What Is a VEBA and Why Do Teachers Have to Keep Voting on it?
Why do teachers have to keep voting on VEBA?
Every year, most teachers receive a request to vote on VEBA funding. In many districts, the VEBA vote comes without a lot of supplementary information, and as busy as teachers are during the school year, it can be challenging to figure out what we’re voting on.
What is a VEBA?
Officially, VEBA stands for Voluntary Employees’ Beneficiary Association, and like most of our benefits, it’s authorized by the IRS via a specific tax code – 501(c)(9). In practice, it’s another type of tax-sheltered Health Reimbursement Account (HRA), similar to the Flexible Savings Account (FSA) and the Health Savings Account (HSA).
Each of these HRAs is governed by a slightly different set of rules, but one thing is true for all of them: You don’t pay taxes on the money that goes into an HRA, and you don’t have to pay taxes when you spend the money, as long as it’s spent on eligible healthcare expenses.
How is a VEBA funded?
The most common source of funding for a VEBA is cashed out sick leave. However, in some districts, teachers have the option to vote on mandatory VEBA funding from a number of different sources including:
The results of the vote are binding for all employees in the year that they vote on them. So, if the VEBA is approved for a certain group and a certain type of leave in your district, then everyone in that category who cashes out that type of leave will be required to cash out their leave into a VEBA.
How Does a VEBA account work?
Once money is placed into a VEBA for an employee, it can be used to pay for any eligible medical expenses, or the money can remain in the account, and be saved as cash or invested. Typically, the VEBA account custodian will send the account owner a debit card to use when they are paying for a qualified medical expense.
A VEBA account is more similar to an HSA than an FSA. All three types of accounts involve tax-sheltered contributions and tax-sheltered spending, provided the money is used for eligible medical expenses, but an FSA has a use it or lose it component—which means the money you put into an FSA has to be spent each year. In a VEBA and an HSA, the money in the account can stay there for as long as you want, and if you’re not planning to use it right away, it can also be invested. Because the balance can be carried over from year to year, when used strategically, the VEBA and HSA are unique accounts that offers tax-free contributions, potentially tax-free investment growth, and tax-free distributions.
Besides how they are funded (HSAs are funded with employee and employer contributions when an employee elects a qualified high deductible health insurance plan), the VEBA and the HSA account also have one notable difference in eligible expenses: VEBA accounts can be used to pay for health insurance premiums before you turn 65, as long as they meet certain eligibility requirements. For folks considering early retirement from teaching, this feature of VEBAs makes them extremely attractive, especially since VEBAs are often funded at retirement with the sick leave a teacher has accrued over their entire career.
What to consider when voting
While I can’t advise you how to vote, there are certain considerations to make when casting your VEBA vote each year. I think it’s worth considering the different types of mandatory funding sources individually when considering where a VEBA makes the most sense, and where it doesn’t.
For leave cash out at retirement, a VEBA is often extremely advantageous because many teachers retire with a significant amount of accrued sick leave that will be treated as taxable income when they cash it out at retirement if it doesn’t go into a VEBA.
For example, consider a teacher in the 22% income tax bracket, who has 100 days of accrued sick leave at retirement, and whose hourly rate of pay is $50. If this teacher cashes out their sick leave at the commonly bargained rate 0.25, the teacher is still looking at about $9,375 in cashed out sick leave at retirement. The entirety of that money will either be placed into a VEBA, or it will be treated as taxable income. If it’s placed into a VEBA, the teacher will receive all $9,375, which can then be invested, saved, or spent on medical costs, including eligible health insurance premiums. If it’s put into the teacher’s paycheck, the teacher will only receive $7,312 after taxes are paid. Because the sick leave cash out at retirement is probably the biggest leave cash out a teacher will take in their career, the potential for immediate tax-savings in this scenario is the highest.
A VEBA is always going to save teachers money on taxes when they cash out leave, so it’s never really a bad financial option for leave cash out. However, since mid-career sick leave and personal leave cash outs are typically for smaller amounts, the potential for immediate tax savings here is not as high as it is for the retirement leave cash out. But, considering the fact that VEBA funds can be invested over time, if a teacher is able to cash their eligible leave out into a VEBA each year, and makes a point to not spend those funds and instead invest and save them for retirement, even these smaller amounts of tax savings can add up, especially considering the investment growth is also tax free as long as you eventually spend the money on eligible medical expenses.
Depending on the way your district votes, you also don’t have a say in whether your leave is cashed out into a VEBA or not (this is an IRS rule, not a district rule). The results of the vote apply to everyone in the specified group who is cashing out leave in a particular year. So particularly if you’ve accrued enough sick leave to be eligible for a mid-career sick leave cash out, it’s worth paying attention to the results of your VEBA vote each year. If they change from year to year, it might make sense to wait until a year when the VEBA is approved for mid-career sick leave cash out if the tax savings and investment opportunities related to the VEBA are important to your overall financial plan.
In my career as a teacher, the option to fund a VEBA with mandatory contributions from teacher pay has only come up for a vote a few times in the districts where I’ve worked, so don’t be surprised if you haven’t seen it. Because teachers have the option to use a high deductible health care plan with an HSA to contribute to a very similar type of account throughout their career, as well as the option to defer a lot of taxable income through using both Deferred Compensation and 403(b) savings, I think making VEBA contributions mandatory deductions from pay doesn’t make that much sense for most teachers, especially considering you’re not voting on the option to do this, you’re voting on it being a mandatory contribution for every teacher, that will actually reduce take-home pay.
The takeaway here is that the VEBA itself is a good, tax efficient way to cash out your sick leave as a teacher and to have a savings bank available for future healthcare expenses. While there’s often a more immediate tax advantage seen in the large leave cash outs associated with retirement, the VEBA can certainly be advantageous for mid-career leave cash out as well, especially for those who plan to invest the money that’s going into the VEBA. So, a teacher considering a mid-career accumulated sick leave cash out may want to consider doing so when VEBA funding has been approved in the annual vote. However, with the other options that teachers have for tax-free health savings and tax-deferred retirement savings, mandatory contributions from pay (in districts where this is even an option to vote on), in my opinion, are unlikely to be a popular source of VEBA funding for teachers.