\[4830-01-p\]

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

\[TD 9079\]

RIN 1545-BA47

10 or More Employer Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document contains final regulations that provide rules
regarding the requirements for a welfare benefit fund that is part of a
10 or more employer plan. The regulations affect certain employers that
provide welfare benefits to employees through a plan to which more than
one employer contributes.

DATES: [Effective Date]{.underline}: These regulations are effective
July 17, 2003.

[Applicability Date]{.underline}: For dates of applicability, see
§1.419A(f)(6)-1(g).

FOR FURTHER INFORMATION CONTACT: Betty J. Clary, (202) 622-6080 (not a
toll‑free number).

SUPPLEMENTARY INFORMATION:

**Paperwork Reduction Act**

The collections of information contained in these final regulations have
been reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545‑1795. Responses to these collections of information
are required to obtain a benefit (to be treated as a 10 or more employer
plan excepted from the deduction limits for employer contributions to a
welfare benefit fund).

An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless the collection of
information displays a valid control number assigned by the Office of
Management and Budget.

The estimated annual burden per respondent and/or recordkeeper varies,
depending on individual circumstances, with an estimated average of 25
hours.

Comments concerning the accuracy of this burden estimate and suggestions
for reducing this burden should be sent to the **Internal Revenue
Service**, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP
Washington, DC 20224, and to the **Office of Management and Budget**,
Attn: Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to these collections of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.

**Background**

This document contains amendments to the Income Tax Regulations under
section 419A of the Internal Revenue Code (Code). Sections 419 and 419A,
which were added to the Code by section 511 of the Deficit Reduction Act
of 1984 (Public Law 98-369, 98 Stat. 494) set forth special rules
limiting the deduction of employer contributions to a welfare benefit
fund. Pursuant to section 419A(f)(6), the rules of sections 419 and 419A
do not apply in the case of a welfare benefit fund that is part of a
plan to which more than one employer contributes and to which no
employer normally contributes more than 10 percent of the contributions
of all employers under the plan, but only if the plan does not maintain
experience-rating arrangements with respect to individual employers.

Section 419A(i) of the Code provides that the Secretary shall prescribe
regulations as may be appropriate to carry out the purposes of sections
419 and 419A. Section 419A(i) further provides that the regulations may
provide that the plan administrator of any welfare benefit fund to which
more than one employer contributes shall submit such information to the
employers contributing to the fund as may be necessary to enable the
employers to comply with the provisions of section 419A.

The legislative history of sections 419 and 419A of the Code explains
that the principal purpose of the deduction limits for contributions to
welfare benefit funds "is to prevent employers from taking premature
deductions, for expenses which have not yet been incurred, by
interposing an intermediary organization which holds assets which are
used to provide benefits to the employees of the employer." H.R. Conf.
Rep. No. 861, 98^th^ Cong., 2d Sess. 1155 (1984), 1984-3 C.B. (Vol. 2)
1, 409.

The legislative history of section 419A(f)(6) of the Code explains that
the reason the deduction limits of sections 419 and 419A do not
generally apply to a fund that is part of a 10 or more employer plan is
that "the relationship of a participating employer to \[such a\] plan
often is similar to the relationship of an insured to an insurer." H.R.
Conf. Rep. No. 861, 98^th^ Cong., 2d Sess. 1159 (1984), 1984-3 C.B.
(Vol. 2) 1, 413. Thus, the premise underlying the exception is that no
special limitation on deductions is necessary in situations where a
payment by an employer in excess of the minimum necessary to currently
provide for the benefits under the plan is effectively lost to that
employer, because the economics of the plan will discourage excessive
contributions.

The 10 or more employer plan exception to the deduction limitation does
not apply, however, where the plan maintains experience-rating
arrangements with respect to individual employers. The reason for
excluding these plans from the exception is that an experience-rating
arrangement with respect to an individual employer changes the economics
of the plan and allows an employer to contribute an amount in excess of
the minimum amount necessary to provide for the current benefits with
the confidence that the excess will inure to the benefit of that
employer as the excess is used to provide benefits to its employees. The
legislative history notes that making the exception to the deduction
limits unavailable to plans that determine contributions on the basis of
experience rating is consistent with the general rules relating to the
definition of fund because "the employer's interest with respect to such
a plan is more similar to the relationship of an employer to a fund than
an insured to an insurer." H.R. Conf. Rep. No. 861, 98^th^ Cong., 2d
Sess. 1159 (1984), 1984-3 C.B. (Vol. 2) 1, 413.

