(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 account limit.
(c) Account limit
For purposes of this section—
(1) In general
Except as otherwise provided in this subsection, 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 referred to in subsection (a), and
(B) administrative costs with respect to such claims.
(2) Additional reserve for post-retirement medical 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 necessary 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 severance pay benefits
(A) In general
The account limit for any taxable year with respect to SUB or severance pay benefits is 75 percent of the average annual qualified direct costs for SUB or severance pay benefits for any 2 of the immediately preceding 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 account
(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 excess 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 benefits
For purposes of paragraph (3), any SUB or severance pay benefit payable to any individual shall not be taken into account to the extent such benefit is payable at an annual rate in excess of 150 percent of the limitation in effect under section 415(c)(1)(A).
(5) Special limitation where no actuarial certification
(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 benefits, 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 percent of the qualified direct costs (other than insurance premiums) for the immediately preceding taxable year with respect to medical benefits.
(iii) SUB or severance pay benefits
In the case of SUB or severance pay benefits, the safe harbor limit for any taxable year is the amount determined under paragraph (3).
(iv) Long-term disability or life insurance benefits
In the case of any long-term disability benefit or life insurance benefit, the safe harbor limit for any taxable year shall be the amount prescribed by regulations.
(6) Additional reserve for medical benefits of bona fide association plans
(A) In general
An applicable account limit for any taxable year may include a reserve in an amount not to exceed 35 percent of the sum of—
(i) the qualified direct costs, and
(ii) the change in claims incurred but unpaid,
for such taxable year with respect to medical benefits (other than post-retirement medical benefits).
(B) Applicable account limit
For purposes of this subsection, the term "applicable account limit" means an account limit for a qualified asset account with respect to medical benefits provided through a plan maintained by a bona fide association (as defined in section 2791(d)(3) of the Public Health Service Act (42 U.S.C. 300gg–91(d)(3))).
(d) Requirement of separate accounts for post-retirement medical or life insurance benefits provided to key employees
(1) In general
In the case of any employee who is a key employee—
(A) a separate account shall be established for any medical benefits or life insurance benefits provided with respect to such employee after retirement, and
(B) medical benefits and life insurance benefits provided with respect to such employee after retirement may only be paid from such separate account.
The requirements of this paragraph shall apply to the first taxable year for which a reserve is taken into account under subsection (c)(2) and to all subsequent taxable years.
(2) Coordination with section 415
For purposes of section 415, any amount attributable to medical benefits allocated to an account established under paragraph (1) shall be treated as an annual addition to a defined contribution plan for purposes of section 415(c). Subparagraph (B) of section 415(c)(1) shall not apply to any amount treated as an annual addition under the preceding sentence.
(3) Key employee
For purposes of this section, the term "key employee" means any employee who, at any time during the plan year or any preceding plan year, is or was a key employee as defined in section 416(i).
(e) Special limitations on reserves for medical benefits or life insurance benefits provided to retired employees
(1) Reserve must be nondiscriminatory
No reserve may be taken into account under subsection (c)(2) for post-retirement medical benefits or life insurance benefits to be provided to covered employees unless the plan meets the requirements of section 505(b) with respect to such benefits (whether or not such requirements apply to such plan). The preceding sentence shall not apply to any plan maintained pursuant to an agreement between employee representatives and 1 or more employers if the Secretary finds that such agreement is a collective bargaining agreement and that post-retirement medical benefits or life insurance benefits were the subject of good faith bargaining between such employee representatives and such employer or employers.
(2) Limitation on amount of life insurance benefits
Life insurance benefits shall not be taken into account under subsection (c)(2) to the extent the aggregate amount of such benefits to be provided with respect to the employee exceeds $50,000.
(f) Definitions and other special rules
For purposes of this section—
(1) SUB or severance pay benefit
The term "SUB or severance pay benefit" means—
(A) any supplemental unemployment compensation benefit (as defined in section 501(c)(17)(D)), and
(B) any severance pay benefit.
(2) Medical benefit
The term "medical benefit" means a benefit which consists of the providing (directly or through insurance) of medical care (as defined in section 213(d)).
(3) Life insurance benefit
The term "life insurance benefit" includes any other death benefit.
(4) Valuation
For purposes of this section, the amount of the qualified asset account shall be the value of the assets in such account (as determined under regulations).
