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MRAs and qualified profit-sharing plans.

Maintains A, a nongovernmental profit-sharing plan intended to be a qualified plan under Sec. 401(a). A includes a separate profit-sharing account and a separate medical retirement account (MRA) for each participant. A provides that 75% of M's annual contributions is allocated to a participant's profit-sharing account and 25% to his or her MRA. A does not provide for (after-tax) employee contributions.

The Plan

A provides that amounts in a participant's MRA may be used to reimburse him or her for any substantiated medical care expenses (as defined by Sec. 213(d)) incurred by the participant or his or her spouse and/or dependents. A also expressly provides that, under no circumstances, may amounts held in the MICA be distributed except to reimburse such expenses. The use restriction applies to all plan participants (i.e., current and former employees, including retired employees).

On the participant's death, the account is available only (1) to reimburse expenses for medical care of the participant's spouse (or, if unmarried or the spouse consents, the participant's dependents, if any); and (2) as long as those individuals qualify as the participant's spouse and dependents for Sec. 105(b) purposes. If there is no surviving spouse or dependent(s), on the participant's death, or when no individual qualifies as a surviving spouse or dependent, any remaining unused portion of the MRA will be forfeited and applied to reduce future employer contributions to MRAs under the plan. Each participant's profit-sharing account (but not amounts in the participant's MRA) is available for distribution to the participant after severance from employment with M.

Analysis

Under a profit-sharing plan, as a defined-contribution plan, benefits must be based solely on amounts contributed to the participant's account and attributable income, gains, expenses and losses. Under Sec. 411 (a)(7), all amounts credited to a participant's account under the plan are part of the accrued benefit and must satisfy Sec. 411(a)(2)'s nonforfeiture requirements.

A provides that under no circumstances may any amounts held in an MICA be distributed to any participant, except to reimburse him or her for substantiated medical expenses incurred by the participant or his or her spouse or dependents. A imposes a condition on this entitlement to the amounts held in the MRAs; as a result of that restriction, these amounts fail to be nonforfeitable.

However, if A instead provided that amounts payable from the MRA were available for distribution under the same terms as those held in the profit-sharing account (e.g., after severance of employment with M), A would not fail to satisfy Sec. 411 merely because it also permitted amounts held in the MIKA to be distributed both before and after severance of employment to reimburse medical expenses (or to pay the cost of major medical insurance, as described in Rev. Rul. 61-164). In that case, no amounts paid from A would be excludible under Sec. 105(b). Thus, any distribution from A would be includible in gross income under Sec. 402(a).

A fails to satisfy the Sec. 411 vesting requirements, because it imposes conditions on the use of the amounts held in participants' accounts. Accordingly, the plan fails to satisfy Sec. 40l(a)(7). In addition, a profit-sharing plan, which only permits distribution of amounts held in a separate MRA for reimbursement of substantiated medical care expenses (as described in the facts above) may fail to satisfy various other Sec. 401(a) qualification requirements, including Sec. 401(a)(9), (11) and (14).

Corrective Plan Amendments

A profit-sharing plan or stock bonus plan will not fail to be qualified under Sec. 401(a) for plan years beginning before Aug. 16, 2005, merely because it provides for a separate MRA subject to the medical expense use restriction, if (1) the plan (including the MRA provisions) is the subject of a favorable determination letter (or favorable advisory or opinion letter) issued before Aug. 15, 2005 and (2) the plan is amended effective on the first day of the first plan year beginning after Aug. 15, 2005, to provide that amounts in each participant's MRA are available for distribution under the same terms as amounts held in the participant's other accounts under the plan (e.g., on severance from employment).

Any distributions made from a plan before the first day of the first plan year beginning after Aug. 15, 2005 to reimburse the participant for any substantiated medical care expenses incurred by the participant, or his or her spouse or dependents, will not fail to be excluded from income under Sec. 105(b).

REV. RUL. 2005-55, IRB 2005-33, 284

David O'Driscoll, J.D., LL.M.
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Title Annotation:medical retirement accounts
Author:O'Driscoll, David
Publication:The Tax Adviser
Date:Dec 1, 2005
Words:768
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