Td 8073

Fed eral R egister / V ol. 51, No. 23 / Tuesd ay, Febru ary 4, 1986 / Rules and R egulations

4312

DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Food and Drug Administration
21 CFR Part 175
lDocket No. 83F-0116]

Indirect Food Additives; Adhesives
and Components of Coatings
AGENCY:
a c t io n

:

Food and Drug Administration.
Final rule.

SUMMARY: The Food and Drug
Administration (FDA) is editorially
amending the food additive regulations
by removing tetrakis[methylene (3,5-diieri-butyl-4-hydroxyhydrocinnamate)]
methane from 21 CFR 175.300(b)(3)
(xxxi). FDA inadvertently omitted
removal of the use of this additive when
it amended 21 CFR 178.2010(b) on June 3,
1985 (50 FR 23296), to provide for new
and increased uses of this substance.
DATES: Effective February 4,1984;
objections by March 6,1986.
a d d r e s s : Written objections to the
Dockets Management Branch (HFA305), Food and Drug Administration, Rm.
4-62, 5600 Fishers Lane, Rockville, MD
20857.
FOR FURTHER INFO RM A TIO N CONTACT:

Thomas C. Brown, Center for Food
Safety and Applied Nutrition (HFF-335),
Food and Drug Administration, 200 C St.
SW., Washington, DC 20204, 202-4725690.
SUPPLEMENTARY IN FO RM ATION: In a final
rule published in the Federal Register of
June 3,1985 (50 FR 23296), FDA
amended § 178.2010 A ntioxidants a n d /
or stabilizers fo r polym ers (21 CFR
178.2010) to provide for a number of new
and increased uses of
tetrakis[methylene(3,5-di-terf-butyl-4hydroxyhydrocinnamate)] methane.
Item 12 under the limitations for this
additive states that the additive may be
used at levels not to exceed 1 percent by
weight of can end cement formulations
complying with 21 CFR 175.300(b) (3)
(xxxi). The listing of this use of this
additive in § 178.2010 superseded the
listing of this additive in § 175.300(b) (3)
(xxxi), which had permitted use of the
additive at a level of only 0.05 percent
by weight of isobutylene-isoprenedivinylbenzene copolymers in can end
cements.
FDA should have removed the listing
of tetrakis[methylene (3,5-di-ie/’i-butyl-4hydroxyhydrocinnamate)] methane from
§ 175.300(b) (3) (xxxi) in the June 3,1985,
final rule. Inadvertently, however, it
failed to do so. Therefore, FDA is
making this editorial amendment at this
time. Because this amendment merely

remedies the agency’s failure to make
all of the appropriate changes in
responding to FAP 3B3701, which sought
the change in the uses of this additive,
FDA finds that is unnecessary to
propose this amendment.
The agency has determined under 21
CFR 25.24(a)(9) (April 26,1985; 50 FR
16636) that this action is of a type that
does not individually or cumulatively
have a significant effect on the human
environment. Therefore, neither an
environmental assessment nor an
environmental impact statement is
required.
Any person who will be adversely
affected by this regulation may at any
time on or before March 6,1986 file with
the Dockets Management Branch
(address above) written objections
thereto. Each objection shall be
separately numbered, and each
numbered objection shall specify with
particularity the provisions of the
regulation to which objection is made
and the grounds for the objection. Each
numbered objection on which a hearing
is requested shall specifically so state.
Failure to request a hearing for any
particular objection shall constitute a
waiver of the right to a hearing on that
objection. Each numbered objection for
which a hearing is requested shall
include a detailed description and
analysis of the specific factual
information intended to be presented in
support of the objection in the event that’
a hearing is held. Failure to include such
a description and analysis for any
particular objection shall constitute a
waiver of the right to a hearing on the
objection. Three copies of all documents
shall be submitted and shall be
identified with the docket number found
in brackets in the heading of this
document. Any objections received in
response to the regulation may be seen
in the Dockets Management Branch
between 9 a.m. and 4 p.m., Monday
through Friday.
List of Subjects in 21 CFR Part 175
Adhesives, Food additives, Food
packaging.
Therefore, under the Federal Food,
Drug, and Cosmetic Act and under
authority delegated to the Commissioner
of Food and Drugs and redelegated to
the Director of the Center for Food
Safety and Applied Nutrition, Part 175 is
amended as follows:
PART 175—INDIRECT FOOD
ADDITIVES: ADHESIVES AND
COMPONENTS OF COATINGS
1. The authority citation for 21 CFR

Part 175 continues to read as follows:
Authority: Secs. 201(s), 409, 72 Stat. 17841788 as amended (21 U.S.C. 321(s), 348); 21
CFR 5.10 and 5.61.
§175.300

[Amended]

Section 175.300 R esinous and
polym eric coatings is amended in
paragraph (b) (3) (xxxi) by removing
from the list of substances the entry
“Tetrakis[methylene(3,5-di-ieri-butyl-4hydroxyhydrocinnamate)] methane * *
* »•
2.

Dated: January 24,1986.
Sanford A. Miller,

D irector, C enter fo r F ood S afety and Applied
Nutrition.
[FR Doc. 86-2406 Filed 2-3-86; 8:45 am]
BILLING CODE 4160-01-M

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1,20,54,301 and 602
[T.D. 8073]

Income, Excise, and Estate and Gift
Taxes; Effective Dates and Other
Issues Arising'Under the Employee
Benefit Provisions of the Tax Reform
Act of 1984
Internal Revenue Service,
Treasury.

AGENCY:

a c t io n

:

Temporary regulations.

s u m m a r y : This document provides
temporary regulations relating to
effective dates and certain other issues
arising under sections 91, 223, and 511561 of the Tax Reform Act of 1984. This
action is necessary because of changes
to the applicable tax law made by the
Tax Reform Act of 1984. The temporary
regulations will affect qualified
employee benefit plans, welfare benefit
funds and employees receiving benefits
through such plans.

DATES: As follows, the temporary
regulations are to be effective on
varying dates dependent upon the
effective dates of the underlying
provisions of the Internal Revenue Code
of 1954. In general, the effective dates
are as follows:
Regulation
section

Subject

1.72(e)-1T......... Treatment of
distributions.
1.79-4T............. Group-term life
insurance.

• Effective date
Amounts received or
loans made after
Oct. 16, 1984.
Generally, taxable
years beginning
after Dec. 31, 1983.

Fed eral R eg ister / Vol. 51, No. 23 / Tuesday, February 4, 1986 / Rules and R egulations
Regulation
section

Subject

Effective date

1.125-2T... ........ Cafeteria plans.... Cafeteria plan years
beginning on or
after Jan 1, 1985.
1.133-1T............ ESOP loan
Loans extended to an
interest
ESOP or
exclusion.
sponsoring
employer after July
18, 1984.
1.402(aX5)-1T.... Rollover of
Distributions made
partial
after July 18, 1984.
distributions.
Generally, amounts
1.404(a)-1T------ Deduction of
deferred
paid or incurred
compensation
after July 18, 1984.
and benefits.
Taxable years
1.404(a)(8)—1T.... Deductions for
plan
beginning after
contributions.
Dec. 31, 1983.
1.404(b)-1T........ Deduction of
Generally, amounts
deferred
paid or incurred
compensation
after July 18, 1984.
and benefits.
1.404(d)-1T........ Deduction of
Generally, amounts
deferred
paid or incurred
benefits to
after July 18, 1984.
nonemployees.
1.404(k)-1T....... Deduction for
Dividends paid in
dividends on
employer taxable
stock held by
years beginning
ESOP,
after July 18, 1984.
1.419—1T.... ....... Funded welfare
Generally,
benefits plans.
contributions paid
or accrued after
Dec. 31, 1985.
1.419A-1T......... Qualified asset
Generally,
account, etc.
contributions paid
or accrued after
Dec. 31, 1985.
1.461(h)-3T.... . Economic
Generally,
performance
contributions
requirement for
incurred in taxable
certain
years ending after
employee
July 18, 1984.
benefits.
1.463-1T........... Transitional rule
First taxable year
for vested
ending on or before
accrued
July 18, 1984.
vacation
benefits.
1.505(c)-1T....... Requirements for Taxable years
exemption.
beginning after July
18, 1984.
1.512(a)-5T....... Unrelated
Generally, income
business
earned after Dec.
income of
31, 1985.
exempt
organizations.
1.1042-1T.......... Sale of stock to
Taxable years
ESOP.
beginning after July
18, 1984.
20.2039-1T........ Repeal of estate Generally, estates of
tax exclusion
decedents dying
for qualified
after Dec. 31, 1984.
plans.
54.4976-1T ....... Taxes with
Generally, disqualified
. respect to
benefits provided
welfare benefit
after Dec. 31, 1985.
plans.
54.4978-1T....... Tax on certain
Taxable years
dispositions by
beginning after July
an ESOP.
' 18, 1984.
301.7701-17T.... Collective
Generally, after Mar.
bargaining
31, 1984.
plans and
agreements.

FOR FURTHER IN FO RM A TIO N CONTACT:

The attorneys indicated in the table
below at the Employee Plans and
Exempt Organizations Division or the
Legislation and Regulations Division,
Office of Chief Counsel, Internal
Revenue Service, 1111 Constitution
Ave., NW., Washington, D.C. 20224
(Attention: CC:LR:T).

Regulation
section

Subject

1.72(e)—1T......... Treatment of
distributions.
1.79-4T............. Group-term life
insurance.

Attorney/
telephone (not
toll-free cards)
Philip R. Bosco,
(202) 5663430.
Nancy J. Marks,
(202) 5663430.

1.125-2T............
1.133-1T............ ESPO loan interest
exclusion.
1.402(a)(5)—1T.... Rollover of partial
distributions.
1.404(a)-1T....... Deduction of deferred
compensation and
benefits.
1.404(a)(8)—1T.... Deductions for plan
contributions.
1.404(b)-1T........ Deduction of deferred
compensation and
benefits.
1.404(d)-1T........ Deduction of deferred
benefits to
nonemployees.
1.404(k)-1T........ Deduction for
dividends on stock
held by ESOP.
1.419-1T............ Funded welfare
benefits plans.
1.419A-1T......... Qualified asset
account, etc..
1.461 (h)-3T........ Economic
performance
requirement for
certain employee
benefits.
1.463-1T............ Transitional rule for
vested accrued
vacation pay.
1.505(c)-1T....... Requirements for
exemption.
1.512(a)-5T....... Unrelated business
income of exempt
organizations.
1.1042-1T.......... Sale of stock to
ESOP.
20.2039-1 T ........ Repeal of estate tax
exclusion for
qualified plans.
54.4976-1 T ........ Taxes with respect to
welfare benefit
. plans.
54.4978-1 T ....... Tax on certain
dispositions by an
ESOP.
301.7701-17T.... Collective bargaining
plans and
agreements.

(202) 5666212.
John T. Ricotta,
(202) 5663544.
Charles M.
Watkins, (202)
566-3430.
John T. Ricotta,
(202) 5663544.
Charles M.
Watkins, (202)
566-3430.
John T. Ricotta,
(202) 5663544.
John T. Ricotta,
(202) 5663544.
Calder L
Robertson,
(202) 5663544.
John T. Ricotta,
(202) 5663544.
John T. Ricotta,
(202) 5663544.
John T. Ricotta,
(202) 5663544.
Annette
Guarisco, (202)
566-3238.
Sylvia F. Hunt,
(202) 5666212.
John T. Ricotta,
(202) 5663544.
Sylvia F. Hunt,
(202) 5666212.
Richard J.
Wickersham,
(202) 5663430.
John T. Ricotta,
(202) 5663544.
John T. Ricotta,
(202) 5663544.
Philip R. Bosco,
(202) 5663430.

SUPPLEMENTARY IN FO RM A TIO N :

Background
This document contains temporary
regulations relating to the economic
performance requirement for certain
employee benefits under section 461(h)
of the Internal Revenue Code of 1954
(Code), as added by section 91 of the
Tax Refrom Act of 1984 (Act) (Pub. L.
98-369, 98 Stat. 598); the transitional rule
for vested accrued vacation pay under
section 463 of the Code, as amended by
section 91(i) of the Act (Pub. L. 98-369,
98 Stat. 609); the treatment of group-term
life insurance purchased for employees
under section 79 of the Code, as

4313

amended by section 223 of the Act (Pub.
L. 98-369, 98 Stat. 775); the treatment of
funded welfare benefit plans under
sections 419 and 419A of the Code, as
added by section 511 of the Act (Pub. L.
98-369, 98 Stat. 854); the treatment of
unfunded deferred benefits under
sections 404(b) and 162 of the Code, as
amended by section 512 of the Act (Pub.
L. 98-369, 98 Stat. 862); additional
requirements for tax-exempt status of
certain organizations under section 505
of the Code, as added by section 513 of
the Act (Pub. L. 98-369, 98 Stat. 863);
rollovers of partial distributions under
sections 402 and 403, as amended by
section 522 of the Act (Pub. L 98-369, 98
Stat. 868); distributions where
substantially all contributions áre
employee contributions under section
72, as amended by section 523 of the Act
(Pub. L. 98-369, 98 Stat. 871); repeal of
the estate tax exclusion for qualified
plan benefits under section 2039, as
amended by section 525 of the Act (Pub.
L. 98-369, 98 Stat. 873); determination of .
whether there is a collective bargaining
agreement under section 7701(a)(46), as
added by section 526(c) of the Act (Pub.
L. 98-369, 98 Stat. 874); statutory
nontaxable benefits under section 125,
as amended by section 531(b) of the Act
(Pub. L. 98-369, 98 Stat. 881);
nonrecognition of gain on stock sold to
an employee stock ownership plan
(ESOP) under section 1042, as added by
section 541 of the Act (Pub. L. 98-369, 98
Stat. 887); deductibility of dividends
relating to ESOPs under section 404 and
3405, as amended by section 542 of the
Act (Pub. L. 98-369, 98 Stat. 890);
exclusion 8f interest on ESOP loans
under section 133, as added by section
543 of the Act (Pub. L. 98-369, 98 Stat.
891); excise tax on certain dispositions
by ESOPs under section 4978, as added
by section 545 of the Act (Pub. L. 98-369,
98 Stat. 894); treatment of an employer
and an employee benefit association as
related under section 1239, as amended
by section 557 of the Act (Pub. L. 98-369,
98 Stat. 898); and technical corrections
to the pension provisions of the Tax
Equity and Fiscal Responsibility Act of
1982 under sections 713 and 715 of the
Act (Pub. L. 98-369, 98 Stat. 955, 966).
Format
These temporary regulations are
generally presented in the form of
questions and answers. Taxpayers may
rely on them for guidance pending the
issuance of final regulations. The
questions and answers are not,
however, intended to address
comprehensively the issues raised by
sections 91, 223 and 511-561 of the Act
and no inference should be drawn

4314

Fed eral R eg ister / V ol. 51, No. 23 / Tuesd ay, F ebru ary 4, 1986 / R ules and R egulations

regarding questions not expressly raised
and answered.
For purposes of developing a notice of
proposed rulemaking to provide
comprehensive guidance under section
404(b) as amended by the Tax Reform
Act of 1984, written comments are
requested regarding whether, in place of
the presumption established under
Q&A-2 or § 1.404(b)-lT, compensation
or benefits shouldjbe considered
unconditionally provided under a plan,
or method or arrangement, deferring the
receipt of compensation or providing for
deferred benefits for purposes of section
404 (a) and (d) and section 404(b) if paid
beyond a 2 V2 month period following the
close of the taxable year. In conjunction
with the presumption and safe harbor
rules of Q&A-2 of § 1.404(b)-lT,
consideration was given to providing
additionally for a fixed period beyond
the close of taxable year (e.g., 8%
months) beyond which a payment would
unconditionally be treated as deferred
compensation or benefits for purposes of
section 404. However, that approach
was dismissed because of a concern
that such a fixed period would
inappropriately be regarded and utilized
as an extended safe harbor within
which a payment would be treated as
not constituting deferred compensation
or benefits for purposes of section 404.
Further, written comments are
requested with respect to the treatment
of an account as a “fund” for purposes
of section 419(e)(3)(C). In particular,
comments are requested regarding the
application of Q&A-3 of § 1.419-1T to
. experience-rated insurance *
arrangements between employers and
insurance companies to provide welfare
benefits to employees, and the
application of § 54.4976-1T to dividends
and refunds under such arrangements.
In addition comments are requested
regarding the inclusion of additional
experience-rated arrangements in the
definition of “welfare benefit fund”
under section 419(e)(3)(C), particularly
where there is a pooling or spreading of
experience among different employers.
Special Analyses
No general notice of proposed
rulemaking is required by 5 U.S.C. 553(b)
for temporary regulations. Accordingly,
the Regulatory Flexibility Act does not
apply and a Regulatory Impact Analysis
is not required .for this rule. The
Commissioner of Internal Revenue has
determined that this proposed rule is not
a major rule as defined in Executive
Order 12291 and that a Regulatory
Impact Analysis is therefore not
required.

Paperwork Reduction Act
The collection of information
requirements contained in this
temporary regulation have been
submitted to the Office of Management
and Budget (OMB) in accordance with
the Paperwork Reduction Act of 1980.
These requirements have been approved
by OMB under control number 15450916.
List of Subjects

.26 CFR 1.61—1— 1.281-4
Income taxes, Taxable income,
Deductions, Exemptions.

26 CFR 1.401-0—1.425-1
Income taxes, Employee benefit plans,
Pensions, Stock options, Individual
retirement accounts, Employee stock
ownership plans.

26 CFR 1.441-1—1.483-2
Income taxes, Accounting, Deferred
compensation plans.

26 CFR 1.501(a)-l—1.528-10
Income taxes, Exempt organizations.

26 CFR 1.1001-1—1.1102-3
Nontaxable exchangers.

26 CFR Part 20
Estate taxes.

26 CFR Part 54
Excise taxes.

26 CFR Part 301
Procedure and administration.

26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Parts 1, 20, 54,
301, and 602 are amended as follows:
Paragraph 1. The authority citations
for Parts 1, 20, 54, and 301 continue to
read as follows:
Authority: 26 U.S.C. 7805.

PART 1—INCOME TAX; TAXABLE
YEARS BEGINNING AFTER
DECEMBER 31,1953
Par. 2. The following new sections are
added after § 1.72-18 to read as follows:
§ 1.72(e)-1T Treatment of distributions
where substantially all contributions are
employee contributions. (Temporary)

Q -l: How did the Tax Reform Act
(TRA) of 1984 change the law with
regard to the treatment of non-annuity
distributions (i.e., amounts distributed
prior to the annuity starting date and not

received as annuities) from a qualified
plan that is treated as a single contract
under section 72 and under which
substantially all of the contributions are
employee contributions?
A -l: (a) Prior to the amendment of
section 72(e) by the TRA of 1984, nonannuity distributions from such a
qualified plan generally were allocable,
first, to nondeductible employee
contributions and thus were not
includible in gross income. After
distributions equaled the balance of
nondeductible employee contributions,
further non-annuity distributions
generally were includible in gross
income.
(b)
Pursuant to section 72(e)(7), as
added by the TRA of 1984, non-annuity
distributions from such a qualified plan
that are allocable to investment in the
plan after August 13,1982 (as
determined in accordance with section
72(e)(5)(B)), generally will be treated,
first, as allocable to income and, second,
as allocable to nondeductible employee
contributions. Distributions allocable-to
income are includible in gross income.
Distributions allocable to nondeductible
employee contributions are not
includible in gross income.
Q-2: To which qualified plans and
contracts does section 72(e)(7) apply?
A-2: Section 72(e)(7) applies to any
plan or contract under which
substantially all of the contributions are
employee contributions if—
(a) Such plan is described in section
401(a) and the related trust or trusts are
exempt from tax under section 501(a); or
(b) Such contract is—
(1) Purchased by a trust described in
(a) above,
(2) Purchased as part of a plan
described in section 403(a), or
(3) Described in section 403(b).
Q-3: What is the definition of a
qualified plan or contract under which
substantially all of the contributions are
employee contributions?
A-3: (a) A qualified plan or contract
under which substantially all of the
contributions are employee
contributions is a plan or contract with
respect to which 85 percent or more of
the total contributions during the
“representative period” are employee
contributions. The "representative
period” means the five-plan-year period
preceding the plan year during which a
distribution occurs. However, if less
than 85 percent of the total contributions
for all plan years during which the plan
or contract is iii existence prior to the
plan year of distribution are employee
contributions, then the plan or contract
is not one with respect to which

F ed eral R eg ister / V ol. 51, No. 23 / Tuesd ay, F ebru ary 4, 1986 / Rules and R egulations

