide retiree health benefits in recent years. It is a way for companies to shed their retiree health liability, but still safeguard retiree benefits for employees, the PRC noted. Employers who set up VEBAs to fund retiree health benefits are able to contribute tax-deductible funds to the account, earn tax-free interest, and maintain control of funding and administration of the VEBA.

ACA reduces need for VEBAs. According to the PRC, the ACA is expected to accelerate the decline of all employer-provided retiree health benefits, including those provided through a VEBA. With retirees able to receive medical coverage through the ACA’s health care exchanges, the number of VEBA plans has already begun to decline. However, the PRC is unclear whether the drop in VEBA plans should be attributed to employers shifting their health care funding to defined contribution-style health care accounts or whether they are moving away from coverage for retirees altogether.

The ACA includes several provisions which impact pre-65 retirees, such as the exchanges, the early retiree reinsurance program, and the excise tax on high-cost plans. However, the PRC contends that “the ACA’s greatest blow to the VEBA plan structure may be the restrictions placed on VEBA trust payments.” Because the ACA prohibits VEBAs from paying all or part of a beneficiary’s exchange premiums, employers will be unable to use VEBAs to provide retirees with financial assistance when buying coverage through the exchange.

While the ACA should lead to improved medical benefits for retirees, the overall need for retiree VEBA plans will continue to decline, according to the PRC. However, “VEBAs will continue to play a useful, albeit reduced, role in providing employee and retiree health benefits,” the report concluded.

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