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/ 2002
/ July
/ Thursday, July 11, 2002
[Federal Register: July 11, 2002 (Volume 67, Number 133)]
[Proposed Rules]
[Page 45933-45945]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11jy02-18]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-165868-01]
RIN 1545-BA47
10 or More Employer Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations that provide
guidance regarding whether a welfare benefit fund is part of a 10 or
more employer plan. The regulations reflect changes to the law made by
the Deficit Reduction Act of 1984. The regulations will affect certain
employers that provide welfare benefits to employees through a plan to
which more than one employer contributes. This document also provides
notice of a public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by October 9,
2002. Requests to speak and outlines of topics to be discussed at the
public hearing scheduled for Tuesday, November 5, 2002, must be
received by Tuesday, October 15, 2002.
ADDRESSES: Send submissions to: CC:ITA:RU (REG-165868-01), room 5226,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand delivered between the hours of 8 a.m.
and 5 p.m. to CC:ITA:RU (REG-165868-01), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC.
Alternatively, taxpayers may submit comments to the IRS Internet site
at www.irs.gov/regs. The public hearing will be held in Room 4718,
Internal Revenue Service Building, 1111 Constitution Avenue, NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Betty J. Clary, (202) 622-6080; concerning submissions of comments, the
hearing, and/or to be placed on the building access list to attend the
hearing, Regulations Unit Paralegal (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collections of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
[[Page 45934]]
Information and Regulatory Affairs, Washington, DC 20503, with copies
to the Internal Revenue Service, Attn: IRS Reports Clearance Officer,
W:CAR:MP:FP:S Washington, DC 20224. Comments on the collections of
information should be received by September 9, 2002. Comments are
specifically requested concerning:
Whether the proposed collections of information are necessary for
the proper performance of the functions of the Internal Revenue
Service, including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collections of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collections of information in this proposed regulation are in
Sec. 1.419A(f)(6)-1(a)(2) and Sec. 1.419A(f)(6)-1(e). These collections
of information are authorized by section 419A(i) of the Internal
Revenue Code. This information will be required by the Commissioner and
by employers participating in a plan that is intended to be a 10 or
more employer plan described in section 419A(f)(6) to verify the plan's
compliance with section 419A(f)(6). This information will be used by
the Commissioner and by the employers to determine whether the
provisions of sections 419 and 419A, concerning the deductibility of
employer contributions to a welfare benefit fund, are applicable to the
employers participating in the plan. The respondents are administrators
of plans that include certain taxable or tax-exempt welfare benefit
funds.
Estimated total annual reporting and/or recordkeeping burden: 2500
hours.
Estimated average annual burden hours per respondent and/or
recordkeeper: 25 hours.
Estimated number of respondents and/or recordkeepers: 100.
Estimated annual frequency of responses: On occasion.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains proposed amendments to the Income Tax
Regulations under section 419A of the Internal Revenue Code. Sections
419 and 419A, which were added to the Code by section 511 of the
Deficit Reduction Act of 1984, Public Law 98-369 (98 Stat. 494), set
forth special rules for the deduction of contributions to a welfare
benefit fund that would otherwise be deductible, including limitations
on the amount of the deduction. Pursuant to section 419A(f)(6), the
rules of sections 419 and 419A do not apply in the case of a welfare
benefit fund that is part of a plan to which more than one employer
contributes and to which no employer normally contributes more than 10
percent of the contributions of all employers under the plan. However,
this exception for 10 or more employer plans does not apply to any plan
that maintains experience-rating arrangements with respect to
individual employers.
Section 419A(i) of the Code provides that the Secretary shall
prescribe regulations as may be appropriate to carry out the purposes
of sections 419 and 419A. Section 419A(i) further provides that the
regulations may provide that the plan administrator of any welfare
benefit fund to which more than one employer contributes shall submit
such information to the employers contributing to the fund as may be
necessary to enable the employers to comply with the provisions of
section 419A.
The legislative history of sections 419 and 419A of the Code
explains that the principal purpose of the deduction limits for
contributions to welfare benefit funds ``is to prevent employers from
taking premature deductions, for expenses which have not yet been
incurred, by interposing an intermediary organization which holds
assets which are used to provide benefits to the employees of the
employer.'' H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 1155 (1984),
1984-3 C.B. (Vol. 2) 1, 409. The section 419(e)(3) definition of fund
includes taxable trusts and organizations described in section
501(c)(9) and includes regulatory authority to encompass ``any account
held for an employer by any person.'' The legislative history indicates
that the regulatory definition of fund should be broad and should
encompass situations ``in which an employer may, in some cases, pay an
insurance company more in a year than the benefit costs incurred in
that year and the employer has an unconditional right in a later year
to a refund or credit of the excess of payments over benefit costs.''
H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 1155 (1984), 1984-3 C.B.
(Vol. 2) 1, 409.\1\
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\1\ Section 1851 of the Tax Reform Act of 1986, Public Law 99-
514 (100 Stat. 2085), modified the definition of ``fund'' in section
419(e) to exclude amounts held pursuant to a specific type of
insurance contract. While section 419(e)(4), as amended, clarifies
that assets held by an insurance company under certain experience-
rated contracts do not constitute a fund (so that premiums under
those contracts are not subject to the deduction limitations of
section 419), this amendment has no relevance in determining whether
a plan intended to be described in section 419A(f)(6) has an
experience-rating arrangement with respect to individual employers.
Any insurance contracts purchased under a 10 or more employer plan
are investments of the fund and are not the fund itself.
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The legislative history of section 419A(f)(6) of the Code explains
that the reason the deduction limits of sections 419 and 419A do not
generally apply to a fund that is part of a 10 or more employer plan is
that ``the relationship of a participating employer to [such a] plan
often is similar to the relationship of an insured to an insurer.''
H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 1159 (1984), 1984-3 C.B.
(Vol. 2) 1, 413. Thus, the premise underlying the exception is that no
special limitation on deductions is necessary in situations where a
payment by an employer in excess of the minimum necessary to currently
provide for the benefits under the plan is effectively lost to that
employer, because the economics of the plan will discourage excessive
contributions.
The exception to the deduction limitation does not apply, however,
where the plan maintains experience-rating arrangements with respect to
individual employers. The reason for excluding these plans from the
exception is that an experience-rating arrangement with respect to an
individual employer changes the economics of the plan and allows an
employer to contribute an amount in excess of the minimum amount
necessary to provide for the current benefits with the confidence that
the excess will inure to the benefit of that employer or its employees.
The legislative history notes that making the exception to the
deduction limits unavailable to plans that determine contributions on
the basis of experience rating is consistent with the general
[[Page 45935]]
rules relating to the definition of fund because ``the employer's
interest with respect to such a plan is more similar to the
relationship of an employer to a fund than an insured to an insurer.''
H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 1159 (1984), 1984-3 C.B.
(Vol. 2) 1, 413.
In Notice 95-34, 1995-1 C.B. 309, the IRS identified certain types
of arrangements that do not satisfy the requirements of section
419A(f)(6). Those arrangements typically require large employer
contributions relative to the cost of the coverage for the benefits to
be provided under the plan. The plans identified in the Notice often
maintain separate accounting of the assets attributable to the
contributions made by each participating employer.\2\ In some cases an
employer's contributions are related to the claims experience of its
employees, while in other cases benefits are reduced if assets derived
from an employer's contributions are insufficient to fund the benefits
to that employer's employees. Thus, a particular employer's
contributions or its employees' benefits may be determined in a way
that insulates the employer to a significant extent from the experience
of other participating employers.
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\2\ See Booth v. Commissioner, 108 T.C. 524 (1997), for an
arrangement using a separate accounting system that does not qualify
under the 10 or more employer plan exception.
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The arrangements described in Notice 95-34 and similar arrangements
do not satisfy the requirements of section 419A(f)(6) of the Code and
do not provide the tax deductions claimed by their promoters for any of
several reasons. For example, such an arrangement may be providing
deferred compensation; the arrangement may be separate plans maintained
for each employer; or the plan may be maintaining, in form or in
operation, experience-rating arrangements with respect to individual
employers (e.g., where the employers have reason to expect that, at
least for the most part, their contributions will benefit only their
own employees). The Notice also states that even if an arrangement
satisfies the requirements of section 419A(f)(6), so that the deduction
limits of sections 419 and 419A do not apply to the arrangement, the
employer contributions may represent expenses that are not deductible
under other sections of the Code.
In Notice 2000-15, 2000-1 C.B. 826 (supplemented and superseded by
Notice 2001-51, 2001-34 I.R.B. 190), the Service identified
transactions that are the same as or substantially similar to the
transactions described in Notice 95-34 as listed transactions for
purposes of Sec. 1.6011-4T(b)(2) of the Temporary Income Tax
Regulations and Sec. 301.6111-2T(b)(2) of the Temporary Procedure and
Administration Regulations. Independent of their classification as
``listed transactions'' for purposes of Secs. 1.6011-4T(b)(2) and
301.6111-2T(b)(2), such transactions may also be subject to the
disclosure requirements of section 6011, the tax shelter registration
requirements of section 6111, or the list maintenance requirements of
section 6112 under the regulations issued in February 2000
(Secs. 1.6011-4T, 301.6111-2T and 301.6112-1T, A-4), as well as the
regulations issued in 1984 and amended in 1986 (Secs. 301.6111-1T and
301.6112-1T, A-3). Persons required to register these tax shelters who
have failed to register the shelters may be subject to the penalty
under section 6707(a), and to the penalty under section 6708(a) if the
requirements of section 6112 are not satisfied.
