26 U.S.C. § 419 — Treatment of funded welfare benefit plans

Page 1459 TITLE 26—INTERNAL REVENUE CODE § 419 (Added Pub. L. 96–364, title II, § 202(a), Sept. 26, 1980, 94 Stat. 1282; amended Pub. L. 109–280, title II, § 213(a), Aug. 17, 2006, 120 Stat. 917; Pub. L. 113–235, div. O, title I, § 108(b)(2), Dec. 16, 2014, 128 Stat. 2787; Pub. L. 115–141, div. U, title IV, § 401(a)(92)–(94), Mar. 23, 2018, 132 Stat. 1188.) Editorial Notes REFERENCES IN TEXT Section 4022A(g)(5) of the Employee Retirement In- come Security Act of 1974, referred to in subsec. (a), is classified to section 1322a(g)(5) of Title 29, Labor. Section 4261 of the Employee Retirement Income Se- curity Act of 1974, referred to in subsecs. (b)(3) and (f), is classified to section 1431 of Title 29, Labor. Section 101(f)(1) of the Employee Retirement Income Security Act of 1974, referred to in subsec. (e)(1), is clas- sified to section 1021(f)(1) of Title 29, Labor. AMENDMENTS 2018—Pub. L. 115–141, § 401(a)(92), substituted ‘‘section 432(b)(2)’’ for ‘‘subsection 432(b)(2)’’ wherever appearing. Subsec. (d)(1). Pub. L. 115–141, § 401(a)(93), substituted ‘‘section 432(b)(2),’’ for ‘‘section 432(b)(2),,’’, ‘‘section 432(b)(2))’’ for ‘‘section 432(b)(2),)’’, and ‘‘compare the value of plan assets for that plan year with’’ for ‘‘com- pare the value of plan assets (determined in accordance with section 418B(b)(3)(B)(ii)) for that plan year with’’. Subsec. (e)(1)(A). Pub. L. 115–141, § 401(a)(94), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: ‘‘notify the Secretary, the Pension Benefit Guaranty Corporation, the parties described in section 418A(a)(2), and the plan participants and bene- ficiaries of that determination, and’’. 2014—Subsec. (c)(1). Pub. L. 113–235, § 108(b)(2)(A), sub- stituted ‘‘critical status, as described in subsection 432(b)(2),’’ for ‘‘reorganization’’. Subsec. (c)(2). Pub. L. 113–235, § 108(b)(2)(B), des- ignated existing provisions as subpar. (A), struck out ‘‘(within the meaning of section 418(b)(6))’’ after ‘‘pay status’’, and added subpar. (B). Subsec. (d). Pub. L. 113–235, § 108(b)(2)(A), substituted ‘‘critical status, as described in subsection 432(b)(2),’’ for ‘‘reorganization’’ wherever appearing. Subsec. (d)(1). Pub. L. 113–235, § 108(b)(2)(C)(i), which directed amendment of par. (1) by striking out ‘‘(deter- mined in accordance with section 418B(3)(B)(ii))’’, could not be executed because the phrase ‘‘(determined in ac- cordance with section 418B(3)(B)(ii))’’ did not appear. Subsec. (d)(4). Pub. L. 113–235, § 108(b)(2)(C)(ii), added par. (4). Subsec. (e)(1). Pub. L. 113–235, § 108(b)(2)(A), sub- stituted ‘‘critical status, as described in subsection 432(b)(2),’’ for ‘‘reorganization’’. Subsec. (e)(1)(A). Pub. L. 113–235, § 108(b)(2)(D)(i), which directed substitution of ‘‘the parties described in section 101(f)(1) of the Employee Retirement Income Security Act of 1974’’ for ‘‘the corporation, the parties described in section 418A(a)(2), and the plan partici- pants and beneficiaries’’, could not be executed because the phrase ‘‘the corporation, the parties described in section 418A(a)(2), and the plan participants and bene- ficiaries’’ did not appear. Subsec. (e)(1)(B). Pub. L. 113–235, § 108(b)(2)(D)(ii), sub- stituted ‘‘section 101(f)(1) of the Employee Retirement Income Security Act of 1974’’ for ‘‘section 418A(a)(2) and the plan participants and beneficiaries’’. Subsec. (e)(2). Pub. L. 113–235, § 108(b)(2)(A), sub- stituted ‘‘critical status, as described in subsection 432(b)(2),’’ for ‘‘reorganization’’. Subsec. (h). Pub. L. 113–235, § 108(b)(2)(E), added sub- sec. (h). 2006—Subsec. (d)(1). Pub. L. 109–280 substituted ‘‘5 plan years’’ for ‘‘3 plan years’’ the second place it ap- peared and inserted at end ‘‘If the plan sponsor makes such a determination that the plan will be insolvent in any of the next 5 plan years, the plan sponsor shall make the comparison under this paragraph at least an- nually until the plan sponsor makes a determination that the plan will not be insolvent in any of the next 5 plan years.’’ Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2014 AMENDMENT Amendment by Pub. L. 113–235 applicable with re- spect to plan years beginning after Dec. 31, 2014, see section 108(c) of div. O of Pub. L. 113–235, set out as an Effective Date of Repeal note under section 418 of this title. EFFECTIVE DATE OF 2006 AMENDMENT Pub. L. 109–280, title II, § 213(b), Aug. 17, 2006, 120 Stat. 918, provided that: ‘‘The amendments made by this sec- tion [amending this section] shall apply with respect to the determinations made in plan years beginning after 2007.’’ EFFECTIVE DATE Section effective, with respect to each plan, on the first day of the first plan year beginning on or after the earlier of the date on which the last collective-bar- gaining agreement providing for employer contribu- tions under the plan, which was in effect on Sept. 26, 1980, expires, without regard to extensions agreed to after such date, or 3 years after Sept. 26, 1980, see sec- tion 210 of Pub. L. 96–364, set out as a note under sec- tion 194A of this title. SUBPART D—TREATMENT OF WELFARE BENEFIT FUNDS Sec. 419. Treatment of funded welfare benefit plans. 419A. Qualified asset account; limitation on addi- tions to account. § 419. Treatment of funded welfare benefit plans (a) General rule Contributions paid or accrued by an employer to a welfare benefit fund— (1) shall not be deductible under this chap- ter, but (2) if they would otherwise be deductible, shall (subject to the limitation of subsection (b)) be deductible under this section for the taxable year in which paid. (b) Limitation 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. (c) Qualified cost For purposes of this section— (1) In general Except as otherwise provided in this sub- section, the term ‘‘qualified cost’’ means, with respect to any taxable year, the sum of— (A) the qualified direct cost for such tax- able year, and (B) subject to the limitation of section 419A(b), any addition to a qualified asset ac- count for the taxable year. (2) Reduction for funds after-tax income In the case of any welfare benefit fund, the qualified cost for any taxable year shall be re- duced by such fund’s after-tax income for such taxable year. Page 1460 TITLE 26—INTERNAL REVENUE CODE § 419 (3) Qualified direct cost (A) In general The term ‘‘qualified direct cost’’ means, with respect to any taxable year, the aggre- gate amount (including administrative ex- penses) which would have been allowable as a deduction to the employer with respect to the benefits provided during the taxable year, if— (i) such benefits were provided directly by the employer, and (ii) the employer used the cash receipts and disbursements method of accounting. (B) Time when benefits provided For purposes of subparagraph (A), a benefit shall be treated as provided when such ben- efit would be includible in the gross income of the employee if provided directly by the employer (or would be so includible but for any provision of this chapter excluding such benefit from gross income). (C) 60-month amortization of child care fa- cilities (i) In general In determining qualified direct costs with respect to any child care facility for purposes of subparagraph (A), in lieu of de- preciation the adjusted basis of such facil- ity shall be allowable as a deduction rat- ably over a period of 60 months beginning with the month in which the facility is placed in service. (ii) Child care facility The term ‘‘child care facility’’ means any tangible property which qualifies under regulations prescribed by the Sec- retary as a child care center primarily for children of employees of the employer; ex- cept that such term shall not include any property— (I) not of a character subject to depre- ciation; or (II) located outside the United States. (4) After-tax income (A) In general The term ‘‘after-tax income’’ means, with respect to any taxable year, the gross in- come of the welfare benefit fund reduced by the sum of— (i) the deductions allowed by this chap- ter which are directly connected with the production of such gross income, and (ii) the tax imposed by this chapter on the fund for the taxable year. (B) Treatment of certain amounts In determining the gross income of any welfare benefit fund— (i) contributions and other amounts re- ceived from employees shall be taken