1.501(c)(9)-2. Membership in a voluntary employees'
beneficiary association; employees; voluntary association of
employees, EE-23-92, 8/7/92.
Par. 2. In §1.501(c)(9)-2, paragraph (a)(1)
is amended by adding a sentence between the fourth and fifth
sentences, and a new paragraph (d) is added, to read as follows:
(a) * * *
(1) In general. * * * (See paragraph (d) of
this section for the meaning of geographic locale.) * * *
***
(d) Meaning of geographic locale --(1) Three-state safe harbor.
An area is a single geographic locale for purposes of paragraph
(a)(1) of this section if it does not exceed the boundaries
of three contiguous states, i.e., three states each of which
shares a land or river border with at least one of the others.
For this purpose, Alaska and Hawaii are deemed to be contiguous
with each other and with each of the following states: Washington,
Oregon, and California.
(2) Discretionary authority to recognize larger
areas as geographic locales. In determining whether an organization
covering employees of employers engaged in the same line of
business is a voluntary employees' beneficiary association (VEBA)
described in section 501(c)(9), the Commissioner may recognize
an area that does not satisfy the three-state safe harbor in
paragraph (d)(1) of this section as a single geographic locale
if --
(i) It would not be economically feasible to
cover employees of employers engaged in that line of business
in that area under two or more separate VEBAs each extending
over fewer states; and
(ii) Employment characteristics in that line
of business, population characteristics, or other regional factors
support the particular states included. This paragraph (d)(2)(ii)
is deemed satisfied if the states included are contiguous.
(3) Examples. The following examples illustrate
this paragraph (d).
Example 1. The membership of the W Association
is made up of employers whose business consists of the distribution
of produce in Virginia, North Carolina, and South Carolina.
Because Virginia and South Carolina each share a land border
with North Carolina, the three states are contiguous states
and form a single geographic locale.
Example 2. The membership of the X Association
is made up of employers whose business consists of the retail
sale of computer software in Montana, Wyoming, North Dakota,
South Dakota, and Nebraska, which are contiguous states. X establishes
the X Trust to provide life, sick, accident, or other benefits
for the employees of its members. The X Trust applies for recognition
of exemption as a VEBA, stating that it intends to permit employees
of any employer that is a member of X to join the proposed VEBA.
In its application, the X Trust provides summaries of employer
data and economic analyses showing that no division of the region
into smaller groups of states would enable X to establish two
or more separate VEBAs each with enough members to make the
formation of those separate VEBAs economically feasible. Furthermore,
although some possible divisions of the region into three-state
or four-state areas could form an economically feasible VEBA,
any such division of the five-state region covered by X would
leave employees of X's employer-members located in at least
one state without a VEBA. The Commissioner may, as a matter
of administrative discretion, recognize the X Trust as a VEBA
described in section 501(c)(9) based on its showing that the
limited number of employees in each state would make any division
of the region into two or more VEBAs economically infeasible.
Example 3. The membership of the Y Association
is made up of employers whose business consists of shipping
freight by barge on the Mississippi and Ohio Rivers. Some of
the members of Y conduct their business out of ports in Louisiana,
while others operate out of ports in Arkansas, Missouri, and
Ohio. Y establishes the Y Trust to provide life, sick, accident,
or other benefits to the employees of its members. The Y Trust
applies for recognition of exemption as a VEBA, stating that
it intends to permit the employees of any employer that is a
member of Y to join the proposed VEBA. In its application, the
Y Trust sets forth facts tending to show that there are so few
members of Y in each of the four states that any division of
those states into two or more separate regions would result
in creating VEBAs that would be too small to be economically
feasible, that all of the members of Y are engaged in river
shipping between inland and Gulf ports that are united by the
existence of a natural waterway, and that the labor force engaged
in providing transportation by river barge is distinct from
that engaged in providing other means of transportation. Even
though Ohio, Louisiana, Arkansas, and Missouri are not contiguous,
because Ohio does not share a land or river border with any
of the other three states, the Commissioner may, as a matter
of administrative discretion, recognize the Y Trust as a VEBA
described in section 501(c)(9) based on its showing that the
establishment of separate VEBAs would not be economically feasible
and that the characteristics of the river shipping business
justify permitting a VEBA to cover the scattered concentrations
of employees in that business located in Louisiana, Arkansas,
Missouri, and Ohio.
Example 4. The membership of the Z Association
is made up of employers whose business consists of the retail
sale of agricultural implements in the states west of the Mississippi
River except California, Alaska, and Hawaii. There are 21 states
in the region covered by Z. Z establishes the Z1 Trust, the
Z2 Trust, and the Z3 Trust to provide life, sick, accident or
other benefits to the employees of its members. The trusts cover
different subregions which were formed by dividing the Z region
into three areas each consisting of seven contiguous states.
Each trust applies for recognition of exemption as a VEBA, stating
that it intends to permit the employees of any employer that
is a member of Z located within its subregion to join its proposed
VEBA. Each trust sets forth facts in its application tending
to show that four states within its particular subregion would
be needed to create a VEBA large enough to be economically feasible,
so that any further division of its seven-state subregion would
leave employees of at least some of Z's employer-members located
in the subregion in an area too small to support an economically
feasible VEBA. The applications contain no justification for
the choice of three seven-state subregions. Since the applicants
have not shown that it would not be economically feasible to
divide the Z region into smaller subregions (e.g., four containing
four states and one containing five states), the applicants
have not satisfied paragraph (d)(2)(i) of this section, and
the Commissioner does not have the discretion to recognize the
Z1, Z2, and Z3 Trusts as VEBAs described in section 501(c)(9).
Presented by Alvin Brown and Associates,
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