In Notice 95-34 (1995-1 C.B. 309), the IRS identified certain types of
arrangements that do not satisfy the requirements of section 419A(f)(6).
Those arrangements typically require large employer contributions
relative to the cost of the coverage for the benefits to be provided
under the plan. The plans identified in the Notice often maintain
separate accounting of the assets attributable to the contributions made
by each participating employer.[^1] In some cases an employer's
contributions are related to the claims experience of its employees,
while in other cases benefits are reduced if assets derived from an
employer's contributions are insufficient to fund the benefits to that
employer's employees. Thus, a particular employer's contributions or its
employees' benefits may be determined in a way that insulates the
employer to a significant extent from the experience of other
participating employers.

The arrangements described in Notice 95-34 and similar arrangements do
not satisfy the requirements of section 419A(f)(6) of the Code and do
not provide the tax deductions claimed by their promoters for any of
several reasons. For example, such an arrangement may be providing
deferred compensation; the arrangement may be separate plans maintained
for each employer; or the plan may be maintaining, in form or in
operation, experience-rating arrangements with respect to individual
employers (e.g., where the employers have reason to expect that, at
least for the most part, their contributions will benefit only their own
employees). The Notice also states that even if an arrangement satisfies
the requirements of section 419A(f)(6), so that the deduction limits of
sections 419 and 419A do not apply to the arrangement, the employer
contributions may represent expenses that are not deductible under other
sections of the Code.

Transactions that are the same as or substantially similar to the
transactions described in Notice 95-34 are listed transactions for
purposes of the tax shelter disclosure, registration, and list
maintenance requirements. See Notice 2000-15 (2000-1 C.B. 826)
(supplemented and superseded by Notice 2001-51 (2001-2 C.B. 190)),
§1.6011-4(b)(2) of the Income Tax Regulations, and §§301.6111-2(b)(2)
and 301.6112-1(b)(2) of the Procedure and Administration Regulations.

On July 11, 2002, a notice of proposed rulemaking (REG-165868-01)
relating to whether a welfare benefit fund is part of a 10 or more
employer plan (as defined in section 419A(f)(6) of the Internal Revenue
Code) was published in the **Federal Register** (67 FR 45933). Written
and electronic comments responding to the notice of proposed rulemaking
were received. A public hearing was held on November 14, 2002. After
consideration of all the comments, the proposed regulations are adopted
as amended by this Treasury decision. The revisions are discussed below.

**Explanation of Provisions**

[Overview of Rules]{.underline}

These regulations provide guidance under section 419A(f)(6) of the Code
regarding the requirements that a welfare benefit fund must satisfy in
order for an employer's contribution to the fund to be excepted from the
rules of sections 419 and 419A.

Section 419A(f)(6) of the Code provides that sections 419 and 419A do
not apply in the case of a welfare benefit fund that is part of a 10 or
more employer plan that does not maintain experience-rating arrangements
with respect to individual employers. A [10 or more employer
plan]{.underline} is a plan to which more than one employer contributes
and to which no employer normally contributes more than 10 percent of
the total contributions contributed under the plan by all employers. The
regulations provide that an employer is determined by aggregating all of
the entities required to be aggregated under the rules under section
414(b), (c), or (m). This is particularly relevant for purposes of
determining how many employers contribute, whether an employer normally
contributes more than 10 percent of the total contributions under the
plan, and whether the plan maintains experience-rating arrangements with
respect to individual employers.

In addition, the regulations make clear that in order to be eligible for
the exception from the deduction limits of sections 419 and 419A, a plan
must satisfy the requirements of section 419A(f)(6) and these
regulations both in form and operation. The determination of whether a
plan is 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. Thus, all agreements and understandings
(including promotional materials and policy illustrations) will be taken
into account in determining whether the requirements of section
419A(f)(6) are satisfied in form and in operation. For example, if
promotional materials indicate that an employer or its employees can be
expected to receive a future benefit based on the employer's accumulated
contributions, the plan will be treated as maintaining experience-rating
arrangements with respect to individual employers, even if the formal
plan does not specifically provide for experience rating.

The regulations provide generally that a plan maintains an
experience-rating arrangement with respect to an employer -- making the
plan ineligible for the section 419A(f)(6) exception -- if any
employer's cost of coverage for any period is based, in whole or in
part, either on the benefits experience or on the overall experience of
that employer or one or more employees of that employer. For purposes of
the regulations, an employer's [cost of coverage]{.underline} is the
relationship between that employer's contributions (including those of
its employees) under the plan and the benefits or other amounts payable
under the plan with respect to that employer. The term [benefits or
other amounts payable]{.underline} includes all amounts payable or
distributable (or that will be otherwise provided), regardless of the
form of the payment or distribution. [Benefits experience]{.underline}
refers, generally, to the benefits and other amounts incurred, paid, or
distributed (or otherwise provided) in the past. The [overall
experience]{.underline} of an employer is the balance that would have
accumulated in a welfare benefit fund if that employer were the only
employer providing benefits under the plan. The [overall
experience]{.underline} of an employee is the balance that would have
accumulated in a welfare benefit fund if that employee were the only
employee being provided benefits under the plan. [Overall
experience]{.underline} is defined similarly for a group of employers or
a group of employees.

