FROM THE OFFICE OF PUBLIC AFFAIRS

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Today, the Treasury Department and the IRS issued final regulations regarding the requirements for a welfare benefit fund that is part of a 10 or more employer plan under section 419A(f)(6) of the Internal Revenue Code.

Section 419A(f)(6) provides an exception to the general rules limiting employers’ deductions for contributions to welfare benefit funds to an amount based on the cost of benefits provided during the year (plus additional amounts for reserves). The exception applies to contributions to a fund that is part of a 10 or more employer plan only if the plan does not maintain experience-rating arrangements with respect to individual employers.

“Clarifying the rules will provide guidance for taxpayers on the scope of section 419A(f)(6) and will aid practitioners who have advised their clients against investing in schemes that have been devised using section 419A(f)(6),” stated Treasury Assistant Secretary for Tax Policy Pam Olson.

The regulations clarify the meaning of “experience-rating arrangements with respect to individual employers”. These regulations respond to the proliferation of tax shelter arrangements which promise unlimited current deductions for employer contributions by purporting to qualify for the exception under section 419A(f)(6) but which in practice pass through favorable experience to individual employers. The regulations accomplish this by aligning the definition of experience rating with the legislative history of the provision which suggests the statutory exception to limits on the deductions for contributions was made available for those limited situations where the economics of the arrangement would serve to prevent excess contributions.

The regulations will generally apply for employer contributions paid or incurred in an employer’s first taxable years beginning after July 11, 2002 (the date of publication of the proposed regulations). Since these regulations only clarify existing law, however, contributions made prior to that date that would be nondeductible under the regulations may also be nondeductible.

Related Documents:

• The text of the final regulations