into account, but (ii) contributions from the employer shall not be taken into account. (5) Item only taken into account once No item may be taken into account more than once in determining the qualified cost of any welfare benefit fund. (d) Carryover of excess contributions If— (1) the amount of the contributions paid (or deemed paid under this subsection) by the em- ployer during any taxable year to a welfare benefit fund, exceeds (2) the limitation of subsection (b), such excess shall be treated as an amount paid by the employer to such fund during the suc- ceeding taxable year. (e) Welfare benefit fund For purposes of this section— (1) In general The term ‘‘welfare benefit fund’’ means any fund— (A) which is part of a plan of an employer, and (B) through which the employer provides welfare benefits to employees or their bene- ficiaries. (2) Welfare benefit The term ‘‘welfare benefit’’ means any ben- efit other than a benefit with respect to which— (A) section 83(h) applies, (B) section 404 applies (determined without regard to section 404(b)(2)), or (C) section 404A applies. (3) Fund The term ‘‘fund’’ means— (A) any organization described in para- graph (7), (9), or (17) of section 501(c), (B) any trust, corporation, or other organi- zation not exempt from the tax imposed by this chapter, and (C) to the extent provided in regulations, any account held for an employer by any person. (4) Treatment of amounts held pursuant to cer- tain insurance contracts (A) In general Notwithstanding paragraph (3)(C), the term ‘‘fund’’ shall not include amounts held by an insurance company pursuant to an in- surance contract if— (i) such contract is a life insurance con- tract described in section 264(a)(1), or (ii) such contract is a qualified non- guaranteed contract. (B) Qualified nonguaranteed contract (i) In general For purposes of this paragraph, the term ‘‘qualified nonguaranteed contract’’ means any insurance contract (including a rea- sonable premium stabilization reserve held thereunder) if— (I) there is no guarantee of a renewal of such contract, and (II) other than insurance protection, the only payments to which the em- ployer or employees are entitled are ex- perience rated refunds or policy divi- dends which are not guaranteed and which are determined by factors other than the amount of welfare benefits paid to (or on behalf of) the employees of the employer or their beneficiaries. Page 1461 TITLE 26—INTERNAL REVENUE CODE § 419 (ii) Limitation In the case of any qualified nonguaran- teed contract, subparagraph (A) shall not apply unless the amount of any experience rated refund or policy dividend payable to an employer with respect to a policy year is treated by the employer as received or accrued in the taxable year in which the policy year ends. (f) Method of contributions, etc., having the ef- fect of a plan If— (1) there is no plan, but (2) there is a method or arrangement of em- ployer contributions or benefits which has the effect of a plan, this section shall apply as if there were a plan. (g) Extension to plans for independent contrac- tors If any fund would be a welfare benefit fund (as modified by subsection (f)) but for the fact that there is no employee-employer relationship— (1) this section shall apply as if there were such a relationship, and (2) any reference in this section to the em- ployer shall be treated as a reference to the person for whom services are provided, and any reference in this section to an employee shall be treated as a reference to the person providing the services. (Added Pub. L. 98–369, div. A, title V, § 511(a), July 18, 1984, 98 Stat. 854; amended Pub. L. 99–514, title XVIII, § 1851(a)(1), (8)(A), (b)(2)(C)(iv), Oct. 22, 1986, 100 Stat. 2858, 2860, 2863; Pub. L. 100–203, title IX, § 10201(b)(4), Dec. 22, 1987, 101 Stat. 1330–387; Pub. L. 100–647, title I, § 1018(t)(2)(C), Nov. 10, 1988, 102 Stat. 3587; Pub. L. 115–141, div. U, title IV, § 401(b)(21)(A), Mar. 23, 2018, 132 Stat. 1202.) Editorial Notes AMENDMENTS 2018—Subsec. (e)(3)(A). Pub. L. 115–141 substituted ‘‘or (17)’’ for ‘‘(17), or (20)’’. 1988—Subsec. (a)(1). Pub. L. 100–647 substituted ‘‘chap- ter’’ for ‘‘subchapter’’. 