4105 / What is the penalty for providing certain disqualified benefits through a welfare benefit fund?

An employer will be subject to a tax equal to 100 percent of:

(1)   any postretirement medical or life insurance benefit including any other death benefit provided to a key employee other than from a separate account, if a separate account was required ( Q 4103);

(2)   any postretirement medical or life insurance benefit including any other death benefit provided with respect to an individual in whose favor discrimination is prohibited unless the plan is nondiscriminatory ( Q 4104, Q 4113) with respect to this benefit, or

(3)   any portion of the fund reverting to the benefit of the employer that is attributable to contributions that were deductible in the current or any prior year.¹

One exception provides that postretirement medical or life insurance benefits charged against amounts in a reserve up to the greater of the amount in the reserve as of the close of the last plan year ending before July 18, 1984, or on July 18, 1984, or charged against the income on such amounts, are not subject to the tax referred to in (1) and (2) above.²

Another exception provides that certain welfare benefit funds maintained pursuant to collective bargaining agreements are not subject to the tax described in (2) above.³

A loan by a VEBA to its members’ employer is not necessarily a prohibited reversion, but any such transaction will be carefully reviewed to determine whether it is a genuine, commercially viable loan.⁴