July 2, 2021
VEBA's exempt status won't be endangered by providing student loan servicing benefit
The IRS has ruled (PLR 202125002) that a student loan servicing benefit that a trust plans to provide to its members would not adversely affect the IRC Section 501(c)(9) status of its voluntary employees' beneficiary association (VEBA) because the new benefit, along with any other nonqualifying benefits provided, will remain under the de minimis level.
The trust asked the IRS to rule on two alternatives, asserting that the proposed student loan servicing benefit would not cause the VEBA to lose its tax-exempt status because the new benefit (1) constituted an "other benefit" under Treas. Reg. Section 1.509(c)(9)-3(d), or (2) was de minimis, costing no more than 3% of the trust's annual expenditures.
The VEBA makes available to trust members and their families certain insurance benefits, including life, health and disability insurance. Some of the benefits are self-funded, and some are provided through insurance policies. The VEBA would also like to offer a student loan servicing benefit to members by providing an online tool to help them comply with certain government loan programs. In addition to providing a financial literacy course on government loan programs, the tool would help members (1) calculate optimal forgiveness and repayment programs based on a member's data; (2) fill in required repayment paperwork; (3) digitally route and file applications; and (4) remember to comply with reporting requirements.
The VEBA intends to offer this student loan servicing benefit on a one-time basis to any member who participates in any of its complimentary life insurance or introductory life insurance products. The student loan servicing benefit would total approximately 0.51% of the total benefits the trust pays in the plan year, and the trust projects that fewer participants would be eligible for the benefit in subsequent years. Therefore, the student loan servicing benefits are predicted to never exceed 3% of the trust's annual expenditures.
Law and analysis
IRC Section 501(c)(9) organizations include VEBAs that pay life, health, accident and other benefits to their members, their dependents and designated beneficiaries, as long as no part of the organization's earnings inure to or benefit any individual or shareholder. Substantially all of a VEBA's operations must further these goals, and no more than a de minimis amount of unpermitted services may be provided (Treas. Reg. Section 1.501(c)(9)-3(a) to (e)).
A benefit is considered similar to a life, health or accident benefit if it is meant to safeguard or improve the health of a member or a member's dependents or "protects against a contingency that interrupts or impairs a member's earning power." Treas. Reg. Section 1.501(c)(9)-3(a) lists examples of permissible "other benefits," such as job readjustment allowances, income maintenance payments in the wake of economic dislocation, temporary living expense loans and grants during a disaster, supplemental unemployment compensation, certain severance benefits, and education/training benefits or programs.
In the PLR, the IRS noted that the student loan servicing benefit being proposed did not qualify as an "other benefit" under IRC Section 501(c)(9) or Treas. Reg. Section 1.501(c)(9)-3 "because it does not protect against a contingency that interrupts or impairs earning power." Accordingly, the IRS concluded that the trust may offer the student loan servicing benefit without endangering the VEBA's exempt status as long as the relatively small amount the trust expects to spend annually for the student loan servicing benefit, plus any other funds the trust spends to provide nonqualifying benefits, does not exceed 3% of the trust's annual benefit expenditures. Below the 3% limit, expenditures for nonqualifying benefits are considered de minimis.
This PLR reaffirms that (1) VEBAs may make an otherwise nonqualifying benefit directly available to their membership and (2) the requesting taxpayer is responsible for showing that nonqualifying benefits, in the aggregate, are de minimis based on Treas. Reg. Section 1.501(c)(9)-3(e). Although neither the statute nor the regulations define "de minimis," the 3% threshold that the IRS acknowledges in this ruling has also been used in at least two other private letter rulings in the last decade (see PLRs 201415011 and 201131028). Taken together, these rulings appear to support an implicit safe harbor for benefits that comprise less than 3% of a trust's annual benefit expenditures. VEBAs seeking to provide nonqualifying benefits under this de minimis exception, however, should take care to ensure that: 1) the combined expenditures of all nonqualifying benefits do not exceed 3% of total expenditures; and 2) any nonqualifying benefits are provided to members in an objective and non-discriminatory way.
Although this PLR only applies to the taxpayer that requested the ruling, it does provide some insight into how the IRS might rule on similar fact patterns. VEBAs should continue to pay close attention to changes in the law and any related IRS notices as guideposts regarding possible taxable expenditures.
Please contact your EO professional for further details.