Retiree-medical reserve cannot fund coverage before employment ends

Plain-English summary

A company funded a welfare-benefit reserve for medical coverage that began when employees reached a stated retirement age, even if they continued working. Chief Counsel advised that the additional reserve for post-retirement medical benefits under IRC § 419A(c)(2) cannot include expected costs for coverage before an employee severs employment. It also cannot be funded over an assumed working life that ends at a plan-defined retirement age when employees are expected to keep working beyond that age. The statute permits level funding over employees' actual expected working lives for benefits provided after retirement, and an assumption that accelerates funding is not reasonable. The company's contributions are therefore not deductible under section 419A(c)(2) to the extent they include pre-severance benefits or funding accumulated too rapidly. The advice also notes that later use of a properly deducted reserve for active employees may trigger the tax-benefit rule.

Ruling snapshot

• Question: May a section 419A reserve include medical coverage before expected severance or use a plan retirement age that shortens employees' expected working lives?
• Outcome: Advice given, neither pre-severance costs nor accelerated funding based on an artificial retirement date qualifies
• Key authorities: IRC §§ 419, 419A; General Signal Corp. v. Commissioner; DEFRA legislative history; Hillsboro National Bank v. Commissioner

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 202534004
       Release Date: 8/22/2025
       CC:EEE:EB:HW
       PRESP-122872-21

UILC: 419A.00-00, 419.11-00

date: July 24, 2025

 to:   Jeremy Fetter
       Area Counsel (Gulf Coast Area)
       Tax Exempt & Government Entities, Division Counsel
       (CC:TEGEDC:GCDAL)

from: Laura Warshawsky
Deputy Associate Chief Counsel
(Employee Benefits)
(CC:EEE:EB)

subject: Qualified Asset Account; Limitation on Additions to Account

       This Chief Counsel Advice responds to your request for assistance. This advice may not
       be used or cited as precedent.

                                               ISSUES

             Under the facts described below, does the additional reserve for post-retirement

       medical benefits, as described in section 419A(c)(2) of the Internal Revenue Code

       (Code), include either (1) the expected cost of providing medical benefits with respect to

       employees for periods of coverage before the employees are expected to sever from

       employment, or (2) amounts funded over the working lives of the employees under

       which the working lives are defined as ending at a specified “retirement age” without

       regard to whether employees are expected to sever from employment at that date?

PRESP-122872-21 2

                                  CONCLUSION

   The additional reserve for post-retirement medical benefits under

section 419A(c)(2) does not include (1) the expected cost of providing medical benefits

with respect to employees for periods of coverage before the employees are expected

to sever from employment, or (2) amounts funded over the working lives of the

employees to the extent that the workings lives are defined as ending at a specified

“retirement age” without regard to whether the employees are expected to sever from

employment at that date.

                                      FACTS

   Company X maintains Plan A to provide medical benefits as defined in

section 419A(f)(2) to certain of its employees and former employees (and their

spouses). Plan A provides that a covered employee will be eligible to receive medical

benefits upon attainment of a specified age, which Plan A refers to as the employee’s

“retirement age” (Retirement Age). These medical benefits are available upon

attainment of that age without regard to severance from employment with Company X.

Company X contributes to a welfare benefit fund to pay for the benefits to be provided

by Plan A, and deducts, under section 419(a)(2), its contributions as an addition to a

reserve for post-retirement medical benefits under section 419A(c)(2). A portion of the

addition to the reserve is attributable to the expected cost of providing future benefits

under Plan A for employees (and their spouses) during the period of time before the

employees are expected to sever from employment. Company X’s actuarial calculations

for the contributions and the deduction use Retirement Age as the end of the
PRESP-122872-21 3

employees’ working lives (and the start of their “post-retirement” coverage), even

though some employees are expected to work past that age.

