PLR 200003053: Supplemental medical fund receives favorable welfare benefit rulings

Plain-English summary

A union and an employers' association agreed to fund supplemental benefits through a health and welfare fund, but the trustees decided to provide only medical benefits. The IRS ruled that the supplemental plan's medical benefits fit the fund's § 501(c)(9) purpose. It also ruled that signatory employers' supplemental contributions were deductible without regard to the reserve limits in §§ 419 and 419A because the plan was maintained under a collective bargaining agreement. Investment income earned by the supplemental fund was exempt function income under § 512(a)(3)(B) on the stated facts. The IRS left three other requested rulings to separate correspondence.

Ruling snapshot

• Question: How are the supplemental medical benefits, employer contributions, and fund investment income treated?
• Outcome: Approved on those three questions; requests four through six were reserved for separate correspondence.
• Key authorities: IRC §§ 501(c)(9), 419, 419A(f)(5), 512(a)(3)(B); Treas. Reg. §§ 1.419A-2T, 1.512(a)-5T.

Full text (IRS public release)

200003053

Internal Revenue Service                 Department of the Treasury
Washington, DC 20224
SIN 0501.09-00
SIN 0512.00-00
In Reference to: OP:E:EO:T:3
Date: OCT 26 1999

Legend:
X = XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Y = XXXXXXXXXXXXXXXXXXXXXXXX
Z = XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

Dear Sir or Madam:

This is in response to your letter dated December 21, 1998,
as supplemented by subsequent correspondence. You requested six
rulings on a proposed transaction. These six rulings involved
sections 501(c) (9), 419, 419A, 512(a)(3)(B), 61(a), 83(a),
105(b), 129, 79, 3121(a), and 3306 of the Internal Revenue Code.
We are responding only to those ruling requests which are under
our jurisdiction. The other ruling requests will be the subject
of separate correspondence.

Specifically, you request us to rule that:

1. The provision of the Supplemental Benefits by X in
accordance with the terms of the Supplemental Plan will
not result in the provision of benefits other than
"life, sick, accident or other benefits" within the
meaning of section 501(c) (9) of the Code.

2. Supplemental contributions would be deductible by
employers who are signatory to the Collective
Bargaining Agreement without regard to the reserve
limits imposed by sections 419 and 419A of the Code.

3. Investment income earned by the Supplemental Fund
will be considered “exempt function income" within the
meaning of section 512(a) (3) (B) of the Code.

Facts:

You are a multi-employer health and welfare fund maintained
pursuant to a collective bargaining agreement between Y, a local
union and Z, an association of employers.

You provide health and welfare benefits to employees of Z's
members, as well as to their dependents. Specifically, you
provide medical, hearing, vision, dental, and prescription drug
benefits to your participants. Benefits, other than vision [illegible]
You were recognized as exempt from federal income tax in
September of 1955. You continue to be recognized as exempt from
federal income tax under section 501(c) (9) of the Code.

Your trustees operate under a written plan document, that
was most recently amended and restated on December 1, 1990. This
plan document sets out the terms and conditions for the
employees’ eligibility for coverage as well as describing the
specific benefits provided to eligible employees.

The plan document provides that employees who no longer are
eligible for benefits as a result of termination of employment,
or reduction of hours may extend eligibility for 20 months by
making monthly self-contributions. Also, the plan document
provides that employees who retire on disability, or who retire
earlier than the normal retirement age, may extend eligibility by
making monthly self-contributions. In addition, the plan document
provides that spouses and dependents may extend eligibility by
making monthly self-contributions.

Y and Z entered into a Memorandum of Understanding on June
1, 1998, under which they agree to amend section 6.02 of the
Collective Bargaining Agreement to provide that:

"Effective June 1, 1998, employer contributions to X
shall be paid at the rate of four dollars per hour for
hours paid, provided that one dollar of such hourly
contributions shall be set aside exclusively for the
payment of additional medical benefits, supplemental
unemployment compensation benefits, and other fringe
benefits for such employees, their spouses and eligible
dependents...."

The terms of the Memorandum of Understanding required that
your Trustees set aside these additional hourly contributions to
pay additional benefits to the employees. Specifically, those
"additional supplemental benefits" were identified as:

Medical Benefits

Dependent Care Assistance Benefits

Group-Term Life Insurance

Vacation Benefits

Supplemental Unemployment Compensation Benefits

However, your Trustees have decided to only fund medical
benefits. You represent that the dependent care assistance
benefits, the group-term life insurance, the vacation benefits,
and the supplemental unemployment compensation benefits will not
be funded.