Explanation of Provisions
These proposed regulations provide guidance under section
419A(f)(6) of the Code regarding the requirements that a welfare
benefit fund must satisfy in order for an employer's contribution to
the fund to be excepted from the rules of sections 419 and 419A. These
regulations are consistent with the IRS's analysis of the arrangements
described in Notice 95-34, discussed above and reproduced below.
Section 419A(f)(6) of the Code provides that sections 419 and 419A
do not apply in the case of a welfare benefit fund that is part of a 10
or more employer plan that does not maintain experience-rating
arrangements with respect to individual employers. A 10 or more
employer plan is a plan to which more than one employer contributes and
to which no employer normally contributes more than 10 percent of the
total contributions contributed under the plan by all employers.
Pursuant to the authority set forth in section 419A(i), the
proposed regulations provide a special rule to assist participating
employers and the Commissioner in verifying that the arrangement
satisfies the section 419A(f)(6) requirements. Under that rule, an
arrangement satisfies the requirements of section 419A(f)(6) and the
regulations only if the plan is maintained pursuant to a written
document that (1) requires the plan administrator to maintain records
sufficient for the Commissioner or any participating employer to
readily verify the plan's compliance with section 419A(f)(6) and (2)
provides the Commissioner and each participating employer with the
right to inspect and copy all such records.
In addition, the proposed regulations make clear that in order to
be eligible for the exception from the deduction limits of sections 419
and 419A, a plan must satisfy the requirements of section 419A(f)(6)
and these regulations both in form and operation. For purposes of these
regulations, the term plan means the totality of the arrangement and
all related facts and circumstances, including any related insurance
contracts. Thus, all agreements and understandings (including
promotional materials and policy illustrations) will be taken into
account in determining whether the requirements of section 419A(f)(6)
are satisfied in form and in operation. For example, if promotional
materials indicate that an employer or its employees will receive a
future benefit based on the employer's accumulated contributions, the
plan will be treated as maintaining experience-rating arrangements with
respect to individual employers, even if the formal plan does not
specifically provide for experience rating.
The proposed regulations clarify the situations in which a plan
maintains experience-rating arrangements with respect to individual
employers for purposes of section 419A(f)(6). A plan maintains an
experience-rating arrangement with respect to an employer if the
employer's cost of coverage for any period is based, in whole or in
part, either on the benefits experience or on the overall experience
(or on any proxy for the benefits experience or overall experience) of
that employer or one or more employees of that employer. The
prohibition against experience rating with respect to individual
employers applies under all circumstances, including employer
withdrawals and plan terminations.
For purposes of the proposed regulations, an employer's cost of
coverage is the relationship between that employer's contributions
(including those of its employees) under the plan and the benefits or
other amounts payable under the plan with respect to that employer. The
term benefits or other amounts payable includes all amounts payable or
distributable (or that will be otherwise provided), regardless of the
form of the payment or distribution. Benefits experience refers,
generally, to the benefits and other amounts incurred, paid, or
distributed (or otherwise provided) in the past. The overall experience
of an employer is the balance that would have accumulated in a welfare
benefit fund if that employer
[[Page 45936]]
were the only employer providing benefits under the plan. The overall
experience of an employee is the balance that would have accumulated in
a welfare benefit fund if that employee were the only employee being
provided benefits under the plan. Overall experience is defined
similarly for a group of employers or a group of employees.
The proposed regulations illustrate various ways a plan can violate
the prohibition against maintaining experience-rating arrangements with
respect to individual employers: By adjusting an employer's
contributions, by adjusting the benefits for its employees, or by
adjusting both, based on the benefits experience or overall experience
of the employees of that employer.
Thus, a plan maintains an experience-rating arrangement with
respect to an individual employer if the current (or future) cost of
coverage of the employer is (or will be) based on either the past
benefits or other amounts paid with respect to one or more of that
employer's employees (or any proxy therefor) or on the balance
accumulated in the fund as a result of the employer's or its employees'
past contributions (or any proxy therefor). Accordingly, the process
for determining whether a plan maintains an experience-rating
arrangement is to inquire whether the past experience of an individual
employer or its employees is used, in whole or in part, to determine
the employer's cost of coverage. This determination is not intended to
be purely a computational one (although actual numbers often can be
used to demonstrate the existence of an experience-rating arrangement).
The proposed regulations also include special rules that apply in
certain situations. One rule applies where a plan specifies a minimum
contribution required to maintain a benefit level, but permits an
employer to contribute more, and the amount of benefits and duration of
coverage are fixed. These plans commonly involve universal life
insurance contracts with flexible premiums. When analyzing these
arrangements, for purposes of determining whether an employer's cost of
coverage is based on past experience, the Commissioner may treat the
employer as contributing the minimum contribution amount needed to
maintain that coverage. The relevant question would then be whether the
relationship between the minimum amount the employer must contribute
and the benefits or other amounts payable under the arrangement depends
on the past experience of that employer or its employees.
Another special rule is provided in the case of a plan maintaining
an experience-rating arrangement with respect to a group of
participating employers or a group of employees covered under the plan
(a rating group). Under that rule, a plan will not be treated as
maintaining an experience-rating arrangement with respect to an
individual employer merely because the cost of coverage under a plan
with respect to the employer is based, in whole or in part, on the
benefits experience or the overall experience (or a proxy for either
type of experience) of a rating group that includes the employer or one
or more of its employees, provided that the employer does not normally
contribute more than 10 percent of all contributions with respect to
that rating group.
Other special rules relate to the treatment of insurance contracts.
Under those rules, insurance contracts under an arrangement are treated
as assets of the fund. Thus, any payments under an arrangement from an
employer or its employees directly to an insurance company will be
treated as contributions to the fund, and any amounts paid by the
insurance company under the arrangement will be treated as paid by the
fund. Further, as of any date, the fund will be treated as having
either a gain or loss with respect to an insurance contract, depending
upon the benefits paid under the contract, the value of the contract,
and the premiums paid on the contract.
These special rules relating to insurance contracts recognize that
if whole life insurance policies, or similar policies that generate a
savings element, are purchased under an arrangement, the retained
values of those policies (including cash values, reserves, and any
other economic values, such as conversion credits or high dividend
rates) reflect the past experience of the employees who participate
under the plan. As a result, if the retained values associated with
policies insuring an employer's employees under an arrangement are used
to determine the current cost of coverage for that employer (as opposed
to being shared among all of the employers participating in the plan),
the employer can anticipate that its past contributions in excess of
incurred losses for claims for its employees will inure to the benefit
of the employer (as opposed to the other employers participating in the
plan). This assurance that the employer will benefit from favorable
past experience is the hallmark of an experience-rating arrangement. It
is also the hallmark of the type of welfare benefit fund that Congress
intended to be subject to the deduction limitations of sections 419 and
419A.
Furthermore, Congress' expectation that employers participating in
10 or more employer plans would not have a financial incentive to over-
contribute was the basis for providing the section 419A(f)(6) exception
from the deduction limits of sections 419 and 419A. Allowing a 10 or
more employer plan to use insurance contracts for an employer's
employees with retained values would provide a financial incentive for
the employer to over-contribute to the plan, contrary to the premise
underlying the intent of Congress in providing the exception for 10 or
more employer plans. If the retained values of life insurance contracts
relating to an employer's employees are used to determine that
employer's cost of coverage, the arrangement results in a prohibited
experience-rating arrangement under these proposed regulations.
These proposed regulations also identify five characteristics that
are indications that an employer's interest with respect to the plan is
more similar to the relationship of an individual employer to a fund
than an insured to an insurer. (See, H.R. Conf. Rep. No. 861, 98th
Cong., 2d Sess. 1155 (1984), 1984-3 C.B. (Vol. 2) 1, 413.) The presence
of some of these characteristics in a plan suggests that there are
multiple plans present instead of a single plan. The presence of others
tends to indicate that an employer's cost of coverage is (or will be)
based on that employer's benefits experience. Others tend to indicate
that the plan is expected to accumulate a surplus that ultimately will
be used for the benefit of the individual employers (or their
employees). One way this surplus might be used would be to reduce
future contributions for the individual employers based on past
contributions or claims of the employers. Another way would be to pay
benefits to an employer's employees based on the employer's share of
the surplus on the occasion of the withdrawal of the employer or at
plan termination, thereby violating the rule that an employer's cost of
coverage cannot be based on its overall experience. Accordingly, these
regulations provide that a plan exhibiting any of these characteristics
is not a 10 or more employer plan described in section 419A(f)(6)
unless it is established to the satisfaction of the Commissioner that
the plan satisfies the requirements of section 419A(f)(6) and these
proposed regulations. It should be noted that the fact that a plan has
none
[[Page 45937]]
of these characteristics does not create an inference that it is a 10
or more employer plan described in section 419A(f)(6).