[Definition of Experience Rating]{.underline}

A number of commentators suggested that the regulatory definition of
experience-rating arrangement is inconsistent with industry usage and
the discussions of experience rating set forth in [United States v.
American Bar Endowment]{.underline}, 477 U.S. 105 (1986) and [Sears
Roebuck and Co. v. Commissioner]{.underline}, 972 F.2d 858 (7^th^ Cir.
1992). These commentators have urged that an experience-rating
arrangement be narrowly defined to include only those situations in
which the employer is automatically entitled to a refund of a portion of
a premium payment if claims experience is better than expected.

The IRS and Treasury have reviewed these comments and have concluded
that the proposed regulatory definition of experience-rating arrangement
should be retained in the final regulations. Where a Code section
provides an exception from the normal tax requirements, the exception
must be narrowly applied and its exclusions interpreted broadly. [Corn
Products Refining Co. v. Commissioner]{.underline}, 350 U.S. 46, 52
(1955). See also, [Arkansas Best Corporation v.
Commissioner]{.underline}, 485 U.S. 212, 219-220 (1987). Thus, the
exclusion for experience-rating arrangements under the 10 or more
employer plan exception should be interpreted broadly.

While both the [American Bar Endowment]{.underline} case and the
[Sears]{.underline} case discuss a specific type of experience rating,
there are other ways an insurance contract or other arrangement might
take experience into account. For example, under one type of
experience-rating arrangement, if the premiums paid exceed the actual
cost of providing insurance to the group, the excess (the source of the
dividend described in [American Bar Endowment]{.underline}) is not
refunded to the premium payer, but is instead used to reduce the cost of
providing benefits for subsequent periods. This reduction in the cost of
providing benefits for subsequent periods can be accomplished directly
by adjusting premiums or indirectly by providing additional benefits
under the arrangement at no cost to the premium payer, or through a
combination of premium reductions and additional benefits.

In view of the variety of ways that an arrangement might take experience
into account, the regulations provide that a plan maintains an
experience-rating arrangement with respect to an individual employer if
the current (or future) cost of coverage of the employer is (or will be)
based on either the past benefits or other amounts paid with respect to
one or more of that employer's employees (or any proxy therefor) or on
the balance accumulated in the fund as a result of the employer's or its
employees' past contributions (or any proxy therefor). Accordingly, the
process for determining whether a plan maintains an experience-rating
arrangement is to inquire whether the past experience of an individual
employer or its employees is used, in whole or in part, to determine the
employer's cost of coverage. This determination is not intended to be
purely a computational one (although actual numbers often can be used to
demonstrate the existence of an experience-rating arrangement).

Some commentators suggested that the regulations equate benefits
provided to the employees of an employer with a payment to the employer
and that such an equation improperly ignores the existence of the
employer. This comment is based on a misreading of the regulations. The
regulations reflect the fact that the provision of a benefit to an
employee at no cost to the employer is, in effect, a credit to the
employer that offsets the employer's otherwise applicable cost of
providing that benefit. Accordingly, if the amount of such a benefit is
based on the experience of the employer or its employees, the plan
includes an experience-rating arrangement with respect to individual
employers and is ineligible for the section 419A(f)(6) exception to
sections 419 and 419A.

[Use of Insurance Contracts]{.underline}

A number of commentators expressed concern with the results under the
proposed regulations when the definition of an experience-rating
arrangement was applied to a plan which provides for contributions equal
to the premiums on a whole life insurance contract or other life
insurance contract having level premiums. These commentators asserted
that the purchase of such policies is not inconsistent with the
requirements of section 419A(f)(6) and that, if the premiums under the
contract are established using standardized actuarial factors (including
issue age), the arrangement is not experience rated.

