[Federal Register Volume 62, Number 145 (Tuesday, July 29, 1997)]
[Rules and Regulations]
[Pages 40447-40449]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19814]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8726]
RIN 1545-AT95
Requirements for Tax Exempt Section 501(c)(5) Organizations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations clarifying certain
requirements of section 501(c)(5). The requirements are clarified to
provide needed guidance to organizations on the requirements an
organization must meet in order to be exempt from tax as an
organization described in section 501(c)(5).
DATES: These regulations are effective on December 21, 1995.
FOR FURTHER INFORMATION CONTACT: Robin Ehrenberg, (202) 622-6080 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 21, 1995, the IRS published in the Federal Register (60
FR 66228) a notice of proposed rulemaking under section 501(c)(5). The
proposed regulations clarified that organizations whose principal
activity is administering retirement plans are not section 501(c)(5)
organizations.
[[Page 40448]]
A public hearing was held on June 5, 1996. Written comments were
received. After consideration of all of the comments, the proposed
regulations under section 501(c)(5) are adopted as revised by this
Treasury Decision. The comments and revisions are discussed below.
Explanation of Revisions and Summary of Comments
Section 501(c)(5) describes certain labor, agricultural and
horticultural organizations. Section 401(a) sets forth the requirements
for exemption for qualified employee benefit pension trusts. Section
501(a) exempts from federal income taxes organizations described in
section 401(a) or section 501(c). Thus, section 401(a) and section
501(c)(5) should be read as enactments of Congress in pari materia,
taken together as one consistent body of law. Pacific Co. v. Johnson,
285 U.S. 480, 495 (1932).
The Treasury and IRS believe that section 501(c)(5) should be
interpreted in a manner consistent with the Employee Retirement Income
Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 829 (1974) (ERISA),
as amended. ERISA was enacted as a ``comprehensive and reticulated
statute'' to regulate retirement plans and trusts, ``the product of a
decade of Congressional study of the Nation's private employee benefit
system.'' Mertens versus Hewitt Assoc., 508 U.S. 248, 251 (1993),
citing Nachman versus PBGC, 46 U.S. 359, 361 (1980). Congress intended
that pension trusts satisfy the comprehensive requirements of section
401(a), as amended by ERISA, in order to be tax exempt. See S. Rep. No.
383, 93d Cong., 1st Sess. at 33, reprinted in 1974-3 C.B. (Supp.) 112;
H. Rep. No. 807, 93d Cong., 1st Sess. at 33, reprinted in 1974-3 C.B.
(Supp.) 236, 266.
Accordingly, Treasury and the IRS continue to believe that an
organization whose principal purpose is managing employer-sponsored
retirement plans is not an exempt labor organization described in
section 501(c)(5). (However, an employer-sponsored pension trust may
nevertheless qualify for exemption under section 501(a) if it meets the
requirements of section 401(a).) Morganbesser versus United States, 984
F.2d 560 (2d Cir. 1993), nonacq. 1995-2 C.B. 2.; In re Morganbesser,
AOD CC-1995-016 (Dec. 26, 1995).
Consistent with ERISA and interpreting section 401(a) and section
501(c)(5) as part of a consistent whole, these regulations provide a
general rule that an organization is not described in section 501(c)(5)
if its principal activity is to receive, hold, invest, disburse or
otherwise manage funds associated with savings or investment plans or
programs, including pension or other retirement savings plans or
programs. However, to the extent that ERISA provides special rules for
certain types of retirement savings plans, it is appropriate to take
those rules into account in interpreting provisions of the Code
relating to such plans, including section 501(c)(5).
