Government retiree health trust receives four favorable rulings

Plain-English summary

An association of state boards of education created a trust to fund medical, dental, and vision benefits for its retired employees. The IRS had previously ruled that the association performed essential governmental functions and excluded its income under section 115(1). In this ruling, the IRS held that qualifying health-benefit distributions were excluded from retirees' income under section 105 and that the association's contributions were excluded under section 106. It also held that the trust's income was excluded under section 115(1) because the trust performed an essential governmental function, accrued for governmental benefit, and provided no more than incidental private benefit. The arrangement qualified as an ordinary trust because its trustees protected and conserved property for beneficiaries who did not jointly conduct a business. Because its income was excluded, the trust was not required to file an annual federal income tax return under the circumstances described.

Ruling snapshot

• Question: What are the income-tax, entity-classification, and filing consequences of the association's retiree health trust?
• Outcome: Approved on all four requested rulings
• Key authorities: IRC §§ 105, 106, 115(1), 6012(a)(4), and 7701(a); Treas. Reg. § 301.7701-4(a)

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202326003                                             Third Party Communication: None
 Release Date: 6/30/2023                                       Date of Communication: Not Applicable
 Index Number: 106.00-00, 105.00-00,
               115.00-00, 6012.00-00,                          Person To Contact:
               7701.00-00                                      ------------------------------, ID No. ------------
                                                               Telephone Number:
 -------------------------------,                              --------------------
 -------------------------------------                         Refer Reply To:
 ---------------------------                                   CC:EEE:EB:HW
 -------------                                                 PLR-113649-22
 --------------------------------                              Date:
                                                               March 27, 2023



Legend:

Trust = ----------------------------------------------------------------------------------------

Association = ------------------------------------------------------------

State = ------------

Plan = ---------------------------------------------------------------------------------------


TY: -------


Dear -------------:

This responds to your letter dated June 13, 2022, and subsequent correspondence
dated December 13, 2022, requesting rulings on behalf of Trust under sections 105,
106, 115(1), and 7701(a) of the Internal Revenue Code (Code).

FACTS

Association was founded in --------and incorporated as a nonprofit, nonstock corporation
in --------to support boards of education in State. The purpose of Association is to
provide a central organization to represent the general interests of its members and to
provide benefit programs for members’ employees. Membership in Association is limited
to boards of education within State. Association provides a multitude of essential
services to its members, including professional development opportunities, advocacy,
legal services, and insurance and financial services.

In a private letter ruling dated -----------------------, the Service determined that
Association is a wholly-owned instrumentality of State for purposes of section
PLR-113649-22                                  2

3121(b)(7) of the Code, that Association’s functions are essential governmental
functions, and that Association's income is excludible from gross income under section
115(1). The ruling noted that the boards of education, which are members of
Association, are integral parts of their respective counties and state governments and
that Association’s functions, which benefit governmental units as well as the boards of
education, are essential government functions.

Association established the Plan to provide health and welfare benefits to its retired
employees. Trust represents that Association pays a portion of the premiums for
individual retiree medical, dental, and vision insurance coverage for Plan participants,
and that participants pay the remaining portion of the premiums for the coverage.

Association established Trust, effective --------------------------, to fund retiree health and
welfare benefits under the Plan. Article II, Section 2.1, of Trust provides that all Trust
assets are fully protected from the creditors of Association and the trustees, and no part
of the net earnings of Trust will inure to the benefit of any individual. Under Article II,
Section 2.4, Trust assets may be used to provide benefits under the Plan either through
self-insurance or through payment of premiums on insurance policies; to pay all
reasonable and necessary administrative costs, and to establish and accumulate a
reserve to fund Association's share of the cost of the Plan. Under Article II, Section 2.3,
Trust consists of contributions made by or on behalf of Association, and earnings
thereon, and participants may not contribute to Trust. Article 5, Section 5.5, of Trust
provides that, upon termination, Trust assets will be transferred to one or more trust
funds, provided that the trust funds are for the purpose of providing health and welfare
benefits consistent with the purposes of Trust, or, if the assets may not be transferred to
such other trust funds, then they will be transferred to Association. Article 5, Section 5.5,
further provides that, in no event will the assets be transferred to an entity that is not a
state, a political subdivision of a state, or Association.

RULINGS REQUESTED

Trust requests the following rulings:

Ruling Request 1: Amounts distributed from Trust for individual retiree medical, dental,
and vision insurance coverage are excluded from the gross income of Plan participants
under section 105 of the Code.

