Accessibility Skip to Top Navigation Skip to Main Content Home  |  Change Text Size  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

Part 4. Examining Process

Chapter 76. Exempt Organizations Examination Guidelines

Section 25. Supplemental Unemployment Benefit Trusts IRC 501(c)(17)

4.76.25  Supplemental Unemployment Benefit Trusts IRC 501(c)(17)

4.76.25.1  (01-01-2003)
Introduction

  1. This IRM contains specific examination guidelines for a trust recognized as exempt from income tax under IRC section 501(a) as a trust described in IRC section 501(c)(17). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of an IRC 501(c)(17) trust.

  2. These guidelines provide specific assistance for the examination of an IRC 501(c)(17) trust and are not all-inclusive. The purpose is to supplement the guidelines contained in IRM sections 4.75.10 through 4.75.13.

  3. The intent is not to restrict the examiner in identifying issues or using examination techniques not included herein.

  4. This IRM does not contain detailed technical information regarding IRC 501(c)(17) trusts. The examiner should review the technical information contained in IRM 7.25.17.

4.76.25.2  (01-01-2003)
Background Information

  1. IRC section 501(c)(17) exempts from Federal income tax a trust or trusts forming part of a plan providing for the payment of supplemental unemployment compensation benefits, if the requirements of IRC section 501(c)(17)(A)(i), (ii), and (iii) are met.

4.76.25.3  (01-01-2003)
Permissible Employee Benefits

  1. Exemption under IRC section 501(c)(17) requires the trust be organized and operated for the purpose of providing supplemental unemployment benefits to employees. Sick and accident benefits are permissible provided such benefits are subordinate to the separation benefits. If the examiner determines from the facts and circumstances the real purpose of the trust is to provide sick and accident benefits, rather than unemployment benefits, the trust will not continue to qualify for exempt status under IRC section 501(c)(17).

  2. A trust described in IRC section 501(c)(17) cannot provide for the payment of a death, vacation, or retirement benefit, since other Internal Revenue Code provisions cover trusts providing such benefits.

  3. A supplemental unemployment benefit trust must provide for the payment of supplemental unemployment benefits only because of an employee's involuntary separation from employment resulting directly from:

    1. A reduction in work force,

    2. The discontinuance of a plant or operation, or

    3. Similar conditions.

4.76.25.3.1  (01-01-2003)
Examination Guidelines - Permissible Employee Benefits

  1. Review the trust instrument and plan document to verify:

    1. The plan provides only supplemental unemployment benefits and subordinate sick and accident benefits.

    2. The trust instrument binds the trustees to act in a manner consistent with the plan provisions.

    3. The plan provides the corpus and income of the trust cannot, before the satisfaction of all liabilities to employees covered by the plan, be used for or diverted to any purpose other than providing supplemental unemployment compensation benefits.

  2. Review minutes, literature, publications, a sample of claims filed, and correspondence files to:

    1. Verify the payment of any sick and accident benefits is subordinate to the unemployment benefits.

    2. Determine whether the plan provides any prohibited death or retirement benefits.

    3. Determine whether the plan provides for the payment of supplemental benefits in the event of an employee's separation from employment other than for involuntary reasons.

  3. Review disbursement journals and supporting documents including invoices and cancelled checks to identify any disbursement for other than allowable benefits and administrative expenses, such as:

    1. Distributions made for the payment of a death, vacation, or retirement benefit.

    2. Benefits paid to the employee for a reason other than an involuntary separation.

    3. Distributions to employees of funds representing contributions in excess of the maximum funding allowed.

4.76.25.4  (01-01-2003)
Non-Discrimination Provisions

  1. Supplemental unemployment benefit plans must meet certain nondiscrimination conditions. These requirements provide that neither the classification under which the plan pays benefits nor the benefits themselves may discriminate in favor of highly compensated employees. The examiner should refer to IRC section 414(q) for definition of highly compensated employees.