                              LAW AND ANALYSIS

   Section 419 prescribes limits on the amount of deductions for contributions paid

or accrued by an employer to a welfare benefit fund. Under section 419(a) and (b), an

employer’s contributions to a welfare benefit fund are deductible in the taxable year in

which paid, but only if they would otherwise be deductible under Chapter 1 of the Code,

and the amount of the deduction is limited to the welfare benefit fund’s qualified cost for

the taxable year.

   The term “qualified cost” for the taxable year is defined in section 419(c)(1) and

(2) as the sum of (A) the qualified direct cost for that taxable year, and (B) any addition

to a qualified asset account for the taxable year (but only to the extent the addition does

not exceed the limit on the additions to the account under section 419A(b)), reduced by

the fund’s after-tax income for the taxable year.

   The term “qualified direct cost” is generally defined in section 419(c)(3)(A) to

mean, with respect to any taxable year, the aggregate amount (including administrative

expenses) that would have been allowable as a deduction to the employer with respect

to the benefits provided during the taxable year if (i) such benefits were provided directly

by the employer, and (ii) the employer used the cash receipts and disbursements

method of accounting. For this purpose, section 419(c)(3)(B) specifies that a benefit is

treated as provided when that benefit would be includible in the gross income of the

employee if provided directly by the employer (or would be so includible but for a

provision of chapter 1 of the Code excluding the benefit from gross income).
PRESP-122872-21 4

   Under section 419(c)(5), no item may be taken into account more than once in

determining the qualified cost of any welfare benefit fund.

   The term “qualified asset account” is defined in section 419A(a) to mean any

account consisting of assets set aside to provide for the payment of disability benefits,

medical benefits, supplemental unemployment benefits or severance pay benefits, or

life insurance benefits. Pursuant to section 419A(b), no addition to any qualified asset

account may be taken into account under section 419(c)(1)(B) to the extent that the

addition would result in the amount in the account exceeding the account limit specified

in section 419A(c).

   Section 419A(c)(1) provides that the account limit for any qualified asset account

for any taxable year is generally the amount reasonably and actuarially necessary to

fund claims incurred but unpaid (as of the close of the taxable year) for benefits referred

to in section 419A(a), and administrative costs with respect to those claims.

Section 419A(c)(2) provides that the account limit for any taxable year may also include

a reserve funded over the working lives of the covered employees and actuarially

determined on a level basis (using assumptions that are reasonable in the aggregate)

as necessary for post-retirement medical benefits to be provided to covered employees

(determined on the basis of current medical costs), or post-retirement life insurance

benefits to be provided to covered employees.

   In order for contributions to a reserve to be deductible as within the account limit

of section 419A(b), those contributions must be intended actually to accumulate for the

purpose of funding post-retirement benefits. General Signal Corp. v. Commissioner, 103

T.C. 216 at 239 (1994), aff’d, 142 F.3d 546 (2d Cir. 1998). Sections 419 and 419A were
PRESP-122872-21 5

enacted by the Deficit Reduction Act of 1984 (DEFRA). The legislative history of

DEFRA explains that, under section 419A(c)(2), the qualified asset account limits allow

amounts reasonably necessary to accumulate reserves in a welfare benefit fund so that

the medical benefits payable to retired employees during retirement are fully funded

upon retirement. These amounts may be accumulated no more rapidly than on a level

basis over the working lives of the employees with the employer. Each year’s

computation of contributions with respect to retiree medical benefits is also limited to the

assumption that the medical benefits provided to retirees in the future will cost the same

as medical benefits currently provided to retirees (i.e., projected inflation in the cost of

medical benefits is not to be taken into account). The legislative history states that it is

“intend[ed] that the Treasury Department prescribe rules requiring that the funding of

retiree benefits be based on reasonable and consistently applied actuarial cost

methods, which take into account experience gains and losses, changes in

assumptions, and other similar items, and be no more rapid than on a level basis over

the remaining working lifetimes of the current participants (reduced on the basis of

reasonable turnover and mortality assumptions).” H.R. Rep. No. 98-861 at 1157 (1984)

(Conf. Rep.).