Ruling Request 2: Contributions made to Trust by Association are excluded from the
gross income of Plan participants under section 106 of the Code.

Ruling Request 3: Income of Trust is excludible from gross income under section
115(1) of the Code because the income is derived from the exercise of an essential
governmental function and will accrue to a state or political subdivision.
PLR-113649-22                                3

Ruling Request 4: Trust is an “ordinary trust,” within the meaning of section 7701(a)
and § 301.7701-4(a) of the Procedure and Administration Regulations, and, therefore, is
not required to file federal income tax returns pursuant to section 6012(a)(4) of the
Code.

LAW

Section 61(a)(1) of the Code and § 1.61-21(a)(3) of the Income Tax Regulations provide
that, except as otherwise provided in subtitle A of the Code, gross income includes
compensation for services, including fees, commissions, fringe benefits, and similar
items.

Section 105(a) of the Code provides that, except as otherwise provided in section 105,
amounts received by an employee through accident or health insurance for personal
injuries or sickness shall be included in gross income to the extent such amounts (1) are
attributable to contributions by the employer which were not includible in the gross
income of the employee, or (2) are paid by the employer.

Section 105(b) of the Code provides that, except in the case of amounts attributable to
(and not in excess of) deductions allowed under section 213 (relating to medical
expenses) for any prior taxable year, gross income does not include amounts referred
to in subsection (a) if such amounts are paid, directly or indirectly, to the taxpayer to
reimburse the taxpayer for expenses incurred by him for the medical care (as defined in
section 213(d)) of the taxpayer, his spouse, and his dependents (as defined in section
152, determined without regard to section 152(b)(1), (b)(2), and (d)(1)(B)), and any child
(as defined in section 152(f)(1)) of the taxpayer who as of the end of the taxable year
has not attained age 27.

Section 213(d)(1)(A) of the Code defines "medical care" to include amounts paid for the
diagnosis, cure, mitigation, treatment, or prevention of disease, or for the
purpose of affecting any structure or function of the body.

Section 106(a) of the Code provides that, except as otherwise provided in section 106,
gross income of an employee does not include employer-provided coverage under an
accident or health plan.

Section 1.106-1(a) of the Income Tax Regulations provides that the gross income of an
employee does not include contributions which his employer makes to an accident or
health plan for compensation (through insurance or otherwise) to the employee for
personal injuries or sickness incurred by him, his spouse, or his dependents, as defined
in section 152 of the Code, determined without regard to section 152(b)(1), (b)(2), or
(d)(1)(B)), or any child (as defined in section 152(f)(1)) of the employee who as of the
end of the taxable year has not attained age 27. The employer may contribute to an
accident or health plan either by paying the premium (or a portion of the premium) on a
policy of accident or health insurance covering one or more of his employees, or by
PLR-113649-22                                 4

contributing to a separate trust or fund (including a fund referred to in section 105(e))
which provides accident and health benefits directly or through insurance to one or
more of his employees. However, if the insurance policy, trust or fund provides other
benefits in addition to accident or health, section 106 applies only to the portion of the
contributions allocable to accident or health benefits.

Coverage provided under an accident and health plan to former employees and their
spouses and dependents is excludable from gross income under section 106. See Rev.
Rul. 82-196, 1982-2 CB 53; Rev. Rul. 85-121, 1985-2 CB 57.

Section 115(1) of the Code provides that gross income does not include income derived
from any public utility or the exercise of any essential government function and accruing
to a State or any political subdivision thereof, or the District of Columbia.

Rev. Rul. 77-261, 1977-2 CB 45, holds that income generated by an investment fund
that is established by a state to hold revenues in excess of the amounts needed to meet
current expenses is excludable from gross income under section 115(1) of the Code
because such investment constitutes an essential government function. The ruling
states that the statutory exclusion is intended to extend not to the income of a state or
municipality resulting from its own participation in activities, but rather to the income of
an entity engaged in the operation of a public utility or the performance of some
governmental function that accrues to either a state or political subdivision of a state.
The ruling explains that it may be assumed that Congress did not desire in any way to
restrict a state’s participation in enterprises that might be useful in carrying out projects
that are desirable from the standpoint of a state government and that are within the
ambit of a sovereign to conduct.

