The long-established practice is that (a) Congress enacts the tax-laws, (b) taxpayers find shelters and loopholes and (c) Congress, and the IRS, seek to plug them. So it has been with the IRC 501(c)(9) Voluntary Employee’s Beneficiary Trust (VEBA Trust) which is the topic of this Commentary.
Some 35 years ago many small employers (a) would establish a VEBA which (b) would sponsor an IRC 501(c)(9) trust; and then (c) prefund the benefits claiming a significant deduction as though it were a pension plan. That is, (a) the employer would claim a large current expense deductible under IRC 162 for the amount placed in the trust and (b) the trust would seek shelter as a tax-exempt trust. During this period, tax provisions affecting pension plans become less generous. As consequence, interest in the VEBA Trust rose.