[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: 26CFR1.419A(f)(6)-1]

[Page 875-887]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
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 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 (2) of this section must be satisfied both in 
form and in operation.
    (ii) Arrangement is considered in its entirety. The determination of 
whether a plan is a 10 or more employer plan described in section 
419A(f)(6) is based on 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)

[[Page 876]]

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.
    (v) Leased employees. In the case of an employer that is the 
recipient of services performed by a leased employee described in 
section 414(n)(2) 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.
    (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).

[[Page 877]]

    (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 merely reflective of differences in current risk or rating factors 
that are commonly taken into account in manual rates used by insurers 
(such as current 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 or the distribution of an insurance contract to an 
employer's employees on the occasion of the employer's withdrawal from 
the plan. A plan will not be treated as having the characteristic 
described in this paragraph merely because, upon cessation of 
participation in the plan, an employee is provided with the right to 
convert coverage under a group life insurance contract to coverage under 
an individual life insurance contract without demonstrating evidence of 
insurability, but only if there is no additional economic value 
associated with the conversion right.
    (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) Employer's overall experience. 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) Employee's overall experience. 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

[[Page 878]]

(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).
    (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 with respect to employees of 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, and that no employer normally 
contributes more than 10 percent of the total contributions contributed 
under the plan by all employers. 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 contributions or the provision of 
the benefits. The examples are as follows:

    Example 1. (i) An arrangement provides welfare benefits to employees 
of participating employers. Each year a participating employer is 
required to contribute an

[[Page 879]]

amount equal to the claims and other expenses expected with respect to 
that employer for the year (based on current 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.
    (ii) This arrangement exhibits at least one of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
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 merely reflective 
of differences in current 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 an 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 current 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 current 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 an 
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 merely reflective of 
differences in current risk or rating factors that are commonly taken 
into account in manual rates used by insurers for

[[Page 880]]

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 whole 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 current risk and rating factors that are commonly taken into 
account in manual rates used by insurers for death benefits.
    (ii) Arrangement B exhibits at least three of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
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, 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 merely reflective of 
differences in current risk or rating factors that are commonly taken 
into account in manual rates used by insurers for the death benefit 
being provided. (The differences in amounts charged are attributable to 
differences in issue age and not to differences in current risk or 
rating factors, as employees P and R are the same age). Third, during 
the early years of the arrangement, the amounts charged 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

[[Page 881]]

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) The facts are the same as in Example 4 except that 
the death benefits are provided under 10-year level term life insurance 
policies. One participating employer, H, has an employee, M, whose 
coverage under the arrangement commenced at the beginning of 2000, when 
M was age 35. M is covered under the arrangement for $1 million of death 
benefits, and a 10-year level term life insurance policy with a face 
amount of $1 million has been purchased on M's life. The level annual 
premium on the policy for the first 10 years is $700. At the beginning 
of 2007, when M is age 42, the $700 premium amount has been paid for 
seven years. Another employer, J, has an employee, N, who is also 42 
years old at the beginning of 2007 and is covered under the arrangement 
for $1 million, for which a 10-year level term life insurance policy 
with a face amount of $1 million has been purchased. However, N did not 
become covered under the arrangement until the beginning of 2007. 
Because N's coverage began at age 42, the 10-year level term premium 
charged for the policy on N's life is $1,100, or $400 more than the 
premiums then payable on the policy in effect on M's life. Neither the 
policy on employee M nor the policy on employee N has any cash value at 
any point during its term. Assume that employees M and N are the only 
covered employees of their respective employers and that they are 
identical with respect to any current risk and rating factors that are 
commonly taken into account in manual rates used by insurers for the 
death benefit being provided.
    (ii) Based on the facts described in this Example 5, this 
arrangement exhibits at least two of the characteristics listed in 
paragraph (c) of this section generally indicating that an arrangement 
is not a 10 or more employer plan described in section 419A(f)(6). 
First, for the same reasons as described in paragraph (ii) of Example 4, 
there is differential pricing under the arrangement. Second, assets of 
the plan are effectively allocated to specific employers. This is the 
case even though the insurance policies used by employers H and J have 
no accessible cash value.
    (iii) The facts described in this Example 5 indicate that the 
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. This arrangement 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 this arrangement employer H's cost of 
coverage in 2007 is $700 for $1 million of coverage. Although the policy 
insuring M's life has no cash value accessible to employer H, the 
accumulation of the excesses of the amounts paid by employer H on behalf 
of employee M over each year's underlying mortality and expense charges 
for providing life insurance coverage to employee M provide economic 
value to employer H (i.e., the ability to purchase future coverage on 
M's life at a premium that is less than the underlying mortality and 
expense charges as those underlying charges increase with M's increasing 
age). Thus, H's cost of coverage for 2007 is based on a proxy for H's 
overall experience. Accordingly, this arrangement maintains an 
experience-rating arrangement with respect to employer H.
    (iv) This arrangement also maintains an experience-rating 
arrangement with respect to employer J because it can be expected that 
for each of the next nine years J will be charged $1,100 for the $1 
million of coverage on N's life. Each year, J's cost of coverage will 
reflect J's prior contributions, so that J's cost of coverage will be 
based on a proxy for J's overall experience. Accordingly, this 
arrangement maintains an experience-rating arrangement with respect to 
employer J. Similarly, this arrangement maintains an experiencing-rating 
arrangement with respect to each other participating employer. 
Accordingly, this arrangement maintains experience-rating arrangements 
with respect to individual employers. This would also be the result if 
this arrangement maintained an experience-rating arrangement with 
respect to only one individual employer.
    Example 6. (i) Under Arrangement C, death benefits are provided for 
eligible employees