4315

substantially all of the contributions are
(b) First, the new rules of section 79
Government is administered by a
employee contributions.
commercial financial institution, it
(b) and (e), that require the inclusion in
(b)
For purposes of the 85 percent test, would not be aggregated with other
income of a retired employee of amounts
contributions made to a predecessor
plans of the Federal Government and its
attributable to the cost of group-term life
plan or contract are aggregated with
instrumentalities for purposes of
insurance in excess of $50,000 and that
contributions made the plan or contract
applying the 85 percent test.
include former employees within the
to which the 85 percent test is being
(d)
In the case of a contract described definition of the term "employee,” will
applied (the successor plan or contract).
in section 403(b), the 85 percent test is
not apply to any employee who retired
For purposes of the preceding sentence,
applied separately to each such
from employment on or before January
a predecessor plan or contract is a plan
contract.
1,1984.
or contract the terms of which are
Q-6: Is a loan from a qualified plan or
(c) Second, in the case of an
substantially the same as the successor
contract described in section 72(e)(7)
individual who retires after January 1,
plan or contract.
treated as a distribution under section
1984, and before January 1,1987, the
Q-4: What is the definition of
72(e)(4)(A)?
new rules of section 79 (b) and (e) do not
employee contributions for purposes of
A-6: Yes. Pursuant to section
apply if (1) the individual attained age
section 72(e)(7)?
72(e)(4)(A), if an employee receives,
55
on or before January 1,1984, and (2)
A-4: For purposes of section 72(e)(7),
either directly or indirectly, any amount
the plan was maintained by the same
employee contributions are those
as a loan from a qualified plan or
employer who employed the individual
amounts contributed by the employee
contract described in section 72(e)(7),
during 1983, or by a successor employer.
and those amounts considered
such amount shall be treated as a
(d) Third, in the case of an individual
contributed by the employee under
distribution from the plan or contract of
who retires after December 31,1986, the
section 72(f). For example, amounts
an amount not received as an annuity.
new rules of section 79 (b) and (e) do not
contributed to a section 401 (k) qualified
Similarly, if an employee assigns or
apply if (1) the individual attained age
cash or deferred arrangement, pursuant
pledges, or agrees to assign or pledge,
55 on or before January 1,1984, (2) the
to an employee’s election to defer such
any portion of the value of any qualified
plan was maintained by the same
amounts, are employer contributions to
plan or contract, such portion shall be
employer who employed the individual
the extent that such amounts are not
treated as a distribution from the plan or during 1983, or by a successor employer,
currently includible in gross income. In
contract of an amount not received as
and (3) the plan is not, after December
addition, deductible employee
an annuity.
31,1986, a discriminatory group-term life
contributions under section 72(o) are
Q-7: Does the five percent penalty for
insurance plan (not taking into account
disregarded in their entirety (i.e., treated
premature distributions from annuity
any group-term life insurance coverage
as neither employee contributions nor
contracts, as described in section 72(q),
provided to employees who retired
employer contributions) in determining
apply to distributions from a qualified
whether substantially all the
before January 1,1987).
plan or contract described in section
contributions are employee
(e) For purposes of determining
72(e)(7)?
contributions.
whether a plan is, after December 31,
A-7: No.
Q-5: How is the 85 percent test of
1986, a discriminatory group-term life
Q-8: When is section 72(e)(7)
section 72(e)(7) applied to a qualified
insurance plan, there shall be ignored
effective?
plan or contract?
any insurance coverage provided
A-5: (a) Except as provided in
A-8: Section 72(e)(7) is effective for
pursuant to a state law requirement that
amounts received or loans made on or
paragraphs (b), (c), and (d), the 85
an insurer continue to provide insurance
percent test is applied separately with
after October 17,1984. For purposes of
coverage for a period of time not in
respect to each contract under section
this effective date provision, loan
excess of two months following the
72.
amounts outstanding on October 16,
termination of a policy.
(b) If a single qualified plan described
1984, which are renegotiated, extended,
Q-2: What is meant by a “group-term
in section 401(a) or section 403(a)
renewed, or revised after that date
life insurance plan of the employer that
comprises more than one contract under
generally are treated as loans made on
was in existence on January 1,1984”?
section 72, regardless of whether such
the date of the renegotiation, etc.
A-2: A group-term life insurance plan
plan includes multiple trusts or
Par. 3. There is added the following
of the employer was in existence on
combinations of profit-sharing and
new section after § 1.79-3:
January 1,1984, only if the group policy
pension features, these contracts are
or policies providing group-term life
§
1.79-4T Questions and answers relating
aggregated for purposes of applying the
to the nondiscrimination requirements for
insurance benefits under the plan were
85 percent test. Thus, if substantially all
group-term life insurance. (Temporary)
executed on or before January 1,1984,
of the contributions under a qualified
and were not terminated prior to such
Q -l: When does section 79, as
plan comprising two contracts under
date. The applicability of section 79, as
amended by the Tax Reform Act of 1984,
section 72 are employee contributions,
amended, to an employee will not be
become effective?
section 72(e)(5)(D) shall not apply to
affected by the transfer of the employee
A -l: (a) Generally, section 79, as
non-annuity distributions under either of
between employers treated as a single
the contracts.
amended, applies to taxable years (of
employer under section 79(d)(7) if the
(c) With respect to the plans
the employee receiving insurance
employee continues, after the transfer,
maintained by the Federal Government
coverage) beginning after December 31,
to be provided with group-term life
or by instrumentalities of the Federal
1983. There are, however, several
insurance benefits under a plan that is
Government, the 85 percent test shall be
exceptions to this effective date where
comparable (determined under the
applied by-uggregating all such plans.
there is coverage under a group-term life
principles set forth in Q&A 3) to the plan
This aggregation rule applies only to
insurance plan of the employer that was
provided by the former employer.
those plans that are actively
in existence on January 1,1984, or a
administered by the Federal
Q-3: When is a plan of group-term life
comparable successor to such a plan
Government or an instrumentality
insurance a "comparable successor” to
maintained by the employer or a
thereof. Thus, if a plan of the Federal
another such plan?
successor employer.

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F ed eral R egister / Vol. 51, No. 23 / Tu esd ay, Febru ary 4, 1986 / R ules and R egulations

A-3: A plan of group-term life
insurance will be a comparable
successor to another plan of group-term
life insurance (the first plan) only if the
plan does not differ from the first plan in
any significant aspect with respect to
individual who are potentially eligible
for benefits provided under the
grandfather provisions in Q&A 1. These
individuals consist of those persons who
are covered under a plan of group-term
life insurance of the employer that was
in existence on January 1,1984, or a
comparable successor to such a plan
maintained by the employer or a
successor employer, and who either
retired on or before January 1,1984, or
who both attained age 55 on or before
January 1,1984, and were employed by
the employer maintaining the plan (or a
predecessor of that employer) during the
year 1983. Accordingly, if significant
additional or reduced benefits are
provided only to individuals who are not
described in the preceding sentence, the
plan will be considered a comparable
successor plan. A plan will not fail to be
a comparable successor plan merely
because the employer purchases a
policy or policies identical to the
employer’s first plan from a different
insurance company. If the new plan
provides significant additional or
reduced benefits (either as to the type or
amount available) to employees, or
provides benefits to a category of
employees that was formerly excluded
from participating in the plan, the plan is
generally not a comparable successor to
the first plan. However, a plan will not
be considered as providing significant
additional or reduced benefits merely
because a participant’s coverage is
based on a percentage of compensation
and the participant’s compensation for
the taxable year has been increased or
decreased. Furthermore, a plan will not
be considered a non-comparable
successor plan merely because it is
amended, either to decrease benefits
provided to key employees or to
increase benefits provided to non-key
employees, solely in order to comply
with the nondiscrimination requirements
of section 79(d). Finally, a plan will not
be considered a non-comparable
successor plan merely because a policy
that is part of a discriminatory plan is
terminated in order to end
discriminatory coverage.
Q-4: For purposes of determining the
effective date of section 79, as amended
by the Tax Reform Act of 1984, what is a
“successor employer”?
A-4: A successor employer is an
employer who employs a group of
individuals formerly employed by

another employer as a result of a
business merger, acquisition or division.
Q-5: Under what circumstances will
separate policies of group-term life
insurance of an employer be considered
to be a single plan in determining
whether the employer’s plan of groupterm life insurance is discriminatory?
A-5: All policies providing group-term
life insurance to a common key
employee or key employees (as defined
in this Q&A) carried directly or
indirectly by an employer (or by a group
of employers described in section
79(d)(7)) will be considered as a single
plan for purposes of determining
whether an employer’s group-term life
insurance plan is discriminatory. For
example, if a key employee receives
$50,000 of group-term life insurance
coverage under one policy and the same
key employee receives an additional
$250,000 of coverage under a separate
group-term life insurance policy, the two
policies will be treated as a single plan
in determining whether the group-term
life insurance provided by the employer
is discriminatory. If it is discriminatory,
the key employees covered by either
policy will not receive the benefit of
section 79(a)(1) or section 79(c) for either
policy. The result is the same even if
each policy, considered alone, would be
nondiscriminatory. A policy that
provides group-term life insurance to a
key employee and a policy under which
the same key employee is eligible to
receive group-term life insurance upon
separation from service will be
considered to provide group-term life
insurance to a common key employee. In
addition, an employer may treat two or
more policies that do not provide groupterm life insurance to a common key
employee as constituting a single plan
for purposes of satisfying the
nondiscrimination provisions of section
79(d). For example, if the employer
provides group-term life insurance
coverage for non-key employees under
one policy and provides group-term life
insurance coverage for key employees
under a second policy, the two policies
may be considered together in
determining whether the requirements of
section 79(d) are satisfied with regard to
the second policy. For purposes of this
section, the term “key employee” has
the meaning given to such term by
paragraph (1) of section 416(i), except
that subparagraph (A)(iv) of such
paragraph shall be applied by not taking
into account employees described in
section 79(d)(3)(B) who are not
participants in the plan. For purposes of
this section, all references to "plan
year” or "plan years” in section
416(g)(4)(C) and section 416(i) shall be

deleted and replaced with “taxable year
of the employer” or “taxable years of
the employer,” respectively.
Q-6: In the case of a discriminatory
group-term life insurance plan, what
amounts should be included in the gross
income of a key employee?
A-6: (a) In the case of a
discriminatory group-term life insurance
plan, each key employee must include in
gross income for the taxable year the
cost of his or her insurance benefit for
that year provided by the employer
under the plan.
(b) The cost of group-term life
insurance coverage provided by an
employer for a key employee during the
employee’s taxable year is determined
by apportioning the net premium (group
premium less policy dividends, premium
refunds or experience rating credits)
allocable to the group-term life
insurance coverage during the key
employee’s taxable year, less the actual
cost allocated to other key employees
pursuant to the method described in the
subparagraph (d) of this answer, if
applicable, among the covered
employees. In the event that the
employer has other forms and types of
coverage with the same insurer, the
employer must make a reasonable
allocation of the total premiums paid to
the insurer. For example, where an
employer has both health insurance
coverage and a plan of group-term life
insurance with the same insurer, and
there is no volume discount, the net
premium for the plan of group-term life
insurance must include the excess, if
any, of the payments the employer
makes for the health insurance coverage
over the payments the employer would
make for such coverage if the plan of
group-term life insurance for which this
calculation is being made did not exist.
(c) In general, the portion of the net
premium for group-term life insurance
that should be apportioned to a key
employee, other than a key employee to
whom the method in subparagraph (d) of
this answer is applicable, is determined
by: (1) Calculating a “tabular” premium
for the entire group (with the exception
of all key employees to whom the
method in subparagraph (d) of this
answer is applicable), in the manner
described below, (2) determining the
ratio of the total actual net premium
(less the actual cost allocated to key
employees pursuant to the method in the
subparagraph (d) of this answer) to the
total tabular premium and (3)
multiplying the tabular premium for the
key employee at his or her attained age
by such ratio. Thus, if the total actual
net premium is 125 percent of the total
tabular premium for all covered

Fed eral R egister / Vol. 51, No. 23 / Tu esd ay, Febru ary 4, 1986 / Rules and R egulations
employees and the tabular premium at
the key employee’s attained age is $2.00
per thousand per month, the cost for
such employee would be $2.50 per
thousand per month ($2.00 times 125
percent). For these purposes the table
used to calculate tabular premiums will
be determined as follows:
(i) If the group policy contains a
reasonable table (based on recognized
mortality assumptions) of premium rates
on an attained age basis (which table
may use age brackets not exceeding five
years) with reference to which the group
premium is determined, such table will
be used;
(ii) If such table is not available, the
1960 Basic Group Table published by the
Society of Actuaries will be used.
(d)
In cases where the mortality
charge for group-term life insurance
coverage provided to a key employee is
calculated separately by the insurer (for
example, where the charge for the
coverage provided to a key employee is
based on a medical examination) and
the amount of such mortality charge plus
a proportionate share of the loading
charge for the coverage provided to the
group is higher than the amount that
would be allocable to such employee
under the allocation method in
subparagraph (c) the cost of group-term
life insurance coverage for that
employee shall be that higher amount.
Q-7: Must all active and former
employees be considered in applying the
coverage tests in section 79 (d) (3) to
determine whether or not a plan of
group-term life insurance is
discriminatory with respect to coverage?
A-7: No. Generally, a plan of groupterm life insurance which covers both
active and former employees will not
satisfy the nondiscrimination
requirements of section 79 (d) unless the
coverage tests in section 79 (d) (3) are
satisfied with respect to both the active
and the former employees of the
employer, Except to the extent they are
excluded from tests for discrimination
by application of the grandfather
provisions set forth in Q&A 1. However,
for purposes of determining whether a
plan is discriminatory with respect to
coverage, the coverage tests must be
applied separately to active and former
employees. In addition, if the plan limits
participation by former employees to
employees who retired from
employment with the employer, then
only retired employees must be
considered in applying the coverage
tests to former employees. Also, in
applying the coverage tests in section 79
(d) (3), the employer may make
reasonable mortality assumptions
regarding former employees who are not
covered under the plan but must be

considered in applying the coverage
tests. Furthermore, only those former
employees who terminated employment
on or after the earliest date of
termination from employment for any
former employee covered by the plan
must be considered. Finally, for
purposes of determining whether a plan
of group-term life insurance of the
employer (or a successor employer) that
was in existence on January 1,1984 (or a
comparable successor to such a plan) is
discriminatory, after December 31,1986,
with respect to group-term life
insurance coverage for former
employees, coverage provided to
employees who retired on or before
December 31,1986, shall not be taken
into account.
Q-8: Will a group-term life insurance
plan be considered discriminatory if
active employees receive greater
benefits as a percentage of
compensation than former employees, or
vice versa?
A-8: No. For purposes of determining
whether a plan is discriminatory with
respect to the type and amount of
benefits available, insurance coverage
for former employees must be tested
separately from insurance coverage for
active employees. For example, a groupterm life insurance plan that provides
group-term life insurance benefits equal
to 200 percent of compensation for all
active employees and 100 percent of
final compensation (based on the
average annual compensation for the
final five years) for all former employees
would satisfy the nondiscrimination
requirements of section 79 (d). However,
a group-term life insurance plan that
provides group-term life insurance
benefits equal to 200 percent of
compensation for all active employees
and 100 percent of final compensation
(based on the average annual
compensation for the final five years)
only for key employees who are no
longer employed by the employer (or a
successor employer) would not satisfy
the nondiscrimination requirement of
section 79 (d) (2) (A).
Q-9: Under what circumstances will
the amount of benefits available under a
plan of group-term life insurance be
considered not to discriminate in favor
of participants who are key employees?
A-9: A plan of group-term life
insurance will be considered not to
discriminate in favor of participants
who are key employees, as to the
amount of benefits available, if the plan
provides a fixed amount of insurance
which is the same for all covered
employees. In other circumstances, the
determination of whether a plan is
nondiscriminatory will be based on all
of the facts and circumstances. Such

4317

plans will be considered not to
discriminate in favor of participants
who are key employees, as to the
amount of benefits available, if the plan
contains no group of employees
described in the following sentence that,
if tested separately, would fail to satisfy
the requirements of section 79(d)(2)(A).
The group subject to separate testing
under the preceding sentence consists of
a key employee and all other
participants (including other key
employees) who receive, under the plan,
an amount of insurance (as a multiple of
compensation (either total compensation
or the basic or regular rate of
compensation)) that is equal to or
greater than the amount of insurance
received by such key employee. As
described in Q&As 7&8, active and
former employees are tested separately
under section 79(d)(2)(A).
Example: Assume that a plan of group-term
life insurance has 500 participants, 10 of
whom are key employees. Under the plan, 400
of the non-key employees receive an amount
of insurance equal to 100 percent of
compensation, while all of the key employees
and 90 of the non-key employees receive an
amount of insurance equal to 200 percent of
compensation. The plan will be considered
not to discriminate in favor of the
participants who are key employees because,
tested separately, the group of participants
receiving an amount of insurance equal to or
greater than 200 percent of compensation
would satisfy the requirements of section
79(d)(2)(A) (by reason of section
79(d)(3)(A)(ii)). If one of the key employees
received an amount of insurance equal to 300
percent of compensation, the plan would be
considered to discriminate in favor of
participants who are key employees,
because, tested separately, the group
consisting of the single key employee
receiving an amount of insurance equal to or
greater than 300 percent of compensation
would fail to satisfy the requirements of
section 79(d)(2)(A).

In determining the groups of
employees that are tested separately for
this purpose, allowance shall be made
for reasonable differences in amount of
insurance (as a multiple of
compensation) due to rounding, the use
of compensation brackets or other
similar factors. Thus, if a plan bases
group-term life insurance coverage on
“compensation brackets,” it is not
intended that any participants will be
treated as receiving an amount of
insurance (as a multiple of
compensation) that is greater (or less)
than that of any other participant merely
because the first participant’s
compensation is at the lower (or higher)
end of a compensation bracket while the
second participant’s compensation is at
the higher (or lower) end of a
compensation bracket. However, any

4318

F ed eral R egister / Vol. 51, No. 23 / Tuesd ay, F ebru ary 4, 1986 / R ules and R egulations

compensation brackets utilized by a
plan will be examined to determine if
the brackets, or compensation
groupings, result in discrimination in
favor of key employees. In addition, a
plan does not meet the requirements for
nondiscrimination as to the type and
amount of benefits available under the
plan unless all types of benefits
(including permanent benefits) and all
terms and conditions with respect to
such benefits which are available to any
participant who is a key employee are
also available on a nondiscriminatory
basis to non-key employee participants.
Q-10: How is additional coverage
purchased by employees under a plan of
group-term life insurance treated for
purposes of determining whether a plan
of group-term life insurance is
discriminatory?
A-10: (a) The extent to which
employees purchase additional coverage
under a plan of group-term life
insurance is not taken into account for
purposes of determining whether a plan
of group-term life insurance is
discriminatory. For example, a plan
providing insurance to all employees of
1 times annual compensation, which
gives all employees the option to
purchase additional insurance of 1 times
annual compensation at their own
expense, would not be considered
discriminatory as to the type and
amount of benefits available, even if the
group (or groups) of participants who
purchase additional insurance, if tested
separately, would not satisfy the
requirements of section 79(d)(2)(A).
Solely for this purpose, the choice of an
amount of group-term life insurance as a
benefit under a cafeteria plan will be
treated as the purchase of group-term
life insurance by an employee. If
additional insurance coverage is
available to any key employee that is
not available, on a nondiscriminatory
basis, to non-key employees, the plan
will be considered discriminatory, even
if the full cost of such additional
insurance coverage is paid by the
employee(s) electing such benefits.
(b)
If the employer bears a part of the
expense of any additional coverage that
is purchased by an employee under a
plan of group-term (ife insurance, the
additional insurance shall be treated, in
part, as an amount of insurance
provided by the employer under the plan
and, in part, as an amount of insurance
purchased by the employee. Except to
the extent provided in subparagraph (a)
above, the portion oFinsurance treated
as an amount of insurance purchased by
the employee is not taken into account
for purposes of determining whether the
plan is discriminatory. Whether such

insurance (together with any other
insurance provided by the employer
under the plan) will cause the plan to be
considered to discriminate in favor of
participants who are key employees is
determined under the rules of Q&A 9.
Q -ll: What effect do the provisions of
section 79(d)(1) have if a plan of groupterm life insurance is discriminatory for
only part of a year?
A - ll: If a plan of group-term life
insurance is discriminatory at any time
during the key employee’s taxable year,
then it is a discriminatory group-term
life insurance plan for that taxable year
and the provisions of section 79(d)(1)
will be applicable with respect to all
group-term life insurance costs allocable
to that employee for that year.
Q-12: Are the section 79(d) provisions
independent from the requirements
contained in Treas. Reg. § 1.79-1?
A-12: Yes. Treas. Reg. § 1.79-l(c)(l)
provides that life insurance provided to
a group of employees cannot qualify as
group-term life insurance if it is
provided to less than ten full-time
employees unless certain requirements
are satisfied. The satisfaction of these
requirements does not guarantee that
the plan will be nondiscriminatory, and
vice versa. Treas. Reg. § 1.79-l(a)(4)
provides that life insurance is not groupterm life insurance unless the amount of
insurance provided to each employee is
computed under a formula that
precludes individual selection. The mere
fact that a life insurance policy is
nondiscriminatory is not determinative
as to whether the policy precludes
individual selection, and vice versa.
Par. 4. Hie following section is added
immediately after § 1.125-1:
§ 1.125-2T Question and answer relating
to the benefits that may be offered under a
cafeteria plan. (Temporary)

