Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

Chapter 18
Voluntary Employees’ Benefit Associations
The tax treatment of contributions to funded welfare benefit plans changed with the enactment of
IRC sections 419 and 419A. It is important to keep the rules regarding deductibility of
contributions in mind as the larger automobile dealerships tend to employ such plans. If an
examination of such a plan is initiated, the agent will want to verify that payments are not strictly
being expensed per IRC section 162.
This section is included in this Guide for agent awareness only.
What is a VEBA to which IRC sections 419 and 419A apply?
A VEBA is a "voluntary employees’ benefit association" that is tax exempt under IRC section
501(c)(9). It is a "welfare benefit fund" to which IRC sections 419 and 419A apply if it is part of
a plan of an employer through which the employer provides welfare benefits to employees and
their beneficiaries. A "welfare benefit" is a type of benefit exclusive of those to which IRC
sections 83(h), 404, and 404A apply.
What do I need?
In order to examine this issue, first question the taxpayer (representative) as to the nature of the
plan and what benefits are provided. Determine if the plan is subject to collective bargaining.
Secure any agreements or contracts at the taxpayer’s disposal. Secure a full list of participants.
Also, secure copies of forms filed in substantiation of the Plan (5500) and the VEBA trust (990).
Whenever an agent encounters a VEBA situation it is suggested they contact the VEBA Issue
Specialist. The VEBA Issue Specialist has spent a significant amount of time developing VEBA
issues and is the best source for information regarding this topic.
Audit Potential
Prior to IRC section 419, employers often deducted funded amounts for employees, care
providers, administrator payments, and insurance company distributions fully per IRC section 162.
Subsequent to IRC section 419, deductions for such funded amounts were limited in accordance
with certain rules and formulas. Audit potential exists when these rules are not followed.
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