Section 15.3A of the Supplemental Plan (hereafter SP) states
that the Trustees have established a segregated account from
which to pay the "supplemental medical benefits". Section 15.3B
[illegible]
entries rather than segregated amounts held for each participant.
Section 15.3C authorizes the crediting of each participant’s
account at the close of each month. Section 15.3D authorizes the
debiting of each participant’s account at the close of each
month.

Section 15.4 of the SP provides that medical expenses not
covered by the current plan document would be paid from the SP
for the benefit of the participant, the participant's spouse
and/or dependents, if any. Section 15.4B(1) (2) (3) of the SP means
any amount paid for (i) the diagnosis, cure, mitigation,
treatment, or prevention of disease, or for the purpose of any
structure or function of the body; (ii) transportation for and
essential to medical care; (iii) for insurance covering medical
care. Section 15.4B specifically provides that monthly self-
contributions made to maintain coverage under the plan would be
medical expenses for those whose employment has been terminated
and/or hours reduced, as well as early retirees or disability
retirees. Further, upon the death of the participant, the account
would be used to provide continued medical benefits to the
deceased participant’s spouse and/ dependents.

Section 15.5A of the SP provides that in the event of a
participant’s death that the credit balance of the participant's
account would be forfeited and applied as set out in section
15.3. However, section 15.5B provides that, notwithstanding the
provisions of section 15.5A, in the event a participant is
survived by a spouse or eligible dependent, the spouse and/or
eligible dependent shali be eligible to receive continued
reimbursements from the SP for medical benefits during the period
of eligibility provided for under the terms of the plan and no
forfeiture of the participant’s account would occur until the
demise of the participant’s spouse and/or dependents.

Law:

Section 501(c) (9) of the Internal Revenue Code of 1986
(hereinafter "Code") provides for the exemption of voluntary
employees’ beneficiary associations that provide for the payment
of life, sick, accident, or other benefits to the members of such
association or their dependents or designated beneficiaries, if
no part of the net earnings of such association inures (other
than through such payments) to the benefit of any private
shareholder or individual.

Section 1.509(c) (9)-3(c) of the Income Tax Regulations
(hereinafter "“regulations") provides that the term "sick and
accident benefits" means amounts furnished to or on behalf of a
member or a member’s dependents in the event of illness or
personal injury to a member or dependent. Such benefits may be
provided through reimbursement to a member or a member’s
dependents for amounts expended because of illness or personal
injury, or through the payment of premiums to a medical benefit
[illegible]
Section 511(a) of the Code imposes a tax for each taxable
year on the unrelated business taxable income of every
organization which is exempt from taxation under section 501(a)
of the Code.

Section 512(a) (3) (A) of the Code provides, in part, that in
the case of an organization described in section 501(c) (9) of the
Code, the term "unrelated business income" means the gross income
(excluding exempt function income),less the deductions allowed
which are directly connected with the production of gross income
(excluding exempt function income).

Section 512(a) (3) (B) of the Code provides that, for the
purposes of subparagraph (A), the term "exempt function income”
means the gross income from dues, fees, charges, or similar
amounts paid by members of the organization as consideration for
providing such members or their dependents or guests goods,
facilities, or services in furtherance of the purposes
constituting the basis for the exemption of the organization to
which such income is paid. Exempt function income also means all
income (other than an amount equal to the gross income derived
from any unrelated trade or business regularly carried on by such
organization computed as if the organization were subject to
paragraph (1)), which is set aside -

(i) for a purpose specified in section 170(c) (4), or
(ii) in the case of an organization described in
section 501(c) (9), to provide for the payment of life,
sick, accident, or other benefits, including reasonable
costs of administration directly connected with a
purpose described in this paragraph.

Section 512 (a) (3) (E) (i) of the Code provides, in part, that
in the case of an organization described in paragraph (9) of
section 501(c), a set-aside for any purpose specified in clause
(11) of subparagraph (B) may be taken into account under
subparagraph (B) only to the extent that such set-aside does not
result in an amount of assets set aside for such purposes in
excess of the account limit under section 419A,

Section 1.512(a)-5T, Q&A-3(a) of the regulations provides,
in part, that the amounts set aside in a VEBA as of the close of
a taxable year of the VEBA to provide for the payment of life,
sick, accident or other benefits may not be taken into account
for purposes of determining "exempt function income" to the
extent that such amounts exceed the qualified asset account
limit, determined under Code section 419A(c) and section
419A(f)(7), for such taxable year of the VEBA.

