[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.419-1T]

[Page 863-873]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.419-1T  Treatment of welfare benefit funds. (Temporary)

    Q-1: What does section 419 of the Internal Revenue Code provide?
    A-1: Section 419 prescribes limitations upon deductions for 
contributions paid or accrued with respect to a welfare benefit fund. 
Under section 419 (a) and (b), an employer's contributions to a welfare 
benefit fund are not deductible under section 162 (relating to trade or 
business expenses) or section 212 (relating to expenses for production 
of income) but, if the requirements of section 162 or 212 are otherwise 
met, are deductible under section 419 for the taxable year of the 
employer in which paid to the extent of the welfare benefit fund's 
qualified cost (within the meaning of section 419(c)(1)) for the taxable 
year of the fund that relates to such taxable year of the employer. 
Under section 419(g), section 419 and this section shall also apply to 
the deduction by a taxpayer of contributions with respect to a fund that 
would be a welfare benefit fund but for the fact that there is no 
employer-employee relationship between the person providing the services 
and the person for whom the services are provided. Contributions paid to 
a welfare benefit fund after section 419 becomes effective with respect 
to such contributions are deemed to relate, first, to amounts accrued 
and deducted (but not paid) by the employer with respect to such fund 
before section 419 becomes effective with respect to such contributions 
and thus shall not be treated as satisfying the payment requirement of 
section 419. See paragraph (b) of Q&A-5 for special deduction limits 
applicable to employer contributions to welfare benefit funds with 
excess reserves.
    Q-2: When do the deduction rules of section 419, as enacted by the 
Tax Reform Act of 1984, become effective?
    A-2: (a) Section 419 generally applies to contributions paid or 
accrued with respect to a welfare benefit fund after December 31, 1985, 
in taxable years of employers ending after that date. See Q&A-9 of this 
regulation for special rules relating to the deduction limit for the 
first taxable year of a fiscal year employer ending after December 31, 
1985.
    (b) In the case of a welfare benefit fund which is part of a plan 
maintained pursuant to one or more collective bargaining agreements (1) 
between employee representatives and one or more employers, and (2) that 
are in effect on July 1, 1985 (or ratified on or before such date), 
sections 419 shall not apply to contributions paid or accrued in taxable 
years beginning before the termination of the last of the collective 
bargaining agreements pursuant to which the plan is maintained 
(determined without regard to any extension thereof agreed to after July 
1, 1985). For purposes of the preceding sentence, any plan amendment 
made pursuant to a collective bargaining agreement relating to the plan 
which amends the plan solely to conform to any requirement added under 
section 511 of the Tax Reform Act of 1984 (i.e., requirements under 
sections 419, 419A, 512(a)(3)(E), and 4976) shall not be treated as a 
termination of such collective bargaining agreement. See Sec. 1.419A-2T 
for special rules relating to the application of section 419 to 
collectively bargained welfare benefit funds.
    (c) Notwithstanding paragraphs (a) and (b), section 419 applies to 
any contribution of a facility to a welfare benefit fund (or other 
contribution, such as cash, which is used to acquire, construct, or 
improve such a facility) after June 22, 1984, unless such facility is 
placed in service by the fund before January 1, 1987, and either (1) is 
acquired or improved by the fund (or contributed to the fund) pursuant 
to a binding contract in effect on June 22, 1984, and at all times 
thereafter, or (2) the construction of which was begun by

[[Page 864]]