The first characteristic indicating that a plan is not a 10 or more
employer plan described in section 419A(f)(6) is that the assets of the
plan are allocated among the participating employers through a separate
accounting of contributions and expenditures for individual employers
or otherwise. The second characteristic is that amounts charged under
the plan differ among the employers in a manner that is not reflective
of differences in risk or rating factors that are commonly taken into
account in manual rates used by insurers (such as age, gender,
dependents covered, geographic locale, or the benefit package). The
third characteristic is that the plan does not provide for fixed
welfare benefits for a fixed coverage period for a fixed price. The
fourth characteristic is that the plan charges the participating
employers an unreasonably high amount for the covered risk. The fifth
characteristic is that the plan provides for payment of benefits upon
triggering events other than the illness, personal injury, or death of
an employee or family member, or the employee's involuntary termination
of employment.
A number of examples are provided in the proposed regulations
illustrating the application of the rules regarding experience-rating
arrangements to specific fact situations. Many of these arrangements
exhibit the characteristics of a fund that Congress intended to be
subject to the deduction limitations of sections 419 and 419A. Each
example illustrates only the application of the definition of
experience-rating arrangements under section 419A(f)(6) and these
regulations, and no inference should be drawn from the scope of the
examples about whether these plans are otherwise described in section
419A(f)(6) or about any other provision of the Code. For example, no
inference should be drawn about whether any plan described in the
examples is a single plan. In addition, no inference should be drawn
about the applicability or nonapplicability of any other Code
provision, such as section 404, that might limit or preclude the
deduction for contributions to the arrangement. For example, in
Neonatology Associates, P.A., v. Commissioner, 115 T.C. 43 (2000),
appeal docketed, No. 01-2862 (3d Cir.), the Tax Court held that the
contributions were in large part constructive dividends to the
employee/owners (and thus did not reach the government's alternative
contention that the plan was maintaining experience-rating arrangements
with respect to individual employers). In Booth v. Commissioner, 108
T.C. 524 (1997), the Tax Court held that the arrangement was an
aggregation of separate plans (and thus was not a single plan) and that
there were experience-rating arrangements with respect to the
individual employers.
Finally, these proposed regulations provide that the plan
administrator of a plan that is intended to be a 10 or more employer
plan shall maintain records sufficient to substantiate that the plan is
described in section 419A(f)(6). An opinion letter stating the plan is
described in section 419A(f)(6) does not constitute substantiation.
Proposed Effective Date
Except as explained below, these regulations--which generally
clarify existing law--are proposed to be effective for contributions
paid or incurred in taxable years of an employer beginning on or after
the date of publication of this Notice of Proposed Rulemaking in the
Federal Register. For contributions made before this proposed effective
date, the IRS will continue applying existing law, including the
analysis set forth in Notice 95-34 and relevant case law. Thus,
taxpayers should not infer that a contribution that would be
nondeductible under the regulations would be deductible if made before
that date. In this regard, taxpayers are reminded that, as noted above,
the IRS has already identified transactions that are the same as or
substantially similar to the transactions described in Notice 95-34 as
listed transactions for purposes of Sec. 1.6011-4T(b)(2) of the
Temporary Income Tax Regulations and Sec. 301.6111-2T(b)(2) of the
Temporary Procedure and Administration Regulations.
The requirement that written plan documents contain specified
provisions relating to compliance information and the record
maintenance requirement for plan administrators are proposed to be
effective for taxable years of a welfare benefit fund beginning after
the publication of final regulations. Existing record retention
requirements and record production requirements under section 6001
continue to apply to employers and promoters.
For the convenience of taxpayers, Notice 95-34 is reproduced below.
Appendix--Notice 95-34
Taxpayers and their representatives have inquired as to whether
certain trust arrangements qualify as multiple employer welfare
benefit funds exempt from the limits of section 419 and section 419A
of the Internal Revenue Code. The Service is issuing this Notice to
alert taxpayers and their representatives to some of the significant
tax problems that may be raised by these arrangements.
In general, contributions to a welfare benefit fund are
deductible when paid, but only if they qualify as ordinary and
necessary business expenses of the taxpayer and only to the extent
allowable under section 419 and section 419A of the Code. Those
sections impose strict limits on the amount of tax-deductible
prefunding permitted for contributions to a welfare benefit fund.
Section 419A(f)(6) provides an exemption from section 419 and
section 419A for certain welfare benefit funds. In general, for this
exemption to apply, an employer normally cannot contribute more than
10 percent of the total contributions, and the plan must not be
experience rated with respect to individual employers. The
legislative history states that the exemption under section
419A(f)(6) is provided because ``the relationship of a participating
employer to [such a] plan often is similar to the relationship of an
insured to an insurer.'' Even if the 10 percent contribution limit
is satisfied, the exemption does not apply to a plan that is
experience rated with respect to individual employers, because the
``employer's interest with respect to such a plan is more similar to
the relationship of an employer to a fund than an insured to an
insurer.'' H.R. Rep. No. 98-861, 98th Cong., 2d Sess., 1159 (1984-3
C.B. (Vol. 2) 1, 413).
In recent years a number of promoters have offered trust
arrangements that they claim satisfy the requirements for the 10-or-
more-employer plan exemption and that are used to provide benefits
such as life insurance, disability, and severance pay benefits.
Promoters of these arrangements claim that all employer
contributions are tax-deductible when paid, relying on the 10-or-
more-employer exemption from the section 419 limits and on the fact
that they have enrolled at least 10 employers in their multiple
employer trusts.
These arrangements typically are invested in variable life or
universal life insurance contracts on the lives of the covered
employees, but require large employer contributions relative to the
cost of the amount of term insurance that would be required to
provide the death benefits under the arrangement. The trust owns the
insurance contracts. The trust administrator may obtain the cash to
pay benefits, other than death benefits, by such means as cashing in
or withdrawing the cash value of the insurance policies. Although,
in some plans, benefits may appear to be contingent on the
occurrence of unanticipated future events, in reality, most
participants and their beneficiaries will receive their benefits.
The trusts often maintain separate accounting of the assets
attributable to the contributions made by each subscribing employer.
Benefits are sometimes related to the amounts allocated to the
employees of the participant's employer. For example, severance and
disability benefits may be subject to reduction if the assets
derived from an employer's contributions are insufficient to fund
all benefits promised to that employer's employees. In other cases,
an
[[Page 45938]]
employer's contributions are related to the claims experience of its
employees. Thus, pursuant to formal or informal arrangements or
practices, a particular employer's contributions or its employees'
benefits may be determined in a way that insulates the employer to a
significant extent from the experience of other subscribing
employers.
In general, these arrangements and other similar arrangements do
not satisfy the requirements of the section 419A(f)(6) exemption and
do not provide the tax deductions claimed by their promoters for any
one of several reasons, including the following:
(1) The arrangements may actually be providing deferred
compensation. This is an especially important consideration in
arrangements similar to that in Wellons v. Commissioner, 31 F.3d 569
(7th Cir. 1994), aff'g, 64 T.C.M. (CCH) 1498 (1992), where the
courts held that an arrangement purporting to be a severance pay
plan was actually deferred compensation. If the plan is a
nonqualified plan of deferred compensation, deductions for
contributions will be governed by section 404(a)(5), and
contributions to the trust may, in some cases, be includible in
employees' income under section 402(b). Section 404(a)(5) provides
that contributions to a nonqualified plan of deferred compensation
are deductible when amounts attributable to the contributions are
includible in the employees' income, and that deductions are allowed
only if separate accounts are maintained for each employee.
(2) The arrangements may be, in fact, separate plans maintained
for each employer. As separate plans, they do not qualify for the
10-or-more employer plan exemption in section 419A(f)(6).
(3) The arrangements may be experience rated with respect to
individual employers in form or operation. This is because, among
other things, the trust maintains, formally or informally, separate
accounting for each employer and the employers have reason to expect
that, at least for the most part, their contributions will benefit
only their own employees. Arrangements that are experience rated
with respect to individual employers do not qualify for the
exemption in section 419A(f)(6).
(4) Even if the arrangements qualify for the exemption in
section 419A(f)(6), employer contributions to the arrangements may
represent prepaid expenses that are nondeductible under other
sections of the Internal Revenue Code.
Taxpayers and their representatives should be aware that the
Service has disallowed deductions for contributions to these
arrangements and is asserting the positions discussed above in
litigation.