The final regulations retain the definition of experience rating
arrangement and the general results that flow from the application of
that definition to a level premium life insurance policy. This analysis
recognizes that if whole life insurance contracts, or other insurance
contracts that provide for level premiums or otherwise generate a
savings element, are purchased under an arrangement, the economic values
reflected under those contracts (including cash values, reserves, and
any other economic values, such as conversion credits, high dividend
rates, or the right to continue coverage at a premium that is lower than
the premium that would apply in the absence of that savings element) are
based on the excess of the premiums paid over the underlying mortality
and related expense charges for providing the insurance and, hence,
reflect the overall experience of the employers and employees who
participate under the plan.

If those economic values are used to determine the current cost of
coverage for that employer (as opposed to being shared among all of the
employers participating in the plan), the employer can anticipate that
its past contributions in excess of incurred losses for claims for its
employees will inure to the benefit of the employer or its employees (as
opposed to the other employers participating in the plan). This
assurance that the employer or its employees will benefit from favorable
past experience is the hallmark of an experience-rating arrangement.[^2]

Furthermore, Congress' expectation that employers participating in 10 or
more employer plans would have no financial incentive to over-contribute
was the basis for providing the section 419A(f)(6) exception from the
deduction limits of sections 419 and 419A. Allowing a 10 or more
employer plan to use insurance contracts with retained values, where a
participating employer can benefit directly or indirectly from the
retained values generated with respect to its employees (e.g., through
enhanced benefits to its employees), would provide a financial incentive
for the employer to over-contribute to the plan and, thus, would be
contrary to the premise underlying the intent of Congress in providing
the exception. This financial incentive can be seen most clearly in a
flexible premium universal life contract, which is almost
indistinguishable from the welfare benefit fund that Congress intended
to be subject to the deduction limitations of sections 419 and 419A. The
fact that the premiums on a whole life contract or other level premium
arrangement are fixed ahead of time (at least with respect to individual
employees) does not alter the fact that the buildup of cash value is
essentially the same as the accumulation of assets in a fund. The result
is the same even where there is no cash value, if the arrangement uses
overpayments in earlier years to levelize the premiums. In all these
cases, the retained values of life insurance contracts relating to an
employer's employees are used to determine that employer's cost of
coverage, and the conclusion remains that there is an experience-rating
arrangement of the type not allowed by section 419A(f)(6).

Some commentators asserted that the definition of experience-rating
arrangements in the proposed regulations will preclude the use of cash
value life insurance under section 419A(f)(6) and will therefore
eviscerate the section 419A(f)(6) exception. Neither section 419A(f)(6)
nor these regulations regulate the investments of a welfare benefit
fund, including investments by a trust in cash value policies. Instead,
section 419A(f)(6) and the regulations are concerned with the economic
relationship between a fund and participating employers, and whether the
pass-through of premiums based on the insurance contracts associated
with an employer's employees has the effect of creating
experience-rating arrangements with respect to individual employers.
Moreover, the IRS and Treasury also believe that the exception is still
viable for many life and health benefit arrangements that are
self-insured in accordance with the Employee Retirement Income Security
Act of 1974 (ERISA) or state law. Under these types of arrangements, the
employers contribute the expected cost of claims for their employees.
Without the section 419A(f)(6) exception, the deduction for these
contributions would be limited to the welfare benefit fund's qualified
cost for the taxable year. The section 419A(f)(6) exception allows these
employers to deduct those contributions without regard to whether the
employees actually incurred claims.

A number of commentators cited to other provisions under sections 419
and 419A for support for their position that a plan can provide for
accumulations within a welfare benefit fund that are effectively
allocated to the employees without causing the plan to be ineligible for
the section 419A(f)(6) exception. The Service and Treasury believe that
these other provisions are not relevant in the determination of whether
a plan provides an experience rating arrangement. For example, the fact
that section 419(e)(4) specifically excludes certain insurance contracts
(including contracts that provide experience rated refunds or policy
dividends) from the definition of fund for purposes of section 419 does
not necessarily mean that such contracts may be held within a welfare
benefit fund while retaining the section 419A(f)(6) exception.
Similarly, the fact that section 419A(c)(2) permits an additional
reserve for post-retirement medical and life insurance benefits does not
mean that such a reserve would not cause the plan to violate the
prohibition on experience rating under section 419A(f)(6).

[Special Rules of Application]{.underline}

The final regulations retain the special rules of application relating
to insurance contracts that were set forth in the proposed regulation.
For example, insurance contracts under an arrangement are treated as
assets of the fund, and the fund will be treated as having either a gain
or loss with respect to those contracts.

