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Welfare benefit fund.

A welfare benefit fund (WBF) is a fund (which is either taxable or a tax-exempt entity, as with a VEBA trust) into which employer(s) make deposits to provide specific benefits to their employees. Typical benefits include severance pay and preretirement death benefits. A WBF is not a qualified plan, nor is it a plan of deferred compensation (which would result in the employer losing his current tax deduction). To avoid classification as deferred compensation, plans are designed to: (1) include a broad group of employees; (2) cover businesses with more than one employee; (3) base funding on actuarial determinations; and (4) avoid any reversion of assets to employers.

Although strict limits are placed on an employer's deductions for contributions to a WBF, these limits do not apply to contributions made to a "10-or-more employer plan." By requiring the pooling of funds in a 10-or-more employer plan, it was expected that the plan would be "self-policing" (e.g., an employer would not be tempted to make excess contributions beyond that needed to pay promised benefits to its own employees since these contributions might benefit the employees of another employer).

Final regulations were issued in 2003 in order to halt what the IRS considered abusive 10-or-more plans (e.g., plans purporting to guarantee payments based upon contributions for specific employees). Under these regulations a 10-or-more employer plan is a single plan: (1) to which more than one employer contributes; (2) to which no employer normally contributes more than 10 percent of the total contributions by all employers;

(3) that does not maintain "experience-rating arrangements" with respect to any individual employer; and (4) that satisfies compliance rules (i.e., written plan document, record keeping, and right of inspection by the IRS and participating employers). A prohibited experience-rating occurs if an employer's costs or an employee's benefits are based upon the employer's overall experience (e.g., claims or expense experience, investment results, or over or underfunding). Although the regulations do not prohibit the use of cash value life insurance, they do express concern that any pass-through of premiums associated with an employer's employees may result in a prohibited experience-rating arrangement. While not clear, it would seem that benefits provided are included in, or excluded from, income under general tax rules (e.g., fully insured group term life insurance proceeds payable by reason of the death of the employee would be excludable from income).

The single-employer welfare benefit plan to prefund post-retirement medical and life insurance benefits appears to offer an attractive supplemental employee benefit. However, it would be prudent to seek guidance from qualified counsel on plan design and any unresolved tax questions.

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Title Annotation:Terms & Concepts
Publication:Field Guide to Estate, Employee, & Business Planning
Date:Jan 1, 2010
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