Introduction. The Minnesota Healthcare Consortium VEBA Committee strongly recommends that employers adopting VEBA and HSA programs adopt personnel policies and collective bargaining agreements that are substantially similar to the following.  The model personnel policy is designed for three purposes.  First, it is intended to comply with Minnesota law requiring that employer contributions to a Health Care Savings Arrangement be made pursuant to a written policy.  Next, it is intended to comply with IRS nondiscrimination rules and requirements that contributions to the VEBA be made solely by the employer without giving employees an option to take cash or other benefits.  And finally, it is designed to establish an arrangement that is consistent with existing plan documents and administration agreements.

The model language described below can be used by employers that wish to offer employees a choice between VEBA accounts, HSAs, or a “Hybrid Option” where employer contributions are split evenly between a VEBA account and an HSA.  Under the Hybrid Option, the VEBA may only be used to reimburse vision and dental expenses until the employee incurs medical expenses up to the minimum statutory deductible for an HSA.  At that point the VEBA may reimburse any eligible medical expense. 

Disclaimer.  Model language may not be appropriate for every situation, and employers should make their own determination as to the suitability of model language for their purposes.  The following is not, and should not be relied upon as, legal or tax advice.  Legal review is recommended.  

Model Personnel Policy/Collective Bargaining Language Active Employees

Section 1         VEBA and HSA Arrangements

Subd. 1.  [Renewal] [Establishment] of VEBA.  Effective __________, Employer shall [continue to] make available a Health Reimbursement Arrangement for Active Employees within the Minnesota Service Cooperatives VEBA Plan and Trust (the “VEBA”) for all [eligible employees] [qualified bargaining unit members] who enroll in VEBA Plan # ___ [or Hybrid Plan # ___], described in summary and available [on the Intranet] [by request from Human Resources].  It is intended that the VEBA constitute a voluntary employees’ beneficiary association under Section 501(c)(9) of the Internal Revenue Code.  

Subd. 2.  [Renewal] [Establishment] of of Health Savings Account (“HSA”) Arrangement.   Effective __________, Employer shall [continue to] make available an HSA arrangement for all eligible qualified bargaining unit members who exercise their option to enroll in HSA Plan # ___ [or Hybrid Plan # ___], described in summary and available [on the Intranet] [from Human Resources].  It is intended that the HSA arrangement comply with all requirements of Section 223 of the Internal Revenue Code.

Section 3. Health Plan Fact Sheet.  Other terms and conditions, including employer contributions and the payment of administration fees, are addressed the in the Health Plan Fact Sheet which is incorporated herein by reference.

Introduction

Eligibility

VEBA Option.  You are eligible to participate in the VEBA and receive contributions to your VEBA Account if you are eligible for and enroll in a group health plan sponsored by your Employer that has been designated as VEBA Plan # ____”).   [The Hybrid Plan described below may be used with both VEBA and HSAs.] 

HSA Option.  You are eligible to make or receive contributions to an HSA if you enroll in a group health plan sponsored by your Employer that has been designated as HSA Plan # ____ and you do not have other disqualifying coverage through your Employer, a spouse’s employer or another private or governmental plan.  [The Hybrid Plan described below is an HSA Plan.][Hybrid Plan Option.  You are eligible to participate in the VEBA and receive a contribution that is split evenly between a limited-purpose VEBA account and an HSA if you are eligible for and enroll in a group health plan sponsored by your Employer that has been designated as Hybrid Plan # ____ by your Employer, and you do not have other disqualifying coverage through your Employer, a spouse’s employer or another private or governmental plan.  You may also make additional contributions to an HSA through your employer’s cafeteria plan.]

Limited-Purpose VEBA Plan

If you wish to make or receive contributions to an HSA, you may not have health coverage (other than preventive care) below the minimum statutory deductible for an HSA-eligible plan.  A “general purpose” VEBA account that reimburses claims for any eligible medical expense would disqualify you from making or receiving HSA contributions.  But a “limited purpose” VEBA account may be offered alongside an HSA.

