PLR 9945066: Union retiree health fund qualifies under collective bargaining rule

Plain-English summary

A company proposed moving the union portion of its retiree health obligations from a combined trust into a new trust with separate accounts for each benefit plan. The IRS ruled that the union retiree plan was maintained under a collective bargaining agreement and that the account holding its assets was a separate welfare benefit fund under § 419A(f)(5). That classification removes the usual § 419A account limits, but contributions still must meet the qualified cost and ordinary deduction rules; amounts exceeding what is needed for future retiree benefits could fail the § 162 test. The IRS sent four other questions, including trust income and transfer issues, to another division. The ruling depended on adoption of the proposed trust agreement and the accuracy of the company's representations.

Ruling snapshot

• Question: Does the union retiree health plan qualify as a separate collectively bargained fund, and how are contributions limited?
• Outcome: Approved for collective bargaining classification; contribution deductions remain subject to stated limits.
• Key authorities: IRC §§ 162, 419, and 419A(f)(5); Treas. Reg. §§ 1.419-1T and 1.419A-2T.

Full text (IRS public release)

199945066

Internal Revenue Service
Department of the Treasury

Significant Index No. 0419.00-00
Washington, DC 20224

Contact Person:

Telephone Number:

In Reference to:
OP:E:EP:A:1

Date:
AUG 20 1999

In re: Company =

Weekly Plan =

Unions =

Weekly Trust =

This letter is in response to your ruling request concerning the tax treatment of contributions to the Weekly Trust, which is a welfare benefit fund, established by the Company.

The Company generally provides health insurance and post-retirement medical benefits for its employees represented by the Unions. The health insurance coverage for these Union employees is provided pursuant to the terms of the collective bargaining agreements with the Unions (the most recent ones being reached in 1996). The Company provides health benefits to active employees and retirees. The post-retirement medical benefits for Union retirees are provided pursuant to the above-referenced collective bargaining agreements. The collective bargaining agreements do not require the Company to establish a welfare benefit fund to provide the post-retirement medical benefits.

The Company is funding retiree health benefit obligations through a trust under which Union and non-Union employee benefits are paid. The Company proposes to spin-off the proportionate share of the Union obligations from the combined trust into the Weekly Trust. The Company proposes to establish and adopt the Weekly Trust. The proposed Weekly Trust is to fund post-retirement accident and health benefits for Union retirees (i.e., retirees who were members of the Unions immediately prior to retirement). The proposed Weekly Trust will have separate accounting for assets of the Weekly Plan and any other plan that may use the Weekly Trust as a funding vehicle for benefits.

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Based upon the above, you have requested rulings on seven issues. We are responding to Issue 1 (whether the Weekly Plan is maintained under a collective bargaining agreement within the meaning of section 419A(f)(5) of the Internal Revenue Code); Issue 2 (whether the portion of the Weekly Trust that holds assets for the Weekly Plan is a separate welfare benefit fund under a collective bargaining agreement within the meaning of section 419A(f)(5)); and Issue 4 (whether the Company’s contributions to the Trust to fund post-retirement medical benefits for retirees under the Weekly Plan will be treated as not exceeding the Weekly Trust’s “qualified cost” under sections 419(b) and (c) and are deductible without regard to the limits of sections 419A(b) and (c)).

We are forwarding a copy of our file to the Exempt Organizations Division (Office of the Assistant Commissioner EP/EO) to reply to Issue 3 (whether the Weekly Trust is subject to the nondiscrimination requirements of section 505(b) of the Code; Issue 5 (whether the Company will be subject to the 100% excise tax imposed on reversions under section 4976 as a result of the transfer of assets comprising the proportionate share of the Weekly Program in the combined trust to the Weekly Trust); Issue 6 (whether upon the transfer of assets, any realization of appreciation in capital occurring in the taxable year in which the transfer occurs, whether before or after the transfer, and set aside to fund post-retirement medical benefits will be considered exempt function income and not be treated as unrelated business taxable income under section 512(a)(3)); and Issue 7 (whether the gross income of the Trust that is set aside to fund post-retirement medical benefits will constitute exempt function income under section 512(a)(3)).