   Thus, in describing the section 419A(c)(2) reserves for post-retirement benefits,

the DEFRA legislative history uses the terms “retired employees,” “during retirement,”

“upon retirement,” “retiree medical benefits,” and “retirees.” Neither section 419A nor the

regulations thereunder expressly provide that, for purposes of section 419A(c)(2), the

term “retirement” may include a period of time before employees have severed

employment, or that “retirement” otherwise is to be defined in a way that differs from its
PRESP-122872-21 6

ordinary, everyday use.1 The ordinary, everyday sense of the words “retired,” “retiree,”

and “retirement” includes, at minimum, a severance from employment with an

employer.2 See, e.g., New Oxford American Dictionary (3rd ed. 2010) (defining “retire”

as leave one’s job and cease to work, typically upon reaching the normal retirement age

for leaving employment).3

   Under Plan A, a portion of the contributions are intended to provide medical

benefits to some employees for periods of time before they have severed from

employment with Company X. Those amounts are not part of a reserve to provide “post-

retirement” benefits and, thus, are not deductible as an addition to a reserve for post-

retirement benefits.

   Further, the actuarial calculations for Plan A use the Plan’s Retirement Age as

the end of the employees’ working lives, even though it is expected that some covered

employees will continue working beyond that age. Section 419A(c)(2) requires that the

“working lives” of an employer’s employees be used as the period for the level funding

of a reserve for post-retirement benefits. Section 419A(c)(2) also requires that

reasonable assumptions be used to actuarially determine the addition to the reserve. It

is not a reasonable assumption that the expected working lives of the covered

1
Gonzales v. Carhart, 550 U.S. 124, 152 (2007) (“In interpreting statutory texts courts use the
ordinary meaning of terms unless context requires a different result.”). See also F.D.I.C. v.
Meyer, 510 U.S. 471, 476 (1994) (“In the absence of such a definition [in the statute], we
construe a statutory term in accordance with its ordinary or natural meaning.”).
2
Wisconsin Central Ltd. v. U.S., 585 U.S. 274, 284, (2018) (“[I]t’s a ‘fundamental canon of
statutory construction’ that words generally should be ‘interpreted as taking their ordinary,
contemporary, common meaning . . . at the time Congress enacted the statute.’”) (quoting
Perrin v. U.S., 444 U.S. 37, 42 (1979)).
3
See also Black’s Law Dictionary (12th ed. 2024) (defining “retire” as “[t]o stop working at a job,
usu[ally] upon reaching the normal age for leaving employment”).
PRESP-122872-21 7

employees ends before the covered employees are expected to sever employment,

because this would result in amounts being funded more rapidly than over the covered

employees’ working lives.

   The section 419A(c)(2) addition to a reserve for post-retirement medical benefits

does not include amounts for benefits expected to be provided with respect to an

employee prior to the employee’s severance from employment with the employer

maintaining the plan. Moreover, the addition to the reserve does not include amounts

funded more rapidly than on a level basis over the covered employees’ working lives.

Thus, Company X’s contributions to the welfare benefit fund are not deductible under

section 419A(c)(2) to the extent they include such amounts.4

   Please call (202) 317-5500 if you have any further questions.

4
In addition, the tax benefit rule generally requires a taxpayer who received a tax benefit from a
deduction in an earlier year to recognize income in a later year if an event occurs that is
fundamentally inconsistent with the premise on which the deduction was initially based.
Hillsboro National Bank v. Commissioner, 460 U.S. 370, 383 (1983). Therefore, even if amounts
are correctly deducted by Company X as a reserve for post-retirement benefits in one year, but
in a later year amounts are used to provide benefits for employees who have not yet severed
employment, that event is fundamentally inconsistent with the premise on which the deduction
was initially based, thereby triggering the tax benefit rule.