Vacation Breaks

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The principal reason companies choose to make VEBAs the owners of their vacation homes is the effect on taxable income. Take the case of Benefit Concepts. It will deposit $30,000, the purchase price of the Stowe condominium, in its VEBA at the end of its fiscal year, entitling it to a $30,000 deduction on its 1983 tax return. If the corporation had planned to purchase the property in its name, rather than through the VEBA, it could not have deducted the full purchase price in one lump sum but would have had to depreciate the property over 15 years.

And this isn't the only selling point. A VEBA can charge its members a fee to pay for upkeep on a vacation home, so the facility can be self-sustaining after it is acquired. "We're definitely going to be utilizing mandatory contributions by the employees," says Carpenter of Benefit Concepts. "It won't be substantial -- $50 or so a month, nothing prohibitive. If you're going to be using the facility, you should have to pay some of the freight."

Also, assets placed in a VEBA can't be attached by creditors of the employer, and interest earned on funds accumulating in the trust is exempt from income taxation. Suppose Benefit Concepts's VEBA earned $1,000 in interest in 1983. Since the trust is tax-exempt, the entire amount would go to pay fringe-benefit costs, such as upkeep on the condominium. "That means," says Larry Richter, chairman and chief executive officer of Corbel & Co., a consulting firm in Jacksonville, Fla., "that you don't have to put as much money in the plan next year. The interest you earned will cover part of the bill for your employees' fringe benefits."

The remaining selling points of a vacation-home VEBA are less tangible. "The company that finds economical ways to provide exceptional vacation benefits," argues Christopher Frey, "will be rewarded by improved employee morale, higher productivity, and more fruitful recruitment programs." Barry Schotz adds, "You will notice less absenteeism right away, and you will notice that employees will be a little more conscientious."

Good as all this sounds, VEBAs aren't right for all companies. Some corporations are too small to make a vacation-home VEBA workable. For example, corporations with fewer than 25 or 30 employees probably won't be able to keep the vacation home full year-round. And renting the facility isn't the answer, because the trust may have to pay taxes on the amount collected. (It would be classified as "unrelated business income.") In addition, small companies have to contend with the IRS. "We've heard," says Larry L. Grudzien, tax supervisor in the Chicago office of the accounting firm, Laventhol & Horwath, "that the IRS is scrutinizing heavily plans with fewer than 10 members."

And there are other drawbacks to consider. You can't use the VEBA home to entertain clients (the facility is for VEBA members only), and, because of the IRS's concern that the vacation home be accessible, the facility should be relatively close to your business's home base. Laventhol & Horwath goes so far as to recommend that your vacation facility be within 250 miles of your business. But consultants say you can increase the likelihood of IRS approval of a more distant location by providing transportation as part of your employees' vacation package.

Another problem is that vacation and recreation benefits that are provided by a VEBA may, in some cases, be taxable to the recipient. That headache may be a minor one, however. Say your corporation's VEBA pays $6,000 for a time-share week at a resort. The time-share week has a useful life of 30 years, making the annual cost of this benefit about $200, an amount that won't make much of a difference on most people's tax returns.

The biggest negative of a vacation-home VEBA, however, is this: Property placed in a VEBA does not belong to the corporation, even though the company paid for it. It is the property of the members of the VEBA. That may not sound so terrible -- and it isn't, until the trust is dissolved. Under the regulations, the assets of a dismantled trust must be distributed to members of the VEBA or used to provide other benefits for them. "But no part of the VEBA's assets," says Frey, "may at any time revert to any contributing employer."

Suppose Benefit Concepts sells its $30,000 condominium. The company paid for the vacation home, but by law it will get nothing at the time of the condominium's sale. Rather, the proceeds would remain in the VEBA, to be divided evenly among the members upon the trust's termination, or the money could be retained by the VEBA and used to pay for other fringe benefits. What is more, if the property has greatly appreciated, the company might forgo substantial capital gains. "You may find that, over the long haul, to keep the facility outside the VEBA is smarter from a capital-gains flexibility point of view," says Schotz. "Don't let the lure of an immediate tax deduction be the overriding reason you put the vacation home in the VEBA."

The key, then, in deciding whether to make use of a VEBA trust for a vacation facility is not to be swayed by any single factor. "It's like the old saying about tax shelters," says Schotz. "A VEBA has got to make more than tax sense. If it doesn't, don't do it."

If you decide to go ahead with a VEBA trust, be prepared for a paperwork avalanche. A VEBA, because it is a tax-exempt entity, must file IRS Form 990 annually, along with a Form 5500 (whether itis a 5500 or a 5500C depends on the number of participants). And, finally, hire a lawyer. He or she will prepare a plan for submission to the IRS. The charge, says Pat Queen, pension sales manager for Corbel & Co., could range from $2,500 to $10,000, depending on the plan's complexity.

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