Issues 1 and 2

Section 419(a) of the Code provides that contributions paid or accrued by an employer to a welfare benefit fund shall not be deductible under Chapter 1 of the Code but if they would otherwise be deductible such contributions shall (subject to the limitations of subsection (b)) be deductible under section 419 of the Code for the taxable year in which paid. Section 419(b) provides that the amount of the deduction allowable under subsection (a) for any taxable year shall not exceed the welfare benefit fund’s qualified cost for the taxable year. Section 419(c) provides that the term “qualified cost” means the sum of (A) the qualified direct cost for such taxable year, and (B) subject to the limitation of section 419A(b), any addition to a qualified asset account for the taxable year, minus (C) after-tax income.

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 under a collective bargaining agreement.

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Section 7701(a)(46) of the Code states that in determining whether there is a collective bargaining agreement between employee representatives and one or more employers, the term "employee representatives" shall not include any organization more than one-half of the members of which are employees who are owners, officers, or executives of the employer. An agreement shall not be treated as a collective bargaining agreement unless it is a bona fide agreement between bona fide employee representatives and one or more employers.

Section 1.419A-2T, Q&A-2, of the (temporary) Income Tax Regulations defines a welfare benefit fund maintained pursuant to a collective bargaining agreement and states:

(1) For purposes of Q&A-1, a collectively bargained welfare fund is a welfare benefit fund that is maintained pursuant to an agreement which the Secretary of Labor determines to be a collective bargaining agreement and which meets the requirements of the Secretary of the Treasury as set forth in paragraph (2) below.

(2) Notwithstanding a determination by the Secretary of Labor that an agreement is a collective bargaining agreement, a welfare benefit fund is considered to be maintained pursuant to a collective bargaining agreement only if the benefits provided through the fund were the subject of arm's-length negotiations between the employee representatives and one or more employers, and if such agreement between employee representatives and one or more employers satisfies section 7701(a)(46) of the Code. Moreover, the circumstances surrounding a collective bargaining agreement must evidence good faith bargaining between adverse parties over the welfare benefits to be provided through the fund. Finally, a welfare benefit fund is not considered to be maintained pursuant to a collective bargaining agreement unless at least 50 percent of the employees eligible to receive benefits under the fund are covered by the collective bargaining agreement.

(3) In the case of a collectively bargained welfare benefit fund, only the portion of the fund (as determined under allocation rules to be provided by the Commissioner) - attributable to employees covered by a collective bargaining agreement, and from which benefits for such employees are provided, is considered to be maintained pursuant to a collective bargained agreement.

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(4) Notwithstanding the preceding paragraphs and pending the issuance of regulations setting account limits for collectively bargained welfare benefit funds, a welfare benefit fund will not be treated as a collectively bargained welfare benefit fund for purposes of Q&A-1 if and when, after July 1, 1985, the number of employees who are not covered by a collective bargaining agreement and are eligible to receive benefits under the fund increases by reason of an amendment, merger, or other action of the employer or the fund. In addition, pending the issuance of such regulations, for purposes of applying the 50 percent test of paragraph (2) to a welfare benefit fund that is not in existence on July 1, 1985, "90 percent" shall be substituted for "50 percent".

The collective bargaining agreements with the Unions mandate that the Company provide the post-retirement benefits that will be funded through the Weekly Trust. The employees who will receive benefits from the account in the Weekly Trust that will hold assets for the Weekly Plan will consist only of former Union employees of the Company. None of the company's Union employees are owners (other than of a de minimis number of shares of the Company), executives or officers of the Company.

The information provided concerning the negotiations between the Company and the Unions evidences the arm's-length nature of the collective bargaining process. The Company has represented that it believes that the Secretary of Labor would hold that the agreements are collective bargaining agreements.

Prior to the proposed transfer of assets, the assets of the combined trust have been commingled for investment purposes. There has been and will continue to be separate accounting for the Union and non-Union assets in the combined trust. The trust document for the Weekly Trust permits contributions for other Union welfare benefit plans. The Weekly Trust provides for separate accounting of assets for benefits under the Weekly Plan and any other plan that may use the Weekly Trust as a funding vehicle for benefits. The funds transferred to the Weekly Trust for benefits provided under the Weekly Plan will be available to provide only benefits under the Weekly Plan. Similarly, contributions to the Weekly Trust for benefits provided for in the Weekly Plan will be available to provide benefits only to those retirees who were members of the Union immediately prior to retirement.