In a limited-purpose VEBA account, you are only eligible (initially) to be reimbursed from the VEBA for vision and dental expenses  Once you reach the minimum statutory deductible required for an HSA-eligible plan, however, you may be reimbursed for any eligible medical expenses from your VEBA account.  If you have a VEBA account and elect the HSA-Only Option [or the Hybrid Option], your VEBA account will automatically be administered as a limited purpose VEBA.  If you elect the VEBA-Only Option, your VEBA account will be administered as a general-purpose VEBA

Coordination with Health FSA. If you participate in a health flexible spending account of the Employer (a “health FSA”), and you choose to enroll in HSA Plan #___ [or Hybrid Plan #____], then prior to the beginning of the health FSA plan year, you must elect limited purpose coverage under the health FSA for that year. 

Note:  Employers need to confirm with their FSA administrator how the grace period or $500 carryover will interact with an HSA program.  IRS Notice 2021-15 offers several ways that plan sponsors can adopt health FSA fund-carryover relief without restricting an employee’s eligibility to contribute to an HSA, such as:

• Automatically treating the leftover health FSA amount as available only under a limited purpose FSA with funds accessible only for dental and vision care.
• Allowing employees to waive any leftover balance.

Source of Funding.  The VEBA is funded entirely with employer contributions.  No employee who enrolls in a VEBA Plan may choose or be offered a choice between taxable cash compensation and the Employer’s contribution to the VEBA. 

HSAs may be funded with Employer contributions and employee contributions made through salary reduction elections.  Both Employer and employee contributions to HSAs are made through your Employer’s section 125 cafeteria plan.

Health FSAs are typically funded through salary reduction contributions, but employers may offer “flex credits” which you may allocate to different benefits under your cafeteria plan, including your health FSA.

Note:  The following paragraph describes the order in which different accounts will be used to pay claims and reflects the most common practice.  The employer may change this order through WEX.

Ordering Rules for Payment from Multiple Accounts.  If an employee is enrolled in a health FSA, medical expenses that are eligible for reimbursement under the health FSA shall be paid from the health FSA first, before any amount is payable from the VEBA, until the individual’s available health FSA funds are depleted. 

If an employee is enrolled in the VEBA, and to the extent applicable, has exhausted any coverage in his or her health FSA, medical expenses that are eligible for reimbursement under the VEBA shall be paid from the VEBA next, until the individual’s available funds in the VEBA account are depleted.

Note: Employers should confirm ordering rules with WEX.

Employer Contributions

VEBA Plan # ____.  If you are eligible for and enroll in the VEBA Plan # ____, Employer will make a[n annual] [monthly] [quarterly] contribution to individual accounts under the VEBA in accordance with the following schedule:

$______ for each eligible employee who elects single coverage under the VEBA Plan described below; and

The contribution will be made [choose one]: [on or about the first day of the VEBA Plan year] [on a monthly basis over the VEBA Plan year] [on a quarterly basis over the VEBA Plan year]. 

Expenses for Spouses and Dependents.  Medical expenses for spouses and dependents who are not enrolled in the same group health plan of your Employer may only be reimbursed from your VEBA account if the spouse or dependent is enrolled in another group health plan that meets minimum value, including group health plans maintained by unrelated employers.  Spouses and dependents enrolled in Medicaid, MinnesotaCare, or individual policies of insurance (or going without insurance) may not be reimbursed from the VEBA.  This limitation does not apply to funds in the VEBA that are transferred to the Postretirement VEBA Plan on your retirement.

Declining Coverage.  If you decline group health plan coverage and have an existing VEBA account, you may not be reimbursed from the VEBA account unless you enroll in your Employer’s group health plan in a subsequent year, or you are covered by another group health plan that meets minimum value (for example, if you have health coverage through your spouse’s employer).  Employer [will/will not] make VEBA contributions for employees who are covered under their spouse’s group health plan.

Note:  Most employers do not contribute to the VEBA for employees who decline coverage.