Section 419(a) of the Code provides that contributions paid
or accrued by an employer to a welfare benefit fund -

(1) shall not be deductible under this chapter, [illegible]
(2) if they would otherwise be deductible, shall (subject to
the limitations of subsection (b)) be deductible under this
section for the taxable year in which paid.

Section 419(b) of the Code provides that the amount of the
deduction allowable under subsection (a)(2) for any taxable year
shall not exceed the welfare benefit fund’s qualified cost for
the taxable year.

Section 419A(a) of the Code provides that for purposes of
this subpart and section 512 of the Code, the term "qualified
asset account" means any account consisting of assets set aside
to provide for the payment of-

(1) disability benefits

(2) medical benefits

(3) SUB or severance benefits
{4) life insurance benefits

Section 419A(f) (5) of the Code provides that no account
limits shall apply in the case of any qualified asset account
under a separate welfare benefit fund (A) under a collective
bargaining agreement, or (B) an employee pay-all plan under
section 501(c) (9).

Section 1.419A-2T, Q&A1 of the regulations provides, in
part, that "neither contributions to nor reserves of a welfare
benefit fund maintained pursuant to a collective bargaining

agreement... shall be treated as exceeding the otherwise
applicable limits of section 419(b), 419A(b), 512(a) (3) (E)...
until the date 3 years after the issuance of ... final

regulations [concerning limits for collective bargained welfare
benefit funds] ."

Conclusions:

You are recognized as exempt from federal income tax under
section 501(c) (9) of the Code, and you provide health and welfare
benefits to employees of Z's members. You propose to fund
supplemental medical benefits in addition to the benefits you
already fund. The supplemental medical benefits are sick and
accident benefits within the meaning of section 1.509(c)(9)-3(c)
of the regulations.

The written agreement between Y and Z is a collective
bargaining agreement. The SP is maintained pursuant to a
collective bargaining agreement within the meaning of section
1.419A-2T, Q&A-2 of the regulations. Because the supplemental
benefits are being provided pursuant to a collective bargaining
agreement between Y and Z, we conclude that, pursuant to section
419A(f)(5)(A) of the Code, there are no account limits imposed on
the benefits provided by the SP. Pursuant to section 1.419A-2T,

[illegible]

bargained welfare benefit fund shall not be treated as exceeding
the limits of section 419(b). Therefore, supplemental
contributions by employers are deductible without regard to the
reserve limits imposed by sections 419 and 419A.

Even though section 1.512(a)-5T, Q&A-3(a) of the regulations
provides that the amounts set aside in a VEBA may not be taken
into account for purposes of determining "exempt function income"
to the extent that such amounts exceed the qualified asset
account limit under section 419A(c) of the Code, because there is
no asset account limit under 419A(c) for welfare benefit funds
established under a collective bargaining agreement, the
investment income, employer contributions, and other income
received by the SP for the payment of life, sick, accident, or
other benefits is "exempt function income" within the meaning of
section 512(a) (3) (B) of the Code.

Accordingly, we rule as follows:

1. The provision of the supplemental medical benefits
by X in accordance with the terms of the Supplemental
Plan will not result in the provision of benefits other
than "medical benefits" within the meaning of section
501(c) (9) of the Code.

2. Supplemental contributions would be deductible by
employers who are signatory to the Collective
Bargaining Agreement without regard to the reserve
limits imposed by sections 419 and 419A of the Code.

3. Investment income earned by the Supplemental Fund
will be considered "exempt function income" within the
meaning of section 512(a) (3) (B) of the Code.

A copy of this ruling will be sent to your Key District
Director. Please keep a copy of this ruling in your permanent
records. As noted above ruling requests four, five, and six will
be the subject of separate correspondence.

Please continue to use your employer identification number

on all returns which you file and in all correspondence with the
Internal Revenue Service.
This ruling is directed only to the organization that
requested it. Section 6110(j)(3) of the Code provides that it
may not be used or cited by others as precedent.

Sincerely yours,
[signature]
Robert C. Harper, Jr.

Chief, Exempt Organizations
Technical Branch 3