Q -l: What benefits may be offered to
participants under a cafeteria plan?
A -l: (a) Generally, for cafeteria plan
years beginning on or after January i ,
1985, a cafeteria plan is a written plan
under which participants may choose
among two or more benefits consisting
of cash and certain other permissible
benefits. In general, benefits that are
excludable from the gross income of an
employee under a specific section of the
Internal Revenue Code may be offered
under a cafeteria plan. However,
scholarships and fellowships under
section 117, vanpooling under section
124, educational assistance under
section 127 and certain fringe benefits
under section 132 may not be offered
under a cafeteria plan. In addition,
meals and lodging under section 119,
because they are furnished for the
convenience of the employer and thus

are not elective in lieu of other benefits
or compensation provided by the
employer, may not be offered under a
cafeteria plan. Thus, a cafeteria plan
may offer coverage under a group-term
life insurance plan of up to $50,000
(section 79), coverage under an accident
or health plan (sections 105 and 106),
coverage under a qualified group legal
services plan (section 120), coverage
under a dependent care assistance
program (section 129), and participation
in a qualified cash or deferred
arrangement that is part of a profitsharing or stock bonus plan (section
401(k)). In addition, a cafeteria plan may
offer group-term life insurance coverage
which is includable in gross income only
because it is in excess of $50,000 or is on
the lives of the participant’s spouse and/
or children. In addition, a cafeteria plan
may offer participants the opportunity to
purchase, with after-tax employee
contributions, coverage under a groupterm life insurance plan (section 79),
coverage under an accident or health
plan (section 105(e)), coverage under a
qualified group legal services plan
(section 120), or coverage under a
dependent care assistance program
(section 129). Finally, a cafeteria plan
may offer paid vacation days if the plan
precludes any participant from using, or
receiving cash for, in a subsequent plan
year, any of such paid vacation days
remaining unused as of the end of the
plan year. For purposes of the preceding
sentence, elective vacation days
provided under a cafeteria plan are not
considered to be used until all
nonelective paid vacation days have
been used.
(b)
Note that benefits that may be
offered under a cafeteria plan may or
may not be taxable depending upon
whether such benefits qualify for an
exclusion from gross income. However,
a cafeteria plan may not offer a benefit
that is taxable because such benefit fails
to satisfy any applicable eligibility,
coverage, or nondiscrimination
requirement. Similarly, a plan may not
offer a benefit for purchase with aftertax employee contributions if such
benefit would fail to satisfy any
eligibility, coverage, or
nondiscrimination requirement that
would apply if such benefit were
designed to be provided on a
nontaxable basis with employer
contributions. Also, note that section
125(d)(2) provides that a cafeteria plan
may not offer a benefit that defers the
receipt of compensation (other than the
opportunity to make elective
contributions under a qualified cash or
deferred arrangement) and may not
operate in a manner that enables

Fed eral R eg ister / Vol. 51, No. 23 / Tuesd ay, Febru ary 4, 1988 / Rules and R egulations
participants to defer the receipt of
compensation.
Par 5. The following new section is
added immediately after § 1.132-1T:
§ 1.133-1T. Questions and answers
relating to interest on certain loans used to
acquire empioyer securities. (Temporary)

Q -l: What does section 133 provide?
A -l: In general, section 133 provides
that certain commercial lenders may
exclude from gross income fifty percent
of the interest received with respect to
securities acquisition loans. A securities
acquisition loan is any loan to an
employee stock ownership plan (ESOP)
(as defined in section 4975(e)(7)) that
qualifies as an exempt loan under
§§ 54.4975-7 and -11 to the extent that
the proceeds are used to acquire
employer securities (within the meaning
of section 409(1)) for the ESOP. A loan
made to a corporation sponsoring an
ESOP (or to a person related to such
corporation under section 133(b)(2)) may
also qualify as a securities acquisition
loan to the extent and for the period that
the proceeds are (a) loaned to the
corporation’s ESOP under a loan that
qualifies as an exempt loan under
§§ 54.4975-7 and -11 and that has
substantially similar terms as the loan
from the commercial lender to the
sponsoring corporation, and (b) used to
acquire employer securities for the
ESOP. The terms of the loan between
the commercial lender and the
sponsoring corporation (or a related
corporation) and the loan between such;
corporation and the ESOP shall be
treated as substantially similar only if
the timing and rate at which employer
securities would be released from
encumbrance if the loan from the
commercial lender were the exempt loan
under the applicable rule of § 54.49757(b)(8) are substantially similar to the
timing and rate at which employer
securities will actually be released from
encumbrance in accordance with such
rule. For this purpose, if the loan from
the commercial lender to the sponsoring
corporation states a variable rate of
interest and the loan between the
corporation and the ESOP states a fixed
rate of interest, whether the terms of the
loans are substantially similar shall be
determined at the time the obligations
are initially issued by taking into
account the adjustment interval on the
variable rate loan and the maturity of
the fixed rate loan. For example, if the
rate on the loan from the commercial
lender to the sponsoring corporation
adjusts each six months and the loan
from the corporation to the ESOP has a
ten year term, the initial interest rate on
the variable rate loan could be
compared to the rate on the fixed rate

loan by comparing the yields on 6 month
and ten year Treasury obligations.
Similarly, if the rates on the two loans
are based on different compounding
assumptions, whether the terms of the
loans are substantially similar shall be
determined by taking into account the
different compounding assumptions. A
securities acquisition loan may be
evidenced by any note, bond, debenture,
or certificate. Also, section 133(b)(2)
provides that certain loans between
related persons are not securities
acquisition loans. In addition, a loan
from a commercial lender to an ESOP or
sponsoring corporation to purchase
employer securities will not be treated
as a securities acquisition loan to the
extent that such loan is used, either
directly or indirectly, to purchase
employer securities from any other
qualified plan, including any other
ESOP, maintained by the employer or
any other corporation which is a
member of the same controlled group (as
defined in section 409(1)(4)}.
Q-2: What lenders are eligible to
receive the fifty percent interest
exclusion?
A-2: Under section 133(a), a bank
(within the meaning of section 581), an
insurance company to which subchapter
L applies, or a corporation (other than a
subchapter S corporation) actively
engaged in the business of lending
money may exclude from gross income
fifty percent of the interest received
with respect to a securities acquisition
loan (as defined in Q&A-l of § 1.1331T). For purposes of section 133(a)(3), a
corporation is actively engaged in the
business of lending money if it lends
money to the public on a regular and
continuing basis (other than in
connection with the purchase by the
public of goods and services from the
lender or a related party). A corporation
is not actively engaged in the business
of lending money if a predominant share
of the original value of the loans it
makes to unrelated parties (other than in
connection with the purchase by the
public of goods and services from the
lender or a related party) are securities
acquisition loans.
Q-3: May loans which qualify for the
fifty percent interest exclusion under
section 133 be syndicated to other
lending institutions?
A-3: Securities acquisition loans
under section 133 may be syndicated to
other lending institutions provided that
such lending institutions are described
in section 133(a) (1), (2) or (3) and the
loan was originated by a qualified
holder. Subsequent holders of the debt
instrument may qualify for the partial
interest exclusion of section 133 if such

4319

holders satisfy the requirements of
section 133 and such loan does not fail
to be a securities acquisition loan under
section 133(b)(2).
Q-4: When is section 133 effective?
A-4: Section 133 applies to securities
acquisition loans made after July 18,
1984, and used to acquire employer
securities after July 18,1984. The
provision does not apply to loans made
after July 18,1984, to the extent that
such loans are renegotiations, directly or
indirectly, of loans outstanding on such
date. A loan extended to an ESOP or
sponsoring corporation after July 18,
1984, will be treated as a renegotiation
of an outstanding loan if the loan
proceeds are used to refinance
acquisitions of employer securities made
prior to July 19,1984. For example, if an
ESOP borrowed money prior to July 19,
1984, to purchase employer securities
and after July 18,1984, borrows other
funds from the same or a different
commercial lender to repay the first
loan, the second loan will be treated as
a renegotiation of an outstanding loan to
the extent of the repaid amount
Similarly, if, after July 18,1984, an ESOP
sells employer securities, uses the
proceeds to retire a pre-July 19,1984,
loan and obtains a second loan to
acquire replacement employer
securities, the second loan will be
treated as a renegotiation of an
outstanding loan.
Par. 6. The following new section is
added immediately after § 1.162-10:
§ 1.162-10T Questions and answers
relating to the deduction of employee
benefits under the Tax Reform Act of 1984;
certain limits on amounts deductible.
(Temporary)

Q -l: How does the amendment of
section 404(b) by the Tax Reform Act of
1984 affect the deduction of employee
benefits under section 162 of the Internal
Revenue Code?
A -l: As amended by the Tax Reform
Act of 1984, section 404(b) clarifies that
section 404(a) and (d) (in the case of
employees and nonemployees,
respectively) shall govern the deduction
of contributions paid or compensation
paid or incurred under a plan, or method
or arrangement, deferring the receipt of
compensation or providing for deferred
benefits. Section 404(a) and (d) requires
that such a contribution or
compensation be paid or incurred for
purposes of section 162 or 212 and
satisfy the requirements for deductibility
under either of these sections. However,
notwithstanding the above, section 404
does not apply to contributions paid or
accrued with respect to a “welfare
benefit fund” (as defined in section

4320

Fed eral R eg ister / V ol. 51, No. 23 / Tuesd ay, F ebru ary 4, 1986 / Rules and R egulations

419(e)) after July 18,1984, in taxable
years of employers (and payors) ending
after that date.
Also, section 463 shall govern the
deduction of vacation pay by a taxpayer
that has elected the application of such
section. Section 404(b), as amended,
generally applies to contributions paid
and compensation paid or incurred after
July 18,1984, in taxable years of
employers (and payors) ending after that
date. See Q&A-3 of § 1.404(b)-lT. For
rules relating to the deduction of
contributions attributable to the
provision of deferred benefits, see
section 404 (a), (b) and (d) and
§ 1.404(a)-lT, § 1.404(b)-lT and
§ 1.404(d)-lT. For rules relating to the
deduction of contributions paid or
accrued with respect to a welfare
benefit fund, see section 419, § 1.419-1T
and § 1.419A-2T. For rules relating to
the deduction of vacation pay for which
an election is made under section 463,
see § 10.2 of this chapter and § 1.463-1T.
Q-2: How does the enactment of
section 419 by the Tax Reform Act of
1984 affect the deduction of employee
benefits under section 162?
A -2: As enacted by the Tax Reform
Act of 1984, section 419 shall govern the
deduction of contributions paid or
accrued by an employer (or a person
receiving services under section 419(g))
with respect to a “welfare benefit fund"
(within the meaning of section 419(e))
after December 31,1985, in taxable
years of the employer (or person
receiving the services) ending after that
date. Section 419(a) requires that such a
contribution be paid or accrued for
purposes of section 162 or 212 and
satisfy the requirements for deductibility
under^either of those sections.
Generally, subject to a binding contract
exception (as described in section
511(e)(5) of the Tax Reform Act of 1984),
section 419 shall also govern the
deduction of the contribution of a
facility (or other contribution used to
acquire or improve a facility) to a
welfare benefit fund after June 22,1984.
See Q & A -ll of § 1.419-1T. In the case of
a welfare benefit fund maintained
pursuant to a collective bargaining
agreement, section 419 applies to the
extent provided under the special
effective date rule described in Q&A-2
of § 1.419-1T and the special rules of
§ 1.419A-2T. For rules relating to the
deduction of contributions paid or
accrued with respect to a welfare
benefit fund, see section 419 and
§ 1.419-1T.
Par. 7. The following new section is
added after § 1.402(a)-l to read as
follows:

§ 1.402(a)(5)-1T Rollovers of partial
distributions from qualified trusts and
annuities. (Temporary)

Q -l: Can an employee or the
surviving spouse of a deceased
employee roll over to an individual
retirement account or annuity, described
in section 408 (a) or (b), the taxable
portion of a partial distribution from a
qualified trust described in section
401(a), a qualified plan described in
section 403(a), or a tax-sheltered annuity
contract under section 403(b)?
A -l: Yes. For distributions made after
July 18,1984, the taxable portion of a
partial distribution may be rolled over
within 60 days of the distribution to an
individual retirement account or
annuity.
Q-2: Are there special requirements
applicable to rollovers of partial
distributions?
A-2: Yes. Section 402(a)(5)(D)(i)
specifies that no part of a partial
distribution may be rolled over unless
the distribution is equal to at least 50
percent of the balance to the credit of
the employee in the contract or plan
immediately before the distribution, and
the distribution is not one of a series of
periodic payments. For purposes of this
section, the balance to die credit of an
employee does not include any
accumulated deductible employee
contributions (within the meaning of
section 72(o)). In addition, in calculating
the balance to the credit for purposes of
the 50 percent test, qualified plans are
not to be aggregated with other qualified
plans and tax-sheltered annuity
contracts are not to be aggregated with
other tax-sheltered annuity contracts.
Also, in applying the 50 percent test to a
surviving spouse, the balance to the
credit is the maximum amount the
spouse is entitled to receive under the
plan or contract, rather than the total
balance to the credit of the employee.
The rollover of a partial distribution
may result in adverse tax consequences;
see section 402(a)(5)(D) (iii) and (iv).
Q-3: Are there any other requirements
applicable to rollovers of partial
distribution?
A-3: Yes. Section 402(a)(5) (D) (i) (III)
requires the employee to elect, in
conformance with Treasury regulations,
to treat a contribution of a partial
distribution to an IRA as a rollover
contribution. An election is made by
designating, in writing, to the trustee or
issuer of the IRA at the time of the
contribution that the contribution is to
be treated as a rollover contribution.
This requirement of a written
designation to the trustee or issuer of
the IRA is effective for contributions
paid to the trustee or issuer of the IRA
after March 20,1986. For contributions

paid to the trustee or issuer before
March 21,1986, an election is made by
computing the individual’s income tax
liability on the income tax return for the
taxable year in which the distribution
occurs in a manner consistent with not
including the distribution (or portion
thereof) in gross income. Both such
elections are irrevocable, except that an
election made on àn income tax return
filed before March 21,1986 is revocable.
Q-4: Does the election requirement
apply to rollovers of qualified total
distributions or rollover contributions
described in section 402(a) (5) or (7),
403(a)(4), 403(b)(8), 405(d)(3), or 408(d)(3)
to individual retirement accounts and
annuities (IRAs)?
A-4: Yes. No amounts may be treated
as a rollover contribution to an IRA
under section 402(a)(5), 402(a)(7),
403(a)(4), 403(b)(8), 405(d)(3) (as
amended by section 491(c) of the TRA of
1984), or 408(d)(3) unless the
requirements described in Q & A-3 of
this section are satisfied. Thus, once any
portion of a total distribution is
irrevocably designated as a rollover
contribution, such distribution is not
taxable under section 402 or 403 and,
therefore, is not eligible for the special
capital gains and separate tax treatment
under section 402 (a) and (e). Election
requirements for rollover contributions
to IRAs described in this Q &A-4 are
subject to the same effective date rules
set forth in Q &A-3.
Par. 8. The following new section is
added immediately after § 1.404(a)-l:
§ 1.404(a)-1(T) Questions and answers
relating to deductibility of deferred
compensation and deferred benefits for
employees. (Temporary)

Q -l: How does the amendment of
section 404(b) by the Tax Reform Act of
1984 affect the deduction of
contributions or compensation under
section 404(a)?
A -l: As amended by the Tax Reform
Act of 1984, section 404(b) clarifies that
section 404(a) shall govern the deduction
of contributions paid and compensation
paid or incurred by the employer under
a plan, or method or arrangement,
deferring the receipt of compensation or
providing for deferred benefits to
employees, their spouses, or their
dependents. See section 404(b) and
§ 1.404(b)-lT. Section 404 (a) and (d)
requires that such a contribution or
compensation be paid or incurred for
purposes of section 162 or 212 and
satisfy the requirements for deductibility
under either of those sections. However,
notwithstanding the above, section 404
does not apply to contributions paid or
accrued with respect to a “welfare

£ e d e ra l^ e g iste r_ / ^ V o L 51, No. 23 / Tuesday, Febru ary 4, 1986 / R ules and R egulations
benefit fund” (as defined in section
419(e)) after July 18,1984, in taxable
years of employers (and payors) ending
after that date. Also, section 463 shall
govern the deduction of vacation pay by
a taxpayer that has elected the
application of such section. For rules
relating to the deduction of
contributions paid or accured with
respect to a welfare benefit fund, see
section 419, § 1.419-1T and § 1.419A-2T.
For rules relating to the deduction of
vacation pay for which an election is
made under section 463, see § 10.2 of
this chapter and § 1.463-1T.
Par. 9. The following new section is
added after §1.404(a}-8 to read as
follows:

with respect to such a plan, or method
or arrangement. Section 404 (a) and (d)
requires that such a contribution or
compensation be paid or incurred for
purposes of section 162 or 212 and
satisfy the requirements for deductibility
under either of those sections. Thus, for
example, under section 404 (a)(5) and
(b), if otherwise deductible under
section 162 or 212, a contribution paid or
incurred with respect to a nonqualified
plan, or method or arragement,
providing for deferred benefits is
deductible in the taxable year of the
employer in which or with which ends
the taxable year of the employee in
which the amount attributable to the
contribution is includible in the gross
income of the employee (without regarcl
§ 1.404(a)(8)-1T Deductions for plan
to any applicable exclusion under
contributions on behalf of self-employed
Chapter
1, Subtitle A, of the Internal
individuals. (Temporary)
Revenue Code). Section 404 (a) and (d)
Q: How does the amendment to
applies to all compensation and benefit
section 404(a)(8)(D), made by section
plans, or methods or arrangements,
713(d)(6) of the Tax Reform Act of 1984
however denominated, which defer the
(TRA of 1984), affect section
receipt of any amount of compensation
404(a)(8)(C)?
or benefit, including fees or other
A: In applying the rules of section
payments. Thus, a limited partnership
404(a)(8)(C), the Service will treat the
(using the accrual method of accounting)
amendment to section 404(a)(8)(D) as
may not accrue deductions for a fee
also having been made to section
owed to an unrelated person (using the
404(a)(8)(C), pending enactment of
cash method of accounting) who
technical corrections to TRA of 1984.
performs services for the partnership
The effect of treating the amendment as
until the partnership taxable year in
having also been made to section
which or within which ends the taxable
404(a)(8)(C) is to increase the amount of
year of the service provider in which the
contributions on behalf of a selffee is included in income. However,
employed individual that will be treated
notwithstanding the above, section 404
as satisfying section 162 or 212.
does not apply to contributions paid or
Generally, therefore, a contribution on
accrued with respect to a “welfare
behalf of a self-employed individual is
benefit fund” (as defined in section
treated as satisfying section 162 or 212 if
419(e)) after July 18,1984, in taxable
it is not in excess of the individual’s
years of employers (and payors) ending
earned income for the year, determined
after that date. Also, section 463 shall
without regard to the deduction allowed
govern the deduction of vacation pay by
by section 404 for the self-employed
a taxpayer that has elected the
individual’s contribution. ~
application of such section. For rules
Par. 10. The following new section is
relating to the deduction of
added immediately after § 1.404(b)-l:
contributions paid or accrued with
respect to a welfare benefit fund, see
§ I.404(b)-1T Method or arrangement of
section 419, § 1.419-T and § 1.419A-2T.
contributions, etc., deferring the receipt of
For rules relating to the deduction of
compensation or providing for deferred
vacation pay for which an election is
benefits. (Temporary)
made under section 463, see § 10.2 of
Q -l: As amended by the Tax Reform
this chapter and § 1.463-1T.
Act of 1984, what does section 404(b) of
Q-2: When does a plan, or method or
the Internal Revenue Code provide?
arrangement, defer the receipt of
A -l: As amended, section 404(b)
compensation or benefits for purposes of
clarifies that any plan, or method or
section 404 (a), (b), and (d)?
arrangement, deferring the receipt of
A-2: (a) For purposes of section 404
compensation or providing for deferred
(a), (b), and (d), a plan, or method or
benefits (other than compensation) is to
arrangement, defers the receipt of
be treated as a plan deferring the receipt
compensation or benefits to the extent it
of compensation for purposes of section
is one under which an employee
404 (a) and (d). Accordingly, section 404
receives compensation or benefits more
(a) and (d) (in the case of employees and than a brief period of time after the end
nonemployees; respectively) shall
of the employer’s taxable year in which
govern the deduction of contributions
the services creating the right to such
paid or compensation paid or incurred
compensation or benefits are performed.