Another special rule is provided in the case of a plan maintaining an
experience-rating arrangement with respect to a group of participating
employers or a group of employees covered under the plan (a rating
group). Under that rule, a plan will not be treated as maintaining an
experience-rating arrangement with respect to an individual employer
merely because the cost of coverage under a plan with respect to the
employer is based, in whole or in part, on the benefits experience or
the overall experience (or a proxy for either type of experience) of a
rating group that includes the employer or one or more of its employees,
provided that the employer does not normally contribute more than 10
percent of all contributions with respect to that rating group. The
effect of this rule is to allow the plan to provide for experience
rating on a plan-wide basis or on the basis of a subset of the employers
within the plan, provided that the subset of employers is not
overweighted by the experience of one employer and is not defined based
on the experience of the employers.

[Characteristics Indicating a Plan Is Not Described in Section
419A(f)(6)]{.underline}

These regulations also identify five characteristics that are
indications that an employer's interest with respect to the plan is more
similar to the relationship of an individual employer to a fund than an
insured to an insurer. (See, H.R. Conf. Rep. No. 861, 98^th^ Cong., 2d
Sess. 1155 (1984), 1984-3 C.B. (Vol. 2) 1, 413.) The presence of some of
these characteristics in a plan suggests that there are multiple plans
present instead of a single plan. The presence of others tends to
indicate that an employer's cost of coverage is (or will be) based on
that employer's benefits experience. Others tend to indicate that the
plan is expected to accumulate a surplus that ultimately will be used
for the benefit of the individual employers (or their employees). One
way this surplus might be used would be to reduce future contributions
for the individual employers based on past contributions or claims of
the employers. Another way would be to pay benefits to an employer's
employees based on the employer's share of the surplus on the occasion
of the withdrawal of the employer or at plan termination, thereby
violating the rule that an employer's cost of coverage cannot be based
on its overall experience. Accordingly, these regulations provide that a
plan exhibiting any of these characteristics is not a 10 or more
employer plan described in section 419A(f)(6) unless it is established
to the satisfaction of the Commissioner that the plan satisfies the
requirements of section 419A(f)(6) and these proposed regulations. It
should be noted that the fact that a plan has none of these
characteristics does not create an inference that it is a 10 or more
employer plan described in section 419A(f)(6).

The first, third and fourth characteristics under the proposed
regulations indicating that a plan is not a 10 or more employer plan
described in section 419A(f)(6) (i.e., the assets of the plan are
allocated among the participating employers through a separate
accounting of contributions and expenditures for individual employers or
otherwise, the plan does not provide for fixed welfare benefits for a
fixed coverage period for a fixed price or the plan charges the
participating employers an unreasonably high amount for the covered
risk) have been retained without change.

The second characteristic under the proposed regulations indicating that
a plan is not a 10 or more employer plan described in section 419A(f)(6)
is that amounts charged under the plan differ among the employers in a
manner that is not reflective of differences in risk or rating factors
that are commonly taken into account in manual rates used by insurers
(such as age, gender, dependents covered, geographic locale, or benefit
terms). In response to comments, this second characteristic has been
clarified so that the exception for reflection of differences in risk or
rating factors commonly taken into account in manual rates is limited to
differences in charges that are merely reflective of differences in
current risk (such as current age, gender, dependents covered,
geographic locale, or benefit terms). Accordingly, an arrangement that
charges different amounts for life insurance based on issue age would
exhibit this second characteristic, unless the differences in amount
charged are merely reflective of differences in risk or rating factors
at the current age (e.g., reflecting select and ultimate mortality).

The fifth characteristic under the proposed regulation indicating that a
plan is not a 10 or more employer plan described in section 419A(f)(6)
is that benefits or other amounts payable can be provided upon
triggering events other than the illness, personal injury, or death of
an employee or family member, or the employee's involuntary termination
of employment. A number of commentators expressed concern that this
fifth characteristic effectively prohibits a termination of a welfare
benefit arrangement or otherwise redefines what is a welfare benefit
arrangement. This concern reflects a misreading of the regulations, as
this fifth characteristic does not prohibit the payment of benefits upon
termination of the arrangement or withdrawal of an employer from the
arrangement[^3] or in any other way seek to redefine what is a permitted
welfare benefit. Instead the characteristic reflects the inherent
difficulty an insurer would have in determining an actuarially
appropriate price for providing fixed benefits on the occasion of these
non-standard benefit triggers and the associated likelihood that the
amount of the benefits payable on such an occasion is being determined
based on the overall experience of the employee or employer. The fact
that some commentators have suggested that an employer be able to
"spin-off" the employer's "share" of a fund is further indication that
many plans that purport to fit within the section 419A(f)(6) exception
are engaging in prohibited experience rating.

