Vacation Breaks

A company can trim its tax bill by purchasing a vacation retreat through a Voluntary Employees' Beneficiary Association.

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When Benefit Concepts Inc. of New York, a $2-million-a-year business-planning and consulting firm in New York City, decided to buy a vacation home for its employees, it narrowed its choices to two. "It was either a beach place in the Hamptons," says Daniel E. Carpenter, the company's president, "or a ski place near Stowe."

The skiers won.

In late January, the company had plans to purchase a $30,000, chalet-style condominium in the Green Mountains of Vermont. But the deed won't be made out to the corporation. It will bear the name of the company's Voluntary Employees' Beneficiary Association (VEBA).

As described under section 501 (c)(9) of the Internal Revenue Code, a VEBA is a vehicle (generally a trust) that pays for employees' fringe benefits after a corporation deposits sufficient money to cover these costs. The primary reason a company would choose to pay for these benefits through a separate entity is that contributions to a VEBA (assuming that certain standards set forth in the Internal Revenue Service regulations have been complied with) are fully deductible in the year that they are made. And that, obviously, helps a corporation trim its tax liabilities.

Through a VEBA, health and disability insurance can be covered (see INC., May 1983, page 182). So can vacation facilities -- even though the IRS isn't crazy about the idea. Its problem with recreation VEBAs is that some businesses abuse them. Owners of small corporations sometimes purchase condominiums through their companies' VEBA trusts, then refuse to share the facilities equally with their employees -- as the regulations require.

"The IRS feels that [the vacation-home VEBA] is a scam, and, in some cases, they're right," says Nancy Keppelman, an associate in the Detroit law firm of Miller, Canfield, Paddock & Stone. "We've heard rumors," she adds, "that the IRS is starting to come down hard in this area."

The IRS denies that it has singled out vacation-home VEBAs for special scrutiny, or that having a recreation VEBA will trigger a tax audit. So, consultants argue, corporations should use VEBAs whenever it is feasible. "If you do it right," says Barry R. Schotz, president of Creative Compensation Inc., a benefits consulting firm in La Jolla, Calif., "if you don't get greedy, the IRS will help you, because they have a stake in this, too, from a social point of view. A healthier employee is going to be less of a drain on the social programs."

The practice of providing workers with vacation benefits is not new. In 1915, the New York Waist and Dress Makers' Union, Local 25 of the International Ladies' Garment Workers' Union, rented a house in Pine Hill, N.Y., for the use of its members. The idea caught on, and, in 1919, the union made the arrangement permanent. It acquired the 1,000-acre Old Forest Park Hotel Resort in the Pocono Mountains in Pennsylvania, where the present ILGWU Forest Park Unity House now stands.

The concept of VEBAs also dates back to the early part of this century. "The original concept was a pass-the-hat situation when a fellow employee died," says Harlan M. Ten Pas of the Chicago accounting firm of Checkers, Simon & Rosner. "Then, in 1928, Congress came out with a statement that said a voluntary employees' beneficiary association could qualify as a tax-exempt entity. That's when it all started."

Oddly enough, small business didn't get around to making use of the technique until 1980, when the IRS finally issued regulations governing VEBAs. A VEBA, according to those rules, must be administered by its members, by an independent trustee, or, in some circumstances, by a corporation. It all depends on the type of fringe benefits provided. For instance, a corporation may control the VEBA if the benefits supplied are among those sanctioned by the Employee Retirement Income Security Act of 1974 (ERISA). If the fringes provided are not on the list of benefits that are covered by an Employee Welfare Benefit Plan under ERISA, members of the VEBA or independent trustees must be in charge. Among the fringe benefits covered by ERISA are medical, dental, life, and disability insurance.

Included in the list of benefits not specifically authorized are recreation facilities. But companies with recreation facilities can still manage their VEBAs, says Nancy Keppelman. To do so, they must expand their trusts to include one or more of the approved benefits. "Our position," Keppelman notes, "is that if you have, along with your recreation facility, something in the VEBA that is covered by ERISA, you'll probably be okay with the Internal Revenue Service."

Generally, participation in a VEBA is voluntary, but companies can require employees to belong, the IRS says, as long as the employees "incur no detriment." Christopher Frey, a resort-development consultant in Waitsfield, Vt., explains what that means: "The regulations cite deductions from pay as such a detriment. An employer may not impose a membership upon an employee by voluntarily withholding on his salary and paying over to a trust."

Membership in a VEBA is generally limited to former and present employees and their dependents (principally, spouses and children who are minors or students). Trustees, administrators of the VEBA, and similar "nonemployee insiders" can participate, too, but such persons can make up no more than 10% of the VEBA's total membership. "Not all members need to be employees in the strict sense," Frey points out. "For example, the proprietor of a business whose employees are members could participate."

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