Opt-Out Rights.  On or before the first day of any plan year, you may irrevocably opt out of and waive future reimbursements from your VEBA account.   Upon the earlier of attainment of Medicare eligibility or death, any such account shall be reinstated and permit reimbursement of all eligible medical expenses.

Note:  This opt-out feature is made available because the benefits provided by the VEBA will constitute “minimum essential coverage” under Affordable Care Act (“ACA”) and will preclude the individual from claiming a premium tax credits if they apply for individual insurance through MNSure.  (Note that employees who are offered single coverage that meets minimum value and is “affordable” under the Affordable Care Act’s “Shared Responsibility” rule will also not be eligible for premium tax credits if they decline the offer and opt out of the VEBA).   Opt-Out Rights would only be used in cases where the offer of coverage is not affordable, such as if the employer offers coverage with VEBA contributions to part-time employees at a higher cost, or if a small employer does not offer coverage that is considered “affordable” under the ACA.  Affordability is usually determined under IRS safe harbors; employees should be instructed to contact Human Resources if they have questions on whether your coverage is considered to be “affordable” under the ACA.

Note:  The paragraph that follows is optional, and reflects concerns that employees who incur claims on the first day of the plan year might not have enough in their account to cover those expenses until much later in the year, which would require them to pay the bill out of pocket while the claim is “pended.”  Employers may “pre-fund” an account, but no amount contributed to the VEBA may be withdrawn by the employer if the employee terminates employment (it belongs to the former employee at that point).  The following is a potential compromise to pre-funding the account, and provides for an acceleration of prorated benefits on an “as needed” basis. 

[Optional:  Accelerated VEBA Contributions.  If an employee in the VEBA Plan is entitled to receive an annual contribution that is prorated on a [monthly] [quarterly] basis over the VEBA Plan year, and the employee incurs one or more claims for an eligible health expense that exceeds the employee’s account balance in the VEBA Plan, the Employer shall, at the employee’s request, accelerate its prorated contribution for that year to the extent necessary to reimburse the employee for the claim.  The total contribution for such an employee shall in no event exceed the contribution to which he or she was originally entitled to for that year.]

Note:  The next paragraph is also optional, and reflects a related concern:  What happens when an employee joins mid-year?  If their contributions are prorated, they will only receive half as much in their VEBA account.  But the deductible will be just as high as an employee who receives the entire contribution.  What follows is a potential compromise to giving these individuals a full year’s contribution, because it allows a mid-year employee to receive up to the annual contribution but only on an “as needed” basis. 

[Optional:  Mid-Year Hire VEBA Contributions.  If an eligible employee enters the VEBA Plan as an employee on a date after the first day of the VEBA Plan year, the Employer shall prorate the amount of the Employer Contribution to reflect the late entry.  If the employee incurs one or more claims for an eligible health expense that exceeds the employee’s account balance in the VEBA Plan, the Employer shall, at the employee’s request, increase its contribution for that year to the extent necessary to reimburse the employee for the claim, but not exceeding the contribution that would be made to similarly situated employees who entered the VEBA Plan on the first day of the VEBA Plan year.  The employee shall be entitled to the same rights as similarly situated employees to accelerate future employer contributions that are prorated over the VEBA Plan year.]

HSA-Only Option.  If you are eligible for and enroll in the HSA-Only Option, Employer will make a[n annual] [monthly] [quarterly] contribution to your HSA in accordance with the following schedule:

$______ for each eligible employee who elects single coverage under the HSA Plan described below; and

$_____ for each eligible employee who elects family coverage under the HSA Plan described below. 

The contribution will be made [choose one]: [on or about the first day of the HSA Plan year] [on a monthly basis over the HSA Plan year] [on a quarterly basis over the HSA Plan year]. 

You may also elect to contribute to your HSA through salary reduction under the Employer’s section 125 Cafeteria plan, and you may change that election prospectively during the year at least once per month.  Combined Employer and employee contributions to your HSA may not exceed statutory maximums that are indexed each year.

