When Can I Cash Out My VEBA Account?

A Voluntary Employees’ Beneficiary Association (VEBA) is a tax-exempt trust established by an employer to help employees and their dependents pay for qualified medical expenses. These accounts are funded solely by the employer, as employee contributions are not permitted. The contributions, investment growth, and withdrawals for valid medical costs are all tax-free. However, the ability to cash out a VEBA for non-medical purposes is highly restricted, depending on specific circumstances governed by the plan’s rules and federal tax law.

Standard Use of VEBA Funds for Medical Expenses

A VEBA’s primary function is to reimburse members for qualified medical expenses, which are costs incurred for the diagnosis, cure, treatment, or prevention of disease. Common examples include:

• Health plan deductibles and copayments
• Prescription drugs
• Dental treatments and vision care
• Over-the-counter medications and menstrual care products
• Post-retirement health insurance premiums

To use VEBA funds, a member first pays for a medical service or product out-of-pocket. They then submit a claim to the VEBA administrator with documentation, such as an itemized receipt or an Explanation of Benefits (EOB) from an insurance carrier. This proof is required to substantiate that the expense is a qualified medical cost.

Once the claim is approved, the member receives a tax-free payment from their VEBA account. Unlike some health spending accounts, VEBAs are not “use-it-or-lose-it” plans. Any unused balance at the end of the year rolls over, allowing funds to accumulate. This feature makes them a useful vehicle for saving for future healthcare costs, particularly in retirement.

Scenarios Permitting Cash Withdrawals

Accessing VEBA funds as a direct cash payment for non-medical reasons is uncommon. The Internal Revenue Code does not provide a universal right for participants to cash out their accounts. The possibility of a cash distribution is entirely dependent on the rules established by the employer in the specific VEBA plan document.

One rare instance where cash withdrawals may be permitted is upon the termination of the entire VEBA plan. If an employer dissolves the trust, the plan document may outline a procedure for distributing the remaining assets to all eligible members.

Another scenario involves a member’s separation from service, such as through retirement or a layoff. Some VEBA plans contain provisions allowing a departing employee to elect a cash-out of their remaining balance. If the plan document does not authorize such a payment, the funds can only be used for medical expense reimbursement, even after employment ends.

Tax Treatment of Non-Medical Cash Distributions

Any cash distribution from a VEBA that is not a reimbursement for a qualified medical expense has tax consequences. The withdrawal is considered taxable income and must be reported on the individual’s federal income tax return. The VEBA administrator reports this payment to the recipient and the IRS by issuing a Form 1099-MISC.

The tax implications also create a liability for the employer. Providing cash-outs for non-medical reasons is classified as a “disqualified benefit.” If a VEBA provides such benefits, including non-medical cash payments, the employer is subject to a 100% excise tax on the amount of the disqualified benefit.

This penalty is a primary reason most VEBA plans do not permit cash withdrawals for non-medical purposes. The financial risk encourages employers to design their plans in strict alignment with IRS regulations to ensure the VEBA maintains its tax-exempt status.