or for the welfare benefit fund before June 22, 1984. See Q&A-11 of this 
regulation for special rules relating to the application of section 419 
to the contribution of a facility to a welfare benefit fund (and to the 
contribution of other amounts, such as cash, used to acquire, construct, 
or improve such a facility) before section 419 generally becomes 
effective with respect to contributions to the fund.
    Q-3. What is a ``welfare benefit fund'' under section 419?
    A-3. (a) A ``welfare benefit fund'' is any fund which is part of a 
plan, or method or arrangement, of an employer and through which the 
employer provides welfare benefits to employees or their beneficiaries. 
For purposes of this section, the term ``welfare benefit'' includes any 
benefit other than a benefit with respect to which the employer's 
deduction is governed by section 83(h), section 404 (determined without 
regard to section 404(b)(2)), section 404A, or section 463.
    (b) Under section 419(e)(3) (A) and (B), the term ``fund'' includes 
any organization described in section 501(c) (7), (9), (17) or (20), and 
any trust, corporation, or other organization not exempt from tax 
imposed by chapter 1, subtitle A, of the Internal Revenue Code. Thus, a 
taxable trust or taxable corporation that is maintained for the purpose 
of providing welfare benefits to an employer's employees is a ``welfare 
benefit fund.''
    (c) Section 419(e)(3)(C) also provides that the term ``fund'' 
includes, to the extent provided in regulations, any account held for an 
employer by any person. Pending the issuance of further guidance, only 
the following accounts, and arrangements that effectively constitute 
accounts, as described below, are ``funds'' within section 419(e)(3)(C).
    A retired lives reserve or a premium stabilization reserve 
maintained by an insurance company is a ``fund,'' or part of a ``fund,'' 
if it is maintained for a particular employer and the employer has the 
right to have any amount in the reserve applied against its future 
years' benefit costs or insurance premiums. Also, if an employer makes a 
payment to an insurance company under an ``administrative services 
only'' arrangement with respect to which the life insurance company 
maintains a separate account to provide benefits, then the arrangement 
would be considered to be a ``fund.'' Finally, an insurance or premium 
arrangement between an employer and an insurance company is a ``fund'' 
if, under the arrangement, the employer has a right to a refund, credit, 
or additional benefits (including upon termination of the arrangement) 
based on the benefit or claims experience, administrative cost 
experience, or investment experience attributable to such employer. 
However, an arrangement with an insurance company is not a ``fund'' 
under the previous sentence merely because the employer's premium for a 
renewal year reflects the employer's own experience for an earlier year 
if the arrangement is both cancellable by the insurance company and 
cancellable by the employer as of the end of any policy year and, upon 
cancellation by either of the parties, neither of the parties can 
receive a refund or additional amounts or benefits and neither of the 
parties can incur a residual liability beyond the end of the policy year 
(other than, in the case of the insurer, to provide benefits with 
respect to claims incurred before cancellation). The determination 
whether either of the parties can receive a refund or additional amounts 
or benefits or can incur a residual liability upon cancellation of an 
arrangement will be made by examining both the contractual rights and 
obligations of the parties under the arrangement and the actual practice 
of the insurance company (and other insurance companies) with respect to 
other employers upon cancellation of similar arrangements. Similarly, a 
disability income policy does not constitute a ``fund'' under the 
preceding provisions merely because, under the policy, an employer pays 
an annual premium so that employees who became disabled in such year may 
receive benefit payments for the duration of the disability.
    Q-4: For purposes of determining the section 419 limit on the 
employer's deduction for contributions to the fund for a taxable year of 
the employer, which taxable year of the welfare benefit fund is related 
to the taxable year of the employer?

[[Page 865]]

    A-4: The amount of an employer's deduction for contributions to a 
welfare benefit fund for a taxable year of the employer is limited to 
the ``qualified cost'' of the welfare benefit fund for the taxable year 
of the fund that is related to such taxable year of the employer. The 
taxable year of the welfare benefit fund that ends with or within the 
taxable year of the employer is the taxable year of the fund that is 
related to the taxable year of the employer. Thus, for example, if an 
employer has a calendar taxable year and it makes contributions to a 
fund having a taxable year ending June 30, the ``qualified cost'' of the 
fund for the taxable year of the fund ending on June 30, 1986, applies 
to limit the employer's deduction for contributions to the fund in the 
employer's 1986 taxable year. In the case of employer contributions paid 
directly to an account or arrangement with an insurance company that is 
treated as a welfare benefit fund for the purposes of section 419, the 
policy year will be treated as the taxable year of the fund. See Q&A-7 
of this regulation for special section 419 rules relating to the 
coordination of taxable years for the taxable year of the employer in 
which a welfare benefit fund is established and for the next following 
taxable year of the employer.
    Q-5: What is the ``qualified cost'' of a welfare benefit fund for a 
taxable year under section 419?
    A-5: (a) Under section 419(c), the ``qualified cost'' of a welfare 
benefit fund for a taxable year of the fund is the sum of: (1) The 
``qualified direct cost'' of such fund for such taxable year of the 
fund, and (2) the amount that may be added to the qualified asset 
account for such taxable year of the fund to the extent that such 
addition does not result in a total amount of such account as of the end 
of such taxable year of the fund that exceeds the applicable account 
limit under section 419A(c). However, in calculating the qualified cost 
of a welfare benefit fund for a taxable year of the fund, this sum is 
reduced by the fund's ``after-tax income'' (as defined in section 
419(c)(4)) for such taxable year of the fund. Also, the qualified cost 
of a welfare benefit fund is reduced further under the provisions of 
paragraph (b) of this Q&A.
    (b)(1) Pursuant to section 419A(i), notwithstanding section 419 and 
Sec. 1.419-1T, contributions to a welfare benefit fund during any 
taxable year of the employer beginning after December 31, 1985, shall 
not be deductible for such taxable year to the extent that such 
contributions result in the total amount in the fund as of the end of 
the last taxable year of the fund ending with or within such taxable 
year of the employer exceeding the account limit applicable to such 
taxable year of the fund (as adjusted under section 419A(f)(7)). Solely 
for purposes of this subparagraph, (i) contributions paid to a welfare 
benefit fund during the taxable year of the employer but after the end 
of the last taxable year of the fund that relates to such taxable year 
of the employer, and (ii) contributions accrued with respect to a 
welfare benefit fund during the taxable year of the employer or during 
any prior taxable year of the employer (but not actually paid to such 
fund on or before the end of a taxable year of the employer) and 
deducted by the employer for such or any prior taxable year of the 
employer, shall be treated as an amount in the fund as of the end of the 
last taxable year of the fund that relates to the taxable year of the 
employer. Contributions that are not deductible under this subparagraph 
are in excess of the qualified cost of the welfare benefit fund for the 
taxable year of the fund that relates to the taxable year of the 
employer and thus are treated as contributed to the fund on the first 
day of the employer's next taxable year.
    (2) Paragraph (b)(1) of this section shall not apply to 
contributions with respect to a collectively bargained welfare benefit 
fund within the meaning of Sec. 1.419A-2T. In addition, paragraph 
(b)(1) of this section shall not apply to any taxable year of an 
employer beginning after the end of the earlier of the following taxable 
years: (i) the first taxable year of the employer beginning after 
December 31, 1985, for which the employer's deduction limit under 
section 419 (after the application of paragraph (b)(1) of this section) 
is at least equal to the qualified direct cost of the fund for the 
taxable year (or years) of the fund that relates to such first taxable 
year of the employer, or (ii) the

