bpcpa Client
Street
City State Zip
Dear
***Salutation***:
I am
writing in response to your inquiry about whether a trust arrangement will qualify
as a multiple employer welfare benefit fund exempt from the limits of Internal
Revenue Code §419 and §419A. You specifically asked
whether contributions to 10-or-more-employer trusts will
be deductible.
In
general, welfare benefits liabilities are deductible only when paid by an
employer, unless the employer has made a deductible contribution to a welfare
benefit fund under §419/§419A. Those Code sections set
limits on the amount an employer can pay into a welfare benefit fund for
welfare benefit liabilities which will be paid in a later tax year of the
employer. The limits prevent employers from
unreasonably accelerating deductions for welfare benefit liabilities which will
be paid in later tax years. If amounts are contributed
in excess of the limits, no deduction is permitted in the current year for the
excess, and the excess may represent actual or deemed unrelated business
taxable income to the fund or the sponsoring employer.
There is,
however, a 10-or-more-employer plan loophole provided in the Code. Under this provision, the contribution limits do not apply
to any welfare benefit fund which is part of a 10-or-more-employer plan
provided that: (1) the plan doesn't maintain experience rating arrangements for
individual employers, and (2) no employer contributes more than 10% of the
total plan contributions. In a properly formed
10-or-more-employer plan the full contribution is
deductible by the employer; however, the excess contribution will generally
result in unrelated business taxable income to the trust or to the employer.
With
regard to the 10-or-more-employer plan exemption, the IRS has issued Notice
95-34. The IRS has stated that certain
10-or-more-employer plans will not satisfy the requirements for the
10-or-more-employer plan exemptions and will not provide the employer with the
desired tax deductions for contributions. Specifically,
the IRS claims that a 10-or-more-employer plan will not qualify for the
exemption if: (1) the arrangement is actually deferred compensation; (2) the
arrangement is actually separate plans maintained for each employer; or (3) the
arrangement is experience rated with respect to the individual employers in
form or operation. Furthermore, the IRS states that
even if an arrangement qualifies for the exemption as a 10-or-more-employer
plan, employer contributions may represent prepaid expenses that are
nondeductible under other Code provisions.
All of
this means that if you are considering entering into such an arrangement for
your business, you should proceed carefully; if your business already makes contributions to such an arrangement, the
deductibility of your contributions should be reviewed.
I hope
that this gives you a better understanding of how contributions to these trusts
may be treated by the IRS. If you would like to
discuss in more detail how such a trust should be drafted
to meet your needs or how the drafting of your present arrangement will have an
impact upon your deduction, please give me a call at your convenience so that
we can set up a meeting.
Sincerely yours,
Employer's
Deduction for Contributions to Funded Welfare Benefit Plans.
Introduction: A
"welfare benefit fund" is any fund which is part of an arrangement
for providing welfare benefits -- benefits other than deferred compensation or
property transferred in connection with the performance of services. The amount of an employer's deduction for amounts paid or
accrued for contributions to a "welfare benefit fund" is subject to
specific limitations, which are in addition to the requirements for
deductibility of payments made as compensation for services.
An employer's deduction
for contributions to a welfare benefit fund is limited to the amount of cash
paid by the fund during the taxable year for welfare benefits, plus an amount
up to specified account limits.
Contributions to welfare
benefit funds.
Contributions paid or
accrued by an employer to a "welfare benefit fund" (see ¶ 27,802) are
deductible (within limits discussed at ¶ 27,803 et seq.) under Code Sec. 419
for the taxable year in which paid if the otherwise applicable requirements for
the deduction of expenses incurred in a trade or business (under Code Sec. 162)
or for for the production of income (under Code Sec.
212) are satisfied. 21
Contributions to a "welfare benefit fund" are not deductible
except under Code Sec. 419. 22
Code Sec.
419(a)(2).
Code Sec.
419(a)(1).
observation: The welfare
benefit fund provisions prevent the benefits of early deductions to employers,
but they do create a window for limited current deductions for accrual basis
employers who provide certain deferred benefits to employees.
Deductible contributions
to employee benefit programs (e.g., insurance, health
and welfare programs) are deducted by corporations on line 25 of Form
1120. 22.1
Instructions to Form 1120 and 1120-A (1999)
Form to use: Form 1120.
observation: Not available
for Form 1120-A
For S corporations,
deductible amounts paid or incurred on behalf of employees owning 2% or less of
the corporation's stock for health and welfare benefits (e.g., the cost of up
to $50,000 of group-term life insurance on an employee's life) are reported on
line 18 of Form 1120S. Amounts paid on behalf of
officers owning more than 2% of the corporation's stock are
reported on line 7, and to non-officers owning more than 2% of the
corporation's stock, on line 8.
Instructions to Form 1120S (1999)
form to use: Form 1120S.
A partnership's
contributions to employee benefit programs are included on line 19 of Form
1065.
Instructions to Form 1065 (1999),
Form to use: Form 1065.
However, amounts paid during
the tax year for medical care for a partner, a partner's spouse or a partner's
dependents are not reported on line 18. Instead, these
amounts are included:
1 on line 10, as guaranteed payments,
2 on line 5 of Schedule K and on line 5 of the Schedule
K-1 of each partner on whose behalf the amounts were paid, and
3 on line 11 of Schedule K, and line 11 of Schedule K-1
of each partner on whose behalf the amounts were paid.
Instructions to Form 1065 (1999),
p. 16.
form to use: Form 1065.
form to use: Form 1065,
Schedule K.
form to use: Form 1065 SCH K-1.
Guaranteed payments to a
partner are shown on line 5 of Schedule K-1 of Form 1065. The
partner reports this amount on Schedule E of Form 1040, Part II, column (k). 22.5 Amounts on line 11 of Schedule K-1 for insurance that
constitutes medical care made on behalf of a partner may be deductible on Form
1040, line 28. 22.6
Instructions to Form 1065 (1999)
Instructions to Form 1065 (1999).
form to use: Form 1040 SCH E.
Self-employed
individuals who employ others deduct contributions to employee welfare benefit
plans on line 14 of Schedule C of Form 1040. However,
contributions made on behalf of self-employed individuals can't
be deducted on line 14 of Schedule C
Instructions
to Form 1040 (1999),.
form to use: Form 1040 SCH C.