4321

The determination of whether a plan, or
method or arrangement, defers the
receipts of compensation or benefits is
made separately with respect to each
employee and each amount of
compensation or benefit. Compensation
or benefits received by an employee’s
spouse or dependent or any other
person, but taxable to the employee, are
treated as received by the employee for
purposes of section 404. An employee is
determined to receive compensation or
benefits within or beyond a brief period
of time after the end of the employer’s
taxable year under the rules provided in
this Q&A. For the treatment of expenses
with respect to transactions between
related taxpayers, see section 267.
(b)(1) A plan, or method or
arrangement, shall be presumed to be
one deferring the receipt of
compensation for more than a brief
period of time after the end of an
employer’s taxable year to the extent
that compensation is received after the
15th day of the 3rd calendar month after
the end of the employer’s taxable year
in which the related services are
rendered (“the 2Vfe month period”). Thus,
'for example, salary under an
employment contract or a bonus under a
year-end bonus declaration is presumed
to be paid under a plan, or method or
arrangement, deferring the receipt of
compensation, to the extent that the
salary or bonus is received beyond the
applicable 2 V2 month period. Further,
salary or a year-end bonus received
beyond the applicable 2 V2 month period
by one employee shall be presumed to
constitute payment under a plan, or
method or arrangement, deferring the
receipt of compensation for such
employee even though salary or bonus
payments to all other employees are not
similarly treated because they are
received within the 2 Vz month period.
Benefits are "deferred benefits” if,
assuming the benefits were cash
compensation, such benefits would be
considered deferred compensation.
Thus, a plan, or plan, or method or
arrangement, shall be presumed to be
one providing for deferred benefits to
the extent benefits for services are
received by an employee after the 2 V2
month period following the end of the
employer’s taxable year in which the
related services are rendered.
(2)
The taxpayer may rebut the
presumption established under the
previous subparagraph with respect to
an amount of compensation or benefits
only by setting forth facts and
circumstances the preponderance of
which demonstrates that it was
impracticable, either administratively or
economically, to avoid the deferral of

4322

Fed eral R eg ister / V ol. 51, No. 23 / Tuesd ay, F ebru ary 4, 1986 / R ules and R egulations

the receipt by an employee of the
amount of compensation or benefits
beyond the applicable 2Vfe month period
and that, as of the end of the employer’s
taxable year such impracticability was
unforeseeable. For example, the
presumption may be rebutted with
respect to an amount of compensation to
the extent that receipt of such amount is
deferred beyond the applicable ZV2
month period (i) either because the
funds of the employer were not
sufficient to make the payment within
the 2 V2 month period without
jeopardizing the solvency of the
employer or because it was not
•reasonably possible to determine within
the 2 V2 month period whether payment
of such amount was to be made, and (ii)
the circumstance causing the deferral
described in (i) was unforeseeable as of
the close of the employer’s taxable year.
Thus, the presumption with respect to
the receipt of an amount of
compensation or benefit is not rebutted
to the extent it was foreseeable, as of
the end of the employer’s taxable year,
that the amount would be received after
the applicable 2Vfe month period. For
example, if, as of the end of the .
employer’s taxable year, it is
foreseeable that calculation of a yearend bonus to be paid to an employee
under a given formula will not be
completed and thus the bonus will not
be received (and is in fact not received)
by the end of the applicable 2 V2 month
period, the presumption that thè bonus
is deferred compensation is not
rebutted.
(c) A plan, or method or arrangement,
shall not be considered as deferring the
receipt of compensation or benefits for
more than a brief period of time after the
end of the employer’s taxable year to
the extent that compensation or benefits
are received by the employee on or
before the end of the applicable 2 V2
month period. Thus, for example, salary
under an employment contract or a
bonus under a year-end bonus
declaration is not considered paid.under
a plan, or method or arrangement,
deferring the receipt of compensation to
the extent that such salary or bonus is
received by the employee on or before
. the end of the applicable 2 V2 month
period.
(d) Solely for purposes of applying the
rules of paragraphs (b) and (c) of this
*
Q&A, in the case of an employer’s
taxable year ending on or after July 18,
1984, and on or before March 21,1986,
compensation or benefits that relate to
services rendered in such taxable year
shall be deemed to have been received
within the applicable 2 V2 month period
if such receipt actually occurs after such

2 V2

month period but on or before
March 21,1986.
Q-3: When does section 404(b), as
amended by the Tax Reform Act of 1984,
become effective?
A-3: With the exceptions discussed
below, section 404(b), as amended, and
the rules under Q&A-2 are effective
with respect to amounts paid or incurred
after July 18,1984, in taxable years of
employers (and payors) ending after that
date. In the case of an extended
vacation pay plan maintained pursuant
to a collective bargaining agreement (a)
between employee representatives and
one or more employers, and (b) in effect
on June 22,1984, section 404(b) is not
effective before the date on which such
collective bargaining agreement
terminates (determined without regard
to any extension thereof agreed to after
June 22,1984). For purposes of the
preceding sentence, 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 under section 512 of the Tax
Reform Act of 1984 shall not be treated
as a termination of such collective
bargaining agreement. For purposes of
this section, an "extended vacation pay
plan” is one under which covered
employees gradually over a specified
period of years earn the right to
additional vacation benefits, no part of
which, under the terms of the plan, can
be taken until the end of the specified
period.
Par. 11. Section 1.404(d)-l is removed
and the following new section is added
in its place:
§ 1.4Q4(d)-1T Questions and answers
relating to deductibility of deferred
compensation and deferred benefits for
independent contractors. (Temporary)

Q -l: How does the amendment of
section 404(b) by the Tax Reform Act of
1984 affect the deduction of
contributions or compensation under
section 404(d)?
A -l: As amended by the Tax Reform
Act of 1984, section 404(b) clarifies that
section 404(d) shall govern the
deduction of contributions paid and
compensation paid or incurred by a
payor under a plan, or method or
arrangement, deferring the receipt of
compensation or providing for deferred
benefits for service providers with
respect to which there is no employeremployee relationship. In such a case,
section 404 (a) and (b) and the
regulations thereunder apply as if the
person providing the services were the
employee and the person to whom the
services are provided were the
employer. Section 404(a) requires that

such a contribution or compensation be
paid or incurred for purposes of section
162 or 212 and satisfy the requirements
for deductibility under either of those
sections. However, notwithstanding the
above, section 404 does not apply to
contributions paid or accrued with
respect to a "welfare benefit fund” (as
defined in section 419(e)) after June 18,
1984, in taxable years of employers (and
payors) ending after that date. Also,
section 463 shall govern the deduction of
vacation pay by a taxpayer that has
elected under such section. For rules
relating to the deduction of
contributions paid or accrued with
respect to a welfare benefit fund, see
section 419, § 1.419-1T and § 1.419A-2T.
For rules relating to the deduction of
vacation pay for which an election is
made under section 463, see § 10.2 of
this chapter and § 1.463-1T.
Par. 12. The following new section is
added immediately after § 1.404(e)-lA:
§ 1.404(k)-1T Questions and answers
relating to the deductibility of certain
dividend distributions. (Temporary)

Q -l: What does section 404(k)
provide?
A -l: Section 404(k) allows a
corporation a deduction for dividends
actually paid in accordance with section
404(k)(2) with respect to stock of such
corporation held by an employee stock
ownership plan (as defined in section
4975(e)(7)) maintained by the
corporation (or by any other corporation
that is a member of a “controlled group
of corporations” within the meaning of
section 409(1) (4) that includes the
corporation), but only if such dividends
may be immediately distributed under
the terms of the plan and all of the
applicable qualification and distribution
rules. The deduction is allowed under
section 404(k) for the taxable year of the
corporation during which the dividends
are received by the participants.
Q-2: Is the deductibility of dividends
paid to plan participants under section
404(k) affected by a plan provision
which permits participants to elect to
receive or not receive payment of
dividends?
A-2: No. Dividends actually paid in
cash to plan participants in accordance
with section 404(k) are. deductible under
section 404(k) despite such an election
provision.
Q-3: Are dividends paid in cash
directly to plan participants by the
corporation and dividends paid to the
plan and then distributed in cash to plan
participants under section 404(k) treated
as distributions under the plan holding
stock to which the dividends relate for
purposes of sections 72, 401 and 402?

F ed eral R egister / VoL 51, No. 23 / Tu esd ay, F ebru ary 4, 1986 / R ules and R egulations
A-3: Generally, yes. However, a
deductible dividend under section 404(k)
is treated for purposes of section 72 as
paid under a contract separate from any
other contract that is part of the plan.
Thus, a deductible dividend is treated as
a plan distribution and as paid under a
separate contract providing only for
payment of deductible dividends.
Therefore, a deductible dividend under
section 404{k) is a taxable plan
distribution even though an employee
has unrecovered employee contributions
or basis in the plan.
Par. 13. A new §1.419-1T is added
immediately following § 1.417(e)-lT to
read as follows:
§ 1.419-1T Treatment of welfare benefit
funds. (Temporary)

Q -l: What does section 419 of the
Internal Revenue Code provide?
A -l: Section 419 prescribes limitations
upon deductions for contributions paid
or accrued with respect to a welfare
benefit fund. Under section 419 (a) and
(b), an employer’s contributions to a
welfare benefit fund are not deductible
under section 162 (relating to trade or
business expenses) or section 212
(relating to expenses for production of
income) but, if the requirements of
section 162 or 212 are otherwise met, are
deductible under section 419 for the
taxable year of the employer in which
paid to the extent of the welfare benefit
fund’s qualified cost (within the meaning
of section 419(c)(1)) for the taxable year
of the fund that relates to such taxable
year of the employer. Under section
419(g), section 419 and this section shall
also apply to the deduction by a
taxpayer of contributions with respect
to a fund that would be a welfare
benefit fund but for the fact that there is
no employer-employee relationship
between the person providing the
services and the person for whom the
services are provided. Contributions
paid to a welfare benefit fund after
section 419 becomes effective with
respect to such contributions are
deemed to relate, first, to amounts
accrued and deducted (but not paid) by
the employer with respect to such fund
before section 419 becomes effective
with respect to such contributions and
thus shall not be treated as satisfying
the payment requirement of section 419.
See paragraph (b) of Q&A-5 for special
deduction limits applicable to employer
contributions to welfare benefit funds
with excess reserves.
Q^-2: When do the deduction rules of
section 419, as enacted by the Tax
Reform Act of 1984, become effective?
A-2: (a) Section 419 generally applies
to contributions paid or accrued with
respect to a welfare benefit fund after

December 31,1985, in taxable years of
employers ending after that date. See
Q&A-9 of this regulation for special
rules relating to the deduction limit for
the first taxable year of a fiscal year
employer ending after December 31,
1985.
(b) In the case of a welfare benefit
fund which is part of a plan maintained
pursuant to one or more collective
bargaining agreements (1) between
employee representatives and one or
more employers, and (2) that are in
effect on July 1,1985 (or ratified on or
before such date), sections 419 shall not
apply to contributions paid or accrued in
taxable years beginning before the
termination of the last of the collective
bargaining agreements pursuant to
which the plan is maintained
(determined without regard to any
extension thereof agreed to after July 1,
1985). For purposes of the preceding
sentence, 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 under section
511 of the Tax Reform Act of 1984 (i.e.,
requirements under sections 419, 419A,
512(a)(3)(E), and 4976) shall not be
treated as a termination of such
collective bargaining agreement. See
§ 1.419A-2T for special rules relating to
the application of section 419 to
collectively bargained welfare benefit
funds.
(c) Notwithstanding paragraphs (a)
and (b), section 419 applies to any
contribution of a facility to a welfare
benefit fund (or other contribution, such
as cash, which is used to acquire,
construct, or improve such a facility)
after June 22,1984, unless such facility is
placed in service by the fund before
January 1,1987, and either (1) is
acquired or improved by the fund (or
contributed to the fund) pursuant to a
binding contract in effect on June 22,
1984, and at all times thereafter, or (2)
the construction of which was begun by
or for the welfare benefit fund before
June 22,1984. See Q & A -ll of this
regulation for special rules relating to
the application of section 419 to the
contribution of a facility to a welfare
benefit fund (and to the contribution of
other amounts, such as cash, used to
acquire, construct, or improve such a
facility) before section 419 generally
becomes effective with respect to
contributions to the fund.
Q-3. What is a “welfare benefit fund”
under section 419?
A-3. (a) A "welfare benefit fund” is
any fund which is part of a plan, or
method or arrangement, of an employer
and through which the employer
provides welfare benefits to employees

4323

or their beneficiaries. For purposes of
this section, the term “welfare benefit”
includes any benefit other than a benefit
with respect to which the employer’s
deduction is governed by section 83(h),
section 404 (determined without regard
to section 404(b)(2)), section 404A, or
section 463.
(b) Under section 419(e)(3) (A) and
(B), the term “fund” includes any
organization described in section 501(c)
(7). (9), (17) or (20), and any trust,
corporation, or other organization not
exempt from tax imposed by chapter 1,
subtitle A, of the Internal Revenue Code.
Thus, a taxable trust or taxable
corporation that is maintained for the
purpose of providing welfare benefits to
an employer’s employees is a “welfare
benefit fund.”
(c) Section 419(e)(3)(C) also provides
that the term “fund” includes, to the
extent provided in regulations, any
account held for an employer by any
person. Pending the issuance of further
guidance, only the following accounts,
and arrangements that effectively
constitute accounts, as described below,
are “funds” within section 419(e)(3)(C).
A retired lives reserve or a premium
stabilization reserve maintained by an
insurance company is a “fund,” or part
of a “fund,” if it is maintained for a
particular employer and the employer
has the right to have any amount in the
reserve applied against its future years’
benefit costs or insurance premiums.
Also, if an employer makes a payment
to an insurance company under an
“administrative services only”
arrangement with respect to which the
life insurance company maintains a
separate account to provide benefits,
then the arrangement would be
considered to be a “fund.” Finally, an
insurance or premium arrangement
between an employer and an insurance
company is a “fund” if, under the
arrangement, the employer has a right to
a refund, credit, or additional benefits
(including upon termination of the
arrangement) based on the benefit or
claims experience, administrative cost
experience, or investment experience
attributable to such employer for such
year or years. However, an arrangement
with an insurance company is not a
"fund” under the previous sentence
merely because the employer’s premium
for a renewal year reflects the
employer’s own experience for an
earlier year if the arrangement is both
cancellable by the insurance company
and cancellable by the employer as of
the end of any policy year and, upon
cancellation by either of the parties,
neither of the parties can receive a
refund or additional amounts or benefits

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and neither of the parties can incur a
residual liability beyond the end of the
policy year (other than, in the case of
the insurer, to provide benefits with
respect to claims incurred before
cancellation). The determination
whether either of the parties can receive
a refund or additional amounts or
benefits or can incur a residual liability
upon cancellation of an arrangement
will be made by examining both the
contractual rights and obligations of the
parties under the arrangement and the
actual practice of the insurance
company (and other insurance
companies) with respect to other
employers upon cancellation of similar
arrangements. Similarly, a disability
income policy does not constitute a
“fund” under the preceding provisions
merely because, under the policy, an
employer pays an annual premium so
that employees who became disabled in
such year may receive benefit payments
for the duration of the disability.
Q-4: For purposes of determining the
section 419 limit on the employer’s
deduction for contributions to the fund
for a taxable year of the employer,
which taxable year of the welfare
benefit fund is related to the taxable
year of the employer?
A-4: The amount of an employer’s
deduction for contributions to a welfare
benefit fund for a taxable year of the
employer is limited to the “qualified
cost” of the welfare benefit fund for the
taxable year of the fund that is related
to such taxable year of the employer.
The taxable year of the welfare benefit
fund that ends with or within the
taxable year of the employer is the
taxable year of the fund that is related
to the taxable year of the employer.
Thus, for example, if an employer has a
calendar taxable year and it makes
contributions to a fund having a taxable
year ending June 30, the “qualified cost”
of the fund for the taxable year of the
fund ending on June 30,1986, applies to
limit the employer’s deduction for
contributions to the fund in the
employer’s 1986 taxable year. In the
case of employer contributions paid
directly to an account or arrangement
with an insurance company that is
treated as a welfare benefit fund for the
purposes of section 419, the policy year
will be treated as the taxable year of the
fund. See Q&A-7 of this regulation for
special section 419 rules relating to the
coordination of taxable years for the
taxable year of the employer in which a
welfare benefit fund is established and
for the next following taxable year of
the employer.

Q-5: What is the ‘‘qualified cost” of a
welfare benefit fund for a taxable year
under section 419?
A-5: (a) Under section 419(c), the
“qualified cost” of a welfare benefit
fund for a taxable year of the fund is the
sum of: (1) The “qualified direct cost” of
such fund for such taxable year of the
fund, and (2) the amount that may be
added to the qualified asset account for
such taxable year of the fund to the
extent that such addition does not result
in a total amount of such account as of
the end of such taxable year of the fund
that exceeds the applicable account
limit under section 419A(c). However, in
calculating the qualified cost of a
welfare benefit fund for a taxable year
of the fund, this sum is reduced by the
fund’s “after-tax income” (as defined in
section 419(c)(4)) for such taxable year
of the fund. Also, the qualified cost of a
welfare benefit fund is reduced further
under the provisions of paragraph (b) of
this Q&A.
(b)(1) Pursuant to section 419A(i),
notwithstanding section 419 and § 1.4191T, contributions to a welfare benefit
fund during any taxable year of theemployer beginning after December 31,
1985, shall not be deductible for such
taxable year to the extent that such
contributions result in the total amount
in the fund as of the end of the last
taxable year of the fund ending with or
within such taxable year of the
employer exceeding the account limit
applicable to Such taxable year of the
fund (as adjusted under section
419A(f)(7)). Solely for purposes of this
subparagraph, (i) contributions paid to a
welfare benefit fund during the taxable
year of the employer but after the end of
the last taxable year of the fund that
relates to such taxable year of the
employer, and (ii) contributions accrued
with respect to a welfare benefit fund
during the taxable year of the employer
or during any prior taxable year of the
employer (but not actually paid to such
fund on or before the end of a taxable
year of the employer) and deducted by
the employer for such or any prior
taxable year of the employer, shall be
treated as an amount in the fund as of
the end of the last taxable year of the
fund that relates to the taxable year of
the employer. Contributions that are not
deductible under this subparagraph are
in excess of the qualified cost of the
welfare benefit fund for the taxable year
of the fund that relates to the taxable
year of the employer and thus are
treated as contributed to the fund on the
first day of the employer’s next taxable
year.
(2)
Paragraph (b)(1) of this section
shall not apply to contributions with

respect to a Collectively bargained
welfare benefit fund within the meaning
of § 1.419A-2T. In addition, paragraph
(b)(1) of this section shall not apply to
any taxable year of an employer
beginning after the end of the earlier of
the following taxable years: (i) the first
taxable year of the employer beginning
after December 31,1985, for which the
employer’s deduction limit under section
419 (after the application of paragraph
(b)(1) of this section) is at least equal to
the qualified direct cost of the fund for
the taxable year (or years) of the fund
that relates to such first taxable year of
the employer, or (ii) the first taxable
year of the employer beginning after
December 31,1985, with or within which
ends the first taxable year of the fund
with respect to which the total amount
in the fund as of the end of such taxable
year of the fund does not exceed the
account limit for such taxable year of
the fund (as adjusted under section
419A(f)(7)).
(3)
For example, assume an employer
with a taxable year ending June 30 and a
welfare benefit fund with a taxable year
ending January 31. During its taxable
year ending June 30,1987, and on or
before January 31,1987, the employer
contributes $250,000 to the fund, and
during the remaining portion of its
taxable year ending June 30,1987, the
employer contributes $200,000. The
qualified direct cost of the fund for its
taxable year ending January 31,1987, is
$500,000, the account limit applicable to
such taxable year (after the adjustment
under section 419A(f)(7)) is $750,000, and
the total amount in the fund as of
January 31,1987, is $800,000. Before the
application of this paragraph, the
employer may deduct the entire $450,000
contribution for its taxable year ending
June 30,1987. However, under this
paragraph, the excess of (i) the sum of
the total amount in the fund as of
January 31,1987 ($800,000), and
employer contributions to the fund after
January 31,1987, and on or before June
30,1987 ($200,000), over (ii) the account
limit applicable to the fund for its
taxable year ending January 31,1987
($750,000), is $250,00d. Thus, under this
paragraph, only $200,000 of the $450,000
contribution the employer made during
its taxable year ending June 30,1987, is
deductible for such taxable year. If the
excess were $450,000 or greater, no
portion of the $450,000 contribution
would be deductible by the employer for
its taxable year ending June 30,1987.
Such nondeductible contributions are in
excess of the fund’s qualified cost for
the taxable year related to the
employer’s taxable year and thus are

F ed eral R egister / Vol. 51, No. 23 / Tuesday, F ebru ary 4, 1986 / Rutes and R egulations
deemed to be contributed on the first
day of the employer’s next taxable year.
(c)
See Q&A-7 of this regulation for
special rules relating to the calculation
of the qualified cost of a welfare benefit
fund for an Initial Fund Year and an
Overlap Fund Year (as defined in Q&A7). See Q & A -ll of this regulation for
special rules relating to the application
of section 419 to the contribution to a
welfare benefit fund of a facility (and to
the contribution of other amounts, such
as cash, used to acquire, construct, or
improve a facility) before section 419
generally becomes effective with respect
to contributions to the fund. See
§ 1.419A-2T for special rules relating to
certain collectively bargained welfare
benefit funds.
Q-6: What is the “qualified direct
cost” of a welfare benefit fund under
section 419(c)(3)?
A-6: (a) Under section 419(c)(3), the
“qualified direct cost” of a welfare
benefit fund for any taxable year of the
fund is the aggregate amount which
would have been allowable as a
deduction to the employer for benefits
provided by such fund during such year
(including insurance coverage for such
year) if (1) such benefits were provided
directly by the employer and (2) the
employer used the cash receipts and
disbursements method of accounting
and had the same taxable year as the
fund. In this regard, a benefit is treated
as provided when such benefit would be
includible in the gross income of the
employee if provided directly by the
employer (or would be so includible but
for a provision of chapter 1, subtitle A,
of the Internal Revenue Code excluding
it from gross income). Thus, for example,
if a calendar year welfare benefit fund
pays an insurance company in July 1986
the full premium for coverage of its
current employees under a term health
insurance policy for the twelve month
period ending June 30,1987, the
insurance coverage will be treated as
provided by the fund over such twelve
month period. Accordingly, only the
portion of the premium for coverage
during 1986 will be treated as a
“qualified direct cost” of the fund for
1986; the remaining portion of the
premium will be treated as a “qualified
direct cost” of the fund for 1987. The
“qualified direct cost” for a taxable year
of the fund includes the administrative
expenses incurred by the welfare benefit
fund in delivering the benefits for such
year. •
(b)
If, in a taxable year of a welfare
benefit fund, the fund holds an asset
with useful life extending substantially
beyond the end of the taxable year (e.g.,
buildings, vehicles, tangible assets, and
licenses) and, for such taxable year of

the fund, the asset is used in the
provision of welfare benefits to
employees, the “qualified direct cost” of
the fund for such taxable year of the
fund includes the amount that would
have been allowable to the employer as
a deduction under the applicable Code
provisions (e.g., sections 168 and 179)
with respect to the portion of the asset
used in the provision of welfare benefits
for such year if the employer had
acquired and placed in service the asset
at the same time the fund received and
placed in service the asset, and the
employer had the same taxable year as
the fund. This rule applies regardless of
whether the fund received the asset
through a contribution of the asset by
the employer or through an acquisition
or the construction by the fund of the
asset. For example, assume that in 1986
a calendar year employer contributes
recovery property under section 168(c)
to a welfare benefit fund with a
calendar taxable year to be used in the
provision of welfare benefits. The
employer will be treated as having sold
the property in such year and thus will
recognize gain to the extent that the fair
market value of the property exceeds
the employer’s adjusted basis in the
property. In this regard, see section
1239(d). Also, the employer will be
treated as having made a contribution to
the fund in such year equal to the fair
market value of the property. Finally,
the qualified direct cost of the welfare
benefit fund for 1986 will include the
amount that the employer could have
deducted in 1986 with respect to the
portion of the property used in the
provision of welfare benefits if the
employer had acquired the property in
1986 and had placed the property in
service when the fund actually placed
the property in service. Similarly, for
example, assume that in 1986 a welfare
bendfit fund purchases and places in
service a facility to be used in the
provision of welfare benefits. The
qualified direct cost of the fund for 1986
will include the amount that the
employer could have deducted with
respect to such facility if the employer
had purchased and placed in service the
facility at the same time that the fund
purchased and placed in service the
facility.
(c)
The qualified direct cost of a
welfare benefit fund does not include
expenditures by the fund that would not
have been deductible if they had been
made directly by the employer. For
example, a fund’s purchase of land in a
year for an employee recreational
facility will not be treated as a qualified
direct cost because, if made directly by
the employer, the purchase would not

