For several years, employers have been using Welfare Benefit Plans and Voluntary Employees’ Beneficiary Associations to find important benefits for their employees and owners. Traditionally, the benefits chosen most often by employers are death benefit plans funded by the life insurance and severance plans. Up until now, there has been no guidance available from the Internal Revenue Service or the courts as to how these plans can qualify as multi-employer plans. The Tax Court recently decided the case of Robert D. Booth v. Commissioner, 108 TC. No. 25 on June 17. This well-reasoned case supplies the needed guidance for sponsors of such plans and the employers that adopt these plans.

· A single plan that covers 10 or more employers.

· No one of which normally contributes more than 10 percent of the trust’s total contributions.

· The plan has no experience-rating arrangements with respect to individual employers.

    Up until the decision in Booth, there was no guidance in the law as to what constituted a proper multi-employer plan under Section 419A(f) (6). Although this provision was enacted as part of DEFRA in 1984, the IRS has not yet issued regulations, some 13 years after promulgation of the Code Section. Similarly, there were no court cases, rulings, GCMs or other pronouncements to provide guidance to sponsors or employers who adopted such plans. Therefore, up until now, employers could only structure their welfare benefit programs in such a manner as to meet the spirit of the Code, including its legislative history. Judicial interpretation of Section 419(f) (6) was eagerly awaited by the benefits community.

Booth Case

     In Booth, the Tax Court reviewed the requirements of a welfare benefit plan in the form of a multi-employer trust, under Section 419A(f) (6), ruling upon several issues. These issues were:

        · Whether or not the plan was a welfare benefit plan or a deferred compensation plan.

        · Whether the provisions of Section 419A(f) (6) were met.

        · Whether there were any penalties resulting from substantial understatement of federal income tax.

     Additionally, the court provided guidance in several other important areas:

        · Whether the ability of the employer to voluntary terminate its participation in the plan constituted sufficient control as to tip the scales in favor of a funding of deferred compensation.

        · The factors indicating that the relationship of a participating employer to the plan is similar to the relationship of an insured to an insurer.

        · What degree of separate accounting was sufficient to prevent compliance with the single plan requirement.

        · The requirement that all assets of the trust be made available to all employees of all participating employers in the trust.

     The good news is that the Tax Court decided the issues if the plan was a welfare benefit and the tax penalty in a manner favorable to the taxpayer. The Tax Court specifically ruled that the welfare benefit plan in question was more like the plans reviewed by the Tax Court in Moser and Schneider, rather than being similar to deferred compensation as in Wellons. This was so even though the plan in question had severance benefits (referred to in the case as DWB or "dismissal wage benefits"). The mere fact that the term "severance benefits" was not mentioned in the case leads to an interesting speculation as to the possible inflammatory nature of that term.

     Specifically, in the plan under review, only the assets of each individual employer were made available to each of its own employees. The plan assets as a whole were not available to all employees. This factor caused the court to rule that the plan was not a single plan, but rather consisted of an aggregation of individual unique plans formed by separate employers who have banded together with certain common elements, such as a common trustee, sponsor and administrator.

     In order for a plan to meet the court's requirements of a single plan, there must be a single pool of funds for use by the group as a whole, to pay the claims of all participants.

     The court provided an excellent analysis of the experience-rating arrangement issue, based primarily upon legislative history of Section 419A(f) (6). The court held that the relationship of a participating employer to a multi-employer plan must resemble the relationship of an insured to an insurer.

     Subsequent to the decision in Booth, WBPs and VEBAs are more viable than ever. This is because the Tax Court in Booth has affirmed that a correctly designed plan will pass muster.

     Specifically, the issue of whether the plan is deferred compensation or not appears to be answered in favor of the taxpayer. The issue of whether the ability to terminate participation in the plan is a permissible feature has been answered affirmatively by the court. The issue of penalties appears to have been put to rest.

     The court has furnished a road map of what to do in order to qualify a plan as a multi-employer plan under Section 4 19A(f) (6), and how to avoid having a plan characterized as an experience-rated arrangement.

     The principle adjustment that must be made by all sponsors of WBPs and VEBAs is to make sure that all assets are available to satisfy the claims of all creditors and all employees of all employers. This requires eliminating any "Chinese Wall" that serves to partition the assets of one employer from the other.

     The language of the opinion in acknowledging that "the plan’s designers intended the plan to provide employees with ‘real’ welfare benefits that wouldn’t be subject to abuse" should be carefully noted in designing promotional materials, illustrations and opinion letters.

     The opinion’s repeated admonition that the plan should be more akin to an insurance plan than to a fund should be given respect by plan sponsors. By eliminating any severance benefit or DWB, and operating as a death-benefit-only plan, what better method could there be of being akin to life insurance, since the entire funding would consist of life insurance policies?

     A longer version of this article originally appeared in the Legal Intelligencer, June 25, 1997.

July/August 1997