Taxpayers are reminded that a plan that exhibits one of these
characteristics may still establish that the plan satisfies the
requirements of section 419A(f)(6). For example, in the case of a plan
that provides for a benefit to be provided on the occasion of an
employer's withdrawal from the plan, the plan would have to demonstrate
that the amount provided to an employee is not based on the benefits
experience or the overall experience of the employee or the employer. In
addition, in response to comments, the final regulations clarify that a
plan does not exhibit this fifth characteristic 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.

The examples in the proposed regulations illustrating the application of
the rules regarding experience-rating arrangements to specific fact
situations are included in the final regulations, with minor changes,
and two additional examples have been included. The facts described in
some of the examples illustrate arrangements that do not maintain
experience-rating arrangements with respect to individual employers.
Other examples, however, describe arrangements that exhibit the
characteristics of a fund that Congress intended to be subject to the
deduction limitations of sections 419 and 419A. Each example illustrates
only the application of the definition of experience-rating arrangements
under section 419A(f)(6) and these regulations, and no inference should
be drawn from the scope of the examples about whether these plans are
otherwise described in section 419A(f)(6) or about any other provision
of the Code.[^4]

Pursuant to the authority set forth in section 419A(i), the regulations
provide a special rule to assist participating employers and the
Commissioner in verifying that the arrangement satisfies the section
419A(f)(6) requirements. Under that rule, an arrangement satisfies the
requirements of section 419A(f)(6) and the regulations only if the plan
is maintained pursuant to a written document that (1) requires the plan
administrator to maintain records sufficient for the Commissioner or any
participating employer to readily verify the plan's compliance with
section 419A(f)(6) and (2) provides the Commissioner and each
participating employer with the right to inspect and copy all such
records.

**Effective Date**

Except as explained below, these regulations \-- which generally clarify
existing law \-- are effective for contributions paid or incurred in
taxable years of an employer beginning on or after July 11, 2002. For
contributions made before this effective date, the IRS will continue
applying existing law, including the analysis set forth in Notice 95-34
and relevant case law. Thus, taxpayers should not infer that a
contribution that would be nondeductible under the regulations would be
deductible if made before that date. In this regard, taxpayers are
reminded that the IRS has already identified transactions that are the
same as or substantially similar to the transactions described in Notice
95-34 as [listed transactions]{.underline} for purposes of
§1.6011-4T(b)(2) of the Temporary Income Tax Regulations and
§301.6111-2T(b)(2) of the Temporary Procedure and Administration
Regulations.

The requirement that written plan documents contain specified provisions
relating to compliance information and the record maintenance
requirement for plan administrators are effective for taxable years of a
welfare benefit fund beginning after July 17, 2003. Existing record
retention requirements and record production requirements under section
6001 continue to apply to employers and promoters.

**Special Analyses**

It has been determined that these regulations are not a significant
regulatory action for purposes of Executive Order 12866. Accordingly, a
regulatory assessment is not required. It has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. Chapter 5)
does not apply to these regulations.

It is hereby certified that the collection of information in these
regulations will not have a significant economic impact on a substantial
number of small entities. The collections of information in the
regulation are in §1.419A(f)(6)-1(a)(2) and (e) and consist of the
requirements that a plan administrator maintain certain information and
that it provide that information upon request to the Commissioner and to
employers participating in the plan. This certification is based on the
fact that requests for such information are likely to be made, on
average, less than once per year per employer and that the costs of
maintaining and providing this information are small. In addition,
relatively few small entities are plan administrators. Therefore, a
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding these regulations was sent to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.

**Drafting Information**

The principal author of these regulations is Betty J. Clary, Office of
the Division Counsel/Associate Chief Counsel (Tax Exempt and Government
Entities). However, other personnel from the IRS and Treasury Department
participated in their development.

**List of Subjects in 26 CFR Part 1**

Income taxes, Reporting and recordkeeping requirements.

**Adoption of Amendments to the Regulations**

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1\--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 \* \* \*

§1.419A(f)(6)-1 is also issued under 26 U.S.C. 419A(i). \* \* \*

Par. 2. Section 1.419A(f)(6)-1 is added to read as follows:

[§1.419A(f)(6)-1 Exception for 10 or more employer plan]{.underline}

\(a\) [Requirements]{.underline}\--(1) [In general]{.underline}.
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]{.underline}. 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 §1.414(g)‑1 for
the definition of plan administrator.

\(3\) [Application of rules]{.underline}\--(i) [In general]{.underline}.
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]{.underline}. 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]{.underline}\--(1) [General
rule]{.underline}. 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]{.underline}) 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]{.underline}, [overall experience]{.underline}, and [benefits
or other amounts payable]{.underline}. The rules of this paragraph (b)
apply under all circumstances, including employer withdrawals and plan
terminations.