Finally, in response to questions raised by taxpayers and their
representatives, we note that the Service has never issued a letter
ruling approving the deductibility of contributions to a welfare
benefit fund under section 419A(f)(6). Although a trust used to
provide benefits under an arrangement of the type discussed in this
Notice may have received a determination letter stating that the
trust is exempt under section 501(c)(9), a letter of this type does
not address the tax deductibility of contributions to such a trust.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It has also been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations. It is hereby certified
that the collections of information in these regulations will not have
a significant economic impact on a substantial number of small
entities. The collections of information in the regulation are in
Sec. 1.419A(f)(6)-1(a)(2) and Sec. 1.419A(f)(6)-1(e) and consist of the
requirements that a plan administrator maintain certain information and
that it provide that information upon request to the Commissioner and
to employers participating in the plan. This certification is based on
the fact that requests for such information are likely to be made, on
average, less than once per year per employer and that the costs of
maintaining and providing this information are small. In addition,
relatively few small entities are plan administrators. Therefore, a
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Public Hearing
A public hearing has been scheduled for November 5, 2002 at 10
a.m., in room 4718 of the Internal Revenue Building, 1111 Constitution
Avenue NW., Washington, DC. Because of access restrictions, visitors
must enter at the main entrance, located at 1111 Constitution Ave, NW.
All visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 30 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend hearing, see the FOR FURTHER INFORMATION CONTACT
portion of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit electronic or
written comments and an outline of topics to be discussed and time to
be devoted to each topic (preferably a signed original and eight (8)
copies) by October 15, 2002. A period of 10 minutes will be allotted to
each person for making comments. An agenda showing the scheduling of
the speakers will be prepared after the deadline for receiving outlines
has passed. Copies of the agenda will be available free of charge at
the hearing.
Drafting Information
The principal author of these regulations is Betty J. Clary, Office
of the Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *.
Section 1.419A(f)(6)-1 is also issued under 26 U.S.C. 419A(i). * *
*
Par. 2. Section 1.419A(f)(6)-1 is added to read as follows:
Sec. 1.419A(f)(6)-1 Exception for 10 or more employer plan.
(a) Requirements--(1) In general. Sections 419 and 419A do not
apply in the case of a welfare benefit fund that is part of a 10 or
more employer plan described in section 419A(f)(6). A plan is a 10 or
more employer plan described in section 419A(f)(6) only if it is a
single plan--
(i) To which more than one employer contributes;
(ii) To which no employer normally contributes more than 10 percent
of the total contributions contributed under the plan by all employers;
(iii) That does not maintain an experience-rating arrangement with
respect to any individual employer; and
(iv) That satisfies the requirements of paragraph (a)(2) of this
section.
(2) Compliance information. A plan satisfies the requirements of
this paragraph (a)(2) if the plan is maintained pursuant to a written
document that requires the plan administrator to maintain records
sufficient for the Commissioner or any participating employer to
readily verify that the plan satisfies the requirements of section
419A(f)(6) and this section
[[Page 45939]]
and that provides the Commissioner and each participating employer (or
a person acting on the participating employer's behalf) with the right,
upon written request to the plan administrator, to inspect and copy all
such records. See Sec. 1.414(g)-1 for the definition of plan
administrator.
(3) Application of rules--(i) In general. The requirements
described in paragraph (a)(1) and (a)(2) of this section must be
satisfied both in form and in operation.
(ii) Plan includes totality of arrangement. For purposes of this
section, the term plan includes the totality of the arrangement and all
related facts and circumstances, including any related insurance
contracts. Accordingly, all agreements and understandings (including
promotional materials and policy illustrations) and the terms of any
insurance contract will be taken into account in determining whether
the requirements are satisfied in form and in operation.
(b) Experience-rating arrangements--(1) General rule. A plan
maintains an experience-rating arrangement with respect to an
individual employer and thus does not satisfy the requirement of
paragraph (a)(1)(iii) of this section if, with respect to that
employer, there is any period for which the relationship of
contributions under the plan to the benefits or other amounts payable
under the plan (the cost of coverage) is or can be expected to be
based, in whole or in part, on the benefits experience or overall
experience (or a proxy for either type of experience) of that employer
or one or more employees of that employer. For purposes of this
paragraph (b)(1), an employer's contributions include all contributions
made by or on behalf of the employer or the employer's employees. See
paragraph (d) of this section for the definitions of benefits
experience, overall experience, and benefits or other amounts payable.
The rules of this paragraph (b) apply under all circumstances,
including employer withdrawals and plan terminations.
(2) Adjustment of contributions. An example of a plan that
maintains an experience-rating arrangement with respect to an
individual employer is a plan that entitles an employer to (or for
which the employer can expect) a reduction in future contributions if
that employer's overall experience is positive. Similarly, a plan
maintains an experience-rating arrangement with respect to an
individual employer where an employer can expect its future
contributions to be increased if the employer's overall experience is
negative. A plan also maintains an experience-rating arrangement with
respect to an individual employer where an employer is entitled to
receive (or can expect to receive) a rebate of all or a portion of its
contributions if that employer's overall experience is positive or,
conversely, where an employer is liable to make additional
contributions if its overall experience is negative.
(3) Adjustment of benefits. An example of a plan that maintains an
experience-rating arrangement with respect to an individual employer is
a plan under which benefits for an employer's employees are (or can be
expected to be) increased if that employer's overall experience is
positive or, conversely, under which benefits are (or can be expected
to be) decreased if that employer's overall experience is negative. A
plan also maintains an experience-rating arrangement with respect to an
individual employer if benefits for an employer's employees are limited
by reference, directly or indirectly, to the overall experience of the
employer (rather than having all the plan assets available to provide
the benefits).
(4) Special rules--(i) Treatment of insurance contracts--(A) In
general. For purposes of this section, insurance contracts under the
arrangement will be treated as assets of the fund. Accordingly, the
value of the insurance contracts (including non-guaranteed elements) is
included in the value of the fund, and amounts paid between the fund
and the insurance company are disregarded, except to the extent they
generate gains or losses as described in paragraph (b)(4)(i)(c) of this
section.
(B) Payments to and from an insurance company. Payments from a
participating employer or its employees to an insurance company
pursuant to insurance contracts under the arrangement will be treated
as contributions made to the fund, and amounts paid under the
arrangement from an insurance company will be treated as payments from
the fund.
(C) Gains and losses from insurance contracts. As of any date, if
the sum of the benefits paid by the insurer and the value of the
insurance contract (including non-guaranteed elements) is greater than
the cumulative premiums paid to the insurer, the excess is treated as a
gain to the fund. As of any date, if the cumulative premiums paid to
the insurer are greater than the sum of the benefits paid by the
insurer and the value of the insurance contract (including non-
guaranteed elements), the excess is treated as a loss to the fund.
(ii) Treatment of flexible contribution arrangements. Solely for
purposes of determining the cost of coverage under a plan, if
contributions for any period can vary with respect to a benefit
package, the Commissioner may treat the employer as contributing the
minimum amount that would maintain the coverage for that period.
(iii) Experience rating by group of employers or group of
employees. A plan will not be treated as maintaining an experience-
rating arrangement with respect to an individual employer merely
because the cost of coverage under the plan with respect to the
employer is based, in whole or in part, on the benefits experience or
the overall experience (or a proxy for either type of experience) of a
rating group, provided that no employer normally contributes more than
10 percent of all contributions with respect to that rating group. For
this purpose, a rating group means a group of participating employers
that includes the employer or a group of employees covered under the
plan that includes one or more employees of the employer.
(iv) Family members, etc. For purposes of this section,
contributions with respect to an employee include contributions with
respect to any other person (e.g., a family member) who may be covered
by reason of the employee's coverage under the plan and amounts
provided with respect to an employee include amounts provided with
respect to such a person.
(c) Characteristics indicating a plan is not a 10 or more employer
plan--(1) In general. The presence of any of the characteristics
described in paragraphs (c)(2) through (c)(6) of this section generally
indicates that the plan is not a 10 or more employer plan described in
section 419A(f)(6). Accordingly, unless established to the satisfaction
of the Commissioner that the plan satisfies the requirements of section
419A(f)(6) and this section, a plan having any of the following
characteristics is not a 10 or more employer plan described in section
419A(f)(6). A plan's lack of all the following characteristics does not
create any inference that the plan is a 10 or more employer plan
described in section 419A(f)(6).
(2) Allocation of plan assets. Assets of the plan or fund are
allocated to a specific employer or employers through separate
accounting of contributions and expenditures for individual employers,
or otherwise.
(3) Differential pricing. The amount charged under the plan is not
the same for all the participating employers, and those differences are
not reflective of differences in risk or rating factors that
[[Page 45940]]
are commonly taken into account in manual rates used by insurers (such
as age, gender, geographic locale, number of covered dependents, and
benefit terms) for the particular benefit or benefits being provided.
(4) No fixed welfare benefit package. The plan does not provide for
fixed welfare benefits for a fixed coverage period for a fixed cost,
within the meaning of paragraph (d)(5) of this section.
(5) Unreasonably high cost. The plan provides for fixed welfare
benefits for a fixed coverage period for a fixed cost, but that cost is
unreasonably high for the covered risk for the plan as a whole.
(6) Nonstandard benefit triggers. Benefits or other amounts payable
can be paid, distributed, transferred, or otherwise provided from a
fund that is part of the plan by reason of any event other than the
illness, personal injury, or death of an employee or family member, or
the employee's involuntary separation from employment. Thus, for
example, a plan exhibits this characteristic if the plan provides for
the payment of benefits to an employer's employees on the occasion of
the employer's withdrawal from the plan.