[[Page 866]]

first taxable year of the employer beginning after December 31, 1985, 
with or within which ends the first taxable year of the fund with 
respect to which the total amount in the fund as of the end of such 
taxable year of the fund does not exceed the account limit for such 
taxable year of the fund (as adjusted under section 419A(f)(7)).
    (3) For example, assume an employer with a taxable year ending June 
30 and a welfare benefit fund with a taxable year ending January 31. 
During its taxable year ending June 30, 1987, and on or before January 
31, 1987, the employer contributes $250,000 to the fund, and during the 
remaining portion of its taxable year ending June 30, 1987, the employer 
contributes $200,000. The qualified direct cost of the fund for its 
taxable year ending January 31, 1987, is $500,000, the account limit 
applicable to such taxable year (after the adjustment under section 
419A(f)(7)) is $750,000, and the total amount in the fund as of January 
31, 1987, is $800,000. Before the application of this paragraph, the 
employer may deduct the entire $450,000 contribution for its taxable 
year ending June 30, 1987. However, under this paragraph, the excess of 
(i) the sum of the total amount in the fund as of January 31, 1987 
($800,000), and employer contributions to the fund after January 31, 
1987, and on or before June 30, 1987 ($200,000), over (ii) the account 
limit applicable to the fund for its taxable year ending January 31, 
1987 ($750,000), is $250,000. Thus, under this paragraph, only $200,000 
of the $450,000 contribution the employer made during its taxable year 
ending June 30, 1987, is deductible for such taxable year. If the excess 
were $450,000 or greater, no portion of the $450,000 contribution would 
be deductible by the employer for its taxable year ending June 30, 1987. 
Such nondeductible contributions are in excess of the fund's qualified 
cost for the taxable year related to the employer's taxable year and 
thus are deemed to be contributed on the first day of the employer's 
next taxable year.
    (c) See Q&A-7 of this regulation for special rules relating to the 
calculation of the qualified cost of a welfare benefit fund for an 
Initial Fund Year and an Overlap Fund Year (as defined in Q&A-7). See 
Q&A-11 of this regulation for special rules relating to the application 
of section 419 to the contribution to a welfare benefit fund of a 
facility (and to the contribution of other amounts, such as cash, used 
to acquire, construct, or improve a facility) before section 419 
generally becomes effective with respect to contributions to the fund. 
See Sec. 1.419A-2T for special rules relating to certain collectively 
bargained welfare benefit funds.
    Q-6: What is the ``qualified direct cost'' of a welfare benefit fund 
under section 419(c)(3)?
    A-6: (a) Under section 419(c)(3), the ``qualified direct cost'' of a 
welfare benefit fund for any taxable year of the fund is the aggregate 
amount which would have been allowable as a deduction to the employer 
for benefits provided by such fund during such year (including insurance 
coverage for such year) if (1) such benefits were provided directly by 
the employer and (2) the employer used the cash receipts and 
disbursements method of accounting and had the same taxable year as the 
fund. In this regard, a benefit is treated as provided when such benefit 
would be includible in the gross income of the employee if provided 
directly by the employer (or would be so includible but for a provision 
of chapter 1, subtitle A, of the Internal Revenue Code excluding it from 
gross income). Thus, for example, if a calendar year welfare benefit 
fund pays an insurance company in July 1986 the full premium for 
coverage of its current employees under a term health insurance policy 
for the twelve month period ending June 30, 1987, the insurance coverage 
will be treated as provided by the fund over such twelve month period. 
Accordingly, only the portion of the premium for coverage during 1986 
will be treated as a ``qualified direct cost'' of the fund for 1986; the 
remaining portion of the premium will be treated as a ``qualified direct 
cost'' of the fund for 1987. The ``qualified direct cost'' for a taxable 
year of the fund includes the administrative expenses incurred by the 
welfare benefit fund in delivering the benefits for such year.
    (b) If, in a taxable year of a welfare benefit fund, the fund holds 
an asset with a useful life extending substantially beyond the end of 
the taxable

