What is a healthcare trust?
A healthcare trust is a legal arrangement that holds the money of an employee health plan in a separate account, managed by one or more trustees, apart from the employer’s own assets. Contributions go into the trust, and claims, stop-loss premiums and plan administration costs are paid out of it.
The trust is a funding vehicle, not a type of coverage. The plan document still sets eligibility and benefits, a third-party administrator (TPA) still processes claims, and stop-loss insurance still protects against large claims. The trust only changes where the plan’s money sits and who is legally responsible for it.
One common misunderstanding is worth clearing up first: self-funding does not require a trust. Most self-funded health plans pay claims directly from the employer’s general bank account through the TPA. A trust is an optional structure that some employers add, and it comes with its own rules.
What does a trust do for a self-funded plan?
The purpose of a health trust is to separate plan money from the employer’s money and lock it to one use. Under ERISA section 403, plan assets held in trust “shall never inure to the benefit of any employer” and must be used only to provide benefits and pay reasonable plan expenses.
That separation does a few things:
- Protects the money. Trust assets are held for participants, not the business. They cannot be used for payroll or the employer’s operating costs.
- Gives a home to plan assets. ERISA’s general rule is that all plan assets must be held in trust. Employee contributions become plan assets as soon as they can reasonably be separated from the employer’s assets, and for welfare plans no later than 90 days after the employer receives or withholds them (29 CFR 2510.3-102).
- Assigns responsibility. The trustees have legal duties to manage the trust prudently and for participants’ exclusive benefit, and they answer for that money in a way a general corporate account does not.
- Can allow pre-funding with tax advantages. A tax-exempt trust such as a VEBA can hold reserves for future claims, within the deduction limits of IRC sections 419 and 419A.
When a trust is (and isn’t) required
The trust requirement has important exceptions for health plans. ERISA itself exempts insurance policies and assets held by an insurer. The DOL’s Technical Release 92-01 says the department will not assert a violation solely because employee contributions under a section 125 cafeteria plan are not held in trust. That is why most self-funded plans, where employees pay their share pre-tax and the employer pays claims from general assets, run without a trust.
A trust matters when the plan holds money of its own, for example:
- Employees pay after-tax contributions outside a cafeteria plan.
- The employer wants to set aside reserves for future claims or retiree benefits.
- A union or several employers fund the plan together.
- Plan assets, such as refunds or stop-loss reimbursements that belong to the plan, need somewhere to sit.
What are the types of healthcare trusts?
Employers generally use one of three structures. The right one depends on who sponsors the plan and whether the trust needs to be tax-exempt.
| Structure | Who sponsors it | How it’s taxed | Main extra obligations |
|---|---|---|---|
| VEBA (IRC 501(c)(9) trust) | One employer, related employers, or a union | Tax-exempt, if it qualifies and notifies the IRS | Form 1024 notice, nondiscrimination rules, deduction limits under sections 419 and 419A |
| Grantor trust (taxable trust) | One employer | Not tax-exempt; the employer is treated as the owner and reports the trust’s income | Trust document, trustees, ERISA plan asset rules |
| Single-employer trust (either form above) | One employer or a controlled group | Depends on the form | ERISA bond, Form 5500 at any size, audit at 100+ participants |
| Multiple employer trust (MEWA) | Two or more unrelated employers | Depends on the form | Form M-1, Form 5500 at any size, state insurance regulation |
VEBA under IRC 501(c)(9)
A voluntary employees’ beneficiary association is a tax-exempt trust that pays life, sick, accident or similar benefits to members, their dependents or beneficiaries. To qualify, the IRS says it must be a voluntary association of employees who share an employment-related common bond, such as a common employer or a collective bargaining agreement, and no part of its earnings may benefit any private individual except through those benefits.
A VEBA must give the IRS timely notice that it is applying for exempt status, usually on Form 1024, and a plan that includes a VEBA must meet nondiscrimination requirements unless it is maintained under a collective bargaining agreement. The employer’s deduction for contributions is limited to the fund’s “qualified cost” under section 419, which caps how much can be pre-funded.
Grantor trust
Some employers use an ordinary taxable trust instead. Under the grantor trust rules (IRC sections 671 to 679), the employer is treated as the owner, so the trust’s income and deductions flow onto the employer’s own tax return. This avoids the VEBA application and nondiscrimination testing, but offers no tax-exempt build-up. It is often used simply to hold employee contributions and pay claims while meeting ERISA’s trust requirement.
Single-employer trust vs. MEWA
A trust for one employer, or for companies under common control, covers a single-employer plan. Once employees of two or more unrelated employers are covered, the arrangement is a multiple employer welfare arrangement (MEWA) under ERISA section 3(40). For this purpose, businesses are under common control only if there is at least a 25 percent ownership link, so separate companies with a loose affiliation, or members of an association, usually form a MEWA.
MEWAs pool small employers’ risk, but the DOL’s MEWA guide notes that a number of them have been unable to pay claims because of insufficient funding and inadequate reserves. That history is why federal and state rules are stricter for them. Collectively bargained plans and certain rural cooperatives are excluded from the definition.