Note:  HSA contribution limits for 2023 are $3,850 for employees enrolled in single coverage, and $7,750 for employees enrolled in family coverage.  The contribution limits are adjusted each year and readily available online.  Employees who are 55 or older may make an additional annual “catch-up” contribution of $1,000. The catch-up contribution is not adjusted.   

[Optional:  Accelerated HSA Contributions.  If an employee enrolled in the HSA-Only or the Hybrid Option is entitled to receive an annual contribution that is prorated on a [monthly] [quarterly] basis over the year, and the employee incurs one or more claims for an eligible health expense that exceeds the employee’s account balance in his or her HSA, the Employer shall, at the employee’s request, accelerate its prorated contribution for that year to the extent necessary to reimburse the employee for the claim.  The total contribution for such an employee shall in no event exceed the contribution to which he or she was originally entitled to for that year]. 

[Optional:  Accelerated Employee Contributions to an HSA.  If an employee enrolled in the HSA-Only or Hybrid Plan Option is making pre-tax salary reduction contributions to an HSA, and the employee incurs oneh or more claims for an eligible health expense that exceeds the employee’s account balance in his or her HSA, the Employer shall, at the employee’s request, accelerate the employee’s future contributions for that year to the extent necessary to reimburse the employee for the claims.  The total contribution for such an employee shall in no event exceed the annualized amount of salary reduction contributions in effect for the balance of the year, and the employee must repay the employer through salary reduction by the end of the calendar year.]

[Optional:  Mid-Year Hire HSA Contributions.  If an eligible employee enrolls in the HSA-Only or Hybrid Plan Option on a date after the first day of the plan year, the Employer shall prorate the amount of the Employer contribution to the HSA to reflect the late entry.  If the employee incurs one or more claims for an eligible health expense that exceeds the employee’s account balance in his or her HSA, the Employer shall, at the employee’s request, increase its contribution for that year to the extent necessary to reimburse the employee for the claim, but not exceeding the total contribution that would be made to similarly situated employees who selected the same options on the first day of the plan year.  An employee who establishes an HSA mid-year may, through employer and employee contribution, contribute up to annual HSA contribution maximum for the year; however, the employee must remain eligible for an HSA for the following calendar year or will be required to take a distribution of excess contributions, which will be subject to penalties.]

[Hybrid Plan Option.  If you are eligible for and enroll in the Hybrid Plan Option, Employer will make a[n annual] [monthly] [quarterly] contribution to be divided evenly between a limited-purpose VEBA account and an HSA in accordance with the following schedule:

$______ for each eligible employee who elects single coverage under the Hybrid Plan described below; and

$_____ for each eligible employee who elects family coverage under the Hybrid Plan described below. 

The contribution will be made [choose one]: [on or about the first day of the Hybrid Plan year] [on a monthly basis over the Hybrid Plan year] [on a quarterly basis over the Hybrid Plan year].]

Group Health Plans.  Employer has made the following group health plan option available.

The plan options above may provide that deductibles and out-of-pocket maximums will be increased each year to keep pace with inflation.  The Internal Revenue Code requires that the minimum statutory deductible for plans used with HSAs be indexed for inflation.

Note:  Most employers agree to pay for the cost of administrative fees for VEBA and HSAs on behalf of active employees, but employers have discretion in this regard.  Employees typically pay Investment Fees.  We strongly recommend that employer NOT pay administrative fees on for VEBA or HSA accounts on behalf of employees or former employees who may have accumulated a balance in the past but are no longer enrolled in employer-sponsored group health insurance.  Otherwise employers may incur indefinite fees for small accounts that are forgotten or ignored.  Recommended choices are indicated in bold below.

Administration Fees.  Administration fees allocable to individual accounts of active employees for the VEBA and HSAs shall be paid [by the Employer/from individual accounts].  Administration fees allocable to individual accounts of current employees who have accrued a balance in the VEBA or an HSA but do not enroll in Employer sponsored coverage in subsequent years shall be paid [by the Employer/from individual accounts].  Administration fees allocable to the individual accounts in the VEBA or HSAs of former employees shall be paid [by the Employer/from individual accounts]. 

