The Deficit Reduction Act of 1984 clearly has curtailed one well-publicized aspect of voluntary employee beneficiary associations (VEBAs) -- the provision that allowed companies to buy vacation homes, essentially tax-free, for their employees. But the tax incentives for using VEBAs as a way to fund other fringe benefits, such as medical insurance and sick pay, still remain under the 1984 bill, scheduled to take effect in January 1986.

VEBAs are tax-exempt trusts into which a corporation deposits funds that cover benefits for employees. Under the old law, companies could claim tax deductions for these funds months before the actual payment was made to the employee or the insurance company. (In companies without VEBAs, employees generally cannot deduct benefits costs until the payments actually have been made.) Under the new law, however, companies can claim the VEBA deductions only in the year in which they pay them -- with one exception.Companies that self-insure are permitted reserves for anticipated but unreported costs; these reserves are still deductible the year that they are contributed, even if they are not spent until later. (In the medical-insurance area, for example, the law allows you to set aside up to 35% of your past year's costs to pay for unreported or unpaid, but incurred, claims.) Also under the new law, money set aside in a VEBA can still, within certain limits, earn interest tax-free.

Even with the new restrictions, VEBAs can be a wise investment of time and money. Certainly, companies that want to self-insure some of their benefits, such as medical and accident insurance, vacation and sick pay, and legal assistance, should consider establishing a VEBA: The money is tax-exempt, and the costs of third-party insurance may be greater for some companies than the risk entailed by self-insuring. In addition, VEBAs may allow some companies to offer benefits they otherwise couldn't afford, thanks to the savings that result from sheltering benefit funds.

VEBAs are not, however, for companies with cash-flow problems, since the money must be paid in during the year, and cannot be removed once it is in the trust. Companies must also be prepared to satisfy lengthy reporting requirements set up by the Internal Revenue Service and the Employee Retirement Income Security Act of 1974 (ERISA). "For really small companies, with 25 employees or less, the advantages may be outweighed by the costs," says Nancy Keppelman, an associate in the Detroit law firm of Miller, Canfield, Paddock, & Stone. "For somewhat bigger companies, it's worth investigation. They should look at their cash flow, review their current benefits programs and costs, and decide how they wish to fund those programs in the future. If [the company] can make contributions on an ongoing basis . . . then it's well worth looking into."