4325

have been deductible under section 263.
See also sections 264 and 274.
(d) Notwithstanding the preceding
paragraphs, the qualified direct cost of a
welfare benefit fund with respect to that
portion of a child care facility used in
the provision of welfare benefits for a
year will include the amount that would
have been allowable to the employer as
a deduction for the year under a
straight-line depreciation schedule for a
period of 60 months beginning with the
month in which the facility is placed in
service under rules similar to those
provided for section 188 property under
§ 1.188-l(a). For purposes of this
section, a “child care facility” is tangible
property of a character subject to
depreciation that is located in the
United States and specifically used as
an integral part of a “qualified child care
center facility” within the meaning of
§ 1.188—1(d)(4).
(e) See Q&A-7 of this regulation for
special section 419 rules relating to the
calculation of the qualified direct cost of
a welfare benefit fund for an Initial Fund
Year and an Overlap Fund Year (as
defined in Q&A-7). See Q & A -ll of this
regulation for special rules relating to
the contribution to a welfare benefit
fund of a facility (and to the contribution
of other amounts, such as cash, used to
acquire, construct, or improve a facility)
before section 419 generally becomes
effective with respect to contributions to
the fund.
Q-7: What special rules apply for
purposes of determining the section 419
limit on the employer’s deduction for
contributions to a welfare benefit fund
for the taxable year of the employer in
which the fund is established and for the
next following taxable year of the
employer?
A-7: (a) If the taxable year of a
welfare benefit fund is the same as the
taxable year of the employer, there are
no special rules that apply for purposes
of determining the section 419 limit on
an employer’s deduction for
contributions to the fund for either the
taxable year of the employer in which
the fund is established or the next
following taxable year of the employer.
However, if the taxable year of a
welfare benefit fund is different from the
taxable year of the employer, the
general section 419 rules are modified
by the special rules set forth below for
purposes of determining the section 419
deduction limit for the taxable year of
the employer in which a fund is
established and for the next following
taxable year of the employer.
(b) If a welfare benefit fund is
established after December 31,1985,
during a taxable year of an employer

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and either (i) the first taxable year of the
fund ends after the close of such taxable
year of the employer, or (ii) the first
taxable year of the fund is six months or
less and ends before the close of such
taxable year of the employer and the
second taxable year of the fund begins
before and ends after the close of such
taxable year of the employer, the
taxable year of the fund that contains
the closing day of such taxable year of
the employer will be treated as an
“Overlap Fund Year.” For purposes of
determining the limit on the employer’s
deduction for contributions to a welfare
benefit fund for the taxable year of the
employer in which the fund was
established, the period between the
beginning of the fund’s Overlap Fund
Year and the end of the employer’s
taxable year in which the Overlap Fund
Year began will be treated as a taxable
year of the fund (“Initial Fund Year”).
(c) The qualified cost of a welfare
benefit fund for its Initial Fund Year will
be equal to the qualified direct cost of
the fund for such Initial Fund Year. The
qualified cost of a fund for its Overlap
Fund Year will be determined under the
general rules of Q&A-5 of this regulation
and section 419(c), with the exception
that such qualfied cost will be reduced
by die employer contributions made
during the Initial Fund Year and
deductible by the employer for the
taxable year of the employer in which
the Overlap Fund Year of the fund
begins.
(d) Assume that an employer with a
calendar taxable year establishes on
July 1,1986, a welfare benefit fund with
a taxable year ending on June 30. The
fund’s first taxable year from July 1,
1986, to June 30,1987, is an Overlap
Fund Year. The employer contributes
$1,000 to the fund during its taxable year
ending December 31,1986 (i.e., during
the period between July 1,1986, and
December 31,1986, which is also the
Initial Fund Year) and another $1,500 to
the fund during its taxable year ending
December 31,1987. Assume further that
the qualified direct cost of the fund for
the Initial Fund Year is $900 and that the
qualified cost for the Overlap Fund Year
is $2,500 (prior to the reduction required
by paragraph (c) of this Q&A). Under the
special rules of paragraphs (b) and (c),
the employer may deduct $900 for its
taxable year ending on December 31,
1986, and $1,600 for its taxable year
ending on December 31,1987. If the
qualified direct cost of the fund for the
Initial Fund Year had been $1,050 and
the qualified cost for the Overlap Fund
Year had been $2,500 (prior to the
reduction required by paragraph (c) of
this Q&A), the employer’s deduction for

its taxable year ending December 31,
1986, would have been $1,000 and its
deduction for its taxable year ending
December 31,1987, would have been
$1,500.
(e)
Assume that an employer with a
calendar taxable year establishes on
March 1,1986, a welfare benefit fund
with a taxable year ending June 30.
Thus, the fund has a short first taxable
year ending June 30,1986, an Overlap
Fund Year from July 1,1986, until June
30,1987, and an ongoing June 30 taxable
year. The employer contributes $1,750 to
the fund during the employer’s taxable
year ending December 31,1986—$750
during the short firstlaxable year of the
fund and $1,000 during the Initial Fund
Year (i.e., the period between July 1,
1986, and December 31,1986)—and
$1,500 to the fund during its taxable year
ending December 31,1987. Assume that
the qualified cost of the fund for the
short first taxable year of the fund is
$800, the qualified direct cost for the
Initial Fund Year is $900, and the
qualified cost for the Overlap Fund Year
is $2,500 (prior to the reduction required
by paragraph (c) of this Q&A). Under the
special rules of paragraphs (b) and (c),
the employer may deduct $1,700 for its
taxable year ending December 31,1986,
and $1,550 for its taxable year ending
December 31,1987.
Q-8: How does section 419 treat an
employer's contribution with respect to
a welfare benefit fund in excess of the
applicable deduction limit for a taxable
year of the employer?
A-8: (a) If an employer makes
contributions to a welfare benefit fund
in a taxable year of the employer and
such contributions (when combined with
prior contributions that are deemed
under the rule of this Q&A and section
419(d) to have been made in such
taxable year) exceed the section 419
deduction limit for such taxable year of
the employer, the excess amounts are
deemed to be contributed to the fund on
the first day of the next taxable year of
the employer. Such deemed
contributions are combined with
amounts actually contributed by the
employer to the fund during the next
taxable year and may be deductible for
such year, subject to the otherwise
applicable section 419 deduction limit
for such year.
(b)
Contributions to a welfare benefit
fund on or before December 31,1985,
that were not deductible by the
employer for any taxable year of the
employer ending on or before December
31,1985, or for the first taxable year of
the employer ending after December 31,
1985, as pre-1986 contributions (see
Q&A-9 of this regulation) are deemed to

be contributed to the fund on January 1,
1986, However, see Q & A -ll of this
regulation for special rules relating to
the contribution to a welfare benefit
fund of amounts (such as cash) used to
acquire, construct, or improve a facility
before section 419 generally becomes
effective with respect to contributions to
the fund. Generally, such contributions
(to the extent that they were made after
June 22,1984 and on or before December
31,1985) are treated as nondeductible
pre-1986 contributions and are deemed
to be contributed in the form of a facility
at the same time as when the facility is
placed in service by the fund.
Q-9: How does an employer with a
fiscal taxable year calculate its
deduction limit for contributions with
respect to a welfare benefit fund for the
first taxable year of the employer ending
after December 31,1985?
A-9: (a) If the first taxable year of an
employer ending after December 31,
1985 (or, if applicable under paragraph
(b) of Q&A-2 of this section, the first
taxable year of an employer beginning
after termination of the last of the
collective bargaining agreements
pursuant to which the fund is
maintained) is a fiscal year, the
employer’s deduction for such taxable
year for contributions to a welfare
benefit fund that is not a collectively
bargained welfare benefit fund under
§ 1.419A-2T is limited to the greater of
the following two amounts: (1) The
contributions paid to the fund during
such first taxable year up to the
qualified cost of the welfare benefit fund
for the taxable year of the fund that
relates to such taxable year of the
employer, and (2) the contributions paid
to the fund during the 1985 portion of
such first taxable year of the employer
(“the pre-1986 contributions”) to the
extent that such pre-1986 contributions
are deductible under the rules governing
the deduction of such contributions
before section 419 generally becomes
effective (including the rules set forth in
Q&A-10 of this regulation, modified for
purposes of this Q&A-9 by substituting
“December 31,1986” for “December 31,
1985” in paragraph (c)). See Q & A -ll of
this regulation for special rules relating
to the contribution to a welfare benefit
fund of a facility (and to the contribution
of other amounts, such as cash, used to
acquire, construct, or improve such a
facility) before section 419 generally
becomes effective with respect to
contributions to such fund.
(b)
For example, assume that an
employer with a taxable year ending
June 30, contributes to a welfare benefit
fund with a taxable year ending January
31. This employer contributes $1,000 to

F ed eral R egister / V ol. 51, No. 23 / Tu esd ay, F ebru ary 4, 1986 / R ules and R egulations
the fund between July 1,1985, and
December 31,1985, and an additional
$500 to the fund between January 1,
1986, and June 30,1986. Assume further
that the qualified direct cost of the fund
for the taxable year of the fund ending
January 31,1986, is $500 and that the
qualified cost for such taxable year is
$800. Under the deduction rule set forth
above, the employer’s deduction for its
taxable year ending June 30,1986, is the
greater of two amounts: (1) The
contributions made during such full
taxable year ($1,500] up to the qualifed
cost of the fund with respect to such
taxable year ($800), and (2) the pre-1986
contributions ($1,000) to the extent that
such pre-1986 contributions are
deductible under the pre-section 419
rules. In determining the extent to which
the pre-1986 contributions are
deductible under the pre-section 419
rules, thé rules contained in Q&A-10
apply as though December 31,1985, in
paragraph (c) were December 31,1986.
Assuming that only $875 is deductible
under the pre-section 419 rules, because
$875 is greater than $800, this employer
may deduct $875 for its first taxable
year ending after December 31,1985.
This full $875 deduction for 1985 is
deemed to consist entirely of pre-1986
contributions.
Q-10: How do the rules of sections
263,446(b), 461(a), and 461(h) apply in
determining whether contributions with
respect to a welfare benefit fund are
deductible for a taxable year?
A-10: (a) Both before an after the
effective date of section 419 (see Q&A-2
of this regulation), and employer is
allowed a deduction for taxable year for
contributions paid or accrued with
respect to a "welfare benefit fund” (as
defined in Q&A-3 of this regulation and
section 419(e)) only to the extent that
such contributions satisfy the
requirements of section 162 or 212,
These requirements must be satisfied
after the effective date of section 419
because 419 requires that (among other
requirements) contributions to a welfare
benefit fund satisfy the requirements of
section 162 or 212.
(b) Except as provided in paragraphs
(c) and (d), in determinig the extent to
which contributions paid or accrued
with respect to welfare benefit fund
satisfy the requirements of section 162
or 212 for a taxable year (both before
and after section 419 generally becomes
effective with respect to such
contributions), the rules of sections 263,
446(b). 461(a) (including the rules that
relate to the creation of an asset with a
useful life extending substantially
beyond the close of the taxable year),
and 461(h) (to the extent that such

section is effective with respect to such
contributions) are are generally
applicable,
• (c) Notwithstanding paragraph (b),
under the authority of section 7805(b),
the rules of sections 263, 446(b), and
461(a) shall not be applied in
determining the extent to which an
employer’s contribution with respect to
a welfare benefit fund is deductible
under section 162 or 212 with respect to
any taxable year of the employer ending
on or before December 31,1985, to the
extent that, for such taxable year, (1) the
contribution was made pursuant to a
bona fide collective bargaining
agreement requiring fixed and
determinable contributions to a
collectively bargained welfare benefit
fund (as defined in § 1.419A-2T), or (2)
the contribution was not in excess of the
amount deductible under the principles
of Revenue Rulings 69-382,1969-2 C.B.
28; 69-478,1969-2 C.B. 29; and 73-599,
1973-2 C.B. 40, modified as appropriate
for benefits for active employees.
(d) Notwithstanding paragraph (b), in
determining the extent to which
contributions paid or accrued with
respect to a welfare benefit fund are
deductible under section 419, the rules
of sections 263, 446(b), and 461(a) will be
treated as having been satisfied to the
extent that such contributions satisfy
the otherwise applicable rules of section
419. Thus, for example, contributions to
a welfare benefit fund will not fail to be
deductible under section 419 merely
because they create an asset with a
useful life extending substantially
beyoud the close of the taxable year if
such contributions satisfy the otherwise
applicable requirements of section 419.
(e) In determining the extent to which
contributions with respect to a welfare
benefit fund satisfy the requirements of
section 461(h) for any taxable year for
which section 461(h) is effective,
pursuant to the authority under section
461(h)(2), economic performance occurs
as contributions to the welfare benefit
fund are made. Solely for purposes of
section 461(h), in the case of an
employer’s taxable year ending on or
after July 18.1984, and on or before
March 21,1986, contributions made to
the welfare benefit fund after the end of
such taxable year and on or before
March 21,1986 shall be deemed to have
been made on the last day of such
taxable year.
Q - ll: What special section 419 rules
apply to the payment or accrual with
respect to a welfare benefit fund of a
facility (and the payment or accrual of
other amounts, such as cash, used to
acquire, construct, or improve such a
facility)?

4327

A - ll: (a)(1) In the case of an
employer’s payment or accrual with
respect to a welfare benefit fund after
June 22,1984, and on or before
December 31,1985 (or, if applicable
under paragraph (b) of Q&A-2 of this
regulation, before section 419 generally
becomes effective with respect to
contributions to such fund), of a facility,
the rules of section 419, § 1.419-1T, and
§ 1.419A-2T generally apply to
determine the extent to which such
contribution is deductible by the
employer for its taxable year of
contribution. For this purpose, however,
the facility is to be treated as the only
contribution made to the fund and the
qualified cost of the fund for the taxable
year of the fund in which the facility
was contributed is to be equal to the
qualified direct cost directly attributable
to the facility (as determined under
Q&A-6 of this regulation). Also, for this
purpose, the welfare benefit fund to
which the facility was contributed may
not be aggregated with any other fund.
For purposes of this Q&A, "facility”
means any tangible asset with a useful
life extending substantially beyond the
end of the taxable year (e.g., vehicles,
buildings) and any intangible asset (e.g.,
licenses) related to a tangible asset,
whether or not such asset is used in the
provision of welfare benefits. See,
however, paragraph (c) of Q&A-2 oLthis
regulation for a binding contract
exception.
(2)
For example, assume that an
employer and a welfare benefit fund
each has a calendar taxable year and
that, during 1985, the employer
contributes to the fund $200,000 in cash
and a facility with a fair market value of
$100,000. Such facility is used in the
provision jof welfare benefits under the
fund. The employer is treated as having
sold the facility in such year and thus
will recognize gain to the extent that the
fair market value of the facility exceeds
the employer’s adjusted basis in the
facility. In this regard, see section
1239(d). The extent to which the facility
contribution is deductible by the
employer for its 1985 taxable year is
determined as though it were the only
contribution made by the employer to
the fund during such year and the
qualified cost of the fund for the taxable
year of the fund in which the
contribution was made (i.e., the 1985
taxable year) were equal to the amount
that would have been allowable to the
employer as a deduction for such year
under the applicable Code provisions
with respect to the portion of the facility
used in the provision of welfare benefits
for such year if the employer had placed
in service the facility at the time the

4328

Fed eral_R egister / V ol, 51, No. 23 / Tuesday, February 4, 1986 / R ules and R egulations

fund placed in service the facility and if
the employer had the same taxable year
as the fund. If, under these assumptions,
the employer would have been allowed
a $10,000 deduction with respect to the
facility for the 1985 taxable year, the
fund’s qualified cost for its 1985 taxable
year would be only $10,000. Thus, only
$10,000 of the $100,000 facility
contribution would be deductible by the
employer for its 1985 taxable year (i.e.,
the taxable year of the employer with or
within which the applicable taxable
year of the fund ends). However, in
determining the extent to which the
$200,000 in cash is deductible by the
employer for its 1985 taxable year, the
$100,000 facility is not to be disregarded.
Thus, if under the applicable pre-section
419 rules the employer is allowed for
1985 a total deduction of only $175,000,
the employer would be permitted a
deduction for 1985 of $175,000 ($10,000
with respect to the facility and $165,000
of the cash contribution). The
nondeductible portion of the cash
contribution is to be treated as
contributed to the fund on the first day
of the next taxable year of the employer.
If under the applicable pre-section 419
rules the employer were allowed a total
deduction of $300,000 for 1985, the
employer would be permitted a
deduction for 1985 of only $210,000
($10,000 with respect to the facility and
the full $200,000 cash contribution).
(3)
For example, assume that an
employer has a June 30 taxable year and
maintains a welfare benefit fund with a
taxable year ending January 31. During
the 1985 portion of its taxable year
ending June 30,1986, the employer
contributes $50,000 in cash and a facility
with a fair market value of $100,000; and
during the 1986 portion of such taxable
year, the employer contributes another
$75,000 in cash to the fund. The facility
is used in the provision of welfare
benefits under the fund. Under the rules
of Q&A-9 of this regulation, the
employer’s deduction for its June 30,
1986, taxable year is limited to the
greater of the following two amounts: (i)
The contributions paid to the fund
during such taxable year ($225,000) up to
the qualified cost of the fund for the
taxable year of the fund ending January
31,1986, and (ii) the contributions paid
to the fund during the 1985 portion of the
employer’s taxable year ending June 30,
1986 (“the pre-1986 contributions”)
($150,000) to the extent that such pre1986 contributions are deductible under
the rules governing the deduction of
such contributions before section 419 isgenerally effective with respect to the
fund. For purposes of this rule, the
contribution of the facility on or before