Employer Note:  Administrative Fees Administrative fees are lower for employers that participate in health insurance pools offered through the SCs. Fees are assessed on a per-enrolled employee per month basis.

Rates for employers in SC Pools:    Rates for employers not enrolled in SC
pools: 

* Employers that offer more than one account type are charged a single (stacked account) fee. Fees are subject to change when MHC goes out to bid as required by state law.

Investments and Fees.   Cash will be held in the Lincoln Stable Value Fund, bearing the participant interest of not less than 1.3% at the current guaranteed rate. Participants that maintain a minimum cash balance of $2,000 may invest the balance of their account in mutual funds. Mutual funds have a 1.2% investment management fee charged outside the net expense ratio. HSA funds will be held in a custodial account through WEX, an IRS-approved nonbank custodian.

Impact on Other Arrangements.  This policy supersedes and revokes all previous policies on this matter, including, to the extent applicable, other written or oral statements of policy and procedure that address other welfare benefits.  The policies and procedures outlined herein are not intended to create any contractual rights or duties, and will be applied at Employer’s discretion.  Although contributions made to your account in the VEBA or an HSA are irrevocable, except in the case of errors, Employer may amend or terminate its contributions policy at any time.

[OPTIONAL PROVISIONS IN BRACKETS]

In order to help eligible employees pay for medical expenses in retirement, [Employer Name] (“Employer”) has adopted the Postretirement Health Care Savings Arrangement.  This arrangement provides for individual medical reimbursement accounts funded with Employer contributions.  If eligible for this benefit, you, your spouse, and your dependents may draw on this account after you retire for the tax-free reimbursement of medical expenses.  Money contributed to your account will be held in trust.

The Postretirement Health Care Savings Arrangement is made available through the Minnesota Service Cooperatives VEBA Plan and Trust (the “VEBA”).  It is intended that this arrangement constitute a voluntary employees’ beneficiary association under Section 501(c)(9) of the Internal Revenue Code.

1. Eligibility

Option A:  Broad-based (deigned to meet the fair cross section test)

See notes at the end of this document for a further explanation of the fair cross section test. 

All [non-union][union] employees [who are enrolled in the employer’s group health plan at the time of retirement] [who meet the age, service or disability requirements to receive an annuity or disability benefit from a Minnesota public pension plan (other than a volunteer firefighter plan),] are eligible for and will be automatically enrolled in the Postretirement Health Care Savings Arrangement on their retirement date.

Option B:  Narrower class of employees (must meet the safe harbor or fair cross section test)

See notes at the end of this document for a further explanation of the safe harbor test. 

All employees who are not excluded below are eligible for and will be automatically enrolled in the Postretirement Health Care Savings Arrangement on their retirement date.

Exclusions (check all that apply):

• Collectively bargained employees, if health benefits were the subject to good faith bargaining.
• Employees who have not completed three years of service prior to the year in which they retire or otherwise become eligible for employer contributions.
• Employees who have not attained age twenty-five prior to the year in which they retire or otherwise become eligible for employer contributions.
• Employees whose customary weekly employment is for less than thirty-five hours, if other employees performing similar work for the same employer have substantially more hours (“substantially more” is not defined in the regulations). These rules have not caught up with the ACA and it is likely that the IRS will reduce this number to 30 hours per week in the future.
• Employees whose customary weekly employment is less than twenty-five hours.
• Seasonal employees whose customary annual employment is less than nine months, if other employees performing similar work for the same employer have substantially more hours.
• Seasonal employees whose customary annual employment is less than seven months.
• Other _______________________ [must be “reasonable classification” of employees].

2. Retirement. An employee’s “retirement date” shall be the earlier of the following: 

1)         Termination of employment;

2)         “Retirement” as that term may be defined under other policies or employee benefit plans of Employer;

3)         The date an employee becomes totally disabled; or

• The date an employee commences a medical leave of absence as determined by other policies or employee benefit plans of the Employer.