[[Page 882]]

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 S and V 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 S makes a contribution of $23,000 (the amount of a level 
premium) while employer V 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 S's policy (including 
earnings) is $18,000, but the balance in V's policy is zero. Although S 
is not required to contribute anything in the second year of coverage, S 
contributes an additional $15,000 in the second year. Employer V 
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 an 
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 7. (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. 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, the employees are not 
provided with any right under Arrangement D to coverage under any other 
arrangement, nor with any right to purchase or to convert to an 
individual insurance policy, other than any conversion rights the 
employees may have in accordance with state law (and which provide no 
additional economic benefit). 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, which is used uniformly 
for all covered employees of all participating employers. The rates in 
the

[[Page 883]]

specified table do not exceed the rates set forth in Table I of Sec. 
1.79-3(d)(2), and differences in the rates in the table are merely 
reflective of differences in mortality risk for the various age 
brackets. The rates in the table are not based in whole or in part on 
the experience of the employers participating in Arrangement D. 
Arrangement D uses the amount contributed by each employer to 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 an 
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 7 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 8. (i) The facts are the same as in Example 7, 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 an 
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 8, 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 8. 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 9. (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

[[Page 884]]

arrangement, there is no refund of any contributions and there is no 
transfer of anything of value to employees of the withdrawing employer, 
to the withdrawing employer, or to another plan or arrangement 
maintained by the withdrawing employer. Arrangement E determines the 
amount required to be contributed by each employer for each year of 
coverage, and the aggregate amounts charged are not unreasonably high 
for the covered risk for the plan as a whole. 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 
determined from a rate-setting manual based on the benefit package and 
geographic area, and differences in the rates in the manual are merely 
reflective of current differences in those risk or rating factors. The 
rates in the rate-setting manual are not based in whole or in part on 
the experience of the employers participating in Arrangement E.
    (ii) Arrangement E does not exhibit any of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). Although the amounts charged under the arrangement to an 
employer in one geographic area can be expected to differ from those 
charged to an employer in another geographic area, the differences are 
merely reflective of differences in current risk or rating factors that 
are commonly taken into account in manual rates used by insurers for 
medical benefits.
    (iii) Nothing in the facts of this Example 9 indicates that 
Arrangement E 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 E 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 10. (i) The facts are the same as in Example 9, except that 
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 and then adjusted to reflect 
the claims experience of the employers in that classification as a 
whole. The arrangement does not have any geographic area classification 
for which one of the employers in the classification normally 
contributes more than 10 percent of the contributions made by all the 
employers in that classification.
    (ii) This arrangement exhibits at least one of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). There is differential pricing under the arrangement because 
the amounts charged to an employer in one geographic area can be 
expected to differ from those charged to an employer in another 
geographic area, and the differences are not merely reflective of 
current risk or rating factors that are commonly taken into account in 
manual rates used by insurers for medical benefits.
    (iii) Based on the facts described in this Example 10, 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 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 11. (i) The facts of Arrangement F are the same as those 
described in Example 10, except that K, an employer in one of 
Arrangement F's geographic areas, normally 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 10, 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 normally 
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 12. (i) The facts of Arrangement G are the same as those 
described in Example 10, except for the way that the arrangement

[[Page 885]]

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 normally contributes more than 10 percent of the 
contributions of all employers in that classification.
    (ii) For the same reasons as described in Example 10, 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 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 13. (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 an 
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 6, 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

[[Page 886]]

cash values is triggered by employees terminating their employment 
rather than by employers ceasing to participate in the arrangement.
    Example 14. (i)(1) The facts of Arrangement J are the same as those 
described in Example 13 for Arrangement H, except that--
    (A) 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
    (B) there is no benefit distributable upon an employer's withdrawal.
    (2) 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 an 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 15. (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 an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). First, 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 merely reflective of differences in current 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

[[Page 887]]

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 July 17, 2003.

[T.D. 9079, 68 FR 42259, July 17, 2003]