Voluntary employees’ beneficiary associations (VEBAs) are tax-exempt organizations, usually irrevocable trusts, which can be used by a business to fund benefits for its employees (e.g., life, health and accident insurance) at a reduced after-tax cost. Generally, the use of a VEBA will enable the business to fund the cost of a future year’s benefits (or, under certain circumstances, multiple future years’ benefits) in the present year and receive a tax deduction for the amount funded. The VEBA may be used for the accumulation of funds for the purpose of providing postretirement benefits. Tax deductions for contributions to a VEBA are available, subject to certain restrictions, limitations, and reporting requirements. Income earned on qualifying funds held by the VEBA is normally not subject to tax for the employer or the VEBA. Assets of the VEBA cannot be returned to the sponsor (employer) and must be distributed to the beneficiaries of the VEBA in the event it is terminated.

6.7.1 Timing of funding and cost recognition

VEBAs are a tax-advantaged means of funding fringe benefits. However, the assets are reported on the sponsor’s balance sheet. Consequently, the timing of payments made to VEBAs does not affect the timing of recognition of the costs of the benefits that the VEBA is designed to fund. Rather, the cost of the benefits funded by the VEBA should be recognized on the same basis they would have been under the terms of the benefit plans provided to employees, absent the existence of the VEBA. For example, VEBAs may be used to fund OPEB obligations as well as obligations related to other employee benefit arrangements. Payments to the VEBA should not be recorded as expense in the period made on the basis that they are similar to insurance premiums or that they are nonrefundable to the sponsor under the tax laws.

6.7.2 Source of funding OPEB benefits

As noted at PEB 2.6, ASC 715-60 requires specified criteria to be met for assets to qualify as plan assets. Only assets that qualify as plan assets using the criteria specified in ASC 715-60 may be netted for presentation purposes in the balance sheet against plan obligations. Similarly, only earnings on assets that qualify as plan assets may be included in the measurement of net periodic benefit cost for income statement reporting purposes. As the "net" treatment of plan assets (without evaluating other consolidation and/or right of offset guidance) is a unique treatment for pension and postretirement benefit plans, only those assets specifically segregated and restricted to provide pension or postretirement benefits to retirees (or postemployment benefits under ASC 712 for which the reporting entity applies the principles in ASC 715) can be considered "plan assets" for this purpose.
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