[[Page 867]]

year (e.g., buildings, vehicles, tangible assets, and licenses) and, for 
such taxable year of the fund, the asset is used in the provision of 
welfare benefits to employees, the ``qualified direct cost'' of the fund 
for such taxable year of the fund includes the amount that would have 
been allowable to the employer as a deduction under the applicable Code 
provisions (e.g., sections 168 and 179) with respect to the portion of 
the asset used in the provision of welfare benefits for such year if the 
employer had acquired and placed in service the asset at the same time 
the fund received and placed in service the asset, and the employer had 
the same taxable year as the fund. This rule applies regardless of 
whether the fund received the asset through a contribution of the asset 
by the employer or through an acquisition or the construction by the 
fund of the asset. For example, assume that in 1986 a calendar year 
employer contributes recovery property under section 168(c) to a welfare 
benefit fund with a calendar taxable year to be used in the provision of 
welfare benefits. The employer will be treated as having sold the 
property in such year and thus will recognize gain to the extent that 
the fair market value of the property exceeds the employer's adjusted 
basis in the property. In this regard, see section 1239(d). Also, the 
employer will be treated as having made a contribution to the fund in 
such year equal to the fair market value of the property. Finally, the 
qualified direct cost of the welfare benefit fund for 1986 will include 
the amount that the employer could have deducted in 1986 with respect to 
the portion of the property used in the provision of welfare benefits if 
the employer had acquired the property in 1986 and had placed the 
property in service when the fund actually placed the property in 
service. Similarly, for example, assume that in 1986 a welfare bendfit 
fund purchases and places in service a facility to be used in the 
provision of welfare benefits. The qualified direct cost of the fund for 
1986 will include the amount that the employer could have deducted with 
respect to such facility if the employer had purchased and placed in 
service the facility at the same time that the fund purchased and placed 
in service the facility.
    (c) The qualified direct cost of a welfare benefit fund does not 
include expenditures by the fund that would not have been deductible if 
they had been made directly by the employer. For example, a fund's 
purchase of land in a year for an employee recreational facility will 
not be treated as a qualified direct cost because, if made directly by 
the employer, the purchase would not have been deductible under section 
263. See also sections 264 and 274.
    (d) Notwithstanding the preceding paragraphs, the qualified direct 
cost of a welfare benefit fund with respect to that portion of a child 
care facility used in the provision of welfare benefits for a year will 
include the amount that would have been allowable to the employer as a 
deduction for the year under a straight-line depreciation schedule for a 
period of 60 months beginning with the month in which the facility is 
placed in service under rules similar to those provided for section 188 
property under Sec. 1.188-1(a). For purposes of this section, a ``child 
care facility'' is tangible property of a character subject to 
depreciation that is located in the United States and specifically used 
as an integral part of a ``qualified child care center facility'' within 
the meaning of Sec. 1.188-1(d)(4).
    (e) See Q&A-7 of this regulation for special section 419 rules 
relating to the calculation of the qualified direct cost of a welfare 
benefit fund for an Initial Fund Year and an Overlap Fund Year (as 
defined in Q&A-7). See Q&A-11 of this regulation for special rules 
relating to the contribution to a welfare benefit fund of a facility 
(and to the contribution of other amounts, such as cash, used to 
acquire, construct, or improve a facility) before section 419 generally 
becomes effective with respect to contributions to the fund.
    Q-7: What special rules apply for purposes of determining the 
section 419 limit on the employer's deduction for contributions to a 
welfare benefit fund for the taxable year of the employer in which the 
fund is established and for the next following taxable year of the 
employer?
    A-7: (a) If the taxable year of a welfare benefit fund is the same 
as the

[[Page 868]]

