[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.501(c)(9)-4]

[Page 25-26]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.501(c)(9)-4  Voluntary employees' beneficiary associations; 
inurement.

    (a) General rule. No part of the net earnings of an employees' 
association may inure to the benefit of any private shareholder or 
individual other than through the payment of benefits permitted by Sec. 
1.501(c)(9)-3. The disposition of property to, or the performance of 
services for, a person for less than the greater of fair market value or 
cost (including indirect costs) to the association, other than as a 
life, sick, accident or other permissible benefit, constitutes 
prohibited inurement. Generally, the payment of unreasonable 
compensation to the trustees or employees of the association, or the 
purchase of insurance or services for amounts in excess of their fair 
market value from a company in which one or more of the association's 
trustees, officers or fiduciaries has an interest, will constitute 
prohibited inurement. Whether prohibited inurement has occurred is a 
question to be determined with regard to all of the facts and 
circumstances, taking into account the guidelines set forth in this 
section. The guidelines and examples contained in this section are not 
an exhaustive list of the activities that may constitute prohibited 
inurement, or the persons to whom the association's earnings could 
impermissibly inure. See Sec. 1.501(a)-1(c).
    (b) Disproportionate benefits. For purposes of subsection (a), the 
payment to any member of disproportionate benefits, where such payment 
is not pursuant to objective and nondiscriminatory standards, will not 
be considered a benefit within the meaning of Sec. 1.501(c)(9)-3 even 
though the benefit otherwise is one of the type permitted by that 
section. For example, the payment to highly compensated personnel of 
benefits that are disproportionate in relation to benefits received by 
other members of the association will constitute prohibited inurement. 
Also, the payment to similarly situated employees of benefits that 
differ in kind or amount will constitute prohibited inurement unless the 
difference can be justified on the basis of objective and

[[Page 26]]

reasonable standards adopted by the association or on the basis of 
standards adopted pursuant to the terms of a collective bargaining 
agreement. In general, benefits paid pursuant to standards or subject to 
conditions that do not provide for disproportionate benefits to 
officers, shareholders, or highly compensated employees will not be 
considered disproportionate. See Sec. 1.501(c)(9)-2(a) (2) and (3).
    (c) Rebates. The rebate of excess insurance premiums, based on the 
mortality or morbidity experience of the insurer to which the premiums 
were paid, to the person or persons whose contributions were applied to 
such premiums, does not constitute prohibited inurement. A voluntary 
employees' beneficiary association may also make administrative 
adjustments strictly incidental to the provision of benefits to its 
members.
    (d) Termination of plan or dissolution of association. It will not 
constitute prohibited inurement if, on termination of a plan established 
by an employer and funded through an association described in section 
501(c)(9), any assets remaining in the association, after satisfaction 
of all liabilities to existing beneficiaries of the plan, are applied to 
provide, either directly or through the purchase of insurance, life, 
sick, accident or other benefits within the meaning of Sec. 
1.501(c)(9)-3 pursuant to criteria that do not provide for 
disproportionate benefits to officers, shareholders, or highly 
compensated employees of the employer. See Sec. 1.501(c)(9)-2(a)(2). 
Similarly, a distribution to members upon the dissolution of the 
association will not constitute prohibited inurement if the amount 
distributed to members are determined pursuant to to the terms of a 
collective bargaining agreement or on the basis of objective and 
reasonable standards which do not result in either unequal payments to 
similarly situated members or in disproportionate payments to officers, 
shareholders, or highly compensated employees of an employer 
contributing to or otherwise funding the employees' association. Except 
as otherwise provided in the first sentence of this paragraph, if the 
association's corporate charter, articles of association, trust 
instrument, or other written instrument by which the association was 
created, as amended from time to time, provides that on dissolution its 
assets will be distributed to its members' contributing employers, or if 
in the absence of such provision the law of the state in which the 
association was created provides for such distribution to the 
contributing employers, the association is not described in section 
501(c)(9).
    (e) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Employees A, B and C, members of the X voluntary employees' 
beneficiary association, are unemployed. They receive unemployment 
benefits from X. Those to A include an amount in addition to those 
provided to B and C, to provide for A's retraining. B has been found 
pursuant to objective and reasonable standards not to qualify for the 
retraining program. C, although eligible for retraining benefits has 
declined. X's additional payment to A for retraining does not constitute 
prohibited inurement.

[T.D. 7750, 46 FR 1725, Jan. 7, 1981]