The IRS has made public a private letter ruling that discusses the tax consequences for voluntary employees' beneficiary associations (VEBA) who provide Health Reimbursement Arrangements (HRAs) to employees' domestic partners.

A VEBA is a trust that has the specific purpose of providing employee benefits. Under tax law, a VEBA is exempt from federal income tax so long as no part of the net earnings benefits any private shareholder or individual other than through the payment of benefits. As such, all of the funds in possession of the VEBA are held in trust for the payment of benefits. VEBAs provide a range of benefits including, but not limited to, life insurance, sick leave pay, and accident insurance. Notably, employer contributions to a VEBA are tax deductible. Employers must obtain a letter of determination from the IRS in order to be granted status as a VEBA.

The IRS letter states that a VEBA will not jeopardize its § 501(c)(9) tax-exempt status if the domestic partner of an employee qualifies as a "dependent" under § 152. In order to qualify as a "dependent" under § 152, a person must be a "qualifying child" or a "qualifying relative." A qualifying child must meet the requirements relating to relationship to the tax payer, age, living with the taxpayer for more than half the year, and providing less than half of his or her own support. A qualifying relative must also meet requirements relating to his or her relationship with the taxpayer, maximum gross income, and level of financial self-support.

The IRS also offered guidance on whether a VEBA's tax-exempt status would be in jeopardy if it provides HRA benefits to an employee's domestic partner who does not qualify as a dependent under § 152. The IRS advised that as long as the total of "impermissible" benefits a VEBA will pay in any year, including benefits to domestic partners who do not qualify as dependents under § 152 will not exceed 3% of the total benefits that the VEBA will pay in any year, a VEBA will not jeopardize its tax-exempt status, as this is considered a de minimis amount.

The letter further states that under a VEBA, the HRA coverage provided to a domestic partner who qualifies as a dependent is not includible in the employee's gross income. Additionally, neither an employee nor the employee's non-dependent domestic partner needs to declare any amount received as payment or reimbursement of HRA benefits with respect to the non-dependent domestic partner as income to the extent the fair market value of the HRA coverage provided to the non-dependent domestic partner was included in the gross income of the employee.

Additionally, since the VEBA is considered to be the employer under § 3401(d)(1), the VEBA must withhold income tax and the employee portion of FICA. The VEBA must also pay the employer portion of the FICA and FUTA taxes. Further, the supplemental wages paid by the employer are considered separately from wages paid by the common law employer.

The IRS ruling is available at: