PLR 1027007: Single-employer welfare plans were not substantially similar to a listed trust transaction

Plain-English summary

The IRS ruled that a taxpayer's single-employer welfare benefit plans were not the same as, or substantially similar to, the listed transaction described in Notice 95-34. The plans used separate subaccounts for each employer, separately accounted for assets and experience, and did not claim the 10-or-more-employer exception to the deduction limits under sections 419 and 419A. The ruling did not decide whether the plans were substantially similar to the transaction identified in Notice 2007-83, whether their earlier versions were listed transactions, or whether other disclosure and deduction rules applied. The ruling matters because the determination addressed whether the described arrangements required reporting as listed transactions under the reportable-transaction regulations.

Ruling snapshot

• Question: Were the taxpayer's amended single-employer welfare benefit plans the same as, or substantially similar to, the listed transaction described in Notice 95-34?
• Outcome: approved
• Key authorities: IRC §§ 419, 419A(f)(6), 6011, 6111, and 6112; Treas. Reg. § 1.6011-4; Notice 95-34 and Notice 2004-67

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201027007 Third Party Communication: None
Release Date: 7/9/2010 Date of Communication: Not Applicable
Index Number: 6011.01-00; 9300.02-00;
9300.48-00 Person To Contact:
----------------------, ID No. -----------------
------------------------------------------------ Telephone Number:
---------------------------- ---------------------
--------------------------- Refer Reply To:
------------------------------------------- CC:PSI:B3
PLR-123750-05
Date:
April 13, 2010

                                                Legend

Taxpayer = -------------------------------------------------------------------------------------------------
-----------------------

Trusts = ---------------------------------------------------------------------

Date = --------------------------

Dear ----------------:

  This letter responds to your letter dated April 25, 2005, and subsequent

correspondence, submitted on behalf of Taxpayer, requesting a ruling that the Single
Employer Plans described below are not the same as, or substantially similar to,
arrangements described in Notice 95-34, 1995-1 C.B. 309, and identified in Notice
2004-67, 2004-1 C.B. 600, as listed transactions under § 1.6011-4(b)(2) of the Income
Tax Regulations.

                                                 Facts

   Taxpayer sponsors and markets to various employers arrangements that

Taxpayer represents are single employer welfare benefit plans to provide death, long-
term care, post-retirement medical, severance and other welfare benefits for their
respective eligible employees (the “Single Employer Plans”). The Single Employer
Plans are funded through Trusts that include a separate sub-account for each
employer’s plan so that the assets of a sub-account are held for the exclusive benefit of
the employees of that employer. Each employer’s plan is accounted for separately and
benefits are paid from the employer’s segregated pool of assets. Each employer files a
Form 5500 for its own plan. No amounts revert to the employer and no employer is
PLR-123750-05 2

entitled to refunds of amounts contributed. Investment gains and losses, forfeitures,
expenses and mortality are determined on a single-employer basis. The Single
Employer Plans do not purport to be a 10 or more employer plan exempt from the
§§ 419 and 419A deduction limits, nor is an employer’s deduction for contributions to
the Single Employer Plan based on a claim that the Single Employer Plans are a 10 or
more employer plan described in § 419A(f)(6).

   Previously, Taxpayer had sponsored and marketed plans that claimed to satisfy

the 10 or more employer plan exception under § 419A(f)(6). By corporate resolution
dated Date, a date that is later than October 22, 2004, Taxpayer claims to have
amended the plans such that each would be an aggregation of single employer plans,
contributions would be based directly upon the experience of the individual employers,
and the plans would no longer meet the requirements of a 10 or more employer plan.

                                       Law

  Sections 419 and 419A provide deduction limits for contributions paid or accrued

by an employer to a welfare benefit fund.

   Section 419A(f)(6)(A) provides that §§ 419 and 419A shall not apply in the case

of any welfare benefit fund which is part of a 10 or more employer plan, but only if the
plan does not maintain experience-rating arrangements with respect to individual
employers.

  Section 419A(f)(6)(B) provides that for purposes of § 419A(f)(6)(A), the term “10

or more employer plan” means a plan -----

(i) to which more than 1 employer contributes, and

(ii) to which no employer normally contributes more than 10 percent of the total
contributions contributed under the plan by all employers.

    Section 1.6011-4(a) provides that, in general, every taxpayer that has

participated in a reportable transaction and who is required to file a tax return must
attach a disclosure statement to its return for the taxable year.

   Section 1.6011-4(b)(1) provides that a reportable transaction is a transaction

described in any of § 1.6011-4(b)(2) through (7). The term transaction includes all of
the factual elements relevant to the expected tax treatment of any investment, entity,
plan, or arrangement, and includes any series of steps carried out as part of a plan.

  Section 1.6011-4(b)(2) provides that a listed transaction is a transaction that is

the same as or substantially similar to one of the types of transactions that the Internal
PLR-123750-05 3

Revenue Service (IRS) has determined to be a tax avoidance transaction and identified
by notice, regulation, or other form of published guidance as a listed transaction.

   Section 1.6011-4(c)(4) provides that the term substantially similar includes any

transaction that is expected to obtain the same or similar types of tax consequences
and that is either factually similar or based on the same or similar tax strategy. Receipt
of an opinion regarding the tax consequences of the transaction is not relevant to the
determination of whether the transaction is the same as or substantially similar to
another transaction. Further, the term substantially similar must be broadly construed in
favor of disclosure.

    In Notice 2004-67, the Service identified transactions described in Notice 95-34

as “listed transactions” for purposes of § 1.6011-4(b)(2). The Service had previously
identified these transactions as “listed transactions” in Notice 2003-76, 2003-2 C.B.
1181, Notice 2001-51, 2001-2 C.B. 190, and Notice 2000-15, 2000-1 C.B. 826.

   Notice 95-34 is entitled “Tax Problems Raised by Certain Trust Arrangements

Seeking to Qualify for Exemption from Section 419.” The opening paragraph of that
notice states that taxpayers and their representatives have inquired as to whether
certain trust arrangements qualify as multiple employer welfare benefit funds exempt
from the limits of §§ 419 and 419A, and that the Service is issuing the notice to alert
taxpayers and their representatives to some of the significant tax problems that may be
raised by these arrangements. The Notice continues by discussing the § 419A(f)(6)
exception for 10 or more employer plans and the legislative history of that exception.

    Notice 95-34 describes some of the arrangements claiming to meet the

§ 419A(f)(6) exception. In addition to the claim by the promoters that the arrangements
satisfy the 10 or more employer plan requirements, some of the other factual elements
of the arrangements described in Notice 95-34 include the existence of a trust providing
benefits such as life insurance, disability, and severance pay benefits that invests in
cash value life insurance contracts on the lives of the covered employees; large
employer contributions relative to the cost of the amount of term insurance that would
be required to provide the death benefits under the arrangement; the use of the cash
values within the insurance contracts owned by the trust to pay benefits other than
death benefits; separate accounting of the assets attributable to the contributions made
by each subscribing employer; determination of an employer’s contributions or its
employees’ benefits in a way that insulates the employer to a significant extent from the
experience of other subscribing employers; and the provision of benefits to most
participants whether or not there has been an occurrence of an unanticipated future
event. 1

1
Solely for purposes of this ruling, it is assumed that some or all of the factual elements described in this
sentence may be present in the Single Employer Plan arrangements.
PLR-123750-05 4

    Finally, Notice 95-34 discusses some of the reasons these arrangements and

similar arrangements do not satisfy the requirements of the § 419A(f)(6) exemption.
Among other reasons discussed in the Notice, the described arrangements may be, in
fact, separate plans maintained for each employer, or they may maintain experience-
rating arrangements with respect to the individual employers. As separate plans, or as
plans that maintain prohibited experience-rating, the arrangements do not qualify for the
10 or more employer plan exception from the §§ 419 and 419A deduction limits.

                                    Conclusion

   Based on the facts submitted and representations made, we conclude that the

Single Employer Plans are not the same as, or substantially similar to, the listed
transaction described in Notice 95-34.

    Except as specifically set forth above, we express no opinion concerning the

federal tax consequences of the above described facts under any other provision of the
Internal Revenue Code. Moreover, this ruling does not address the issue of whether
the Single Employer Plans are the same as, or substantially similar to, the transactions
identified as listed transactions in Notice 2007-83, 2007-2 C.B. 960, or whether the
plans, prior to the amendment to become Single Employer Plans, were the same as, or
substantially similar to, the listed transaction described in Notice 95-34. This ruling
does not address whether there are disclosure requirements under § 1.6011-4 for
persons participating in the Single Employer Plans or disclosure or list maintenance
requirements under §§ 6111 or 6112, respectively, with respect to advisors to the Single
Employer Plans. This ruling does not address whether there are disclosure or list
maintenance requirements for any person with respect to the plans prior to the
amendment to become Single Employer Plans. This ruling also does not address the
income tax consequences to participating employers and covered employees resulting
from the amendment to the plans to become Single Employer Plans or whether the
deductions are allowable under §§ 419 and 419A for contributions to the Single
Employer Plans.

   In accordance with a power of attorney on file with this office, a copy of this letter

is being sent to your authorized representative.
PLR-123750-05 5

  This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

                                        Sincerely,


                                            /s/

                                        Tara P. Volungis
                                        Senior Technician Reviewer, Branch 3
                                        Office of the Associate Chief Counsel
                                        (Passthroughs & Special Industries)

Enclosures (2):
Copy of this letter
Copy for §6110 purposes