Certain Types of Arrangements That do not Satisfy the Requirements of Internal Revenue Code Section 419A(f)(6)

2.2.3               Arrangements that do not satisfy 419A(f)(6)

In Notice 95-34, 1995-1 C.B. 309, the IRS identified . 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. See Booth v. Commissioner, 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.  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.