December 31,1985, is to be treated as a
pre-1986 contribution and the rules of
section 419 and this Q&A are to be
treated as rules governing the deduction
of such contribution before section 419
generally becomes effective with respect
to the fund. Thus, in determining the
extent to which the facility is deductible
as a pre-1986 contribution under the
rules before section 419 generally
becomes effective, the facility is treated
as the only contribution to the welfare
benefit fund and the qualified cost of
such fund for the taxable year of the
fund in which the facility was
contributed is the amount that would
have been allowable to the employer as
a deduction with respect to the portion
of the facility used in the provision of
welfare benefits if the employer had
placed in service the facility at the same
time that the fund placed in service the
facility and the employer’s taxable year
ended on January 31,1986.
(b)(1) The preceding rules shall also
apply for purposes of determining when
and the extent to which an employer
may deduct contributions or other items
and amounts after June 22,1984 and on
or before December 31,1985 (or, if
applicable under paragraph (b) of Q&A2 of this regulation, before section 419
generally becomes effective with respect
to contributions to the fund) that are not
facilities (e.g., cash contributions) to a
welfare benefit fund that are used by the
fund to acquire, construct, or improve a
facility. The most recent non-facility
contributions made to a welfare benefit
fund before the facility in question is
placed in service by the fund (up to the
fair market value of the facility at such
time) are to be treated as used by the
fund for the acquisition, construction, or
improvement (as the case may be) of
such facility. To the extent that
contributions before such a facility is
placed in service are not at least equal
to the value of the facility at such time,
contributions after such date (up to the
value of the facility at the time it is
placed in service) are treated as used for
acquisition, construction, or
improvement of the facility. Such nonfacility contributions, to the extent that
they were made after June 22,1984, and
on or before December 31,1985 (or, if
applicable under paragraph (b) of Q&A2 of this regulation, before section 419
generally becomes effective with respect
to contributions to the fund), are not
deductible by the employer as nonfacility contributions for any year.
Instead, the employer is permitted a
deduction with respect to such
contributions only under the rules of this
Q&A as though the employer had
contributed a facility to the fund at the

same time that the fund placed in
service the facility in question and, at
such time, the facility had a fair market
value equal to the total of such nonfacility contributions.
(2) For example, assume that an
employer and a welfare benefit fund
each has a calendar taxable year and
during 1985 the fund acquired and
placed in service a facility with a fair
market value of $100,000 to be used in
the provision of welfare benefits.
Further, during July 1984 the employer
contributed $150,000 in cash to the fund
and, during the portion of 1985, before
the facility was placed in service by the
fund, the employer contributed another
$75,000 in cash to the fund; during the
remaining portion of 1985, the employer
contributed $125,000 in cash. The facility
is used in the provision of welfare
benefits under the fund. Because $25,000
of the employer’s 1984 contribution is
treated under this rule as used for the
acquisition of a facility, such $25,000 is
not deductible by the employer for 1984.
For purposes of determining the
employer’s deduction for 1985, the
employer will be treated as having
contributed $125,000 in cash and a
facility with a fair market value of
$100,000. The employer’s deduction for
its 1985 taxable year will be determined
under the rules relating to the
contribution of a facility after June 22,
1984, and on or before December 31,
1985.
(3) For example, assume that an
employer and a welfare benefit fund
each has a calendar taxable year and
during 1986 the fund placed in service a
facility with a fair market value of
$100,000 to be used in the provision of
welfare benefits. During 1985, the
employer contributed $125,000 in cash to
the fund. During the portion of 1986
before the facility was placed in service,
the employer contributed $60,000 in
cash, and during the remaining portion
of 1986, the employer contributed
another $75,000 in cash. The facility is
used in the provision of welfare benefits
under the fund. Because $40,000 of its
1985 cash contribution is treated under
this rule as used for the acquisition of
the facility, such $40,000 is not
deductible by the employer for 1985. For
purposes of determining the employer’s
deduction for 1986, the employer will be
treated as though it had contributed a
$40,000 facility to the fund at the time
the fund placed the facility in service.
(c) For purposes of calculating the
“existing excess reserve amount” under
Q&A-l of § 1.419A-1T and the “existing
reserves for post-retirement medical or
life insurance benefits” under Q&A-4 of
§ 1.512(a)-5T (but not the exempt

F ed eral R egister / Vol. 51, No. 23 / Tuesday, Febru ary 4, 1986 / R ules and R egulations
function income under Q&A-3 of
§ 1.512(a)-5T), the amount set aside as
of any applicable date is to be reduced
to the extent that contributions
originally included in such amount are
subsequently treated under this Q&A as
used for the acquisition, construction, or
improvement of an asset excluded from
the calculation of the total amount set
aside under paragraph (b) of § 1.512(a)5(T) (or would be so treated under this
Q&A if it applied to such asset). The
reduction required under this paragraph
applies for purposes of calculating the
“existing excess reserve amount” and
the “existing reserves for postretirement medical or life insurance
benefits” for all taxable years of the
welfare benefit fund.
Par. 14. A new § 1.419A-1T is added
immediately following § 1.419-lT to
read as follows:
§ 1.419A-1T Qualified asset account
limitation of additions to account.
(Temporary)

Q -l: What does the transition rule
under section 419A(f)(7) provide?
A -l: Section 419A(f)(7) provides that,
in the case of a welfare benefit fund that
was in existence on July 18,1984, the
account limit (as determined under
section 419A(c)) for each of the first four
taxable years of the fund that relate to
taxable years of the employer ending after December 31,1985 (or, if applicable
under paragraph (b) of Q&A-2 of this
regulation, taxable years of the
employer beginning after the
termination of the last of the collective
bargaining agreements pursuant to
which the plan is maintained) shall be
increased by the following percentages
of the “existing excess reserve amount”:
P ercent

First taxable year....................................
Second taxable year....................
Third taxable year.................................
Fourth taxable year................................

80
60
40
20

For purposes of this section, the
“existing excess reserve amount” for
any taxable year of a fund is the excess
of (a) the assets actually set aside for
purposes described in section 419A(a) at
the close of the first taxable year of the
fund ending after July 18,1984
(calculated in the manner set forth in
Q&A-3 of § 1.512(a)-3T, and adjusted
under paragraph (c) of Q & A -ll of
§ 1.419-lT), reduced by employer
contributions to the fund before the
close of such first taxable year to the
extent that such contributions are not
deductible for the taxable year of the
employer with or within which such
taxable year of the fund ends and for

any prior taxable year of the employer,
over (b) the account limit which would
have applied to the taxable year of the
fund for which the excess is being
computed (without regard to this
transition rule). A welfare benefit fund
is treated as in existence on July 18,
1984, for purposes of this transition rule
only if amounts were actually set aside
in such fund on such date to provide
welfare benefits enumerated under
section 419A.
Par. 15. The following new section is
added immediately after § 1.461-3T to
read as follows:
§ 1.461(h)-4T Questions and answers
relating to the economic performance
requirement for certain employee benefits.
(Temporary)

Q -l: What is the relationship between
the economic performance requirement
of section 461(h) and sections 404 and
419?
A -l: Section 404 provides that
contributions paid and compensation
paid or incurred with respect to a plan,
or method or arrangement, deferring the
receipt of compensation or providing for
deferred benefits will be deductible only
to the extent that they satisfy the
requirements of section 162 or 212.
Section 419 provides that contributions
paid or accrued with respect to a
“welfare benefit fund” (as defined in
section 419(e) and Q&A-3 of § 1.419-lT)
will be deductible only to the extent that
they satisfy the requirements of section
162 or 212. In the case of an accrual
method taxpayer, a contribution or
compensation satisfies the requirements
of section 162 or 212 only to the extent
that the all events test (as defined in
section 461(b)(4)) and the economic
performance requirement of section
461(h)(1) are satisfied. In the case of a
contribution or compensation subject to
section 404 or 419, pursuant to the
authority under section 461(h)(2),
economic performance occurs (a) in the
case of a plan subject to section 404,
either as the contribution is made under
the plan or, if section 404(a)(5) is
applicable, as an amount attributable to
such contribution is includible in the
gross income of an employee (or, if
section 404(d) applies, a nonemployee):
or (b) in the case of a welfare benefit
fund, as a contribution is made to the
welfare benefit fund. Solely for purposes
of section 461(h), in the case of an
employer’s taxable year ending on or
after July 18,1984, and on or before
March 21,1986 contributions made to a
welfare benefit fund after the end of
such taxable year and on or before
March 21,1986 shall be deemed to have
been made on the last day of such
taxable year.

4329

Par. 16. The following new section is
added immediately after § 1.461(h)-4T:
§ 1.463-1T Transitional rule for vested
accrued vacation pay. (Temporary)

(a) Introduction. Section 91 (i) of the
Tax Reform Act of 1984 provides a
transitional rule for the election under
section 463, relating to accrual of
vacation pay. Section 91(i) applies only
in the case of taxpayers with respect to
which a deduction was allowable (other
than under section 463) for vested
accrued vacation pay for the last
taxable year ending or or before July 18,
1984.
(b) E lection under transitional rule. A
taxpayer described in paragraph (a) of
this section that makes an election
under section 463 for the first taxable
year ending after July 18,1984, shall
compute the opening balance of the
account described in section 463(a)(1)
(“accrual account”) with respect to such
vacation pay under the rules provided in
paragraph (e)(3) of this section.
(c) M ultiple vacation p ay accounts
within a single trade or business. (1) An
election under section 463 must be made
with respect to all vacation pay
accounts maintained by the taxpayer
within a single trade or business
whether the liability is for vested
accrued vacation pay or for vacation
pay that is contingent.
(2) If a taxpayer has elected, in a
taxable year ending on or before July 184
1984, to treat contingent vacation pay
with respect to a single trade or
business under section 463, the taxpayer
may elect, under the provisions of
section 91(i) of the Tax Reform Act of
1984, to treat vested accrued vacation
pay with respect to the same trade or
business under section 463. However, no
election may be made with respect to
vacation pay for which a prior section
463 election was made and that is
accounted for under section 463.
(d) Time fo r m aking election . A
taxpayer described in paragraph (a) of
this section that makes an election
under section 463 for the firsttaxable
year ending after July 18,1984, must
make the election on or before the due
date (determined with regard to
extensions) for filing the taxpayer’s
income tax return for such taxable year.
However, if the taxpayer’s income tax
return was filed for the first taxable year
ending after July 18,1984, prior to March
6,1986, the taxpayer must make the
election by the later of the due date
(determined with regard to extensions)
for filing the taxpayer’s income tax
return, or May 5,1986. In this case, the
election must be made by filing an
amended return (showing adjustments,

if any) for such year and attaching the
statement required by paragraph (e) of
this section on or before the later of the
due date (determined with regard to
extensions) for filing the taxpayer’s
income tax return, or May 5,1986.
(e)
M anner o f m aking election. A
taxpayer must make the election
described in paragraph (b) of this
section by attaching a statement to the
taxpayer’s income tax return for the first
taxable year ending after July 18,1984.
The statement must indicate that the
taxpayer is electing to apply the
provisions of section 463 with respect to
vested accrued vacation pay for the
taxpayer’s first taxable year ending
after July 18,1984. The statement must
contain the following information:
(1) »The taxpayer’s name and a
description of the vacation pay plans to
which the election applies.
(2) If a taxpayer has more than one
trade or business and is not making the
election with respect to all trades or
businesses, a description of the trades
or businesses to which the election
applies.
(3) The opening balance in the
taxpayer’s accrual account. This
balance equals the amount determined
as if the taxpayer had maintained an
account for the last taxable year ending
on or before July 18,1984, representing
the taxpayer’s liability for vested
accrued vacation pay earned by
employees before the close of the last
taxable year ending on or before July 18,
1984, and payable during that taxable
year or within 12 months following the
close of that taxable year. If the
taxpayer’s liability for vacation pay
includes both vested accrued vacation
pay and vacation pay the liability for
which is contingent, the amount in the
opening balance of the accrual account
that represents the taxpayer’s liability
for contingent vacation pay is to be
determined under the rules provided in
§ 10.2(c)(ii)(B) of this chapter.
(4) The opening balance in the
taxpayer’s suspense account. This
balance equals the amount determined
under paragraph (e)(3) of this section
less the portion allowed as deductions
under section 162 for prior taxable years
for vacation pay earned but not paid at
the close of the last taxable year ending
on or before July 18,1984.
(f)
V ested accru ed vacation pay. For
purposes of paragraphs (a) through (e) of
this section, “vested accrued vacation
pay” means any amount allowable as
deductions under section 162(a) for a
taxable year with respect to vacation
pay of employees of the taxpayer
(determined without regard to section
463). For purposes of this section,
vacation pay will be considered vested

accrued vacation pay even though there
is a limit or ceiling on the amount of
vacation pay an employee is entitled to
as of the close of any plan year.
For example, if under a vacation pay
plan an employee may accumulate no
more than 40 days of vacation leave by
the end of any plan year and any unused
days in excess of 40 days are forfeited,
the taxpayer is considered to have
vested accrued vacation pay (even
though the plan is not fully vested) and
may make an election under the
transitional rule.
Par. 17. A new § 1.505(c)-lT is added
immediately after § 1.503(f)—1 to read as
set forth below.
§ 1.505(c)-1T. Questions and Answers
Relating to the Notification Requirement for
Recognition of Exemption Under
Paragraphs (9), (17) and (20) of Section
501(c). (Temporary)

Q -l: What does section 505(c) of the
Internal Revenue Code provide?
A -l: Section 505(c) provides that an
organization will not be recognized as
exempt under section 501(c)(9) as a
voluntary employees’ beneficiary
association, under section 501(c)(17) as
a trust forming part of a plan providing
for the payment of supplemental
unemployment compensation benefits,
or under section 501(c) (20) as a trust
forming part of a qualified group legal
services plan unless notification is given
to the Internal Revenue Service. The
notification required of a trust created
pursuant to section 501(c)(20) and
forming part of a qualified group legal
services plan is set forth in Q&A-2. The
notification required of an organization
organized after July 18,1984, and
applying for exempt status as an
organization described in section 501(c)
(9) or (17) is set forth in Q&A-3 through
Q&A-8. The notification required of an
organization organized on or before July
18,1984, and claiming exemption as an
organization described in section 501(c)
(9) or (17) is set forth in Q&A-9 through
Q & A -ll. However, an organization that
has previously notified the Internal
Revenue Service of its claim to
exemption under section 501(c) (9), (17),
or (20) or its claim to exemption under
those sections pursuant to another
provision of the Code, is not required,
under section 505(c), to submit a
renotification (See Q&A-2 and Q&A-12).
Section 501(c)(20) Trusts
Q-2: What is the notice required of a
trust created pursuant to section
501(c) (20) and forming part of a qualified
group legal services plan under section
120?
A-2: (a) A trust claiming exemption as
an organization described in section

501(c)(20) will be recognized as exempt
if the exclusive function qf the trust is to
form part of a qualified group legal
services plan or plans. Exemption of the
trust under section 501(c) (20) will
generally be dependent upon and
coextensive with recognition of the plan
as a qualified group legal services plan.
Therefore, a trust organized pursuant to
section 501(c) (20) after July 18,1984,
need not file a separate notice with the
Internal Revenue Service of its claim to
exemption because the notice required
by section 120(c)(4) will suffice for
purposes of section 505(c), provided a
copy of the trust instrument is filed with
the Form 1024 submitted by the group
legal services plan. If the trust
instrument has not been filed with the
Form 1024 submitted by the group legal
services plan, the trust must comply
with (and exemption will be dependent
upon) the filing applicable to a trust
organized on or before July 18,1984. For
the notice required and effective dates
of exemption of a qualified group legal
services plan under section 120, see
§ 1.120-3.
(b) A trust organized on or before July
18,1984, that claims exempt status as a
trust described in section 501(c)(20) and
that forms part of a qualified group legal
services plan which has been recognized
as exempt under section 120, must file a
copy of its trust instrument with the
Internal Revenue Service before
February 4,1987. If a copy of the trust
instrument is filed within the time
provided, the trust’s exemption will be
recognized retroactively to the date the
qualified group legal services plan was
recognized as exempt under section 120.
However, if a copy of the trust
instrument is filed after the time
provided, exemption will be recognized
only for the period after the copy of the
trust instrument is filed with the Internal
Revenue Service. See Q&A-7 for a
further discussion of “date of filing.” A
trust that has previously filed a copy of
its trust instrument with the Service
need not refile that document.
Section 501(c) (9) and (17) Organizations
Organized After July 18,1984
Q-3: What is the notice required of an
organization or trust, organized after
July 18,1984, that is applying for
recognition of tax exempt status under
section 501(c) (9) or (17)?
A-3: An organization or trust that is
organized after July 18,1984, will not be
treated as described in paragraphs (9) or
(17) of section 501(c), unless the
organization notifies the Internal
Revenue Service that it is applying for
recognition of exemption. In addition,
unless the required notice is given in the

F ed eral R eg ister / V ol. 51, No. 23 / Tu esd ay, F ebru ary 4, 1986 / R ules and R egulations
manner and within the time prescribed
by these regulations, an organization
will not be treated as exempt for any
period before the giving of the required
notice. The notice is filed by submitting
a properly completed and executed
Form 1024, “Application for Recognition
of Exemption Under Section 501(a) or
for Determination Under Section 120”
together with the additional information
required under Q&A-4 and Q&A-5. The
notice is filed with the district director
for the key district in which the
organization’s principal place of
business or principal office is located.
The notice may be filed by either the
plan administrator (as defined in section
414(g)) or the trustee. The Internal
Revenue Service will not accept a Form
1024 for any organization or trust before
such entity has been organized.
Q-4: What inforfnation, in addition to
the information required by Form 1024,
must be submitted by an organization or
trust seeking recognition of exemption
under section 501(c) (9) or (17)?
A-4: A notice will not be considered
complete unless, in addition to a
properly completed and executed Form
1024, the organization or trust submits a
full description of the benefits available
to participants under section 501(c) (9)
or (17). Moreover, both the terms and
conditions of eligibility for membership
and the terms and conditions of
eligibility for benefits must be set forth.
This information may be contained in a
separate document, such as a "plan
document,” or it may be contained in the
creating document of the entity (e.g., the
articles of incorporation or association,
or a trust indenture). For benefits
provided through a policy or policies of
insurance, all such policies must be
included with the notice. Where
individual policies of insurance are
provided to the participants, single
exemplar copies, typical of policies
generally issued to participants, are
acceptable, provided they adequately
describe all forms of insurance available
to participants. In providing a full
description of the benefits available, the
benefits provided must be sufficiently
described so that each benefit is
definitely determinable. A benefit is
definitely determinable if the amount of
the benefit, its duration, and the persons
eligible to receive it are ascertainable
from the plan document or other
instrument. Thus, a benefit is not.
definitely determinable if the rules
governing either its amount, its duration,
or its recipients are not ascertainable
from the plan document or other
instrument but are instead subject to the
discretion of a person or committee.
Likewise, a benefit is not definitely

determinable if the amount for any
individual is based upon a percentage
share of any item that is within the
discretion of the employer. However, a
disability benefit will not fail to be
considered definitely determinable
merely because the determination of ■
whether an individual is disabled is
made under established guidelines by
an authorized person or committee.
Q-5: What is the notice required of
collectively bargained plans?
A-5: If an organization or trust
claiming exemption under section 501(c)
(9) or (17) is organized and maintained
pursuant to a collective bargaining
agreement between employee
representatives and one or more
employer, only one Form 1024 is
required to be filed for the organization
or trust, regardless of the number of
employers originally participating in the
agreement. Moreover, once a Form 1024
is filed pursuant to a collective
bargaining areement, an additional Form
1024 is not required to be filed by an
employer who thereafter participates in
that agreement. When benefits are
provided pursuant to a collective
bargaining agreement, the notice will
not be considered complete unless, in
addition to a properly completed and
executed Form 1024, a copy of the
collective bargaining agreement is also
submitted together with the additional
information delineated in Q&A-4.
Q-6: When must the required notice
be filed by an organization or trust,
organized after July 18,1984, that seeks
recognition of exemption under section
501(c) (9) or (17)?
A-6: An organization or trust applying
for exemption must file the required
notice by the later of February 4,1987 or
15 months from the end of the month in
which the organization or trust was
organized. An extension of time for
filing the required notice may be granted
by the district director if the request is
submitted before the end of the
applicable period and it is demonstrated
that additional time is needed.
Q-7: What is the effective date of
exemption for a new organization or
trust, organized after July 18,1984, that
has submitted the required notice?
A-7: If the required notice is filed
within the time provided by these
regulations, the organization’s
exemption will be recognized
retroactively to the date the
organization was organized, provided its
purpose, organization and operation
(including compliance with the
applicable nondiscrimination
requirements) during the period prior to
the date of the determination letter are
in accordance with the applicable law.

4331

However, if the required notice is filed
after the time provided by these
regulations, exemption will be
recognized only for the period after the
application is filed with the Internal
Revenue Service. The date of filing is
the date of the United States postmark
on the cover in which an exemption
application is mailed or, if no postmark
appears on the cover, the date the
application is stamped as received by
the Service. If an extension for filing the
required notice has been granted to the
organization, a notice filed on or before
the last day specified in the extension
will be considered timely and not the
otherwise applicable date under Q&A-6.
Q-8: What is the effect on exemption
of the filing of an incomplete notice?
A-8: Although a properly completed
and executed Form 1024 together with
the required additional information (See
Q&A-4 and Q&A-5) must be submitted
to satisfy the notice required by section
505(c), the failure to file, within the time
specified, all of the information
necessary to complete such notice will
not alone be sufficient to deny
recognition of exemption from the date
of organization to the date the
completed information is submitted to
the Service. If the notice which is filed
with the Service within the required
time is substantially complete, and the
organization supplies the necessary
additional information requested by the
Service within the additional time
allowed, the original notice will be
considered timely. However, if the
notice is not substantially complete or
the additional information is not
provided within the additional time
allowed, exemption will be recognized
only from the date of filing of the
additional information.
Section 501(c) (9) and (17) Organizations
Organized on or Before July 18,1984
Q-9: What is the notice required of an
organization or trust organized on or
before July 18,1984, that claims exempt
status as an organization described in
section 501(c) (9) or (17)?
A-9: Section 505(c) provides a special
rule for existing organizations and trusts
organized on or before July 18,1984.
Such an organization or trust will not be
treated as described in paragraphs (9) or
(17) of section 501(c) unless the
organization or trust notifies the Internal
Revenue Service in the manner and
within the time prescribed in these
regulations that it is claiming exemption
under the particular section. The type of
notice, the manner for filing that notice,
and the additional information required
is the same as that set forth in Q&A-3
through Q&A-5 for new organizations.