  2. Benefits based on a uniform relationship to total compensation are not considered discriminatory. However, a plan will not qualify if benefits to highly compensated employees bear a larger ratio to their compensation than to the lower paid employees.

4.76.25.4.1  (01-01-2003)
Examination Guidelines - Non-Discrimination Provisions

  1. Review the plan document to determine how benefits are determined.

  2. Review disbursements journal and supporting documents to:

    1. Identify indications of discrimination in the payment of benefits in favor of employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees.

    2. Identify any disparity in the ratio of compensation to benefits paid indicating discrimination in favor of the highly compensated employees.

    3. Identify any disparity in the payment of benefits to highly compensated employees.

      Example:

      The payment of sick and accident benefits to highly compensated employees only would be discriminatory.

4.76.25.5  (01-01-2003)
Prohibited Transactions under IRC section 503(b)

  1. IRC section 503 prohibits exemption under IRC section 501(c)(17) to a trust that engages in a prohibited transaction under IRC section 503(b). Such transactions generally relate to preferential treatment accorded to disqualified persons. See Treas. Regs. section 1.503(b)-1.

  2. The term "prohibited transaction " as described in IRC section 503(b) means any transaction in which an organization subject to the provisions of this section

    • Lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest to

    • Pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered to

    • Makes any part of its services available on a preferential basis to

    • Makes any substantial purchase of securities or any other property for more than adequate consideration in money or money's worth from

    • Sells any substantial part of its securities or other property for less than an adequate consideration in money or money's worth to

    • Engages in any other transaction which results in a substantial diversion of its income or corpus to

    the creator of such organization (if a trust); a person who has made a substantial contribution to such organization; a member of the family (as defined in IRC section 267(c)(4)) of an individual who is the creator of such trust or who has made a substantial contribution to such organization; or a corporation controlled by such creator or person through the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation.

4.76.25.5.1  (01-01-2003)
Examination Guidelines - Prohibited Transactions under IRC section 503(b)

  1. The examiner should review the cash receipts journal and related supporting documents to identify income from the sale of assets at less than fair market value which could be a prohibited transaction under IRC section 503(b).

  2. The examiner should review disbursement journals and supporting documents, including invoices and cancelled checks to:

    1. Identify unusual disbursements, which could be considered prohibited transactions.

    2. Determine whether salaries are commensurate with the employee's duties and responsibilities and further the association's exempt purposes. Excessive compensation could be a prohibited transaction under IRC section 503(b).

  3. The examiner should analyze any acquisitions or dispositions of assets to verify all were at fair market value and no prohibited transactions occurred.

  4. The examiner should review income from investments to identify low-yield income-producing investments which could indicate prohibited transactions.

  5. The examiner should analyze accounts, notes, and mortgages payable to identify any transactions without receipt of adequate security or a reasonable rate of interest which could be indications of prohibited transactions.

4.76.25.6  (01-01-2003)
Unrelated Business Income

  1. Trusts exempt under IRC section 501(c)(17) are subject to the unrelated business income tax provisions described in IRC section 512(a)(3).

  2. To the extent the trust exceeds the IRC section 419A(c)(3) account limit at the end of the taxable year, the excess is subject to tax under IRC section 512(a)(3)(E). The account limit for any taxable year with respect to supplemental unemployment benefits is 75 percent of the average annual qualified direct costs for supplemental unemployment benefits for any of the immediately preceding seven taxable years.

4.76.25.6.1  (01-01-2003)
Examination Guidelines - Unrelated Business Income

  1. The examiner should review cash receipts to identify any unusual sources of income. Income received from any source other than members, employers, or investments should be considered unusual and may be subject to the unrelated business income tax provisions described in IRC section 511.

  2. Determine if the employer contributions exceed the deduction limitations described in IRC sections 419(c) and 419A. The Deficit Reduction Act of 1984, Public Law 98-369 provides for the imposition of unrelated business income tax on amounts exceeding specified account limits, and an excise tax on disqualified benefits.


More Internal Revenue Manual