(5) Special rule for collective bargained and employee pay-all plans
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) if—
(i) such plan has at least 50 employees (determined without regard to subsection (h)(1)), and
(ii) no employee is entitled to a refund with respect to amounts in the fund, other than a refund based on the experience of the entire fund.
(6) Exception for 10-or-more employer plans
(A) In general
This subpart shall not apply in the case of any welfare benefit fund which is part of a 10 or more employer plan. The preceding sentence shall not apply to any plan which maintains experience-rating arrangements with respect to individual employers.
(B) 10 or more employer plan
For purposes of subparagraph (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.
(7) Adjustments for existing excess reserves
(A) Increase in account limit
The account limit for any of the first 4 taxable years to which this section applies shall be increased by the applicable percentage of any existing excess reserves.
(B) Applicable percentage
For purposes of subparagraph (A)—
| In the case of: | The applicable percentage is: |
|---|---|
| The first taxable year to which this section applies | 80 |
| The second taxable year to which this section applies | 60 |
| The third taxable year to which this section applies | 40 |
| The fourth taxable year to which this section applies | 20. |
(C) Existing excess reserve
For purposes of computing the increase under subparagraph (A) for any taxable year, the term "existing excess reserve" means the excess (if any) of—
(i) the amount of assets set aside at the close of the first taxable year ending after July 18, 1984, for purposes described in subsection (a), over
(ii) the account limit determined under this section (without regard to this paragraph) for the taxable year for which such increase is being computed.
(D) Funds to which paragraph applies
This paragraph shall apply only to a welfare benefit fund which, as of July 18, 1984, had assets set aside for purposes described in subsection (a).
(g) Employer taxed on income of welfare benefit fund in certain cases
(1) In general
In the case of any welfare benefit fund which is not an organization described in paragraph (7), (9), or (17) of section 501(c), the employer shall include in gross income for any taxable year an amount equal to such fund's deemed unrelated income for the fund's taxable year ending within the employer's taxable year.
(2) Deemed unrelated income
For purposes of paragraph (1), the deemed unrelated income of any welfare benefit fund shall be the amount which would have been its unrelated business taxable income under section 512(a)(3) if such fund were an organization described in paragraph (7), (9), or (17) of section 501(c).
(3) Coordination with section 419
If any amount is included in the gross income of an employer for any taxable year under paragraph (1) with respect to any welfare benefit fund—
(A) the amount of the tax imposed by this chapter which is attributable to the amount so included shall be treated as a contribution paid to such welfare benefit fund on the last day of such taxable year, and
(B) the tax so attributable shall be treated as imposed on the fund for purposes of section 419(c)(4)(A).
(h) Aggregation rules
For purposes of this subpart—
(1) Aggregation of funds
(A) Mandatory aggregation
For purposes of subsections (c)(4), (d)(2), and (e)(2), all welfare benefit funds of an employer shall be treated as 1 fund.
(B) Permissive aggregation for purposes not specified in subparagraph (A)
For purposes of this section (other than the provisions specified in subparagraph (A)), at the election of the employer, 2 or more welfare benefit funds of such employer may (to the extent not inconsistent with the purposes of this subpart and section 512) be treated as 1 fund.
(2) Treatment of related employers
Rules similar to the rules of subsections (b), (c), (m), and (n) of section 414 shall apply.
(i) Regulations
The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subpart. Such regulations may provide that the plan administrator of any welfare benefit fund which is part of a plan to which more than 1 employer contributes shall submit such information to the employers contributing to the fund as may be necessary to enable the employers to comply with the provisions of this section.
Amendments
2018—Subsec. (c)(6)(B). Pub. L. 115–141, §401(a)(96), substituted "(42 U.S.C. 300gg–91(d)(3)))" for "(42 U.S.C. 300gg–91(d)(3))".
Subsec. (g)(1), (2). Pub. L. 115–141, §401(b)(21)(B), (C), substituted "or (17)" for "(17), or (20)".
2006—Subsec. (c)(6). Pub. L. 109–280 added par. (6).
1996—Subsec. (c)(3). Pub. L. 104–188 substituted "severance" for "severence" in heading.
1988—Subsec. (a). Pub. L. 100–647, §1018(u)(12), made technical amendment to directory language of Pub. L. 99–514, §1851(a)(6)(B). See 1986 Amendment note below.