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Q-10: When must the required notice
be filed by an organization or trust
organized on or before July 18,1984?
A-10: An organization or trust
organized on or before July 18,1984, that
claims exempt status as an organization
described in section 501(c) (9) or (17),
must file the required notice before
February 4,1987. An extension of time
for filing the required notice may be
granted by the district director if the
request is submitted before the due date
of the notice and it is demonstrated that
additional time is needed.
Q -ll: What is the effective date of
exemption for an organization or trust
organized on or before July 18,1984, that
has submitted the required notice?
A - ll: If the required notice is filed
within the time provided by these
regulations, the organization’s
exemption will be recognized
retroactively to the date the
organization was organized, provided its
purpose, organization and operation
(including compliance with the
applicable nondiscrimination
requirements) during the period prior to
the date of the determination letter are
in accordance with the applicable law.
If, on the other hand, the required notice
is filed after the time provided by these
regulations, exemption will be
recognized only for the period after the
notice is received by the Internal
Revenue Service. See Q&A-7 for a
further discussion of “date of filing.” See
also Q&A-8 for the effect on exemption
of a notice that has been timely filed but
is incomplete.
Exceptions to Notice Requirement
Q-12: Are any organizations or trusts
claiming recognition of exemption as an
organization described in section 501(c)
(9) or (17) excepted from the notice
requirement of section 505(c)?
A-12: An organization or trust that
has previously notified the Internal
Revenue Service of its claim to
exemption by filing Form 1024 is not
required, under section 505(c), to
renotify the Service. Thus, an
organization that has filed a Form 1024
that is pending with the Service need
not refile that form. Also, an
organization that has received a ruling
or determination letter from the Service
recognizing its exemption from taxation
need not submit the notification
required by section 505(c).
Par. 18. There is added the following
new section after § 1.512(a)-4 to read as
follows:

§ 1.512(a)-5T Questions and answers
relating to the unrelated business taxable
income of organizations described in
paragraphs (9), (17) or (20) of section
501(c). (Temporary)

Q -l: What does section 512(a)(3), as
amended by the Tax Reform Act of 1984
(Act), provide with respect to
organizations described in paragraphs
(9), (17) or (20) of section 501(c)?
A -l: In general, section 512(c)(3), as
amended by section 511 of the Act,
extends the rules for determining the
unrelated business income tax of
voluntary employees’ beneficiary
associations (VEBAs) to supplemental
unemployment compensation benefit
trusts (SUBs) and group legal service
organizations (GLSOs). The section also
restricts the amount of income that may
be set aside by such organizations for
exempt purposes.
Q-2: What is the effective date of the
amendments to section 512(a)(3)?
A-2: The amendments to section
512(a)(3) will apply to income earned by
VEBAs, SUBs or GLSOs after December
31,1985, in the taxable years of such
organizations ending after such date. For
purposes of applying section 512(a)(3) to
the first taxable year of such an
organization ending after December 31,
1985, the income of the VEBA, SUB or
GLSO earned after December 31,1985,
will be determined by allocating the
total income earned for such taxable
year on the basis of the calendar year
1985 and 1986 months in such taxable
year. However, if a VEBA, SUB or GLSO
is part of a plan that is maintained
pursuant to one or more collective
bargaining agreements (a) between
employee representatives and one or
more employers, and (b) which are in
effect on July 1,1985 (or ratified on or
before that date), the amendments do
not apply to income earned in a taxable
year of a VEBA, SUB or GLSO b e ginning
before the termination of the last of the
collective bargaining agreements
pursuant to which the plan is
maintained (determined without regard
to any extension of the contract agreed
to after July 1,1985). For purposes of the
preceding sentence, 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 under section 511 of the Tax
Reform Act 1984 (i.e., requirements
under section 419, 419A, 512(a)(3)(E),
and 4976) shall not be treated as a
termination of such collective bargaining
agreements.
Q-3: What amount of income may a
VEBA, SUB or GLSO set aside for
exempt purposes?

A-3: (a) Pursuant to section
512(a)(3) (E)(i), the amounts set aside in a
VEBA, SUB, or GLSO (including a
VEBA, SUB, or GLSO that is part of a 10
or more employer plan, as defined in
section 419A|f)(6)(B)) as of the close of a
taxable year of such VEBA, SUB, or
GLSO to provide for the payment of life,
sick, accident, or other benefits may not
be taken into account for purposes of
determining “exempt function income”
to the extent that such amounts exceed
the qualified asset account limit,
determined under sections 419A(c) and
419A(f)(7), for such taxable year of the
VEBA, SUB, or GLSO. In calculating the
qualified asset account limit ft» this
purpose, a reserve for post-retirement
medical benefits under section
419A(c)(2)(A) is not to be taken into
account.
(b)
The exempt function income of a
VEBA, SUB, or GLSO for a taxable year
of such an organization, under section
512(a)(3)(B), includes: (1) Certain
amounts paid by members of the VEBA
SUB, or GLSO within the meaning of the
first sentence of section 512(a)(3)(B)
(“member contributions”); and (2) other
income of the VEBA, SUB, or GLSO
(including earnings on member
contributions) that is set aside for the
payment of life, sick, accident, or other
benefits to the extent that the total
amount set aside in the VEBA SUB or
GLSO as of the close of the taxable year
for any purpose (including member
contributions and other income set aside
in the VEBA, SUB, or GLSO as of the
close of the year) does not exceed the
qualified asset account limit for such
taxable year of the organization. For
purposes of section 512(c)(3)(B), member
contributions include both employee
contributions and employer
contributions to the VEBA, SUB, or
GLSO. In calculating the total amount
set aside in a VEBA, SUB, or GLSO as of
the close of a taxable year, certain
assets with useful lives extending
substantially beyond the end of die
taxable year (e.g., buildings, and
licenses) are not to be taken into
account to the extent they are used in
the provision of life, sick, accident, or
other benefits. For example, cash and
securities (and similar investments) held
by a VEBA, SUB or GLSO are not
disregarded in calculating the total
amount set aside for this purpose
because they are used to pay welfare
benefits, rather than merely used in the
provision of such benefits. Accordingly,
the unrelated business taxable income
of a VEBA, SUB, or GLSO for a taxable
year of such an organization generally
will equal the lesser of two amounts: (3)
the income of the VEBA, SUB, or GLSO

F ed eral R eg ister / Vol. 51, No. 23 / Tuesd ay, F ebru ary 4, 1986 / R ules and R egulations
for the taxable year (excluding member
contributions), or (4) the excess of the
total amount set aside as of the close of
the taxable year (including member
contributions, and excluding certain
assets with a useful life extending
substantially beyond the end of the
taxable year to the extent they are used
in the provision of welfare benefits) over
the qualified asset account limit
(calculated without regard to the
otherwise permitted reserve for postretirement medical benefits) for the
taxable year. See § 1.419A-2T for
special rules relating to collectively
bargained welfare benefit funds.
(q) The income of a VEBA, SUB, or
GLSO for any taxable year includes gain
realized by the organization on the sale
or disposition of any asset during such
year. The gain realized by a VEBA, SUB,
or GLSO on the sale or disposition of an
asset is equal to the amount realized by
the organization over the basis of such
asset (in the hands of the organization),
reduced by any qualified direct costs
attributable to such asset (under
paragraphs (b), (c), and (d) of Q&A-6 of
§ 1.419-1T).
Q^4: What transition rules apply to
“existing reserves for post-retirement
medical or life insurance benefits”?
A-4: (a) Section 512(a)(3)(E)(iii)(I)
provides that income that is either
directly or indirectly attributable to
“existing reserves for post-retirement
medical or life insurance benefits” will
not be treated as unrelated business
taxable income. An “existing reserve for
post-retirement medical or life insurance
benefits” (as defined in section
512(a)(3)(E)(iii)(II)) is the total amount of
assets actually set aside in a VEBA,
SUB, or GLSO on July 18,1984
(calculated in the manner set forth in
Q8A-3 of the regulation, and adjusted
under paragraph (c) of Q & A -ll of
§ 1.419-1T), reduced by employer
contributions to the fund on or before
such date to the extent such
contributions are not deductible for the
taxable year of the employer containing
July 18,1984, and for any prior taxable
year of the employer, for purposes of
providing such post-retirement benefits.
For purposes of the preceding sentence
only, an amount that was not actually
set aside on July 18,1984, will be treated
as having been actually set aside on
such date if (1) such amount was
incurred by the employer (without
regard to section 461(h)) as of the close
of the last taxable year of the VEBA,
SUB, or GLSO ending before July 18,
1984, and (2) such amount was actually
contributed to the VEBA, SUB, or GLSO
within 8 V2 months following the close of
such taxable year.

(b) In addition, section
512(a)(3)(E)(iii)(I) applies to existing
reserves for such post-retirement
benefits only to the extent that such
“existing reserves” flo not exceed the
amount that could be accumulated
under the principles set forth in Revenue
Rulings 69-382,1969-2, C.B. 28; 69-478,
1969-2 C.B. 29; and 73-599,1973-2 C.B.
40. Thus, amounts attributable to such
excess “existing reserves” are not
within this transition rule eventhough
they were actually set aside on July 18,
1984.
(c) All post-retirement medical or life
insurance benefits (or other benefits to
the extent paid with amounts set aside
to provide post-retirement medical or
life insurance benefits) provided'after
July 18,1984 (whether or not the
employer has maintained a reserve or
fund for such benefits) are to be
charged, first, against the “existing
reserves” within this transition rule
(including amounts attributable to
“existing reserves” within this transition
rule) for post-retirement medical
benefits or for post-retirement life
insurance benefits (as the case may be)
and, second, against all other amounts.
For this purpose, the qualified direct
cost of an asset with a useful life
extending substantially beyond the end
of the taxable year (as determined under
Q&A-6 of § 1.419-1T) will be treated as
a benefit provided and thus charged
against the “existing reserve” based on
the extent to which such asset is used in
the provision of post-retirement medical
benefits of post-retirement life insurance
benefits (as the case may be). All plans
of an employer providing postretirement medical benefits are to be
treated as one plan for purposes of
section 512(a)(3)(E)(iii)(III), and all plans
of an employer providing postretirement life insurance benefits are to
be treated as one plan for purposes of
section 512(a)(3)(E)(iii)(III).
(d) In calculating the unrelated
business taxable income of a VEBA,
SUB, or GLSO for a taxable year o f such
organization, the total income of the
VEBA, SUB, or GLSO for the taxable
year is reduced by the income
attributable to “existing reserves”
within the transition rule before such
income is compared to the excess of the
total amount set aside as of the close of
the taxable year over the qualified asset
account limit for the taxable year. Thus,
for example, assume that the total
income of a VEBA for a taxable year is
$1,000, and that the excess of the total
amount of the VEBA set aside as of the
close of the taxable year over the
applicable qualified asset account limit
is $600. Assume also that of the $1,000 of

4333

total income, $500 is attributable to
“existing reserves” within the transition
rule of section 512(a)(3)(E)(iii)(I). The
unrelated business income of this VEBA
for the taxable year is equal to the lesser
of the following two amounts: (1) the
total income of the VEBA for the taxable
year ($1,000), reduced to the extent that
such income is attributable to “existing
reserves” within the transition rule
($500); or (2) the excess of the total
amount set aside as of the close of the
taxable year over the applicable
qualified asset account limit ($600).
Thus, the unrelated business income of
this VEBA for the taxable year is $500.
Par. 19. The following new section is
added immediately after § 1.1041-1T:
§ 1.1042-1T Questions and answers
relating to the sales of stock to employee
stock ownership plans or certain
cooperatives. (Temporary)

Q -l: What does section 1042 provide?
A -l: (a) Section 1042 provides rules
under which a taxpayer may elect not to
recognize gain in certain cases where
“qualified securities” are sold to a
qualifying employee stock ownership
plan or worker-owned cooperative in
taxable years of the seller beginning
after July 18,1984, and “qualified
replacement property” is purchased by
the taxpayer within the “replacement
period.” If the requirements of Q&A-2 of
this section are met, and if the taxpayer
makes an election under section 1042(a)
in accqrdance with Q&A-3 of this
section, the gain realized by the
taxpayer on the sale of the qualified
securities is recognized only to the
extent that the amount realized on such
sale exceeds the cost to the taxpayer of
the qualified replacement property.
(b)
Under section 1042, the term
“qualified securities” means employer
securities (as defined in section 409(1))
with respect to which each of the
following requirements is satisfied: (1)
The employer securities were issued by
a domestic corporation; (2) for at least
one year before and immediately after
the sale, the domestic corporation that
issued the employer securities (and each
corporation that is a member of a
“controlled group of corporations” with
such corporation for purposes of section
409(1)) has no stock outstanding that is
readily tradeable on an established
market; (3) as of the time of the sale, the
employer securities have been held by
the taxpayer for more than 1 year; and
(4) the employer securities were not
received by the taxpayer in a
distribution from a plan described in
section 401(a) or in a transfer pursuant
to an option or other right to acquire

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stock to which section 83, 422, 4224. 423,
or 424 applies.
(c) The term “replacement period”
means the period which begins 3 months
before the date on which the sale of
qualified securities occurs and which
ends 12 months after the date of such
sale. A replacement period may include
any period which occurs prior to July 19,
1984.
(d) The term “qualified replacement
property” means any securities (as
defined in section 165(g)(2)) issued by a
domestic corporation which does not,
for the taxable year of such corporation
in which the securities are purchased by
the taxpayer, have passive investment
income (as defined in section
1362(d)(3)(D)) that exceeds 25 percent of
the gross receipts of such corporation
for the taxable year preceding the
taxable year of purchase. In addition,
securities of the domestic corporation
that issued the employer securities
qualifying under section 1042 (and of
any corporation that is a member of a
“controlled group of corporations" with
such corporation for purposes of section
409(1)) will not qualify as "qualified
replacement property.”
(e) For purposes of section 1042(a),
there is a "purchase” of qualified
replacement property only if the basis of
such property is determined by
reference to its cost to the taxpayer. If
the basis of the qualified replacement
property is determined by reference to
its basis in the hands of the transferor
thereof or another person, or by
reference to the basis of property (other
than cash or its equivalent) exchanged
for such property, then the basis of such
property is not determined solely by
reference to its cost to the taxpayer.
Q-2: What is a sale of qualified
securities for purposes of section
1042(b)?
A-2: (a) Under section 1042(b), a sale
of qualified securities is one under
which all of the following requirements
are met:
(1) The qualified securities are sold to
an employee stock ownership plan (as
defined in section 4975(e)(7)) maintained
by the corporation that issued the
qualified securities (or by a member of
the "controlled group of corporations”
with such corporation for purposes of
section 409(1)) or to an eligible workerowned cooperative (as defined in
section 1042(c)(2));
(2) The employee stock ownership
plan or eligible worker-owned
cooperative owns, immediately after the
sale, 30 percent or more of the total
value of the employer securities (within
the meaning of section 409(1)
outstanding as of such time;

(3) No portion of the assets of the
employee stock ownership plan or
eligible worker-owned cooperative
attributable to qualified securities that
are sold to the plan or cooperative by
the taxpayer or by any other person in a
sale with respect to which an election
under section 1042(a) is made accrue
under the plan or are allocated by the
cooperative, either directly or indirectly
and either concurrently with or at any
time thereafter, for the benefit of (i) the
taxpayer; (ii) any person who is a
member of the family of the taxpayer
(within the meaning of section 267(c)(4));
or (iii) any person who owns (after the
application of section 318(a)), at any
time after July 18,1984, and until
immediately after the sale, more than 25
percent of in value of the outstanding
portion of any class of stock of the
corporation that issued the qualified
securities (or of any member of the.
“controlled group of corporations” with
such corporation for purposes of section
409(1)). For purposes of this calculation,
stock that is owned, directly or
indirectly, by or for a qualified plan
shall not be treated as outstanding.
(4) The taxpayer files with the
Secretary (as part of the required
election described in Q&A-3 of this
section) a verified written statement of
the domestic corporation (or
corporations) whose employees are
covered by the plan acquiring the
qualified securities or of any authorized
officer of the eligible workerowned
cooperative, consenting to the
application of section 4978(a) with
respect to such corporation or
cooperative.
(b) For purposes of determining
whether paragraph (a)(2) of this section
is satisfied, sales of qualified securities
by two or more taxpayers may be
treated as a single sale if such sales are
made as part of a single, integrated
transaction under a prearranged
agreement between the taxpayers.
(c) For purposes of determining
whether paragraph (a)(3) of this section
is satisfied with respect to the
prohibition against an accrual or
allocation of qualified securities, the
accrual or allocation of any benefits or
contributions or other assets that are not
attributable to qualified securities sold
to the employee stock ownership plan or
eligible worker-owned cooperative in a
sale with respect to which an election
under section 1042(a) is made (including
any accrual or allocation under any
other plan or arrangement maintained
by the corporation or any member of
“the controlled group of corporations”
with such corporation for purposes of section 409(1)) must be made without
regard to the allocation of such qualified

securities. Paragraph (a)(3) of this
section above may be illustrated in part
by the following example: Individuals A,
B, and C own 50, 25, and 25,
respectively, of the 100 outstanding
shares of common stock of Corporation
X. Such shares constitute qualified
securities as defined in Q&A-l of this
section. A and B, but not C, are
employees of Corporation X. For the
benefit of all its employees, Corporation
X establishes an employee stock
ownership plan that obtains a loan
meeting the exemption requirements of
section 4975(d)(3). The loan proceeds
are used by the plan to purchase the 100
shares of qualified securities from A, B,
and C, all of whom elect nonrecognition
treatment under section 1042(a) with
respect to the gain realized on their sale
of such securities. Under the
requirements of paragraph (a)(3) of this
section, no part of the assets of the plan
attributable to the 100 shares of
qualified securities may accrue under
the plan (or under any other plan or
arrangement maintained by Corporation
X) for the benefit of A or B or any
person who is a meiiiber of the family of
A or B (as determined under section
267(c)(4)). Furthermore, no other assets
of the plan or assets of the employer
may accrue for the benefit of such
individuals in lieu of the receipt of
assets attributable to such qualified
securities.
(d)
A sale under section 1042(a) shall
not include any sale of securities by a
dealer or underwriter in the ordinary
course of its trade or business as a
dealer or underwriter, whether or not
guaranteed.
Q-3: What is the time and manner for
making the election under section
1042(a)?
A-3: (a) The election not to recognize
the gain realized upon the sale of
qualified securities to the extent
provided under section 1042(a) shall be
made in a “statement of election”
attached to the taxpayer’s income tax
return filed on or before the due date
(including extensions of time) for the
taxable year in which the sale occurs. If
a taxpayer does not make a timely
election under this section to obtain
section 1042(a) nonrecognition treatment
with respect to the sale of qualified
securities, it may not subsequently make
an election on an amended return or
otherwise. Also, an election once made
is irrevocable.
(b) The statement of election shall
provide that the taxpayer elects to treat
the sale of securities as a sale of
qualified securities under section
1042(a), and shall contain the following
information:

F ed eral R egister / Vol. 51, No. 23 / Tuesday, Febru ary 4, 1986 / Rules and R egulations
(1) A description of the qualified
securities sold, including the type and
number of shares;
(2) The date of the sale of the
qualified securities;
(3) The adjusted basis of the qualified
securities;
(4) The amount realized upon the sale
of the qualified securities;
(5) The identity of the employee stock
ownership plan or eligible workerowned cooperative to which the
qualified securities were sold; and
(6) If the sale was part of a single,
interrelated transaction under a
prearranged agreement between
taxpayers involving other sales of
qualified securities, the names and
taxpayer identification numbers of the
other taxpayers under the agreement
and the number of shares sold by the
other taxpayers. See Q&A-2 of this
section.
If the taxpayer has purchased
qualified replacement property at the
time of the election, the taxpayer must
attach as part of the statement of
election a “statement of purchase”
describing the qualified replacement
property, the date of the purchase, and
the cost of the property, and declaring
such property to be the qualified
replacement property with respect to the
sale of qualified securities. Such
statement of purchase must be notarized
by the later of thirty days after the
purchase or March 6,1986. In addition,
the statement of election must be
accompanied by the verified written
statement of consent required under
Q&A-2 of this section with respect to
the qualified securities sold.
(c)
If the taxpayer has not purchased
qualified replacement property at the
time of the filing of the statement of
election, a timely election under this
Q&A shall not be considered to have
been made unless the taxpayer attaches
the notarized statement of purchase
described above to the taxpayer’s
income tax return filed for the taxable
year following the year for which the
election under section 1042(a) was
made. Such notarized statement of
purchase shall be filed with the district
director or the director of the regional
service center with whom such election
was originally filed, if the return is not
filed with such director.
Q-4: What is the basis of qualified
replacement property?
A-4: If a taxpayer makes an electron
under section 1042(a), the basis of the
qualified replacement property
purchased by the taxpayer during the
replacement period shall be reduced by
an amount equal to the amount of gain
which was not recognized. If more than
one item of qualified replacement

property is purchased, the basis of each,
of such items shall be reduced by an
amount determined by multiplying the
total gain not recognized by reason of
the application of section 1042(a) by a
fraction, the numerator of which is the
cost of such item of property and the
denominator of which is the total cost of
all such items of property. For the rule
regarding the holding period of qualified
replacement property, see section
1223(13).
Q-5: What is the statute of limitations
for the assessment of a deficiency
relating to the gain on the sale of
qualified securities?
A-5: (a) If any gain is realized by the
taxpayer on the sale of any qualified
securities and such gain has not been
recognized under section 1042(a) in
accordance with the requirements of
this section, the statutory period
provided in section 6501(a) for the
assessment of any deficiency with
respect to such gain shall not expire
prior to the expiration of 3 years from
the date of receipt, by the district
director or director of regional service
center with whom the statement of
election under 1042(a) was originally
filed, of:
(1) A notarized statement of purchase
as described in Q&A-3;
(2) A written statement of the
taxpayer’s intention not to purchase
qualified replacement property within
the replacement period; or
(3) A written statement of the
taxpayer’s failure to purchase qualified
replacement property within the
replacement period.
In those situations when a taxpayer is
providing a written statement of an
intention not to purchase or of a failure
to purchase qualified replacement
property, the statement shall be
accompanied, where appropriate, by an
amended return for the taxable year in
which the gain from the sale of the
qualified securities was realized, in
order to reflect the inclusion in gross
income for that year of gain required to
be recognized in connection with such
sale.
(b) Any gain from the sale of qualified
securities which is required to be
recognized due to a failure to meet the
requirements under section 1042 shall be
included in the gross income for the
taxable year in which the gain was
realized. If any gain from the sale of
qualified securities is not recognized
under section 1042(a) in accordance
with the requirements of this section,
any deficiency attributable to any
portion of such gain may be assessed at
any time before the expiration of the 3year period described in this Q&A,
notwithstanding the provision of any

