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September 14, 2022

IRS rules VEBA may expand membership to all former employees without negative tax consequences

  • A voluntary employee benefit association (VEBA) asked the IRS to rule on whether it may expand membership from retired employees to all former employees without risking its IRC Section 501(c)(9) tax-exempt status.
  • Because the code and regulations allow former employees to belong to a VEBA, the IRS ruled that the change was permissible.
  • This ruling serves as an opportunity for VEBAs to review their bylaws and consider whether expanding their memberships may confer tax benefits.

In a recently published private letter ruling (PLR 202236004), the IRS ruled that a voluntary employee beneficiary association (VEBA) will not jeopardize its tax-exempt status under IRC Section 501(c)(9) by expanding its membership to include all former employees.


The VEBA represented to the IRS that its only contributions come from its members; the VEBA receives no employer contributions. Currently, membership in the VEBA is open to current employees, retired employees, spouses of current and retired employees, and surviving spouses of deceased former employees.

The VEBA proposed to amend its bylaws to expand its membership eligibility to include all former employees and asked the IRS whether this change was permissible under IRC Section 501(c)(9) and Treas. Reg. Section 1.501(c)(9)-2(a).


An entity may qualify for tax-exempt status as an organization described under IRC Section 501(c)(9) if the organization provides for the payment of life, sick, accident, or other benefits to its members or their dependents or designated beneficiaries, and if no part of the organization's net earnings inure to the private benefit of other private shareholders or individuals.

The regulations require members of an organization described in IRC Section 501(c)(9) to consist of "employees whose eligibility for membership is defined by reference to objective standards that constitute an employment-related common bond among such individuals." (Treas. Reg. Section 1.501(c)(9)-2(a)(1).)

Whether someone is considered an "employee" is determined by looking to "the legal and bona fide relationship of employer and employee" and "includes an individual who became entitled to membership in the association by reason of being or having been an employee." (Treas. Reg. Section 1.501(c)(9)-2(b).)


Based on the code and regulations, the IRS concluded that an individual who qualified as an employee "will continue to qualify even [if the individual] is on leave of absence, works temporarily for another employer or as an independent contractor, or has been terminated by reason of retirement, disability, or layoff." Therefore, the IRS ruled that expanding eligible VEBA membership to include all former employees would not have adverse tax consequences for the VEBA.


This PLR serves as an opportunity for VEBAs to review their bylaws and consider whether it may be advantageous to expand their memberships to include former employees. VEBAs in different stages could potentially benefit from a membership expansion. For example, expanding the membership of a VEBA that has asset accumulations (excess set-aside) over the IRC Section 419A "qualified asset account" limit could reduce or eliminate the income subject to unrelated business income tax. For a VEBA that is in the termination stage, expanding its membership could reduce the risk of being assessed termination-related taxes.

An additional item to note, the IRS announced in January that it would not rule on excise tax issues, particularly in areas related to IRC Section 4976 "employer reversions." (Revenue Procedure 2022-3 states that the IRS will not issue rulings under IRC Section 4976(b)(1)(C) on "[w]hether a transfer of assets between welfare benefit funds (including VEBAs), or a new or different use of assets of a welfare benefit fund (including a VEBA), results in a reversion to the employer.") This PLR relates to amending a VEBA's bylaws to expand membership — but permissible reallocation or transfer of assets rulings continue to be "no-rule" areas.

For more information, please see Treas. Reg. Section 1.512(a)-5 or contact your EY representative.



— For more information about EY's Exempt Organization Tax Services group, visit us here.


Contact Information
For additional information concerning this Alert, please contact:
Exempt Organization Tax Services
   • Stephanie Clarke (
   • Melanie McPeak (
   • Morgan Moran (
   • Jay Qi (