Subsec. (f)(5). Pub. L. 100–647, §1018(t)(2)(A), repealed Pub. L. 99–514, §1851(a)(4). See 1986 Amendment note below.
Pub. L. 100–647, §1018(t)(1)(C), substituted "account" for "accounts".
1986—Subsec. (a). Pub. L. 99–514, §1851(a)(6)(B), as amended by Pub. L. 100–647, §1018(u)(12), inserted "and section 512" after "this subpart".
Subsec. (c)(5)(A). Pub. L. 99–514, §1851(a)(5), substituted "under this subsection" for "under paragraph (1)".
Subsec. (d)(1). Pub. L. 99–514, §1851(a)(2)(B), inserted "The requirements of this paragraph shall apply to the first taxable year for which a reserve is taken into account under subsection (c)(2) and to all subsequent taxable years."
Subsec. (d)(2). Pub. L. 99–514, §1851(a)(2)(A), inserted "Subparagraph (B) of section 415(c)(1) shall not apply to any amount treated as an annual addition under the preceding sentence."
Subsec. (e). Pub. L. 99–514, §1851(a)(3)(A), amended subsec. (e) generally. Prior to amendment, par. (1), benefits must be nondiscriminatory, read as follows: "No reserve may be taken into account under subsection (c)(2) for post-retirement medical benefits or life insurance benefits to be provided to covered employees unless the plan meets the requirements of section 505(b)(1) with respect to such benefits.", and par. (2), taxable life insurance benefits not taken into account, read as follows: "No life insurance benefit may be taken into account under subsection (c)(2) to the extent—
"(A) such benefit is includible in gross income under section 79, or
"(B) such benefit would be includible in gross income under section 101(b) (determined by substituting '$50,000' for '$5,000')."
Subsec. (f)(5). Pub. L. 99–514, §1851(a)(13), amended par. (5) generally. Prior to amendment, par. (5) read as follows: "
Pub. L. 99–514, §1851(a)(4), which directed amendment of par. (5) by substituting "welfare benefit fund maintained pursuant to" for "welfare benefit fund established under", was repealed by Pub. L. 100–647, §1018(t)(2)(A).
Subsec. (f)(7)(C), (D). Pub. L. 99–514, §1851(a)(7), added subpars. (C) and (D) and struck out former subpar. (C) which read as follows: "For purposes of this paragraph, the term 'existing excess reserve' means the excess (if any) of—
"(i) the amount of assets set aside for purposes described in subsection (a) as of the close of the first taxable year ending after the date of the enactment of the Tax Reform Act of 1984, over
"(ii) the account limit which would have applied under this section to such taxable year if this section had applied to such taxable year."
Subsec. (g)(3). Pub. L. 99–514, §1851(a)(9), added par. (3).
Subsec. (h)(1). Pub. L. 99–514, §1851(a)(6)(A), amended par. (1) generally. Prior to amendment, par. (1) read as follows: "At the election of the employer, 2 or more welfare benefit funds of such employer may be treated as 1 fund."
Effective Date of 2006 Amendment
Pub. L. 109–280, title VIII, §843(b), Aug. 17, 2006, 120 Stat. 1010, provided that: "The amendment made by this section [amending this section] shall apply to taxable years beginning after December 31, 2006."
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 1986 Amendment
Amendment by Pub. L. 99–514 effective, except as otherwise 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.
Savings Provision
For provisions that nothing in amendment by section 401(b)(21)(B), (C) of 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 liability 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.
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.
Application of Section 419A(e) to Group-Term Life Insurance
Pub. L. 99–514, title XVIII, §1851(a)(3)(B), Oct. 22, 1986, 100 Stat. 2859, as amended by Pub. L. 100–647, title I, §1018(t)(2)(D), Nov. 10, 1988, 102 Stat. 3587, provided that: "Subsection (e) of section 419A, section 505, and section 4976(b)(1)(B) of the Internal Revenue Code of 1954 [now 1986] (as amended by subparagraph (A)) shall not apply to any group-term life insurance to the extent that the amendments made by section 223(a) of the Tax Reform Act of 1984 [section 223(a) of Pub. L. 98–369, amending section 79 of this title] do not apply to such insurance by reason of paragraph (2) of section 223(d) of such Act [set out as a note under section 79 of this title]."
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