Thanks for the info.  One of us is reading this incorrectly.

Page 1 of what you reference explains what qualifies as an IRC Section 501(c) (9) organization.  That is not the employer.

Then, what you cite on Page 8 refers to whether or not the IRC Section 501 9(c) (9) organization is meeting THEIR responsibilities.  That is again not the employer.

So I think you proved my point.  It is clearly not the employer's issue.  

Let's look at what you said.  You asked:

What makes you think the employer did not set this up for the employees?  Just because it told you so?  Why would they lie?

Answer: I told you they didn't.  They didn't tell me so, a collective bargaining agreement said so.  There is no reason for the employer, a local government as mentioned at beginning of thread, to lie, obfuscate, or mislead in this instance.  

You said:

IRS has audit guidelines on what to look for, including evasion of employment taxes.

They do, but it sure looks like what you cite is referring to the VEBA and NOT the employer.

Seriously, I am not trying to be argumentative.  I appreciate you taking the time to reply during our busy time of the year.  I do think this is very instructive.  The problem is not the employer.  It is the VEBA.  Now I do understand why the form came from the VEBA administrator.  That is explained on the bottom of page 8 - top of page 9.  I don't know which of the two options are correct.  If they reported it on a W-2, then to bring this full circle, the Medicare issue would have been resolved.  Since they reported it on a 1099, I think I am right back to reporting it as I suggested earlier today, as other income subject to income tax only, with an explanation that the taxpayer is not in a trade or business subject to SE tax.