Benefits by Association

When the City of Minneapolis sought ways to control escalating health care costs for its employees, a management-labor committee decided to create a health reimbursement account (HRA) plan funded by a trust known as a voluntary employee beneficiary association, or VEBA. The VEBA and a deductible coinsurance plan replaced a copayment system with “first-dollar” coinsurance coverage, says Tim Giles, director of employee services for Minneapolis. The change ultimately helped the city turn a projected 18 percent increase in health premium costs into a six percent decrease, Giles says. While city employees were asked to assume more responsibility and risk with the first-dollar plan, the city was able to use much of the money it saved on lower premium costs to fund the HRA-VEBA, a tool which provides employees certain tax advantages in using their health care funds.

A VEBA is a tax-exempt vehicle that organizations can use to accumulate assets to pay health, life, or other insurance-related expenses of employees and retirees. VEBAs have two components, a trust and a plan. The trust holds the VEBA money and protects it against claims from creditors—which can have particular benefit for high-risk businesses—while the plan funnels money into the trust and defines what it can be used for. To qualify for the tax benefits of a VEBA, no part of the VEBA’s net earnings can benefit any private shareholder or individual. Membership in a VEBA must consist of individuals who have an “employment-related” common bond, such as a common employer, coverage under a collective bargaining agreement, or membership in a labor union or a trade association.

VEBAs provide a trifecta of tax advantages—deposits into the trust can be made tax-free, investment earnings on trust funds are tax-free, and reimbursements made to pay for qualified health care or other insurance costs are tax-free. While VEBAs can be used for life, accident, and other types of insurance, the majority are used for health care purposes.

VEBAs differ from health savings accounts by virtue of how the inflow of funds is controlled. Under a VEBA, only employers can make contributions to health insurance plans, while with health savings accounts—which also carry tax benefits—individuals pay into their own accounts. Health care VEBAs do operate similar to flexible spending plans, however, sans the “use it or lose it” provision; unused dollars from one year typically carry over to the next.