\(2\) [Adjustment of contributions]{.underline}. 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]{.underline}. An example of a plan that
maintains an experience-rating arrangement with respect to an individual
employer is a plan under which benefits for an employer's employees are
(or can be expected to be) increased if that employer's overall
experience is positive or, conversely, under which benefits are (or can
be expected to be) decreased if that employer's overall experience is
negative. A plan also maintains an experience-rating arrangement with
respect to an individual employer if benefits for an employer's
employees are limited by reference, directly or indirectly, to the
overall experience of the employer (rather than having all the plan
assets available to provide the benefits).

\(4\) [Special rules]{.underline}\--(i) [Treatment of insurance
contracts]{.underline}\--(A) [In general]{.underline}. 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]{.underline}. 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]{.underline}. 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]{.underline}.
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]{.underline}. 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]{.underline} 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]{.underline}. 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]{.underline}. 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]{.underline}\--(1) [In general]{.underline}. The presence of any of
the characteristics described in paragraphs (c)(2) through (c)(6) of
this section generally indicates that the plan is not a 10 or more
employer plan described in section 419A(f)(6). Accordingly, unless
established to the satisfaction of the Commissioner that the plan
satisfies the requirements of section 419A(f)(6) and this section, a
plan having any of the following characteristics is not a 10 or more
employer plan described in section 419A(f)(6). A plan's lack of all the
following characteristics does not create any inference that the plan is
a 10 or more employer plan described in section 419A(f)(6).

\(2\) [Allocation of plan assets]{.underline}. 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]{.underline}. 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]{.underline}. 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]{.underline}. 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]{.underline}. 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]{.underline}. For purposes of this section:

\(1\) [Benefits or other amounts payable]{.underline}. The term
[benefits or other amounts payable]{.underline} 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]{.underline}. The [benefits
experience]{.underline} 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]{.underline}\--(i) [Employer's overall
experience]{.underline}. The term [overall experience]{.underline}
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]{.underline}. The term [overall
experience]{.underline} means, with respect to an employee (or group of
employees, whether or not employed by the same employer), the balance
that would have accumulated in a welfare benefit fund if the employee
(or group of employees) were the only employee (or employees) being
provided welfare benefits under the plan. Thus, the overall experience
is credited with the sum of the contributions under the plan with
respect to that employee (or group of employees), less the benefits and
other amounts paid or distributed (or otherwise provided) with respect
to that employee (or group of employees), and adjusted for gain or loss
from insurance contracts (as described in paragraph (b)(4)(i) of this
section), investment return, and expenses. Overall experience as of any
date may be either a positive or a negative number.

\(4\) [Employer]{.underline}. The term [employer]{.underline} 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]{.underline}\--(i) [In
general]{.underline}. 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]{.underline}. 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]{.underline}. 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
§1.414(g)-1 for the definition of plan administrator.)

\(f\) [Examples]{.underline}. 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]{.underline}. 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]{.underline}. (i) An arrangement provides welfare benefits to
employees of participating employers. Each year a participating employer
is required to contribute an amount equal to the claims and other
expenses expected with respect to that employer for the year (based on
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]{.underline}. (i) The facts are the same as in [Example
1]{.underline}, 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]{.underline}), 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]{.underline}, 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]{.underline}
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]{.underline}, 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]{.underline}. (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 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]{.underline}, 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]{.underline}. (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 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]{.underline}. (i) The facts are the same as in [Example
4]{.underline} 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]{.underline},
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]{.underline}, 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]{.underline} 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]{.underline}. (i) Under Arrangement C, death benefits are
provided for eligible employees of each participating employer. Flexible
premium universal life insurance policies are purchased to provide the
death benefits. Each policy has a face amount equal to the death benefit
payable with respect to the individual employee. Each participating
employer can make any contributions to the arrangement provided that the
amount paid for each employee is at least the amount needed to prevent
the lapse of the policy. The amount needed to prevent the lapse of the
universal life insurance policy is the excess, if any, of the mortality
and expense charges for the year over the policy balance. All
contributions made by an employer are paid as premiums to the universal
life insurance policies purchased on the lives of the covered employees
of that employer. Participating employers 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]{.underline}. (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 specified table do not exceed the rates set forth in Table I of
§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]{.underline} 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]{.underline}. (i) The facts are the same as in [Example
7]{.underline}, 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]{.underline}, 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]{.underline}. (i) Arrangement E provides medical benefits for
covered employees of 90 participating employers. The level of medical
benefits is determined by a schedule set forth in the trust document and
does not vary by employer. Other than any rights an employee may have to
COBRA continuation coverage, the medical benefits cease when an employee
terminates employment with the employer. If an employer withdraws from
the arrangement, there is no refund of any contributions and there is no
transfer of anything of value to employees of the withdrawing employer,
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]{.underline} 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]{.underline}. (i) The facts are the same as in [Example
9]{.underline}, 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]{.underline},
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]{.underline}. (i) The facts of Arrangement F are the same as
those described in [Example 10]{.underline}, 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]{.underline},
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]{.underline}. (i) The facts of Arrangement G are the same as
those described in Example 10, except for the way that the arrangement
classifies the employers. Under Arrangement G, the experience of each
employer for the prior year is reviewed and then the employer is
assigned to one of three classifications (low cost, intermediate cost,
or high cost) based on the ratio of actual claims with respect to that
employer to expected claims with respect to that employer. No employer
in any classification 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]{.underline},
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]{.underline}. (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]{.underline}, the aggregate value of the life
insurance policies on the lives of an employer's employees is a proxy
for that employer's overall experience. Thus, a participating's
employer's cost of coverage for any period is based on a proxy for the
overall experience of that employer. Accordingly, Arrangement H
maintains experience-rating arrangements with respect to individual
employers.