(d) Definitions. For purposes of this section:
(1) Benefits or other amounts payable. The term benefits or other
amounts payable includes all amounts that are payable or distributable
(or that will be otherwise provided) directly or indirectly to
employers, to employees or their beneficiaries, or to another fund as a
result of a spinoff or transfer, and without regard to whether payable
or distributable as welfare benefits, cash, dividends, rebates of
contributions, property, promises to pay, or otherwise.
(2) Benefits experience. The benefits experience of an employer (or
of an employee or a group of employers or employees) means the benefits
and other amounts incurred, paid, or distributed (or otherwise
provided) directly or indirectly, including to another fund as a result
of a spinoff or transfer, with respect to the employer (or employee or
group of employers or employees), and without regard to whether
provided as welfare benefits, cash, dividends, credits, rebates of
contributions, property, promises to pay, or otherwise.
(3) Overall experience--(i) Employers. The term overall experience
means, with respect to an employer (or group of employers), the balance
that would have accumulated in a welfare benefit fund if that employer
(or those employers) were the only employer (or employers) providing
welfare benefits under the plan. Thus, the overall experience is
credited with the sum of the contributions under the plan with respect
to that employer (or group of employers), less the benefits and other
amounts paid or distributed (or otherwise provided) with respect to
that employer (or group of employers) or the employees of that employer
(or group of employers), and adjusted for gain or loss from insurance
contracts (as described in paragraph (b)(4)(i) of this section),
investment return, and expenses. Overall experience as of any date may
be either a positive or a negative number.
(ii) Employees. The term overall experience means, with respect to
an employee (or group of employees, whether or not employed by the same
employer), the balance that would have accumulated in a welfare benefit
fund if the employee (or group of employees) were the only employee (or
employees) being provided welfare benefits under the plan. Thus, the
overall experience is credited with the sum of the contributions under
the plan with respect to that employee (or group of employees), less
the benefits and other amounts paid or distributed (or otherwise
provided) with respect to that employee (or group of employees), and
adjusted for gain or loss from insurance contracts (as described in
paragraph (b)(4)(i) of this section), investment return, and expenses.
Overall experience as of any date may be either a positive or a
negative number.
(4) Employer. The term employer means the employer whose employees
are participating in the plan and those employers required to be
aggregated with the employer under section 414(b), (c), or (m). In the
case of an employer that is the recipient of services performed by a
leased employee described in section 414(n) who participates in the
plan, the leased employee is treated as an employee of the recipient
and contributions made by the leasing organization attributable to
service performed with the recipient are treated as made by the
recipient.
(5) Fixed welfare benefit package--(i) In general. A plan provides
for fixed welfare benefits for a fixed coverage period for a fixed
cost, if it--
(A) Defines one or more welfare benefits, each of which has a fixed
amount that does not depend on the amount or type of assets held by the
fund,
(B) Specifies fixed contributions to provide for those welfare
benefits, and
(C) Specifies a coverage period during which the plan agrees to
provide specified welfare benefits, subject to the payment of the
specified contributions by the employer.
(ii) Treatment of actuarial gains or losses. A plan will not be
treated as failing to provide for fixed welfare benefits for a fixed
coverage period for a fixed cost merely because the plan does not pay
the promised benefits (or requires all participating employers to make
proportionate additional contributions based on the fund's shortfall)
when there are insufficient assets under the plan to pay the promised
benefits. Similarly, a plan will not be treated as failing to provide
for fixed welfare benefits for a fixed coverage period for a fixed cost
merely because the plan provides a period of extended coverage after
the end of the coverage period to all participating employers at no
cost to the employers (or provides a proportionate refund of
contributions to all participating employers) because of the plan-wide
favorable actuarial experience during the coverage period.
(e) Maintenance of records. The plan administrator of a plan that
is intended to be a 10 or more employer plan described in section
419A(f)(6) shall maintain permanent records and other documentary
evidence sufficient to substantiate that the plan satisfies the
requirements of section 419A(f)(6) and this section. (See
Sec. 1.414(g)-1 for the definition of plan administrator.)
(f) Examples. The provisions of paragraph (c) of this section and
the provisions of section 419A(f)(6) and this section relating to
experience-rating arrangements may be illustrated by the following
examples. Unless stated otherwise, it should be assumed that any life
insurance contract described in an example is non-participating and has
no value other than the value of the policy's current life insurance
protection plus its cash value. Paragraph (ii) of each example applies
the characteristics listed in paragraph (c) of this section to the
facts described in that example. Paragraphs (iii) and (iv) of each
example analyze the facts described in the example to determine whether
the plan maintains experience-rating arrangements with respect to
individual employers. Paragraphs (iii) and (iv) of each example
illustrate only the meaning of experience-rating arrangements. No
inference should be drawn from these examples about whether these plans
are otherwise described in section 419A(f)(6) or about the
applicability or nonapplicability of any other Internal Revenue Code
provision that may limit or deny the deduction of contributions to the
arrangements. Further, no inference should be drawn from the examples
concerning the tax treatment of employees as a result of the employer
[[Page 45941]]
contributions or the provision of the benefits.
Example 1. (i) An arrangement provides welfare benefits to
employees of participating employers. Each year a participating
employer is required to contribute an amount equal to the claims and
other expenses expected with respect to that employer for the year
(based on age, gender, geographic locale, number of participating
employees, benefit terms, and other risk or rating factors commonly
taken into account in manual rates used by insurers for the benefits
being provided), multiplied by the ratio of actual claims with
respect to that employer for the previous year over the expected
claims with respect to that employer for the previous year. No
employer participating in the arrangement contributes more than 10
percent of the total contributions made under the arrangement by all
the employers.
(ii) This arrangement exhibits at least one of the
characteristics listed in paragraph (c) of this section generally
indicating that the arrangement is not a 10 or more employer plan
described in section 419A(f)(6). Differential pricing exists under
this arrangement because the amount charged under the plan is not
the same for all the participating employers, and those differences
are not reflective of differences in risk or rating factors that are
commonly taken into account in manual rates used by insurers for the
particular benefit or benefits being provided.
(iii) This arrangement does not satisfy the requirements of
section 419A(f)(6) and this section because, at a minimum, the
requirement of paragraph (a)(1)(iii) of this section is not
satisfied. Under the arrangement, an employer's cost of coverage for
each year is based, in part, on that employer's benefits experience
(i.e., the benefits and other amounts provided in the past with
respect to one or more employees of that employer). Accordingly,
pursuant to paragraph (b)(1) of this section, the arrangement
maintains experience-rating arrangements with respect to individual
employers.
Example 2. (i) The facts are the same as in Example 1, except
that the amount charged to an employer each year is equal to claims
and other expenses expected with respect to that employer for the
year (determined the same as in Example 1), multiplied by the ratio
of actual claims for the previous year (determined on a plan-wide
basis) over the expected claims for the previous year (determined on
a plan-wide basis).
(ii) Based on the limited facts described above, this
arrangement exhibits none of the characteristics listed in paragraph
(c) of this section generally indicating that the arrangement is not
a 10 or more employer plan described in section 419A(f)(6). Unlike
the arrangement discussed in Example 1, there is no differential
pricing under the arrangement because the only differences in the
amounts charged to the employers are solely reflective of
differences in risk or rating factors that are commonly taken into
account in manual rates used by insurers for the particular benefit
or benefits being provided.
(iii) Nothing in the facts described in this Example 2 indicates
that the arrangement maintains experience-rating arrangements
prohibited under section 419A(f)(6) and this section. An employer's
cost of coverage under the arrangement is based, in part, on the
benefits experience of that employer (as well as of all the other
participating employers). However, pursuant to paragraph (b)(4)(iii)
of this section, the arrangement will not be treated as maintaining
experience-rating arrangements with respect to the individual
employers merely because the employers' cost of coverage is based on
the benefits experience of a group of employees eligible under the
plan, provided no employer normally contributes more than 10 percent
of all contributions with respect to the rating group that includes
the employees of an individual employer. Under the arrangement
described in this Example 2, the rating group includes all the
participating employers (or all of their employees), and no employer
normally contributes more than 10 percent of the contributions made
under the arrangement by all the employers. Accordingly, absent
other facts, the arrangement will not be treated as maintaining
experience-rating arrangements with respect to individual employers.
Example 3. (i) Arrangement A provides welfare benefits to
employees of participating employers. Each year an employer is
required to contribute an amount equal to the claims and other
expenses expected with respect to that employer for the year (based
on risk or rating factors commonly taken into account in manual
rates used by insurers for the benefits being provided), adjusted
based on the employer's notional account. An employer's notional
account is determined as follows. The account is credited with the
sum of the employer's contributions previously paid under the plan
less the benefit claims for that employer's employees. The notional
account is further increased by a fixed five percent investment
return (regardless of the actual investment return earned on the
funds). If an employer's notional account is positive, the
employer's contributions are reduced by a specified percentage of
the notional account. If an employer's notional account is negative,
the employer's contributions are increased by a specified percentage
of the notional account.