4335

law or rule of law which would
otherwise prevent such assessment.
Q-6: When does section 1042 become
effective?
A-6: Section 1042 applies to sales of
qualified securities in taxable years of
sellers beginning after July 18,1984.
PART 20—ESTATE TAX; ESTATES OF
DECEDENTS DYING AFTER AUGUST
16,1954
Par. 20. The following new section is
added after § 20.2039-5 to read as
follows:
§ 20.2039-1T Limitations and repeal of
estate tax exclusion for qualified plans and
individual retirement plans (IRAs).
(Temporary)

Q -l: Are there any exceptions to the
general effective dates of the $100,000 '
limitation and the repeal of the estate
tax exclusion for the value of interests
under qualified plans and IRAs
described in section 2039 (c) and (e)?
A -l: (a) Yes. Section 245 of the Tax
Equity and Fiscal Responsibility Act of
1982 (TEFRA) limited the estate tax
exclusion to $100,000 for estates of
decedents dying after December 31,
1982. Section 525 of the Tax Reform Act
of 1984 (TRA of 1984) repealed the
exclusion for estates of decedents dying
after December 31,1984.
(b) Section 525(b)(3) of the TRA of
1984 amended section 245 of TEFRA to
provide that the $100,000 limitation on
the exclusion for the value of a
decedent's interest in a plan or IRA will
not apply to the estate of any decedent
dying after December 31,1982, to the
extent that the decedent-participant was
in pay status on December 31,1982, with
respect to such interest and irrevocably
elected the form of benefit payable
under the plan or IRA (including the
form of any survivor benefits) with
respect to such interest before January 1,
1983.
(c) Similarly, the TRA of 1984 provides
that the repeal of the estate tax
exclusion for the value of a decedent’s
interest in a plan or IRA will not apply
to the estate of a decedent dying after
December 31,1984, to the extent that the
decedent-participant was in pay status
on December 31,1984, with respect to
such interest and irrevocably elected the
form of benefit payable under the plan
or IRA (including the form of any
survivor benefits) with respect to such
interest before July 18,1984.
Q-2: What is the meaning of “in pay
status” on the applicable date?
A-2: A participant was in pay status
on the applicable date with respect to a
portion of his or her interest in a plan or
IRA if such portion is to be paid in a

4336

F ed eralJR eg ister / Vol. 51, No. 23 / Tu esd ay, Febru ary 4, 1986 / R ules and R egulations

benefit form that has been elected on or
respect to that benefit; and (c) any
before such date and the participant has
portion of the fund which reverts to the
received, on or before such date, at least
benefit of the employer. A postone payment under such benefit form.
retirement medical or life insurance
Q-3: What is required for an election
benefit provided with respect to a key
of the form of benefit payable under the
employee will not constitute a
plan to have been irrevocable as of any
disqualified benefit even though such
applicable date?
benefit is not provided through a
A-3: As of any applicable date, an
separate account if the cost of such
election of the form of benefit payable
benefit is paid by the employer in the
under a plan is irrevocable if, as of such
taxable year in which the benefit is
date, it was a written irrevocable
provided and there is not (and there is
election that, with respect to all
not required to be) a separate account
payments to be received after such date,
with an outstanding credit balance
specified the form of distribution (e.g.,
- maintained for the key employee.
lump sum, level dollar annuity, formula
Q-3: What is the effective date of
annuity) and the period over which the
section 4976?
distribution would be made (e.g., single
A-3: (a) Generally, section 4976
life, joint and survivor, term certain). An
applies to disqualified benefits provided
election is not irrevocable as of any
by a welfare benefit fund after
applicable date if, on or after such date,
December 31,1985. However, a
the form or period of the distribution
disqualifiedbenefit, as defined in
could be determined or altered by any
section 4976(b)(1) or (2), is not subject to
person or persons. An election does not
section 4976(a) if it is provided from
fail to be irrevocable as of an applicable
“existing reserves for post-retirement
date merely because the beneficiaries
medical or life insurance benefits” that
were not designated as of such date or
are within the transition rule set forth in
could be changed after such date. If any
section 512(a)(3)(E)(iii) and Q&A-4 of
interest in any IRA may not, by law or
§ 1.512(a)-5T (or would be if such
contract, be subject to an irrevocable
transition rule applied to such welfare
election described in this section, any
benefit fund). For example, if a welfare
election of the form of benefit payable
benefit fund in existence on July 18,
under the IRA does not satisfy the
1984, provides an individual in whose
requirement that an irrevocable election
favor discrimination is prohibited with a
have been made.
post-retirement life insurance benefit
after December 31,1985, that does not
PART 54—PENSION EXCISE TAXES
meet the requirements of section 505(b)
and if the welfare benefit fund received
Par. 21. There is added the following
no contributions after July 18,1984, then
new section after § 54.4975-15 to read as
the disqualified benefit provided by the
follows:
fund is not subject to section 4976(a)
§ 54.4976-1T Questions and answers
(b) A welfare benefit fund will be able
relating to taxes with respect to welfare
to avoid the application of section
benefit funds. (Temporary)
4976(b)(1) and (2) if the employer
Q -l: What does section 4976 provide?
withdraws from such fund, before April
A -l: Section 4976 imposes a tax on
7,1986, any amounts that are not
employers who provide disqualified
attributable to “existing reserves for
benefits through a welfare benefit fund.
post-retirement medical or life insurance
The tax imposed is equal to 100 percent
benefits” because they were neither
of the disqualified benefit.
actually set aside nor treated as actually
Q-2: What constitutes a disqualified
set aside under Q&A-4 of § 1.512(a)-5T,
benefit?
on July 18,1984. The employer making
A-2: A disqualified benefit is (a) any
such a withdrawal must include the
post-retirement medical or life insurance
amount in income for the first taxable
benefit provided with respect to a key
year ending after July 18,1984, or, to the
employee (as defined in section
extent that the withdrawn amount is
419A(d)(3)) through a welfare benefit
attributable to the following taxable
fund if a separate account is required to
year, for such following taxable year.
be established for such employee under
Such a withdrawal will not be treated as
section 419A(d) and the cost for such
an impermissible distribution or
coverage is not charged against or paid
reversion under section 501(c)(9), and
from such separate account; (b) any
will not be treated as a disqualified
post-retirement medical or life insurance benefit under section 4976(b)(3). Of
benefit provided through a welfare
course, to the extent that the welfare
benefit fund with respect to an
benefit fund contains amounts that are
individual in whose favor discrimination
attributable to “existing reserves” but
is prohibited unless the plan of which
are not within the transition rule set
the fund is a part meets the
forth in Q&A-4 of § 1.512(a)-5T (as
requirements of section 505(b) with
applied to welfare benefit funds), for

example, because such amounts exceed
the amounts that could have been
accumulated under the principles set
forth in Revenue Rulings 69-382,1969-2
C.B. 28; 69-478,1969-2 C.B. 29; and 73599,1973-2 C.B. 40, the fund will not be
able to avoid the application of section
4976(b)(1) and (2) under this paragraph.
(c)
In the case of a plan which is
maintained pursuant to one or more
collective bargaining agreements (1)
between employee representatives and
one or more employers and (2) which
are in effect on July 1,1985 (or ratified
on or before that date), the provision
does not apply to disqualified benefits
provided in years beginning before the
termination of the last of the collective
bargaining agreements pursuant to
which the plan is maintained
(determined without regard to any
extension of the contract agreed to after
July 1,1985). For purposes of the
preceding sentence, 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 under section 511 of the Tax
Reform Act 1984 (i.e., requirements
under sections 419,419A, 512(a)(3)(E),
and 4976) shall not be treated as a
termination of such collective bargaining
agreement.
Par. 22. The following new section is
added immediately after § 54.4976-1T:
§ 54.4978-1T Questions and answers
relating to the tax on certain dispositions
by employee stock ownership plans and
certain cooperatives. (Temporary)

Q -l: What does section 4978 provide?
A -l: Section 4978 imposes a tax (as
determined under section 4978(b) and
Q&A-2 of thi§ section) on the amount
realized on the disposition of any
qualified securities, if:
(a) An employee stock ownership plan
or eligible worker-owned cooperative
acquires any qualified securities in a
sale to which section 1042 applies;
(b) Such plan or cooperative disposes
of any qualified securities during the 3year period after the date on which any
qualified securities were acquired in the
sale to which section 1042 applies; and
(c) Either (1) the percentage of the
total outstanding shares of the class of
employer securities of which the
disposed qualified securities are a part
held by such plan or cooperative after
such disposition is less than the
percentage of the total outstanding
shares of such class of employer
securities held immediately after the
sale to which section 1042 applies, or (2)
the value of the employer securities held
by such plan or cooperative immediately

F ed eral R eg ister / Vol. 51, No. 23 / Tuesdayi F ebru ary 4, 1986 / R ules and R egulations
after such disposition is less than 30
percent of the total value of all employer
securities outstanding at that time. For
purposes of this section, the following
terms have the same meanings given to
such terms by the identified provisions:
“employee stock ownership plan”
(section 4975(e)(7)); “qualified
securities” (section 1042(b)(1)); "eligible
worker-owned cooperative” (section
1042(b)(2)); “employer securities”
(section 409(1)). For purposes of
determining what constitutes a
disposition to which section 4978
applies, see Q&A-3 of this section.
Q-2: What is the amount of tax
imposed under section 4978?
A-2: Section 4978 imposes a tax of 10
percent of the amount realized on the
disposition of qualified securities. The
amount realized that is subject to tax
under section 4978 shall not exceed that
portion of the amount realized that is
allocable to qualified securities acquired
within the 3-year period prior to the date
of disposition and to which section 1042
applied (“restricted qualified
securities”). In determining the amount
realized (except as otherwise provided
in Q&A-3 of this section), any
disposition of employer securities with
respect to which the condition contained
in provision (c) of Q&A-l is met shall be
treated, first, as a disposition of
restricted qualified securities (on a first
in, first out basis) and, thereafter, as a
disposition of any other employer
securities. Thus, for example, if a plan
disposes of more employer securities
than the number of restricted qualified
securities held by the plan at that time
and immediately after such disposition
the value of the employer securities held
by the plan is less than 30 percent of the
total value of all outstanding employer
securities, the portion of the total
amount realized that is allocable to
restricted qualified securities subject to
tax under section 4978 is determined by
multiplying the total amount realized on
the disposition by a fraction, the
numerator of which is the total value of
restricted qualified securities included
in the disposition and the denominator
of which is the total value of employer
securities in the disposition.
Q-3: What constitutes a “disposition”
under section 4978?
A-3: (a) Under section 4978, the term
“disposition” includes any sale,
exchange, or distribution. However, in
the case of any exchange of qualified
■securities for stock of another
corporation in any reorganization
described in section 368(a)(1), such
exchange shall not be treated as a
disposition for purposes of section 4978.

(b) Section 4978 shall not apply to any
disposition of qualified sécurités which
is made by reason of:
(1) The death of the employee;
(2) The retirement of the employee
after the employee has attained 59Vfe
years of age;
(3) The disability of the employee
(within the meaning of section 72(m)(5});
or
(4) The separation of the employee
from service for any period which
results in a 1-year break in service
(within the meaning of section
411(a)(6)(A)).
Any disposition of employer securities
within this paragraph and any
disposition of employer securities with
respect to which the condition contained
in provision (c) of Q&A-l of this section
is not met shall be treated, first, as a
disposition of securities that are not
restricted qualified securities and,
thereafter, as a disposition of restricted
qualified sécurités (on a first-in, first-out
basis).
(c) If restricted qualified securities
held by an employee stock ownership
plan or eligible worker-owned
cooperative no longer meet the
definition of qualified securities (“old
restricted qualified securities”) as a
result of a transaction changing (1) the
status of a corporation as an employer,'
or as a member of a controlled group of
corporations including the employer, or
(2) the existence o f employer securities
of the type described in section 409(1)(1),
the disposition of such securities shall
not be treated as a dispostion of
restricted qualified sécurités to which
the tax under section 4978 is imposed if,
within 90 days after such disposition,
securities meeting the requirements of
section 409(1) (“new restricted qualified
securities”) that are of equal value to the
old restricted qualfied securities (at the
time of the disposition of the old
restricted qualified securities) are
substituted for such old restricted
qualified securities. However, for
purposes of determining the tax imposed
under section 4978, old restricted
qualified securities shall not be treated
as if they retained their status as
restricted qualified securities and new
restricted qualified securities derived
from the disposition of old restricted
qualified securities pursuant to the
preceding sentence shall be treated as
restricted qualified securities for the
remaining portion of the period during
which the disposition of the old
restricted qualified securities would
have been subject to tax under section
4978.
Q-4: To whom does the tax under
section 4978 apply?

4337

A-4: The tax under section 4978 is
imposed on the domestic corporation (or
corporations) or the eligible workerowned cooperative that made the
written statement of consent as
described in section 1042(a)(2)(B) and
Q&A-2 of § 1.1042-1T with respect to
the disposition of the restricted qualified
securities.
Q-5: When does section 4978, as
enacted by the Tax Reform Act of 1984,
become effective?
A-5: Section 4978 applies to the
disposition of qualified securities
acquired in a sale to which section 1042
applies. See Q&A-6 of § 1.1042-lT for
the effective date of section 1042.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 23. The following new section is
added after § 301.7701-16 to read as
follows:
§ 301.7701-17T Collective-bargaining
plans and agreements. (Temporary)

Q -l: How did the Tax Reform Act of
1984 (TRA of 1984) change the laws with
respect to plans that are maintained
pursuant to collective bargaining
agreements?
A -l: (a) Many of the requirements and
rules applicable to deferred
compensation and welfare benefit plans
are different for plans maintained
pursuant to a collective bargaining
agreement. Prior to the TRA of 1984, the
Internal Revenue Code provided no
clear definition of an employee
representative or whether there is a
collective bargaining agreement
between such employee representative
and one or more employers.
(b) Section 526(c) of the TRA of 1984
added a new condition under a new
section 7701(a)(46) that must be satisfied
in order for a plan to be considered to
be a plan maintained pursuant to a
collective bargaining agreement
between employee representatives and
one or more employers for purposes of
the Code after March 31,1984. If more
than one-half of the membership of an
organization is comprised of owners,
officers, and executives of employers
covered by the plan, then such
organization is not an employee
representative for purposes of
determining whether a plan is to be
treated as maintained pursuant to a
collective bargaining agreement
between employee representatives and
one or more employers. Whether an
individual is an owner, officer or
executive is to be determined separately
with respect to each employer.
Additionally, section 7701(a)(46)
provides that the Internal Revenue

4338

F ed eral R egister / Vol. 51, No. 23 / Tuesd ay, Febru ary 4, 1986 / Rules and Regulations

Service shall make the determination for
purposes of the Code as to whether
there is a collective bargaining
agreement between employee
representatives and one or more
employers.
Q-2: If an organization does not fail to
be an employee representative under the
50 percent or less test of section
7701(a)(46), is a plan maintained
pursuant to an agreement between such
organization and one or more employers
necessarily treated, under the Code, as a
plan maintained pursuant to a collective
bargaining agreement between an
employee representative and one or
more employers?
A-2: (a) No.
(b) Specific Code provisions generally
require other conditions than that in
section 7701(a)(46) to be satisfied in
order for a plan to be considered to be
collectively-bargained. For example, in
order for a plan to be described in
section 413(a), the Secretary of Labor
must find that the plan is maintained
pursuant to a collective bargaining
agreement between employee
representatives and one or more
employers.
(c) Even if (1) the finding in the
example in the preceding paragraph (b)
is made by the Secretary of Labor, (2)
the union has been recognized as
exempt under section 501(c)(5), and (3)
the percentage condition in section
7701(a)(46) is satisfied, the Internal
Revenue Service has the authority,
pursuant to section 7701(a)(46), to
determine whether there is a collective
bargaining agreement under the Code.
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 24. The authority citation for Part
602 continues to read as follows:
Authority: 26 U.S.C. 7805

§602.101

Roscoe L. Egger, Jr.,

C om m issioner o f Internal Revenue.
Approved: December 20,1985.
Ronald A. Pearlman,

A ssistant Secretary o f the Treasury.
[FR Doc. 86-2172 Filed 1-29-86; 4:04 pm]
BILLING CODE 4830-01-M

Bureau of Alcohol, Tobacco and
Firearms
27 CFR Parts 4, 5, and 7
[T.D. AT F -210; Correction]

Disclosure of Saccharin in the
Labeling of Wine, Distilled Spirits, and
Malt Beverages
Bureau of Alcohol, Tobacco
and Firearms (ATF), Treasury.
a c t i o n : Treasury decision, final rule;
correction.
AGENCY:

s u m m a r y : This document corrects errors
made in FR Doc 85-^29707, published in
the Federal Register on December 20,
1985, at 50 FR 51851.
*

FOR FURTHER IN FO R M A TIO N CONTACT:

James P. Ficaretta, FAA, Wine and Beer
Branch, Bureau of Alcohol, Tobacco and
Firearms, 1200 Pennsylvania Avenue,
NW„ Washington, DC 20226. (202) 5667626.
SUPPLEMENTARY INFO RM A TIO N :

Paragraph 1. The Treasury decision
number should read “T.D. ATF-220.”
Para. 2. In the left column under
“Summary” in the fifth line the word
“continuing” should read “containing.”
Para. 3. In the right column in the
second and third lines remove the
words”, or on the basis of petitions.”
Para. 4. On page 51852 in the right
Golumn the name “David D. Green”
should read “David D. Queen.”
Signed: January 27,1986.
Stephen E. Higgins,

D irector.

[Amended]

Par. 25. Section 602.101(c) is amended
by inserting the following items in the
appropriate places in the table:
§ 1.463-1T.......................................
§ 1.505(c)-lT.......................
§ 1.1042-1T ..............................

date limitation of subsection (d) of that
section.

1545-0916
.....1545-0916
1545-0916

There is a need for immediate
guidance with respect to the provisions
contained in this Treasury decision. For
this reason, it is found impracticable to
issue this Treasury decision with notice
and public procedure under subsection
(b) of section 553 of Title 5 of the United
States Code or subject to the effective

[FR Doc. 86-2416 Filed 2-3-86; 8:45 am]
BILLING CODE 4810-31-M

DEPARTMENT OF TRANSPORTATION
Coast Guard
33 CFR Parts 146,175, and 181
[CGD 78-174A]

Hybrid PFD Carriage Requirements
a g en c y
a c t io n

:

Coast Guard, DOT.
Final rules.

:

: These rules authorize
carriage of hybrid inflatable personal
flotation devices (hybrid PFD’s) on
recreational boats and on Outer
Continental Shelf facilities and establish
conditions for their use. Use of approved
hybrid PFD’s is optional but, if carried,
certain limitations apply. Compared to
most other approved PFD’s, hybrid
PFD’s are more comfortable to wear,
because they contain less flotation
material, yet they provide greater
buoyancy when fully inflated. This
comfort feature should lead to increased
wearing of PFD’s and result in a
corresponding reduction in the number
of drownings in boating accidents.
EFFECTIVE DATE: These rules become
effective on August 4,1986.
a d d r e s s e s : A final regulatory
evaluation has been included in the
public docket for this rulemaking and
may be inspected and copied at the
Marine Safety Council (G-CMC/21),
Room 2110, U.S. Coast Guard, 2100
Second Street SW., Washington, DC
between the hours of 8:00 a.m. and 4:00
p.m., Monday through Friday.
su mma r y

FOR FURTHER IN FO RM A TIO N CONTACT:

Mr. Samuel Wehr, Office of Merchant
Marine Safety, Attn: G-MVI-3/14, 2100
Second Street SW., Washington, DC
20593, (202)-426-1444.
SUPPLEMENTARY INFO RM ATION:

1.
N otice o f P roposed Rulemaking. A
Notice of Proposed Rulemaking (NPRM)
was published in the Federal Register of
May 29,1985 (50 FR 21862 and 21878).
Comments were received from 19
parties in response to the NPRM.
, 2. Equipm ent A pproval Requirements.
An interim final rule for approving
hybrid PFD’s was published in the
Federal Register of August 22,1985 (50
FR 33923). That document contains a
detailed discussion of comments
concerning the carriage of hybrid PFD’s
on recreational boats as well as
comments on the approval requirements
for hybrid PFD’s. The two remaining
comments that relate to hybrid PFD’s
are discussed in this document. For a
detailed explanatiQn of the costs and
benefits associated with the approval
and carriage of hybrid PFD’s please
refer to the discussion accompanying
the hybrid PFD regulation published on
August 22,1985.
3. C arriage R equirem ents For
C om m ercial V essels. Final regulations
for carriage of hybrid PFD’s on certain
commercial vessels are published
elsewhere in this issue of the Federal
Register.
4. P otential For Significant Benefits. A
principal benefit in using hybrid PFD’s
results from having reduced bulk and a