Rev. Rul. 90-74, 1990-2 CB 34, holds that income from an organization formed, funded,
and operated by political subdivisions to pool various risks (casualty, public liability,
workers’ compensation, and employees’ health) is excludable from gross income under
section 115(1) of the Code because the organization is performing an essential
governmental function. The revenue ruling states that the income of such an
organization is excludable from gross income so long as private interests do not
participate in the organization or benefit more than incidentally from the organization.
The benefit to the employees of the insurance coverage obtained by the member
political subdivisions was deemed incidental to the public benefit.

Section 6012(a)(4) of the Code provides that every trust having for the taxable year any
taxable income, or having gross income of $600 or over, regardless of the amount of
taxable income, must file a return with respect to income taxes under subtitle A.

Section 301.7701-1(b) of the Procedure and Administration Regulations provides that
the classification of organizations that are recognized as separate entities is determined
under sections 301.7701-2, 301.7701-3, and 301.7701-4, unless a provision of the
Code provides for special treatment of that organization.
PLR-113649-22                                  5


Section 301.7701-4(a) provides that, in general, an arrangement will be treated as a
trust under the Code if it can be shown that the purpose of the arrangement is to vest in
trustees responsibility for the protection and conservation of property for beneficiaries
who cannot share in the discharge of this responsibility and, therefore, are not
associates in a joint enterprise for the conduct of business for profit.

ANALYSIS AND CONCLUSION

Based on the foregoing, we rule as follows:

Ruling Request 1: Amounts distributed from Trust for individual retiree medical, dental,
and vision insurance coverage are excluded from the gross income of Plan participants
under section 105 of the Code.

Ruling Request 2: Contributions made to Trust by Association are excluded from the
gross income of Plan participants under section 106 of the Code.

Ruling Request 3: Trust was established to fund health and welfare benefits for eligible
retirees of Association. Trust’s income accrues to the benefit of Association, an entity
that previously received a private letter ruling from the IRS indicating that all of its
members are integral parts of their respective counties and state governments and
concluding that Association’s functions are essential government functions and its
income is excluded from gross income under section 115(1) of the Code. Trust’s
provision of benefits to retired employees of Association constitutes the performance of
an essential governmental function within the meaning of section 115(1) of the Code.
See Rev. Rul. 90-74 and Rev. Rul. 77-261. Trust’s activities do not provide more than
an incidental benefit to private interests. See Rev. Rul. 90-74. In no event, including
dissolution, will Trust’s assets be distributed or revert to any entity that is not a state, a
political subdivision of a state, or Association, an entity the income of which is excludible
from its gross income by application of section 115(1) of the Code. Thus, Trust’s income
is excludible from gross income under section 115(1) of the Code because Trust’s
income derives from the exercise of an essential governmental function and will accrue
to a state or a political subdivision of a state.

Ruling Request 4: Trust enables Association to set aside funds to provide health and
welfare benefits for its retirees. Trust represents that its trustees are charged with the
responsibility to protect and conserve Trust’s assets for the benefit of Trust’s
beneficiaries. Trust further represents that beneficiaries of Trust cannot share in the
discharge of the trustees’ responsibility for the protection and conservation of property
and, therefore, are not associates in a joint enterprise for the conduct of business for
profit. As such, Trust is classified as a trust within the meaning of section 7701(a) of the
Code and section 301.7701-4(a) of the Procedure and Administration Regulations.
Because Trust's income is excludable from gross income under section 115(1) of the
Code, and section 6012(a)(4) does not require a trust without taxable income to file a
PLR-113649-22                                 6

return when gross income is less than $600, Trust is not required to file an annual
income tax return.

No opinion is expressed concerning the Federal tax consequences under any other
provision of the Code other than those specifically stated herein.

This ruling is directed only to the party requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

The ruling contained in this letter is based upon information and representations
submitted by your authorized representatives and accompanied by a penalties of
perjury statement executed by an appropriate party, as specified in Rev. Proc. 2023-1,
2023-1 IRB 1, § 7.01(16)(b). This office has not verified any of the material submitted in
support of the request for ruling, and such material is subject to verification on
examination. This office will revoke or modify a letter ruling and apply the revocation
retroactively if there has been a misstatement or omission of controlling facts; the facts
at the time of the transaction are materially different from the controlling facts on which
the ruling was based; or, in the case of a transaction involving a continuing action or
series of actions, the controlling facts change during the course of the transaction. See
Rev. Proc. 2023-1, § 11.05.


                                          Sincerely,




                                          Dara Alderman, Senior Counsel
                                          Health & Welfare Branch, Office of Associate
                                          Chief Counsel
                                          Employee Benefits, Exempt Organizations, and
                                          Employment Taxes




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