(ii) Arrangement A exhibits at least two of the characteristics
listed in paragraph (c) of this section generally indicating that
the arrangement is not a 10 or more employer plan described in
section 419A(f)(6). First, assets under the plan are allocated to
specific employers. Second, differential pricing exists because the
amount charged under the plan is not the same for all the
participating employers, and those differences are not reflective of
differences in risk or rating factors that are commonly taken into
account in manual rates used by insurers for the particular benefit
or benefits being provided.
(iii) Arrangement A does not satisfy the requirements of section
419A(f)(6) and this section because, at a minimum, the requirement
of paragraph (a)(1)(iii) of this section is not satisfied. Under the
arrangement, a participating employer's cost of coverage for each
year is based on a proxy for that employer's overall experience. An
employer's overall experience, as that term is defined in paragraph
(d)(3) of this section, includes the balance that would have
accumulated in the fund if that employer's employees were the only
employees being provided benefits under the plan. Under that
definition, the overall experience is credited with the sum of the
contributions paid under the plan by or on behalf of that employer
less the benefits or other amounts provided to with respect to that
employer's employees, and adjusted for gain or loss from insurance
contracts, expenses, and investment return. Under the formula used
by the arrangement in this example to determine employer
contributions, expenses are disregarded and a fixed investment
return of five percent is used instead of actual investment return.
The disregard of expenses and substitution of the fixed investment
return for the actual investment return merely results in an
employer's notional account that is a proxy for the overall
experience of that employer. Accordingly, the arrangement maintains
experience-rating arrangements with respect to individual employers.
Example 4. (i) Under Arrangement B, death benefits are provided
for eligible employees of each participating employer. Individual
level premium life insurance policies are purchased to provide the
death benefits. Each policy has a face amount equal to the death
benefit payable with respect to the individual employee. Each year,
a participating employer is charged an amount equal to the level
premiums payable with respect to the employees of that employer. One
participating employer, F, has an employee, P, whose coverage under
the arrangement commenced at the beginning of 2000, when P was age
50. P is covered under the arrangement for $1 million of death
benefits, and a life insurance policy with a face amount of $1
million has been purchased on P's life. The level annual premium on
the policy is $23,000. At the beginning of 2005, when P is age 55,
the $23,000 premium amount has been paid for five years and the
policy, which continues to have a face amount of $1 million, has a
cash value of $92,000. Another employer, G, has an employee, R, who
is also 55 years old at the beginning of 2005 and is covered under
Arrangement B for $1 million, for which a level premium life
insurance policy with a face amount of $1 million has been
purchased. However, R did not become covered under Arrangement B
until the beginning of 2005. Because R's coverage began at age 55,
the level annual premium charged for the policy on R's life is
$30,000, or $7,000 more than the premiums payable on the policy in
effect on P's life. Employer F is charged $23,000 and employer G is
charged $30,000 for the death benefit for employees P and R,
respectively. Assume that employees P and R are the only covered
employees of their respective employers and that they are identical
with respect to any risk and rating factors used by the insurer
(other than age at policy issuance).
(ii) Arrangement B exhibits at least three of the
characteristics listed in paragraph (c) of this section generally
indicating that the arrangement is not a 10 or more employer
[[Page 45942]]
plan described in section 419A(f)(6). First, assets of the plan are
effectively allocated to specific employers. Second, there is
differential pricing under the arrangement. That is, the amount
charged under the plan during the year for a specific amount of
death benefit coverage is not the same for all the employers
(employer F is charged $23,000 each year for $1 million of death
benefit coverage while employer G is charged $30,000 each year for
the same coverage), and the difference is not reflective of
differences in risk or rating factors that are commonly taken into
account in manual rates used by insurers for the death benefit being
provided (employees P and R are the same age). Third, there is
unreasonably high cost, at least during the early years of coverage
under the arrangement when the amounts charged to an employer for
that employee's death benefit coverage are unreasonably high for the
covered risk for the plan as a whole.
(iii) Arrangement B does not satisfy the requirements of section
419A(f)(6) and this section because, at a minimum, the requirement
of paragraph (a)(1)(iii) of this section is not satisfied.
Arrangement B maintains experience-rating arrangements with respect
to individual employers because the cost of coverage for each year
for any employer participating in the arrangement is based on a
proxy for the overall experience of that employer. Under Arrangement
B, employer F's cost of coverage for 2005 is $23,000 for $1 million
of coverage. The $92,000 cash value at the beginning of 2005 in the
policy insuring P's life is a proxy for employer F's overall
experience. (The $92,000 is essentially the balance that would have
accumulated in the fund if employer F were the only employer
providing welfare benefits under Arrangement B.) Further, the
$23,000 charged to F for the $1 million of coverage in 2005 is based
on the $92,000 since, in the absence of the $92,000, employer F
would have been charged $30,000 for P's $1 million death benefit
coverage. (Note that the conclusion that the $92,000 balance is the
basis for the lower premium charged to employer F is consistent with
the fact that a $92,000 balance, if converted to a life annuity
using the same actuarial assumptions as were used to calculate the
cash value amount, would be sufficient to provide for annual annuity
payments of $7,000 for the life of P--an amount equal to the $7,000
difference from the premium charged in 2005 to employer G for the $1
million of coverage on employee R's life.) Thus, F's cost of
coverage for 2005 is based on a proxy for F's overall experience.
Accordingly, Arrangement B maintains an experience-rating
arrangement with respect to employer F.
(iv) Arrangement B also maintains an experience-rating
arrangement with respect to employer G because it can be expected
that each year G will be charged $30,000 for the $1 million of
coverage on R's life. Each year, G's cost of coverage will reflect
G's prior contributions and allocable earnings, so that G's cost of
coverage will be based on a proxy for G's overall experience.
Accordingly, Arrangement B maintains an experience-rating
arrangement with respect to employer G. Similarly, Arrangement B
maintains an experience-rating arrangement with respect to each
other participating employer. Accordingly, Arrangement B maintains
experience-rating arrangements with respect to individual employers.
This would also be the result if Arrangement B maintained an
experience-rating arrangement with respect to only one individual
employer.
Example 5. (i) Under Arrangement C, death benefits are provided
for eligible employees of each participating employer. Flexible
premium universal life insurance policies are purchased to provide
the death benefits. Each policy has a face amount equal to the death
benefit payable with respect to the individual employee. Each
participating employer can make any contributions to the arrangement
provided that the amount paid for each employee is at least the
amount needed to prevent the lapse of the policy. The amount needed
to prevent the lapse of the universal life insurance policy is the
excess, if any, of the mortality and expense charges for the year
over the policy balance. All contributions made by an employer are
paid as premiums to the universal life insurance policies purchased
on the lives of the covered employees of that employer.
Participating employers H and J each have a 50-year-old employee
covered under Arrangement C for death benefits of $1 million, which
is the face amount of the respective universal life insurance
policies on the lives of the employees. In the first year of
coverage employer H makes a contribution of $23,000 (the amount of a
level premium) while employer J contributes only $6,000, which is
the amount of the mortality and expense charges for the first year.
At the beginning of year two, the balance in employer H's policy
(including earnings) is $18,000, but the balance in J's policy is
zero. Although H is not required to contribute anything in the
second year of coverage, H contributes an additional $15,000 in the
second year. Employer J contributes $7,000 in the second year.
(ii) Arrangement C exhibits at least two of the characteristics
listed in paragraph (c) of this section generally indicating that
the arrangement is not a 10 or more employer plan described in
section 419A(f)(6). First, assets of the plan are effectively
allocated to specific employers. Second, the arrangement does not
provide for fixed welfare benefits for a fixed coverage period for a
fixed cost.
(iii) Arrangement C does not satisfy the requirements of section
419A(f)(6) and this section because, at a minimum, the requirement
of paragraph (a)(1)(iii) of this section is not satisfied.
Arrangement C maintains experience-rating arrangements with respect
to individual employers because the cost of coverage of an employer
participating in the arrangement is based on a proxy for the overall
experience of that employer. Pursuant to paragraph (b)(4)(ii) of
this section (concerning treatment of flexible contribution
arrangements), solely for purposes of determining an employer's cost
of coverage, the Commissioner may treat an employer as contributing
the minimum amount needed to maintain the coverage. Applying this
treatment, H's cost of coverage for the first year of coverage under
Arrangement C is $6,000 for $1 million of death benefit coverage,
but for the second year it is zero for the same amount of coverage
because that is the minimum amount needed to keep the insurance
policy from lapsing. Employer H's overall experience at the
beginning of the second year of coverage is $18,000, because that is
the balance that would have accumulated in the fund if H were the
only employer providing benefits under Arrangement C. (The special
rule of paragraph (b)(4)(ii) of this section only applies to
determine cost of coverage; it does not apply in determining overall
experience.) The $18,000 balance in the policy insuring the life of
employer H's employee is a proxy for H's overall experience.
Employer H can choose not to make any contributions in the second
year of coverage due to the $18,000 policy balance. Thus, H's cost
of coverage for the second year is based on a proxy for H's overall
experience. Accordingly, Arrangement C maintains an experience-
rating arrangement with respect to employer H.