3. Source of Funds. The Postretirement VEBA is funded entirely with employer contributions.  No employee may choose or be offered the choice between taxable cash compensation and contributions to this arrangement. 
4. Employer Contributions. Within sixty (60) days of the effective date of retirement, your VEBA account balance in the Health Reimbursement Arrangement for Active Employees, if any, shall be transferred to the Postretirement Health Care Savings Arrangement.  In addition, your Employer will make contributions to the VEBA in an amount equivalent to the following:

 Note to employer.  The following longevity-based compensation programs are only examples.  Your model policies should reflect actual policies in effect for employees. 

(Select one or more)

›          Accrued Severance Pay:  Within sixty (60) days of the effective date of your retirement, Employer shall contribute _________% of the amount of your accrued severance pay, if any.  You will not be eligible to receive this amount in the form of taxable cash compensation. 

›          Perfect Attendance Bonus: Within sixty (60) days of the effective date of your retirement, Employer shall contribute _________% of the amount of your perfect attendance bonus, if any.  You will not be eligible to receive this amount in the form of taxable cash compensation. 

›          Unused Sick Pay. Within sixty (60) days of the effective date of your retirement, Employer shall contribute _________% of the amount of your unused sick pay/personal leave, if any.  You will not be eligible to receive this amount in the form of taxable cash compensation. 

›          Unused Paid Vacation. Within sixty (60) days of the effective date of your retirement, Employer shall contribute _________% of the amount of your unused paid vacation, if any.  You will not be eligible to receive this amount in the form of taxable cash compensation. 

›          Longevity in Extra Duties. Within sixty (60) days of the effective date of your retirement, Employer shall contribute _________% of the amount of your longevity in coaching (or other extra duties) bonus, if any.  You will not be eligible to receive this amount in the form of taxable cash compensation. 

›          Periodic Contributions for Retiree Health Savings (Rarely Used). Employer will make a[n annual] [monthly] [quarterly] contribution to your account in the amount of $__________ [until you attain age 65] [for ____ months] [other].

 Note to Employer:  If an employer checks the “periodic contribution” box, it must make the same contribution for all eligible retirees within a nondiscriminatory classification of employees (i.e., at least a fair cross section).   Thus, retirees in Class A could receive $X per month for each year of service with the employer; retirees in Class B could receive $Y per month for each year of service.  But Class A and Class B must each include more than nominal numbers of employees in lower and middle wage groups (i.e., employees who are not in the top 25% of pay). 

5. Payment of Administration Fees and Expenses. Administration allocable to the individual accounts of retirees shall be deducted from individual accounts.  Administration fees are subject to change from time to time.  All investment fees are paid by VEBA plan participants. 
6. Investments and Fees. Cash will be held in the Lincoln Stable Value Fund, bearing the participant interest of not less than 1.3% at the current guaranteed rate. Participants that maintain a minimum cash balance of $2,000 may invest the balance of their account in mutual funds. Mutual funds have a 1.2% investment management fee charged outside the net expense ratio. HSA funds will be held in a custodial account through WEX, an IRS-approved nonbank custodian.
7. Impact on Other Arrangements. This policy supersedes and revokes all previous policies on this matter, including, to the extent applicable, other written or oral statements of policy and procedure that address other welfare benefits.  The policies and procedures outlined herein are not intended to create any contractual rights or duties, and will be applied at Employer’s discretion.  Although contributions made to your account in the VEBA or an HSA are irrevocable, except in the case of errors, Employer may amend or terminate its contributions policy at any time. 

Nondiscrimination Rules

The VEBA is a health reimbursement arrangement, which is a type of self-funded group health plan.  As such it is subject to nondiscrimination rules under Section 105(h) of the Internal Revenue Code and Treasury regulations at 26 CFR 1.105-11.  The basic rules are as described below.

