You are a successful physician or small business owner and you have taken all the tax deductions available to you. However, you are still paying too much in taxes and you wish you had additional deductions.
Imagine a vehicle that allows large, flexible tax deductible contributions that compound and grow tax deferred. These assets are completely creditor proof inside an IRS approved tax-exempt trust. Money can be withdrawn tax free for qualified health and welfare benefits, if stated in the plan. The largest benefits are for the owners of the corporation and any key employees. The plan offers survivor options to transfer assets to the next generation avoiding all income, estate and gift taxes. A Voluntary Employees Beneficiary Association (VEBA) is an IRS approved tax-exempt organization authorized by Section 501(c)(9) of the Internal Revenue Code having a letter of determination from the IRS granting it tax-exempt status. A VEBA is one of the most underutilized business and personal tax planning tools available for physicians. A VEBA usually provides for the payment of life, accident, health and other benefits to the VEBA participants or their beneficiaries. A VEBA is usually structured as a trust with a bank serving as an independent trustee. In the 1980s, changes to the IRS Code made it feasible for small businesses, such as medical practices, to implement VEBAs. VEBAs are classified as an employee benefit plan which is not the same as a qualified retirement plan. There is no annual limit on contributions, which can provide physicians with tax deductions greatly exceeding those that could be made in a qualified retirement plan such as a 401(k), SEP IRA, or 412(i). For example, in Schneider v. Commissioner, 63 T.C.M. 1789 (1992), the U.S. Tax Court allowed a physician to deduct VEBA contributions of more than $400,000 in a single year and over $1.1 million over three years with just one other employee. Because a VEBA is not a qualified retirement plan, there is no 10% penalty for termination of the plan before 59 ½ and a participant is not required to start taking minimum distribution withdrawals at age 70 ½. A VEBA is subject to some Employment Retirement Income Security Act (ERISA) rules. As with a qualified plan, all employees must be allowed to participate. An employer only needs one employee to establish a VEBA and that additional person can be the owners spouse. A VEBA can be designed so that the owners and key employees benefit to a greater extent than would be possible under a qualified retirement plan. The cost per employee participation is less than the costs involved under qualified plans. Part-time employees and those with less than three years of service can be excluded. A VEBA can be funded in addition to funding a retirement plan. The assets of a VEBA trust are protected from creditors. A VEBA is especially appropriate for profitable businesses that wish to reduce their income tax liability, avoid penalties on excess retained earnings, or for businesses that have overfunded their retirement plans and thus cannot make additional tax deductible contributions. Of the various benefits that may be provided using a VEBA, life insurance is perhaps the most common. A VEBA allows a business owner to deduct payments for life insurance premiums. The death benefits when paid out are not subject income tax, and the insurance proceeds can also be protected from estate tax, by simply making an irrevocable beneficiary designation, which can include naming a trust. As retirement approaches, an increasing percentage of expenses will be health and welfare related. Pursuant to statutory changes regarding Medicare to take effect in 2006, Medicare plan retirees with higher incomes will receive proportionately lower Medicare reimbursement rates. Individuals at higher income levels will pay a significantly greater proportion of their Medicare costs. A VEBA will help offset the impact of these changes by providing tax-free withdrawals for qualified health and welfare benefits, including but not limited to health insurance premiums, payments for doctor visits including dental and vision care, co-payments, prescriptions, long term care insurance premiums, and other medical expenses. There are plans that look like VEBAs but are not. For example, a 419A(f)(6), also referred to as a “419 plan” is required by the IRS to self disclose the transaction in an attachment to the tax return as a potential abusive tax shelter. Relatively few CPAs, financial advisors, and attorneys have an in depth working familiarity with this specialized area and as a result, pass up the option altogether. It is highly recommended that you and your financial professional confer with an attorney or CPA specializing in VEBAs in order to properly understand how well a VEBA can benefit your business or practice.