(iv) Arrangement C also maintains an experience-rating
arrangement with respect to employer J because in each year J can
contribute more than the amount needed to prevent a lapse of the
policy on the life of its employee and can expect that its cost of
coverage for subsequent years will reflect its prior contributions
and allocable earnings. Accordingly, Arrangement C maintains an
experience-rating arrangement with respect to employer J.
Example 6. (i) Arrangement D provides death benefits for
eligible employees of each participating employer. Each employer can
choose to provide a death benefit of either one, two, or three times
the annual compensation of the covered employees, provided that no
employer contributes more than 10 percent of the total contributions
under the plan by all employers. Under Arrangement D, the death
benefit is payable only if the employee dies while employed by the
employer. If an employee terminates employment with the employer or
if the employer withdraws from the arrangement, the death benefit is
no longer payable, no refund or other credit is payable to the
employer or to the employees, and no policy or other property is
transferrable to the employer or the employees. Furthermore, other
than any conversion rights the employees may have under state law,
the employees have no right under Arrangement D to coverage under
any other arrangement and no right to purchase or to convert to an
individual insurance policy. Arrangement D determines the amount
required to be contributed by each employer for each month of
coverage by aggregating the amount required to be contributed for
each covered employee of the employer. The amount required to be
contributed for each covered employee is determined by multiplying
the amount of the death benefit coverage (in thousands) for the
employee by five-year age bracket rates in a table specified by the
plan. The rates in the specified table do not exceed the rates set
forth in Table I of Sec. 1.79-3(d)(2). The table is used uniformly
for all covered employees of all employers participating in
Arrangement D. Arrangement D uses the amount contributed by each
employer to
[[Page 45943]]
purchase one-year term insurance coverage on the lives of the
covered employees with a face amount equal to the death benefit
provided by the plan. No employer is entitled to any rebates or
refunds provided under the insurance contract.
(ii) Arrangement D does not exhibit any of the characteristics
listed in paragraph (c) of this section generally indicating that
the arrangement is not a 10 or more employer plan described in
section 419A(f)(6). Under Arrangement D, assets are not allocated to
a specific employer or employers. Differences in the amounts charged
to the employers are solely reflective of differences in risk or
rating factors that are commonly taken into account in manual rates
used by insurers for the particular benefit or benefits being
provided. The arrangement provides for fixed welfare benefits for a
fixed coverage period for a fixed cost, within the meaning of
paragraph (d)(5) of this section. The cost charged under the
arrangement is not unreasonably high for the covered risk of the
plan as a whole. Finally, benefits and other amounts payable can be
paid, distributed, transferred, or otherwise made available only by
reason of the death of the employee, so that there is no nonstandard
benefit trigger under the arrangement.
(iii) Nothing in the facts of this Example 6 indicates that
Arrangement D fails to satisfy the requirements of section
419A(f)(6) or this section by reason of maintaining experience-
rating arrangements with respect to individual employers. Based
solely on the facts described above, Arrangement D does not maintain
an experience rating-arrangement with respect to any individual
employer because for each participating employer there is no period
for which the employer's cost of coverage under the arrangement is
based, in whole or in part, on either the benefits experience or the
overall experience (or a proxy for either type of experience) of
that employer or its employees.
Example 7. (i) The facts are the same as in Example 6, except
that under the arrangement, any refund or rebate provided under that
year's insurance contract is allocated among all the employers
participating in the arrangement in proportion to their
contributions, and is used to reduce the employers' contributions
for the next year.
(ii) This arrangement exhibits at least one of the
characteristics listed in paragraph (c) of this section generally
indicating that the arrangement is not a 10 or more employer plan
described in section 419A(f)(6). The arrangement includes
nonstandard benefit triggers because amounts are made available to
an employer by reason of the insurer providing a refund or rebate to
the plan, an event that is other than the illness, personal injury,
or death of an employee or family member, or an employee's
involuntary separation from employment.
(iii) Based on the limited and specific facts described in this
Example 7, an employer participating in this arrangement should be
able to establish to the satisfaction of the Commissioner that the
plan does not maintain experience-rating arrangements with respect
to individual employers. A participating employer's cost of coverage
is the relationship of its contributions to the death benefit
coverage or other amounts payable with respect to that employer,
including the employer's portion of the insurance company rebate and
refund amounts. The rebate and refund amounts are allocated to an
employer based on that employer's contribution for the prior year.
However, even though an employer's overall experience includes its
past contributions, contributions alone are not a proxy for an
employer's overall experience under the particular facts described
in this Example 7. As a result, a participating employer's cost of
coverage under the arrangement for each year (or any other period)
is not based on that employer's benefits experience or its overall
experience (or a proxy for either type of experience), except as
follows: If the total of the insurance company refund or rebate
amounts is a proxy for the overall experience of all participating
employers, a participating employer's cost of coverage will be based
in part on that employer's overall experience (or a proxy therefor)
by reason of that employer's overall experience being a portion of
the overall experience of all participating employers. Under the
special rule of paragraph (b)(2)(iii) of this section, however, that
fact alone will not cause the arrangement to be treated as
maintaining an experience-rating arrangement with respect to an
individual employer because no employer normally contributes more
than 10 percent of the total contributions under the plan by all
employers (the rating group). Accordingly, the arrangement will not
be treated as maintaining experience-rating arrangements with
respect to individual employers.
Example 8. (i) Arrangement E provides medical benefits for
covered employees of 90 participating employers. The level of
medical benefits is determined by a schedule set forth in the trust
document and does not vary by employer. Other than any rights an
employee may have to COBRA continuation coverage, the medical
benefits cease when an employee terminates employment with the
employer. If an employer withdraws from the arrangement, there is no
refund of any contributions and there is no transfer of anything of
value to employees of the withdrawing employer. Arrangement E
determines the amount required to be contributed by each employer
for each year of coverage. To determine the amount to be contributed
for each employer, Arrangement E classifies an employer based on the
employer's location. These geographic areas are not changed once
established under the arrangement. The amount charged for the
coverage under the arrangement to the employers in a geographic area
is initially determined from a rate-setting manual based on the
benefit package, but adjusted to reflect the claims experience of
the employers in that classification as a whole. Arrangement E does
not have any geographic area classification for which one of the
employers in the classification contributes more than 10 percent of
the contributions made by all the employers in that classification.
(ii) Arrangement E exhibits at least one of the characteristics
listed in paragraph (c) of this section generally indicating that
the arrangement is not a 10 or more employer plan described in
section 419A(f)(6). The amount charged under the arrangement to an
employer in one geographic area can be expected to differ from that
charged to an employer in another geographic area (and the
differences are not merely reflective of risk or rating factors for
those geographic areas), resulting in differential pricing.
(iii) Based on the facts described in this Example 8, an
employer participating in Arrangement E should be able to establish
to the satisfaction of the Commissioner that the plan does not
maintain experience-rating arrangements with respect to individual
employers even though there is differential pricing. Although an
employer's cost of coverage for each year is based, in part, on its
benefits experience (as well as the benefits experience of the other
employers in its geographic area), that does not result in
experience-rating arrangements with respect to any individual
employer because the employers in each geographic area are a rating
group and no employer normally contributes more than 10 percent of
the contributions made by all the employers in its rating group.
(See paragraph (b)(4)(iii) of this section.)
Example 9. (i) The facts of Arrangement F are the same as those
described in Example 8 for Arrangement E, except that K, an employer
in one of Arrangement F's geographic areas, contributes more than 10
percent of the contributions made by the employers in that
geographic area.
(ii) For the same reasons as described in Example 8, Arrangement
F results in differential pricing.
(iii) Arrangement F does not satisfy the requirements of section
419A(f)(6) and this section because, at a minimum, the requirement
of paragraph (a)(1)(iii) of this section is not satisfied. An
employer's cost of coverage for each year is based, in part, on its
benefits experience (as well as the benefits experience of the other
employers in its geographic area) and the special rule for
experience-rating by a rating group does not apply to Arrangement F
because employer K contributes more than 10 percent of the
contributions made by the employers in its rating group.
Accordingly, Arrangement F maintains experience-rating arrangements
with respect to individual employers.
Example 10. (i) The facts of Arrangement G are the same as those
described in Example 8 for Arrangement E, except for the way that
the arrangement classifies the employers. Under Arrangement G, the
experience of each employer for the prior year is reviewed and then
the employer is assigned to one of three classifications (low cost,
intermediate cost, or high cost) based on the ratio of actual claims
with respect to that employer to expected claims with respect to
that employer. No employer in any classification contributes more
than 10 percent of the contributions of all employers in that
classification.
(ii) For the same reasons as described in Example 8, Arrangement
G results in differential pricing.