1987—Subsec. (e)(2)(D). Pub. L. 100–203 struck out sub- par. (D) which related to a benefit with respect to which an election under section 463 applies. 1986—Subsec. (a)(1). Pub. L. 99–514, § 1851(b)(2)(C)(iv)(I), substituted ‘‘under this sub- chapter’’ for ‘‘under section 162 or 212’’. Subsec. (a)(2). Pub. L. 99–514, § 1851(b)(2)(C)(iv)(II), substituted ‘‘they would otherwise be deductible’’ for ‘‘they satisfy the requirements of either of such sec- tions’’. Subsec. (e)(4). Pub. L. 99–514, § 1851(a)(8)(A), added par. (4). Subsec. (g)(1). Pub. L. 99–514, § 1851(a)(1), substituted ‘‘such a relationship’’ for ‘‘such a plan’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1987 AMENDMENT Amendment by Pub. L. 100–203 applicable to taxable years beginning after Dec. 31, 1987, see section 10201(c)(1) of Pub. L. 100–203, set out as a note under sec- tion 404 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–514 effective, except as oth- erwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title. EFFECTIVE DATE Pub. L. 98–369, div. A, title V, § 511(e), July 18, 1984, 98 Stat. 862, as amended by Pub. L. 99–514, title XVIII, § 1851(a)(12), (14), Oct. 22, 1986, 100 Stat. 2862, provided that: ‘‘(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section [enacting this subpart] shall apply to contributions paid or accrued after December 31, 1985, in taxable years ending after such date. ‘‘(2) SPECIAL RULE FOR COLLECTIVE BARGAINING AGREE- MENTS.—In the case of plan maintained pursuant to 1 or more collective bargaining agreements— ‘‘(A) between employee representatives and 1 or more employers, and ‘‘(B) in effect on July 1, 1985 (or ratified on or before such date), the amendments made by this section shall not apply to years beginning before the date on which the last of the collective bargaining agreements relating to the plan terminates (determined without regard to any ex- tension thereof agreed to after July 1, 1985). ‘‘(3) SPECIAL RULE FOR PARAGRAPH (2).—For purposes of paragraph (2), any plan amendment made pursuant to a collective bargaining agreement relating to the plan which amends the plan solely to conform to any requirement added by this section shall not be treated as a termination of such collective bargaining agree- ment. ‘‘(4) SPECIAL EFFECTIVE DATE FOR CONTRIBUTIONS OF FACILITIES.—Notwithstanding paragraphs (1) and (2), the amendments made by this section shall apply in the case of— ‘‘(A) any contribution after June 22, 1984, of a facil- ity to a welfare benefit fund, and ‘‘(B) any other contribution after June 22, 1984, to a welfare benefit fund to be used to acquire or im- prove a facility. ‘‘(5) BINDING CONTRACT EXCEPTIONS TO PARAGRAPH (4).—Paragraph (4) shall not apply to any facility placed in service before January 1, 1987— ‘‘(A) which is acquired or improved by the fund (or contributed to the fund) pursuant to a binding con- tract in effect on June 22, 1984, and at all times there- after, or ‘‘(B) the construction of which by or for the fund began before June 22, 1984. ‘‘(6) AMENDMENTS RELATED TO TAX ON UNRELATED BUSINESS INCOME.—The amendments made by sub- section (b) [amending section 512 of this title] shall apply with respect to taxable years ending after De- cember 31, 1985. For purposes of section 15 of the Inter- nal Revenue Code of 1954 [now 1986], such amendments shall be treated as a change in the rate of a tax im- posed by chapter 1 of such Code. ‘‘(7) AMENDMENTS RELATED TO EXCISE TAXES ON CER- TAIN WELFARE BENEFIT PLANS.—The amendments made by subsection (c) [enacting section 4976 of this title] shall apply to benefits provided after December 31, 1985.’’ SAVINGS PROVISION For provisions that nothing in amendment by Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining li- ability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. Page 1462 TITLE 26—INTERNAL REVENUE CODE § 419A PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. EFFECTIVE DATE OF REGULATIONS Pub. L. 99–514, title XVIII, § 1851(a)(8)(B), Oct. 22, 1986, 100 Stat. 2860, provided that: ‘‘Except in the case of a reserve for post-retirement medical or life insurance benefits and any other arrangement between an insur- ance company and an employer under which the em- ployer has a contractual right to a refund or dividend based solely on the experience of such employer, any account held for an employer by any person and defined as a fund in regulations issued pursuant to section 419(e)(3)(C) of the Internal Revenue Code of 1954 [now 1986] shall be considered a ‘fund’ no earlier than 6 months following the date such regulations are pub- lished in final form.’’ § 419A. Qualified asset account; limitation on ad- ditions to account (a) General rule For purposes of this subpart and section 512, 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 pay benefits, or (4) life insurance benefits. (b) Limitation on additions to account No addition to any qualified asset account may be taken into account under section 419(c)(1)(B) to the extent such addition results in the amount in such account exceeding the ac- count limit. (c) Account limit For purposes of this section— (1) In general Except as otherwise provided in this sub- section, the account limit for any qualified asset account for any taxable year is the amount reasonably and actuarially necessary to fund— (A) claims incurred but unpaid (as of the close of such taxable year) for benefits re- ferred to in subsection (a), and (B) administrative costs with respect to such claims. (2) Additional reserve for post-retirement med- ical and life insurance benefits The account limit for any taxable year may include a reserve funded over the working lives of the covered employees and actuarially determined on a level basis (using assumptions that are reasonable in the aggregate) as nec- essary for— (A) post-retirement medical benefits to be provided to covered employees (determined on the basis of current medical costs), or (B) post-retirement life insurance benefits to be provided to covered employees. (3) Amount taken into account for SUB or sev- erance pay benefits (A) In general The account limit for any taxable year with respect to SUB or severance pay bene- fits is 75 percent of the average annual quali- fied direct costs for SUB or severance pay benefits for any 2 of the immediately pre- ceding 7 taxable years (as selected by the fund). (B) Special rule for certain new plans In the case of any new plan for which SUB or severance pay benefits are not available to any key employee, the Secretary shall, by regulations, provide for an interim amount to be taken into account under paragraph (1). (4) Limitation on amounts to be taken into ac- count (A) Disability benefits For purposes of paragraph (1), disability benefits payable to any individual shall not be taken into account to the extent such benefits are payable at an annual rate in ex- cess of the lower of— (i) 75 percent of such individual’s average compensation for his high 3 years (within the meaning of section 415(b)(3)), or (ii) the limitation in effect under section 415(b)(1)(A). (B) Limitation on SUB or severance pay ben- efits For purposes of paragraph (3), any SUB or severance pay benefit payable to any indi- vidual shall not be taken into account to the extent such benefit is payable at an annual rate in excess of 150 percent of the limita- tion in effect under section 415(c)(1)(A). (5) Special limitation where no actuarial cer- tification (A) In general Unless there is an actuarial certification of the account limit determined under this subsection for any taxable year, the account limit for such taxable year shall not exceed the sum of the safe harbor limits for such taxable year. (B) Safe harbor limits (i) Short-term disability benefits In the case of short-term disability bene- fits, the safe harbor limit for any taxable year is 17.5 percent of the qualified direct costs (other than insurance premiums) for the immediately preceding taxable year with respect to such benefits. (ii) Medical benefits In the case of medical benefits, the safe harbor limit for any taxable year is 35 per- cent of the qualified direct costs (other than insurance premiums) for the imme- diately preceding taxable year with re- spect to medical benefits. (iii) SUB or severance pay benefits In the case of SUB or severance pay ben- efits, the safe harbor limit for any taxable