taxable year of the employer, there are no special rules that apply for 
purposes of determining the section 419 limit on an employer's deduction 
for contributions to the fund for either the taxable year of the 
employer in which the fund is established or the next following taxable 
year of the employer. However, if the taxable year of a welfare benefit 
fund is different from the taxable year of the employer, the general 
section 419 rules are modified by the special rules set forth below for 
purposes of determining the section 419 deduction limit for the taxable 
year of the employer in which a fund is established and for the next 
following taxable year of the employer.
    (b) If a welfare benefit fund is established after December 31, 
1985, during a taxable year of an employer and either (i) the first 
taxable year of the fund ends after the close of such taxable year of 
the employer, or (ii) the first taxable year of the fund is six months 
or less and ends before the close of such taxable year of the employer 
and the second taxable year of the fund begins before and ends after the 
close of such taxable year of the employer, the taxable year of the fund 
that contains the closing day of such taxable year of the employer will 
be treated as an ``Overlap Fund Year.'' For purposes of determining the 
limit on the employer's deduction for contributions to a welfare benefit 
fund for the taxable year of the employer in which the fund was 
established, the period between the beginning of the fund's Overlap Fund 
Year and the end of the employer's taxable year in which the Overlap 
Fund Year began will be treated as a taxable year of the fund (``Initial 
Fund Year'').
    (c) The qualified cost of a welfare benefit fund for its Initial 
Fund Year will be equal to the qualified direct cost of the fund for 
such Initial Fund Year. The qualified cost of a fund for its Overlap 
Fund Year will be determined under the general rules of Q&A-5 of this 
regulation and section 419(c), with the exception that such qualfied 
cost will be reduced by the employer contributions made during the 
Initial Fund Year and deductible by the employer for the taxable year of 
the employer in which the Overlap Fund Year of the fund begins.
    (d) Assume that an employer with a calendar taxable year establishes 
on July 1, 1986, a welfare benefit fund with a taxable year ending on 
June 30. The fund's first taxable year from July 1, 1986, to June 30, 
1987, is an Overlap Fund Year. The employer contributes $1,000 to the 
fund during its taxable year ending December 31, 1986 (i.e., during the 
period between July 1, 1986, and December 31, 1986, which is also the 
Initial Fund Year) and another $1,500 to the fund during its taxable 
year ending December 31, 1987. Assume further that the qualified direct 
cost of the fund for the Initial Fund Year is $900 and that the 
qualified cost for the Overlap Fund Year is $2,500 (prior to the 
reduction required by paragraph (c) of this Q&A). Under the special 
rules of paragraphs (b) and (c), the employer may deduct $900 for its 
taxable year ending on December 31, 1986, and $1,600 for its taxable 
year ending on December 31, 1987. If the qualified direct cost of the 
fund for the Initial Fund Year had been $1,050 and the qualified cost 
for the Overlap Fund Year had been $2,500 (prior to the reduction 
required by paragraph (c) of this Q&A), the employer's deduction for its 
taxable year ending December 31, 1986, would have been $1,000 and its 
deduction for its taxable year ending December 31, 1987, would have been 
$1,500.
    (e) Assume that an employer with a calendar taxable year establishes 
on March 1, 1986, a welfare benefit fund with a taxable year ending June 
30. Thus, the fund has a short first taxable year ending June 30, 1986, 
an Overlap Fund Year from July 1, 1986, until June 30, 1987, and an 
ongoing June 30 taxable year. The employer contributes $1,750 to the 
fund during the employer's taxable year ending December 31, 1986--$750 
during the short first taxable year of the fund and $1,000 during the 
Initial Fund Year (i.e., the period between July 1, 1986, and December 
31, 1986)--and $1,500 to the fund during its taxable year ending 
December 31, 1987. Assume that the qualified cost of the fund for the 
short first taxable year of the fund is $800, the qualified direct cost 
for the Initial Fund Year is $900, and the qualified cost for the 
Overlap Fund Year is $2,500 (prior to the reduction required by 
paragraph (c) of this Q&A). Under

[[Page 869]]

the special rules of paragraphs (b) and (c), the employer may deduct 
$1,700 for its taxable year ending December 31, 1986, and $1,550 for its 
taxable year ending December 31, 1987.
    Q-8: How does section 419 treat an employer's contribution with 
respect to a welfare benefit fund in excess of the applicable deduction 
limit for a taxable year of the employer?
    A-8: (a) If an employer makes contributions to a welfare benefit 
fund in a taxable year of the employer and such contributions (when 
combined with prior contributions that are deemed under the rule of this 
Q&A and section 419(d) to have been made in such taxable year) exceed 
the section 419 deduction limit for such taxable year of the employer, 
the excess amounts are deemed to be contributed to the fund on the first 
day of the next taxable year of the employer. Such deemed contributions 
are combined with amounts actually contributed by the employer to the 
fund during the next taxable year and may be deductible for such year, 
subject to the otherwise applicable section 419 deduction limit for such 
year.
    (b) Contributions to a welfare benefit fund on or before December 
31, 1985, that were not deductible by the employer for any taxable year 
of the employer ending on or before December 31, 1985, or for the first 
taxable year of the employer ending after December 31, 1985, as pre-1986 
contributions (see Q&A-9 of this regulation) are deemed to be 
contributed to the fund on January 1, 1986, However, see Q&A-11 of this 
regulation for special rules relating to the contribution to a welfare 
benefit fund of amounts (such as cash) used to acquire, construct, or 
improve a facility before section 419 generally becomes effective with 
respect to contributions to the fund. Generally, such contributions (to 
the extent that they were made after June 22, 1984 and on or before 
December 31, 1985) are treated as nondeductible pre-1986 contributions 
and are deemed to be contributed in the form of a facility at the same 
time as when the facility is placed in service by the fund.
    Q-9: How does an employer with a fiscal taxable year calculate its 
deduction limit for contributions with respect to a welfare benefit fund 
for the first taxable year of the employer ending after December 31, 
1985?
    A-9: (a) If the first taxable year of an employer ending after 
December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2 of 
this section, the first taxable year of an employer beginning after 
termination of the last of the collective bargaining agreements pursuant 
to which the fund is maintained) is a fiscal year, the employer's 
deduction for such taxable year for contributions to a welfare benefit 
fund that is not a collectively bargained welfare benefit fund under 
Sec. 1.419A-2T is limited to the greater of the following two amounts: 
(1) The contributions paid to the fund during such first taxable year up 
to the qualified cost of the welfare benefit fund for the taxable year 
of the fund that relates to such taxable year of the employer, and (2) 
the contributions paid to the fund during the 1985 portion of such first 
taxable year of the employer (``the pre-1986 contributions'') to the 
extent that such pre-1986 contributions are deductible under the rules 
governing the deduction of such contributions before section 419 
generally becomes effective (including the rules set forth in Q&A-10 of 
this regulation, modified for purposes of this Q&A-9 by substituting 
``December 31, 1986'' for ``December 31, 1985'' in paragraph (c)). See 
Q&A-11 of this regulation for special rules relating to the contribution 
to a welfare benefit fund of a facility (and to the contribution of 
other amounts, such as cash, used to acquire, construct, or improve such 
a facility) before section 419 generally becomes effective with respect 
to contributions to such fund.
    (b) For example, assume that an employer with a taxable year ending 
June 30, contributes to a welfare benefit fund with a taxable year 
ending January 31. This employer contributes $1,000 to the fund between 
July 1, 1985, and December 31, 1985, and an additional $500 to the fund 
between January 1, 1986, and June 30, 1986. Assume further that the 
qualified direct cost of the fund for the taxable year of the fund 
ending January 31, 1986, is $500 and that the qualified cost for such 
taxable year is $800. Under the deduction rule set forth above, the 
employer's deduction