(iii) Arrangement G does not satisfy the requirements of section
419A(f)(6) and this section because, at a minimum, the requirement
of paragraph (a)(1)(iii) of this
[[Page 45944]]
section is not satisfied. The special rule in paragraph (b)(4)(iii)
of this section for rating groups can prevent a plan from being
treated as maintaining experience-rating arrangements with respect
to individual employers if the mere use of a rating group is the
only reason a plan would be so treated. Under Arrangement G,
however, an employer's cost of coverage for each year is based on
the employer's benefits experience in two ways: the employer's
benefits experience is part of the benefits experience of a rating
group that is otherwise permitted under the special rule of
paragraph (b)(4)(iii) of this section, and the employer's benefits
experience is considered annually in redetermining the rating group
to which the employer is assigned. Accordingly, Arrangement G
maintains experience-rating arrangements with respect to individual
employers.
Example 11. (i) Arrangement H provides a death benefit equal to
a multiple of one, two, or three times compensation as elected by
the participating employer for all of its covered employees.
Universal life insurance contracts are purchased on the lives of the
covered employees. The face amount of each contract is the amount of
the death benefit payable upon the death of the covered employee.
Under the arrangement, each employer is charged annually an amount
equal to 200 percent of the mortality and expense charges under the
contracts for that year covering the lives of the covered employees
of that employer. Arrangement H pays the amount charged each
employer to the insurance company. Thus, the insurance company
receives an amount equal to 200 percent of the mortality and expense
charges under the policies. The excess amounts charged and paid to
the insurance company increase the policy value of the universal
life insurance contracts. When an employer ceases to participate in
Arrangement H, the insurance policies are distributed to each of the
covered employees of the withdrawing employer.
(ii) Arrangement H exhibits at least three of the
characteristics listed in paragraph (c) of this section generally
indicating that the arrangement is not a 10 or more employer plan
described in section 419A(f)(6). First, assets are effectively
allocated to specific employers. Second, because the amount of the
withdrawal benefit (i.e., the value of the life insurance policies
to be distributed) is unknown, the arrangement does not provide for
fixed welfare benefits for a fixed coverage period for a fixed cost.
Finally, Arrangement H includes nonstandard benefit triggers because
amounts can be distributed under the arrangement for a reason other
than the illness, personal injury, or death of an employee or family
member, or an employee's involuntary separation from employment.
(iii) Arrangement H does not satisfy the requirements of section
419A(f)(6) and this section because, at a minimum, the requirement
of paragraph (a)(1)(iii) of this section is not satisfied. Pursuant
to paragraph (b)(1) of this section, the prohibition against
maintaining experience-rating arrangements applies under all
circumstances, including employer withdrawals. Arrangement H
maintains experience-rating arrangements with respect to individual
employers because the cost of coverage for a participating employer
is based on a proxy for the overall experience of that employer.
Under Arrangement H, the contributions of a participating employer
are fixed. The benefits or other amounts payable with respect to an
employer include the value of the life insurance policies that are
distributable to the employees of that employer upon the withdrawal
of that employer from the plan. Thus, the cost of coverage for any
period of an employer's participation in Arrangement H is the
relationship between the fixed contributions for that period and the
variable benefits payable under the arrangement. The value of those
variable benefits depends on the value of the policies that would be
distributed if the employer were to withdraw at the end of the
period. (Each year the insurance policies to be distributed to the
employees in the event of the employer's withdrawal will increase in
value due to the premium amounts paid on the policy in excess of
current mortality and expense charges.) For reasons similar to those
discussed above in Example 5, the aggregate value of the life
insurance policies on the lives of an employer's employees is a
proxy for that employer's overall experience. Thus, a
participating's employer's cost of coverage for any period is based
on a proxy for the overall experience of that employer. Accordingly,
Arrangement H maintains experience-rating arrangements with respect
to individual employers.
(iv) The result would be the same if, rather than distributing
the policies, Arrangement H distributed cash amounts equal to the
cash values of the policies. The result would also be the same if
the distribution of policies or cash values is triggered by
employees terminating their employment rather than by employers
ceasing to participate in the arrangement.
Example 12. (i) The facts of Arrangement J are the same as those
described in Example 11 for Arrangement H, except that (1)
Arrangement J purchases a special term insurance policy on the life
of each covered employee with a face amount equal to the death
benefit payable upon the death of the covered employee, and (2)
there is no benefit distributable upon an employer's withdrawal. The
special term policy includes a rider that extends the term
protection for a period of time beyond the term provided on the
policy's face. The length of the extended term is not guaranteed,
but is based on the excess of premiums over mortality and expense
charges during the period of original term protection, increased by
any investment return credited to the policies.
(ii) Arrangement J exhibits two of the characteristics listed in
paragraph (c) of this section generally indicating that the
arrangement is not a 10 or more employer plan described in section
419A(f)(6). First, assets of the plan are effectively allocated to
specific employers. Second, the plan does not provide for fixed
welfare benefits for a fixed coverage period for a fixed cost
because the coverage period is not fixed.
(iii) Arrangement J does not satisfy the requirements of section
419A(f)(6) and this section because, at a minimum, the requirement
of paragraph (a)(1)(iii) of this section is not satisfied.
Arrangement J maintains experience-rating arrangements with respect
to individual employers because the cost of coverage for a
participating employer is based on a proxy for the overall
experience of that employer. Under Arrangement J, the contributions
of a participating employer are fixed. The benefits or other amounts
payable with respect to an employer are the one-, two-, or three-
times-compensation death benefit for each employee of the employer
for the current year, plus the extended term protection coverage for
future years. Thus, for any period extending to or beyond the end of
the original term of one or more of the policies on the lives of an
employer's employees, the employer's cost of coverage is the
relationship between the fixed contributions for that period and the
variable benefits payable under the arrangement. The value of those
variable benefits depends on the aggregate value of the policies
insuring the employer's employees (i.e., the total of the premiums
paid on the policies by Arrangement J to the insurance company,
reduced by the mortality and expense charges that were needed to
provide the original term protection, and increased by any
investment return credited to the policies). The aggregate value of
the policies insuring an employer's employees is, at any time, a
proxy for the employer's overall experience. Thus, a participating
employer's cost of coverage for any period described above is based
on a proxy for the overall experience of that employer. Accordingly,
Arrangement J maintains experience-rating arrangements with respect
to individual employers.
Example 13. (i) Arrangement K provides a death benefit to
employees of participating employers equal to a specified multiple
of compensation. Under the arrangement, a flexible-premium universal
life insurance policy is purchased on the life of each covered
employee in the amount of that employee's death benefit. Each policy
has a face amount equal to the employee's death benefit under the
arrangement. Each participating employer is charged annually with
the aggregate amount (if any) needed to maintain the policies
covering the lives of its employees. However, each employer is
permitted to make additional contributions to the arrangement and,
upon doing so, the additional contributions are paid to the
insurance company and allocated to one or more contracts covering
the lives of the employer's employees. In the event that any policy
covering the life of an employee would lapse in the absence of new
contributions from that employee's employer, and if at the same time
there are policies covering the lives of other employees of the
employer that have cash values in excess of the amounts needed to
prevent their lapse, the employer has the option of reducing its
otherwise-required contribution by amounts withdrawn from those
other policies.
(ii) Arrangement K exhibits at least two of the characteristics
listed in paragraph (c) of this section generally indicating that
the arrangement is not a 10 or more employer plan described in
section 419A(f)(6). First,
[[Page 45945]]
assets of the plan are allocated to specific employers. Second,
because the plan allows an employer to choose to contribute an
amount that is different than that contributed by another employer
for the same benefit, the amount charged under the plan is not the
same for all participating employers (and the differences in the
amounts are not reflective of differences in risk or rating factors
that are commonly taken into account in manual rates used by
insurers for the particular benefit or benefits being provided),
resulting in differential pricing.
(iii) Arrangement K does not satisfy the requirements of section
419A(f)(6) and this section because, at a minimum, the requirement
of paragraph (a)(1)(iii) of this section is not satisfied.
Arrangement K maintains experience-rating arrangements with respect
to individual employers because the cost of coverage for any
employer participating in the arrangement is based on a proxy for
the overall experience of that employer. Under Arrangement K the
benefits with respect to an employer for any year are a fixed
amount. For purposes of determining the employer's cost of coverage
for that year, the Commissioner may treat the employer's
contribution under the special rule of paragraph (b)(4)(ii) of this
section (concerning treatment of flexible contribution\arrangements)
as being the minimum contribution amount needed to maintain the
universal life policies with respect to that employer for the death
benefit coverage for that year. Because the employer has the option
to prevent the lapse of one policy by having amounts withdrawn from
other policies, that minimum contribution amount will be based in
part on the aggregate value of the policies on the lives of that
employer's employees. That aggregate value is a proxy for the
employer's overall experience. Accordingly, Arrangement K maintains
experience-rating arrangements with respect to individual employers.
(g) Effective date--(1) In general. Except as set forth in
paragraph (g)(2) of this section, this section applies to contributions
paid or incurred in taxable years of an employer beginning on or after
July 11, 2002.
(2) Compliance information and recordkeeping. Paragraphs
(a)(1)(iv), (a)(2), and (e) of this section apply for taxable years of
a welfare benefit fund beginning after the date of publication of final
regulations in the Federal Register.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-17469 Filed 7-10-02; 8:45 am]
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