4.76.25  Supplemental Unemployment Benefit Trusts IRC 501(c)(17)

Manual Transmittal

February 04, 2015

Purpose

(1) This transmits revised IRM 4.76.25, Exempt Organizations Examination Guidelines, Supplemental Unemployment Benefit Trusts IRC 501(c)(17).

Material Changes

(1) Converted this manual to plain language to comply with the Plain Writing Act of 2010, P.L. 111-274.

Effect on Other Documents

This supersedes IRM 4.76.25, Exempt Organizations Examination Guidelines, Supplemental Unemployment Benefit Trusts IRC 501(c)(17), dated January 1, 2003.

Audience

Tax Exempt and Government Entities
Exempt Organization
Examinations

Effective Date

(02-04-2015)

Tamera L. Ripperda
Director, Exempt Organizations
Tax Exempt and Government Entities

4.76.25.1  (02-04-2015)
Introduction

  1. This IRM contains specific audit guidelines for IRC 501(c)(17) trusts. It gives audit techniques useful in finding and developing issues commonly faced during an IRC 501(c)(17) trust audit.

  2. These guidelines give specific aid for IRC 501(c)(17) trust audits but aren’t all-inclusive. The purpose is to add to the guidelines in:

    • IRM 4.75.10, Exempt Organization Pre-Audit Procedures

    • IRM 4.75.11, On Site Examination Guidelines

    • IRM 4.75.12, Required Filing Checks

    • IRM 4.75.13, Issue Development

  3. The intent isn’t to restrict identifying issues or using audit techniques not included herein.

4.76.25.2  (02-04-2015)
Background Information

  1. IRC 501(c)(17) exempts from federal income tax a trust(s) that is part of a plan that provides supplemental unemployment compensation benefits (SUB) if it meets the requirements of:

    1. IRC 501(c)(17)(A)(i)

    2. IRC 501(c)(17)(A)(ii)

    3. IRC 501(c)(17)(A)(iii)

4.76.25.3  (02-04-2015)
Permissible Employee Benefits

  1. An IRC 501(c)(17) trust must be organized and operated to provide SUB to employees; this must be the trust’s primary purpose. Sick and accident benefits are allowable but only if a secondary purpose.

  2. An IRC 501(c)(17) trust can’t provide for the payment of death, vacation, or retirement benefits.

  3. An IRC 501(c)(17) trust must provide payment only if an employee’s involuntary separation from employment is a result of either:

    1. A reduction in work force

    2. The discontinuance of a plant or operation

    3. Similar conditions

4.76.25.3.1  (02-04-2015)
Audit Guidelines: Permissible Employee Benefits

  1. Review the trust instrument and plan document to verify:

    1. The plan provides only SUB and subordinate sick and accident benefits.

    2. The trust instrument binds the trustees to act in a manner consistent with the plan provisions.

    3. The corpus and income of the trust were used to satisfy all liabilities to covered employees before any other purpose.

  2. Review such items as minutes, publications, and a sample of claims filed to:

    1. Verify the payment of SUB was primarily to sick and accident benefits.

    2. Verify the plan pays for SUB only if separation was involuntary.

    3. Determine whether the plan provides any prohibited death or retirement benefits.

  3. Review disbursement journals and supporting documents (i.e., invoices and cancelled checks) for any disbursement other than allowable benefits and administrative expenses, such as:

    1. Payment of a death, vacation, or retirement benefit.

    2. Benefits paid to the employee for a reason other than an involuntary separation.

    3. Distributions to employees of funds representing contributions in excess of the maximum funding allowed.

4.76.25.4  (02-04-2015)
Non-Discrimination Provisions

  1. SUB plans must meet certain nondiscrimination conditions. They must not discriminate in favor of highly compensated employees (HCEs). Neither the classification under which benefits are paid nor the benefits may discriminate in favor of HCEs. See IRC 414(q) for the definition of HCEs.

  2. If benefits paid to HCEs bear a larger ratio to their compensation than benefits to the lower paid employees, the plan doesn’t qualify. Benefits paid on a uniform ratio qualify.

4.76.25.4.1  (02-04-2015)
Audit Guidelines: Non-Discrimination Provisions

  1. Review the plan document to learn how benefits are determined.

  2. Review disbursements journals and supporting documents for:

    1. Indications of discrimination in the payment of benefits.

    2. Any disparity in the ratio of compensation to benefits paid.

    3. Any disparity in the payment of benefits to HCEs.

    Example:

    The payment of sick and accident benefits solely to HCEs would be discriminatory.

4.76.25.5  (02-04-2015)
Prohibited Transactions Under IRC 503(b)

  1. IRC 503(b) prohibits trusts exempt under IRC 501(c)(17) from engaging in certain transactions. In general, these relate to preferential treatment for prohibited parties. See Treas. Reg. 1.503(b)-1.

    Note:

    Neither the Internal Revenue Code nor regulations specifically use the term "prohibited party." The term as used in this manual references a specific set of entities listed in Treas. Reg. 1.503(b)-1(a)

    .

  2. The term "prohibited transaction" as described in IRC 503(b) means any transaction in which an organization subject to the provisions of this:

    Prohibited Transactions

    Prohibited Transaction: Prohibited Party:
    Lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest to a prohibited party. The creator of such organization (if a trust).
    Pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered to a prohibited party. A person who has made a substantial contribution to such organization.
    Makes any part of its services available on a preferential basis to a prohibited party. A member of the family (as defined in IRC 267(c)(4)) of an individual who is the creator of such trust or who has made a substantial contribution to such organization.
    Makes any substantial purchase of securities or any other property for more than adequate consideration in money or money’s worth from a prohibited party. A corporation controlled by such creator or person through the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation.
    Sells any substantial part of its securities or other property for less than an adequate consideration in money or money’s worth to a prohibited party.    
    Engages in any other transaction which results in a substantial diversion of its income or corpus to a prohibited party.    

4.76.25.5.1  (02-04-2015)
Audit Guidelines: Prohibited Transactions Under IRC 503(b)

  1. Review books and records to identify transactions prohibited under IRC 503(b). The following are examples of potential issues you should analyze if a prohibited party is involved:

    1. Acquisitions/dispositions of assets at above or below fair market value.

    2. Unusual disbursements.

    3. Salary not commensurate to employee’s duties.

    4. Income from low-yield investments.

    5. Accounts, notes, and mortgages payable without proper collateral and/or a reasonable rate of interest.

4.76.25.6  (02-04-2015)
Unrelated Business Income

  1. Trusts exempt under IRC 501(c)(17) are subject to the unrelated business income tax (UBIT) provisions described in IRC 512(a)(3).

  2. To the extent the trust exceeds the IRC 419A(c)(3) account limit at the end of the taxable year, the excess is subject to tax under IRC 512(a)(3)(E). The account limit with respect to SUB is 75 percent of the average annual qualified direct costs for SUB for any of the immediately preceding seven years.

4.76.25.6.1  (02-04-2015)
Audit Guidelines: Unrelated Business Income

  1. Review cash receipts to identify any unusual sources of income. Analyze income from any source other than members, employers, or investments to determine if it’s subject to the UBIT.

  2. Determine if the employer contributions exceed the deduction limitations described in IRC 419(c) and IRC 419A. UBIT and excise tax may apply as allowed by the Deficit Reduction Act of 1984, P.L. 98-369.


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