[[Page 870]]

for its taxable year ending June 30, 1986, is the greater of two 
amounts: (1) The contributions made during such full taxable year 
($1,500) up to the qualifed cost of the fund with respect to such 
taxable year ($800), and (2) the pre-1986 contributions ($1,000) to the 
extent that such pre-1986 contributions are deductible under the pre-
section 419 rules. In determining the extent to which the pre-1986 
contributions are deductible under the pre-section 419 rules, the rules 
contained in Q&A-10 apply as though December 31, 1985, in paragraph (c) 
were December 31, 1986. Assuming that only $875 is deductible under the 
pre-section 419 rules, because $875 is greater than $800, this employer 
may deduct $875 for its first taxable year ending after December 31, 
1985. This full $875 deduction for 1985 is deemed to consist entirely of 
pre-1986 contributions.
    Q-10: How do the rules of sections 263, 446(b), 461(a), and 461(h) 
apply in determining whether contributions with respect to a welfare 
benefit fund are deductible for a taxable year?
    A-10: (a) Both before and after the effective date of section 419 
(see Q&A-2 of this regulation), an employer is allowed a deduction for 
taxable year for contributions paid or accrued with respect to a 
``welfare benefit fund'' (as defined in Q&A-3 of this regulation and 
section 419(e)) only to the extent that such contributions satisfy the 
requirements of section 162 or 212. These requirements must be satisfied 
after the effective date of section 419 because 419 requires that (among 
other requirements) contributions to a welfare benefit fund satisfy the 
requirements of section 162 or 212.
    (b) Except as provided in paragraphs (c) and (d), in determinig the 
extent to which contributions paid or accrued with respect to welfare 
benefit fund satisfy the requirements of section 162 or 212 for a 
taxable year (both before and after section 419 generally becomes 
effective with respect to such contributions), the rules of sections 
263, 446(b), 461(a) (including the rules that relate to the creation of 
an asset with a useful life extending substantially beyond the close of 
the taxable year), and 461(h) (to the extent that such section is 
effective with respect to such contributions) are are generally 
applicable.
    (c) Notwithstanding paragraph (b), under the authority of section 
7805(b), the rules of sections 263, 446(b), and 461(a) shall not be 
applied in determining the extent to which an employer's contribution 
with respect to a welfare benefit fund is deductible under section 162 
or 212 with respect to any taxable year of the employer ending on or 
before December 31, 1985, to the extent that, for such taxable year, (1) 
the contribution was made pursuant to a bona fide collective bargaining 
agreement requiring fixed and determinable contributions to a 
collectively bargained welfare benefit fund (as defined in Sec. 1.419A-
2T), or (2) the contribution was not in excess of the amount deductible 
under the principles of Revenue Rulings 69-382, 1969-2 C.B. 28; 69-478, 
1969-2 C.B. 29; and 73-599, 1973-2 C.B. 40, modified as appropriate for 
benefits for active employees.
    (d) Notwithstanding paragraph (b), in determining the extent to 
which contributions paid or accrued with respect to a welfare benefit 
fund are deductible under section 419, the rules of sections 263, 
446(b), and 461(a) will be treated as having been satisfied to the 
extent that such contributions satisfy the otherwise applicable rules of 
section 419. Thus, for example, contributions to a welfare benefit fund 
will not fail to be deductible under section 419 merely because they 
create an asset with a useful life extending substantially beyoud the 
close of the taxable year if such contributions satisfy the otherwise 
applicable requirements of section 419.
    (e) In determining the extent to which contributions with respect to 
a welfare benefit fund satisfy the requirements of section 461(h) for 
any taxable year for which section 461(h) is effective, pursuant to the 
authority under section 461(h)(2), economic performance occurs as 
contributions to the welfare benefit fund are made. Solely for purposes 
of section 461(h), in the case of an employer's taxable year ending on 
or after July 18, 1984, and on or before March 21, 1986, contributions 
made to the welfare benefit fund after the end of such taxable year and 
on or before March 21, 1986 shall be deemed

