Notice 2007–84 Notice to all that 419 plans are abusive

Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). For further information regarding
this notice, contact Mr. Isaacs
at RetirementPlanQuestions@irs.gov

Ms. Clary. Trust Arrangements
Purporting to Provide
Nondiscriminatory
Post-Retirement Medical
and Life Insurance Benefits

Notice 2007–84

Sections 419 and 419A of the Internal
Revenue Code set forth rules under
which employers are permitted to make
currently deductible contributions to welfare
benefit funds in order to provide their
retirees with medical and life insurance
benefits. Businesses often maintain welfare
benefit funds that comport with the
intent of §§ 419 and 419A and do in fact
provide meaningful medical and life insurance
benefits to retirees on a nondiscriminatory
basis, and make substantial contributions
to those welfare benefit funds that
are fully deductible. Such welfare benefit
funds are outside the scope of this notice.
This notice addresses certain trust arrangements
that are being promoted to and
used by small businesses to avoid federal
income and employment taxes. The
arrangements described in this notice involve
purported welfare benefit funds that,
in form, provide post-retirement medical
and life insurance benefits to employees on
a nondiscriminatory basis, but that, in operation,
will primarily benefit the owners
or other key employees of the businesses.
This notice alerts taxpayers and their representatives
that the tax treatment of these
arrangements may vary from the claimed
tax treatment. The Internal Revenue Service
(IRS) may issue further guidance to
address these arrangements, and taxpayers
should not assume that the guidance will
be applied prospectively only.
Concurrentlywith this notice, the IRS is
publishing Notice 2007–83, this Bulletin,
which identifies as listed transactions certain
transactions involving purported welfare
benefit fund arrangements using cash
value life insurance policies. The fact that
an arrangement is described in this notice
does not preclude it from also being a listed
transaction under Notice 2007–83 where
the arrangement provides benefits to active
employees as well as to retired employees.
The IRS has previously identified certain
other transactions that claim to be
welfare benefit funds as listed transactions.
Notice 2003–24, 2003–1 C.B. 853,
describes certain transactions purporting
to meet the exception under § 419A(f)(5)
of the Internal Revenue Code for collectively
bargained plans. Notice 95–34,
1995–1 C.B. 309, describes transactions
that purport to meet the 10-or-more employer
plan exception under § 419A(f)(6).
Notice 2004–67, 2004–2 C.B. 600, includes
transactions described in Notice
2003–24 and Notice 95–34, as well as
substantially similar transactions, as listed
transactions.
BACKGROUND
Promoted trust arrangements claiming
to provide nondiscriminatory post-retirement
medical benefits and post-retirement
life insurance benefits have recently come
to the attention of the IRS. These arrangements,
among others, may be referred to
by persons advocating the use of the plans
as “single employer plans” or “419(e)
plans.” These purported welfare benefit
arrangements are usually sold to small
businesses and other closely held businesses
as a way to provide post-retirement
medical benefits, post-retirement life insurance,
and cash and other property to
the owners or other key employees of the
business on a tax-favored basis through
the use of a trust. Those advocating the
use of these plans usually assert that the
contributions are tax-deductible, but with
no corresponding inclusion by the owner
or other key employee. Some of these arrangements
involve plans that previously
had claimed to be 10-or-more employer
plans under § 419A(f)(6); some others
were established to receive policies transferred
from terminating plans that claimed
to be 10-or-more employer plans.
A promoted arrangement may involve
either a taxable trust or a tax-exempt trust,
i.e., a voluntary employees’ beneficiary association
(VEBA) that has received a determination
letter fromthe IRS that it is described
in § 501(c)(9). The trust frequently
uses the employer’s contributions to purchase
cash value life insurance policies on
the lives of employees who are owners of
the business and, sometimes, on the lives
of other key employees.
The amount of the employer’s deduction
for contributions to one of these plans
is often based on a calculation of a reserve
associated with each of the plan participants.
However, the calculation may be
based on an unreasonable assumption that
all of the covered employees will eventually
receive post-retirement benefits under
the plan, ormay be based on other actuarial
assumptions that either are not reasonable
or are not permitted to be reflected in the
reserve calculations for purposes of §§ 419
and 419A.
Under some arrangements, the plan
documents may indicate that post-retirement
benefits will be provided on a nondiscriminatory
basis when, in fact, only a few
employees (primarily the employees who
are also owners of the business) will ever
receive those benefits. To the extent a trust
holds excess assets not needed to pay the
original benefits, the owner will also receive
a substantial portion of those assets.
Under some arrangements, this will be
accomplished through the use of “loans”
to the owners. For some arrangements, the
plan will be amended to provide benefits
other than the plan’s original post-retirement
medical or life insurance benefits.
For others, the plan will be terminated
prior to the payment of the post-retirement
benefits and the timing of the termination
and the methods used to allocate the
remaining assets are structured so that
the owners and other key employees will
receive, directly or indirectly, all or a substantial
portion of the assets held by the
trust.
Persons advocating the use of these
plans claim that the employer’s contributions
for the post-retirement medical and
life benefits are deductible under §§ 419
and 419A as additions to a qualified asset
account. They may also claim that owners
or other key employees receive the
economic benefits from the contributions
with little or no income inclusion.
LAW
Sections 419 and 419A prescribe limits
on the amount of deductions for contributions
paid or accrued by an employer
November 5, 2007 963 2007–45 I.R.B.