\(iv\) The result would be the same if, rather than distributing the
policies, Arrangement H distributed cash amounts equal to the cash
values of the policies. The result would also be the same if the
distribution of policies or cash values is triggered by employees
terminating their employment rather than by employers ceasing to
participate in the arrangement.

[Example 14]{.underline}. (i)(1) The facts of Arrangement J are the same
as those described in [Example 13]{.underline} 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]{.underline}. (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 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]{.underline}\--(1) [In general]{.underline}.
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]{.underline}. 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.

PART 602\--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part 602 continues to read as
follows:

Authority: 26 U.S.C. 7805.

Par. 4. In §602.101, paragraph (b) is amended by adding an entry in
numerical order to the table to read as follows:

[§602.101 OMB control numbers]{.underline}.

\* \* \* \* \*

\(b\) \* \* \*

\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\--

CFR part or section where Current OMB

[identified and described control No.]{.underline}

\* \* \* \* \*

1.419A(f)(6)-1\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...1545-1795

[\* \* \* \* \*]{.underline}

Robert E. Wenzel,

Deputy Commissioner for Services and Enforcement.

Approved: July 9, 2003

Pamela F. Olson,

Assistant Secretary of the Treasury.

[^1]: See [Booth v. Commissioner]{.underline}, 108 T.C. 524 (1997), for
    an arrangement using a separate accounting system that does not
    qualify under the 10 or more employer plan exception.

[^2]: The existence of experience rating in a level premium life
    insurance arrangement can be viewed not only from the perspective of
    overall experience, but also from that of claims experience. For
    example, assume that Employer A and Employer B have the same number
    of employees, and the employees of A have the same ages and other
    risk factors as those of B. If, on the same day in Year 1, each
    employer purchases from the same insurer the same amount of level
    premium whole life insurance coverage for each of its employees, the
    aggregate premium charges for A and B will be equal. Further, assume
    that in Year 5, A's employee who is age 60 dies, and is replaced by
    individual who is also age 60 and has identical risk
    characteristics. A purchases a new level premium whole life
    insurance contract of the same amount for the new employee who has
    an issue age of 60. A's premiums for the new 60-year-old employee
    will now be higher than those of B for its employee corresponding to
    the 60-year-old who died, because B's premiums for its 60-year-old
    employee are based on an issue age of 55. A's premiums for its other
    employees will be the same as those for B's corresponding employees.
    Thus, after the death of its employee, A's aggregate premium charges
    are higher than those of B, and this is due solely to the fact that
    A's employees have incurred claims in excess of the claims of B's
    employees.

[^3]: A withdrawal of an employer merely terminates the arrangement for
    that employer, but it continues for the other employers.

[^4]: For example, in [Neonatology Associates, P.A., v.
    Commissioner]{.underline}, 299 F.3d 221 (3d Cir. 2002), affirming
    115 T.C. 43 (2000), the Court held that the contributions were in a
    large part constructive dividends to the employee/owners (and thus
    did not reach the government's alternative contention that the plan
    was maintaining experience-rating arrangements with respect to
    individual employers). In [Booth v. Commissioner]{.underline}, 108
    T.C. 524 (1997), the Tax Court held that the arrangement was an
    aggregation of separate plans (and thus was not a single plan) and
    that there were experience-rating arrangements with respect to the
    individual employers.