If an employer makes the same VEBA contributions for all of its non-union, full-time employees who enroll in the VEBA plan option (or a Hybrid plan option that works with both VEBAs and HSAs), most employers will meet these nondiscrimination requirements by default.  Unions have the right to negotiate different arrangements.  If a “fair cross section” of employees (including more than nominal numbers of employees in lower and middle pay ranges) receives contributions to their Postretirement VEBA account on retirement that are based on fixed percentages of benefits such as accumulated sick pay, most employers will meet these nondiscrimination rules by default. Employers with arrangements that include larger VEBA contributions for higher paid employees should read further.  

1. Nondiscrimination in Benefits and Eligibility

A. Non-Union Employees. IRS rules prevent discrimination in eligibility that favor non-union employees in the top 25% of pay.  The rules generally require that eligibility for the VEBA (both for active employees and retirees) follow one of two methods. 

(i)        Under the “safe harbor” method, which some employers will have difficulty meeting, the plan must actively benefit at least 70% of employees, or if at least 70% are eligible to benefit, the plan must actively benefit 80% of that group.  In making this calculation, you can exclude the following employees: 

• employees who have not completed 3 years of service;
• employees who have not attained age 25;
• part-time or seasonal employees;
• employees who are included in a unit of employees covered by an agreement between employee representatives and one or more employers which the Secretary finds to be a collective bargaining agreement, if accident and health benefits were the subject of good faith bargaining between such employee representatives and such employer or employers; and
• employees who are nonresident aliens (probably not an issue for Minnesota public employers).

Side Note:  Don’t be confused between these rules and the completely unrelated requirements under the Affordable Care Act (ACA).  The ACA require applicable large employers (with 50 or more full-time and full-time equivalent employees) to make an offer of coverage to all full-time employees (who work an average of 30 hours per week) that is affordable and meets minimum value. 

(ii)       Under the “fair cross section” method, the class of active employees or retirees eligible for a VEBA contribution must include more than nominal numbers of employees from middle and lower wage brackets (i.e., employees who are not in the top 25% of pay).  Because there is little guidance from the IRS on the fair cross section test, employers that use the fair cross section test should define the class of eligible employees to include as many lower-paid employees (not among those in the top 25% of pay) as practicable. 

Between the two approaches, the safe harbor provides more certainty that the arrangement is compliant.  But many employers cannot meet the safe harbor method, and the fair cross section method is a viable option.

B. General rule for including or excluding employees.   Regardless of which method is used above, employers should select who is eligible to participate in the VEBA for active employees and retirees (and who is not) based on “reasonable classifications” of employees.  This generally includes specified job categories, nature of salary (hourly vs. salaried), geographical location or similar bona fide business criteria.  Listing employees by name or other specific criteria having the same effect is not considered a reasonable classification.

C. Nondiscrimination in Benefits. Each nondiscriminatory class of non-union employees must receive the same dollar amount of contributions to the VEBA plan for active employees.  Under the Postretirement plan, the dollar amount need not be equal, provided that benefits contributed to the Postretirement VEBA are calculated in the same way.  If an employee in the top 25% of pay receives a contribution to the Postretirement VEBA equal 100% of their accumulated sick leave benefits, for example, a lower-paid employee in the same class must receive a contribution to the VEBA equal to 100% of their accumulated sick leave benefits. The retiree with a greater amount of accumulated sick leave benefits will receive a larger contribution.

D. Union Employees. If health benefits are subject to good faith negotiations with a union, union members may be excluded or provided with a different set of benefits or contribution levels to the VEBA.  Contributions to VEBAs for active employees remain limited to employees enrolled in group health coverage.  Unions that participate in the VEBA under a separate collective bargaining agreement are generally “deemed” to meet IRS nondiscrimination rules.   The union must be “bona fide” per IRS regulations.  We have determined in the past that “unions of one” (such as school superintendents) do not qualify for the union exception from nondiscrimination under IRS regulations.  Unions that are certified under Minnesota Statutes Section 179A.12 will always qualify for this exception.