What does a trust mean for compliance?
Adding a trust changes how the government treats your plan. A self-funded plan paid from general assets is “unfunded” for reporting purposes. A plan that uses a trust, including a 501(c)(9) trust, is not, and several requirements follow.
| Requirement | Unfunded self-funded plan | Plan with a trust |
|---|---|---|
| ERISA bond | Usually not needed, because no one handles plan funds | Needed for everyone who handles trust money |
| Form 5500 | Not required under 100 participants (29 CFR 2520.104-20) | Required regardless of size |
| Independent audit | Exempt at any size (29 CFR 2520.104-44) | Required once the plan files as a large plan, generally 100+ participants |
| Form M-1 | Not required unless it is a MEWA | Required if the trust covers unrelated employers |
| State insurance regulation | Generally preempted by ERISA | Applies to MEWAs |
Plan asset rules and the ERISA bond
Money in the trust is plan assets. Every fiduciary and other person who handles it must be covered by an ERISA fidelity bond for at least 10 percent of the funds handled, with a $1,000 minimum and a $500,000 cap per plan. See our page on ERISA bond requirements for who counts as handling funds. Trustees must also follow ERISA’s prohibited transaction rules, so the employer cannot borrow from the trust or take money back.
Form 5500 at any size
The small plan filing exemption covers only welfare plans with fewer than 100 participants that are fully insured, unfunded, or a combination of the two. The Form 5500 instructions say a plan that used a trust or separately maintained fund, including a section 501(c)(9) trust, to hold or pass through plan assets is not unfunded. A trust-funded health plan therefore files a Form 5500 every year, even with 10 employees. Our Form 5500 deadline page covers due dates and extensions.
An audit at 100 or more participants
Insured and unfunded health plans are exempt from the independent auditor’s report even when they are large. A funded plan is not. Once a trust-funded plan files as a large plan, generally with 100 or more participants at the start of the plan year, it needs an independent qualified public accountant’s audit attached to the Form 5500. See employee benefit plan audits for what that involves.
Form M-1 and state rules for MEWAs
The administrator of a MEWA that provides medical care must file Form M-1 with the DOL each year by March 1 for the previous calendar year, with an automatic 60-day extension available on request. A MEWA must also register at least 30 days before it begins operating in any state, and file again within 30 days of certain events, such as operating in a new state or a large jump in enrollment. A welfare plan that must file Form M-1 also files a Form 5500 regardless of its size or funding.
ERISA section 514(b)(6) lets states regulate MEWAs directly. If the MEWA is fully insured, states may apply insurance laws on reserves and contributions, along with licensing, registration and audit rules to enforce them. If it is not fully insured, any state insurance law may apply as long as it does not conflict with ERISA. Rules vary widely by state, so check the requirements in each state where the MEWA covers employees.
Should your plan use a trust?
A trust makes the most sense when the plan has money of its own to protect. It adds cost and filings, so many self-funded employers are better off without one.
A trust may fit when:
- Employees make after-tax contributions that fall outside a cafeteria plan.
- You want to pre-fund reserves or retiree health benefits, and a VEBA’s tax treatment is worth the setup.
- A collective bargaining agreement or several employers fund the plan jointly.
- You want a firm legal wall between plan money and company money, for governance or creditor reasons.
A trust may not fit when:
- Your plan pays claims from general assets and employee contributions run through a cafeteria plan. A trust would add a bond, a Form 5500 at any size and, at 100 or more participants, an audit, with little practical benefit.
- You want flexibility with surplus. Money placed in trust cannot come back to the employer.
- You are a small employer considering a multiple employer trust. Check the MEWA’s Form M-1 filings and its license status in your state before joining.
Whatever the structure, the core risks of self-funding stay the same: claims can swing from month to month, large claims fall on the plan up to the stop-loss attachment point, and claims incurred before a plan ends can still be owed afterward. A trust does not change those risks. Stop-loss insurance and adequate reserves do. Ethos reviews and places stop-loss contracts for self-funded plans through its stop-loss service.
How do you set one up?
If a trust is the right fit, the steps are mostly legal and administrative:
- Confirm the purpose. Decide what the trust will hold: employee contributions, reserves, retiree funds, or all of these.
- Choose the form. Decide between a VEBA and a taxable grantor trust with your ERISA counsel and tax advisor.
- Draft the documents. You need a trust agreement naming the trustees, plus a plan document and summary plan description that describe how the plan is funded.
- File with the IRS if needed. A VEBA gives notice on Form 1024.
- Bond the people who handle money. Put an ERISA bond in place before the trust receives contributions.
- Line up reporting. Plan for a Form 5500 every year and, at 100 or more participants, an independent audit. If more than one unrelated employer is involved, plan for Form M-1 and state licensing.
- Coordinate the vendors. Your TPA, stop-loss carrier and bank need to know claims are paid from the trust, and who owns the stop-loss policy.