[[Page 871]]

to have been made on the last day of such taxable year.
    Q-11: What special section 419 rules apply to the payment or accrual 
with respect to a welfare benefit fund of a facility (and the payment or 
accrual of other amounts, such as cash, used to acquire, construct, or 
improve such a facility)?
    A-11: (a)(1) In the case of an employer's payment or accrual with 
respect to a welfare benefit fund after June 22, 1984, and on or before 
December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2 of 
this regulation, before section 419 generally becomes effective with 
respect to contributions to such fund), of a facility, the rules of 
section 419, Sec. 1.419-1T, and Sec. 1.419A-2T generally apply to 
determine the extent to which such contribution is deductible by the 
employer for its taxable year of contribution. For this purpose, 
however, the facility is to be treated as the only contribution made to 
the fund and the qualified cost of the fund for the taxable year of the 
fund in which the facility was contributed is to be equal to the 
qualified direct cost directly attributable to the facility (as 
determined under Q&A-6 of this regulation). Also, for this purpose, the 
welfare benefit fund to which the facility was contributed may not be 
aggregated with any other fund. For purposes of this Q&A, ``facility'' 
means any tangible asset with a useful life extending substantially 
beyond the end of the taxable year (e.g., vehicles, buildings) and any 
intangible asset (e.g., licenses) related to a tangible asset, whether 
or not such asset is used in the provision of welfare benefits. See, 
however, paragraph (c) of Q&A-2 of this regulation for a binding 
contract exception.
    (2) For example, assume that an employer and a welfare benefit fund 
each has a calendar taxable year and that, during 1985, the employer 
contributes to the fund $200,000 in cash and a facility with a fair 
market value of $100,000. Such facility is used in the provision of 
welfare benefits under the fund. The employer is treated as having sold 
the facility in such year and thus will recognize gain to the extent 
that the fair market value of the facility exceeds the employer's 
adjusted basis in the facility. In this regard, see section 1239(d). The 
extent to which the facility contribution is deductible by the employer 
for its 1985 taxable year is determined as though it were the only 
contribution made by the employer to the fund during such year and the 
qualified cost of the fund for the taxable year of the fund in which the 
contribution was made (i.e., the 1985 taxable year) were equal to the 
amount that would have been allowable to the employer as a deduction for 
such year under the applicable Code provisions with respect to the 
portion of the facility used in the provision of welfare benefits for 
such year if the employer had placed in service the facility at the time 
the fund placed in service the facility and if the employer had the same 
taxable year as the fund. If, under these assumptions, the employer 
would have been allowed a $10,000 deduction with respect to the facility 
for the 1985 taxable year, the fund's qualified cost for its 1985 
taxable year would be only $10,000. Thus, only $10,000 of the $100,000 
facility contribution would be deductible by the employer for its 1985 
taxable year (i.e., the taxable year of the employer with or within 
which the applicable taxable year of the fund ends). However, in 
determining the extent to which the $200,000 in cash is deductible by 
the employer for its 1985 taxable year, the $100,000 facility is not to 
be disregarded. Thus, if under the applicable pre-section 419 rules the 
employer is allowed for 1985 a total deduction of only $175,000, the 
employer would be permitted a deduction for 1985 of $175,000 ($10,000 
with respect to the facility and $165,000 of the cash contribution). The 
nondeductible portion of the cash contribution is to be treated as 
contributed to the fund on the first day of the next taxable year of the 
employer. If under the applicable pre-section 419 rules the employer 
were allowed a total deduction of $300,000 for 1985, the employer would 
be permitted a deduction for 1985 of only $210,000 ($10,000 with respect 
to the facility and the full $200,000 cash contribution).
    (3) For example, assume that an employer has a June 30 taxable year 
and maintains a welfare benefit fund with a taxable year ending January 
31. During

[[Page 872]]