Based on the information furnished, the Weekly Plan is maintained pursuant to a collective bargaining agreement under section 419A(f)(5) of the Code. In addition, the portion of the Weekly Trust that will hold assets for the Weekly Plan will constitute a separate welfare benefit fund maintained pursuant to a collective bargaining agreement within the meaning of section 419A(f)(5).

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Issue 4

Section 419(a) of the Code provides that contributions paid or accrued by an employer to a welfare benefit fund shall not be deductible under Chapter 1 but if they would otherwise be deductible such contributions shall (subject to the limitations of subsection (b)) be deductible under section 419 of the for the taxable year in which paid.

Section 1.419-1T, Q&A-10(a), of the regulations states in part that contributions to a welfare benefit fund are deductible only to the extent that the requirements of Section 162 of the Code are met.

Section 1.419-1T, Q&A-10(d) of the regulations provides that in determining the extent to which contributions paid or accrued with respect to a welfare benefit fund are deductible under section 419, the rules of section 263, 446(b), and 461(a) will be treated as having been satisfied to the extent that such contributions satisfy the otherwise applicable rules of section 419. Thus, for example, contributions to a welfare benefit fund will not fail to be deductible under section 419 merely because they create an asset with a useful life extending substantially beyond the close of the taxable year if such contributions satisfy the otherwise applicable requirements of section 419.

Section 1.419-1T, Q&A-10(e) of the regulations provides that in determining the extent to which contributions with respect to a welfare benefit fund satisfy the requirements of section 461(h) for any taxable year for which section 461(h) is effective, pursuant to the authority under section 461(h)(2), economic performance occurs as contributions to the welfare benefit fund are made.

Revenue Ruling 69-382, 1969-2 C.B. 28, Revenue Ruling 69-478, 1969-2 C.B. 29, and Revenue Ruling 73-599, 1973-2 C.B. 40, held, in effect, that employer contributions to a reserve for post-retirement benefits were deductible under section 162 of the Code if (1) the reserve was held for the sole purpose of providing benefits to covered employees; (2) the employer had no contractual right to recapture any part of the reserve as long as any active or retired employee remains alive; and (3) the contribution did not exceed the amount necessary to fairly allocate the cost of post-retirement benefits over the working lives of covered employees.

Section 419 of the Code limits the deduction that may be taken for contributions to a welfare benefit fund to the qualified cost for the year. One element of the qualified cost is the amount that may be added to the qualified asset account of the fund to the extent that limits of section 419A are not exceeded. In general, in order for an amount to be deductible under section 419, the rules of sections 162 and 263 (among other requirements) must be satisfied. Therefore, the addition to a qualified asset account would be required to satisfy the requirements of sections 162 and 263.

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The three enumerated revenue rulings are concerned with the amount of deduction that meets the requirements of section 162 of the Code but do not necessarily provide the exclusive rule as to whether an amount satisfies the requirements of section 162. Section 263 is also concerned with the amount of the deduction allowable for a year. Section 1.419-1T, Q&A-10(d) of the regulations provides, however, that section 263 of the Code will be treated as having been satisfied to the extent that the contributions to a welfare benefit fund satisfy the otherwise applicable rules of section 419 of the Code. Thus, if the amount of contribution to a welfare benefit fund does not exceed the limits of section 419, the deduction of such amount is not limited by section 263. Thus, if the amount of the contribution satisfies the requirements of section 419, the deduction of such amount is generally not limited by section 162. Note, however, that if the contribution is such that the assets exceed the amount needed to provide post-retirement benefits to all current and future retirees (from current active employees) (i.e., the present value of future benefits), then the contribution would fail to satisfy the requirements of section 162 of the Code.

Except as specifically ruled above, no opinion is expressed as to the federal tax consequences of the contributions to the Weekly Trust under any other provision of the Code. Specifically, no opinion is expressed regarding whether part or all of the contributions to the Weekly Trust must be capitalized or included in inventory costs because they are allocable to the cost of property produced by the taxpayer to which section 263A applies.

This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited by others as precedent.

This ruling is being given with the understanding that the proposed trust agreement, as provided to us, is adopted. Failure to adopt the proposed trust as stated would cause the retroactive revocation of this ruling letter. In addition, if the representations made pursuant to this request are not accurate, the Company may not rely upon this ruling letter.

Sincerely yours,

James E. Holland, Jr.
Chief, Actuarial Branch 1