the 1985 portion of its taxable year ending June 30, 1986, the employer 
contributes $50,000 in cash and a facility with a fair market value of 
$100,000; and during the 1986 portion of such taxable year, the employer 
contributes another $75,000 in cash to the fund. The facility is used in 
the provision of welfare benefits under the fund. Under the rules of 
Q&A-9 of this regulation, the employer's deduction for its June 30, 
1986, taxable year is limited to the greater of the following two 
amounts: (i) The contributions paid to the fund during such taxable year 
($225,000) up to the qualified cost of the fund for the taxable year of 
the fund ending January 31, 1986, and (ii) the contributions paid to the 
fund during the 1985 portion of the employer's taxable year ending June 
30, 1986 (``the pre-1986 contributions'') ($150,000) to the extent that 
such pre-1986 contributions are deductible under the rules governing the 
deduction of such contributions before section 419 is generally 
effective with respect to the fund. For purposes of this rule, the 
contribution of the facility on or before December 31, 1985, is to be 
treated as a pre-1986 contribution and the rules of section 419 and this 
Q&A are to be treated as rules governing the deduction of such 
contribution before section 419 generally becomes effective with respect 
to the fund. Thus, in determining the extent to which the facility is 
deductible as a pre-1986 contribution under the rules before section 419 
generally becomes effective, the facility is treated as the only 
contribution to the welfare benefit fund and the qualified cost of such 
fund for the taxable year of the fund in which the facility was 
contributed is the amount that would have been allowable to the employer 
as a deduction with respect to the portion of the facility used in the 
provision of welfare benefits if the employer had placed in service the 
facility at the same time that the fund placed in service the facility 
and the employer's taxable year ended on January 31, 1986.
    (b)(1) The preceding rules shall also apply for purposes of 
determining when and the extent to which an employer may deduct 
contributions or other items and amounts after June 22, 1984 and on or 
before December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2 
of this regulation, before section 419 generally becomes effective with 
respect to contributions to the fund) that are not facilities (e.g., 
cash contributions) to a welfare benefit fund that are used by the fund 
to acquire, construct, or improve a facility. The most recent non-
facility contributions made to a welfare benefit fund before the 
facility in question is placed in service by the fund (up to the fair 
market value of the facility at such time) are to be treated as used by 
the fund for the acquisition, construction, or improvement (as the case 
may be) of such facility. To the extent that contributions before such a 
facility is placed in service are not at least equal to the value of the 
facility at such time, contributions after such date (up to the value of 
the facility at the time it is placed in service) are treated as used 
for acquisition, construction, or improvement of the facility. Such non-
facility contributions, to the extent that they were made after June 22, 
1984, and on or before December 31, 1985 (or, if applicable under 
paragraph (b) of Q&A-2 of this regulation, before section 419 generally 
becomes effective with respect to contributions to the fund), are not 
deductible by the employer as non-facility contributions for any year. 
Instead, the employer is permitted a deduction with respect to such 
contributions only under the rules of this Q&A as though the employer 
had contributed a facility to the fund at the same time that the fund 
placed in service the facility in question and, at such time, the 
facility had a fair market value equal to the total of such non-facility 
contributions.
    (2) For example, assume that an employer and a welfare benefit fund 
each has a calendar taxable year and during 1985 the fund acquired and 
placed in service a facility with a fair market value of $100,000 to be 
used in the provision of welfare benefits. Further, during July 1984 the 
employer contributed $150,000 in cash to the fund and, during the 
portion of 1985, before the facility was placed in service by the fund, 
the employer contributed another $75,000 in cash to the fund; during the 
remaining portion of 1985, the employer contributed $125,000 in cash. 
The facility is

[[Page 873]]

used in the provision of welfare benefits under the fund. Because 
$25,000 of the employer's 1984 contribution is treated under this rule 
as used for the acquisition of a facility, such $25,000 is not 
deductible by the employer for 1984. For purposes of determining the 
employer's deduction for 1985, the employer will be treated as having 
contributed $125,000 in cash and a facility with a fair market value of 
$100,000. The employer's deduction for its 1985 taxable year will be 
determined under the rules relating to the contribution of a facility 
after June 22, 1984, and on or before December 31, 1985.
    (3) For example, assume that an employer and a welfare benefit fund 
each has a calendar taxable year and during 1986 the fund placed in 
service a facility with a fair market value of $100,000 to be used in 
the provision of welfare benefits. During 1985, the employer contributed 
$125,000 in cash to the fund. During the portion of 1986 before the 
facility was placed in service, the employer contributed $60,000 in 
cash, and during the remaining portion of 1986, the employer contributed 
another $75,000 in cash. The facility is used in the provision of 
welfare benefits under the fund. Because $40,000 of its 1985 cash 
contribution is treated under this rule as used for the acquisition of 
the facility, such $40,000 is not deductible by the employer for 1985. 
For purposes of determining the employer's deduction for 1986, the 
employer will be treated as though it had contributed a $40,000 facility 
to the fund at the time the fund placed the facility in service.
    (c) For purposes of calculating the ``existing excess reserve 
amount'' under Q&A-1 of Sec. 1.419A-1T and the ``existing reserves for 
post-retirement medical or life insurance benefits'' under Q&A-4 of 
Sec. 1.512(a)-5T (but not the exempt function income under Q&A-3 of 
Sec. 1.512(a)-5T), the amount set aside as of any applicable date is to 
be reduced to the extent that contributions originally included in such 
amount are subsequently treated under this Q&A as used for the 
acquisition, construction, or improvement of an asset excluded from the 
calculation of the total amount set aside under paragraph (b) of Sec. 
1.512(a)-5T (or would be so treated under this Q&A if it applied to such 
asset). The reduction required under this paragraph applies for purposes 
of calculating the ``existing excess reserve amount'' and the ``existing 
reserves for post-retirement medical or life insurance benefits'' for 
all taxable years of the welfare benefit fund.

[T.D. 8073, 51 FR 4323, Feb. 4, 1986; 51 FR 7262, Mar. 3, 1986; 51 FR 
11303, Apr. 2, 1986]