As noted by one commentator, ERISA excepts certain dues-financed
plans from Parts 2 and 3 of Title I of ERISA (vesting, funding and
certain other qualification requirements). Those pension trusts
sponsored by labor organizations for their members, which accept no
employer contributions, do not qualify for exemption under section
401(a) because they are not maintained by an employer. Section 401(a),
Rev. Rul. 80-306, 1980-2 C.B. 131. Accordingly, the regulations provide
that an organization (including a pension trust) may qualify as an
organization described in section 501(c)(5) if it meets all of the
following requirements:
(1) The organization is established and maintained by another labor
organization described in section 501(c)(5) (determined without
reference to the tests in Treas. Reg. Sec. 1.501(c)(5)-1(b)(2));
(2) The organization is not directly or indirectly established or
maintained in whole or in part by any employer or by any government (or
any agency, instrumentality or controlled entity thereof);
(3) The organization is funded by membership dues paid to the labor
organization establishing and maintaining the organization and earnings
thereon; and
(4) After September 2, 1974 (the date of enactment of ERISA, 88
Stat. 829), the organization's governing documents have not permitted
or provided for nor did the organization accept, any contribution from
any employer or from any government (or any agency, instrumentality or
controlled entity thereof). Treas. Reg. Sec. 1.501(c)(5)-1(b)(2).
Treas. Reg. Sec. 1.892-2T(c) governs the tax status of a pension
trust that is wholly owned and controlled by a foreign sovereign.
Scope
These regulations solely address the tax exempt status of
organizations under section 501(c)(5) whose principal activity is to
receive, hold, invest, disburse, or otherwise manage funds associated
with savings or investment plans or programs. Other Code sections and
tax principles apply to the tax exempt status of these organizations
and the tax consequences of these arrangements to employers and
participants in these arrangements.
One commentator requested that the IRS clarify that the regulations
do not apply to health and welfare benefits not specifically mentioned
in the regulations, such as retiree health benefits, death benefits,
and group legal services. The regulations address only savings or
investment plans or programs, (including pension or other retirement
savings plans or programs) and do not address other types of benefits.
Cf. Rev. Rul. 62-17, 962-1 C.B. 87.
Special Analyses
It has been determined that this Treasury Decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations, and because the notice of proposed
rulemaking preceding the regulations was issued prior to March 29,
1996, the Regulatory Flexibility Act, (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding these regulations was submitted
to the Chief Counsel for Advocacy of the Small Business Administration
for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Robin Ehrenberg,
Office of Associate Chief Counsel (Employee Benefits and Exempt
Organizations). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.501(c)(5)-1 is amended by:
[[Page 40449]]
1. Redesignating paragraph (b) as paragraph (c).
2. Adding a new paragraph (b).
The addition reads as follows:
Sec. 1.501(c)(5)-1 Labor, agricultural, and horticultural
organizations.
* * * * *
(b)(1) General rule. An organization is not an organization
described in section 501(c)(5) if the principal activity of the
organization is to receive, hold, invest, disburse or otherwise manage
funds associated with savings or investment plans or programs,
including pension or other retirement savings plans or programs.
(2) Exception. Paragraph (b)(1) of this section shall not apply to
an organization which--
(i) Is established and maintained by another labor organization
described in section 501(c)(5) (determined without regard to this
paragraph (b)(2));
(ii) Is not directly or indirectly established or maintained in
whole or in part by one or more--
(A) Employers;
(B) Governments or agencies or instrumentalities thereof; or
(C) Government controlled entities;
(iii) Is funded by membership dues from members of the labor
organization described in this paragraph (b)(2) and earnings thereon;
and
(iv) Has not at any time after September 2, 1974 (the date of
enactment of the Employee Retirement Income Security Act of 1974, Pub.
L. 93-406, 88 Stat. 829) provided for, permitted or accepted employer
contributions.
(3) Example. The principles of this paragraph (b) are illustrated
by the following example:
Example. Trust A is organized in accordance with a collective
bargaining agreement between labor union K and multiple employers.
Trust A forms part of a plan that is established and maintained
pursuant to the agreement and which covers employees of the
signatory employers who are members of K. Representatives of both
the employers and K serve as trustees. A receives contributions from
the employers who are subject to the agreement. Retirement benefits
paid to K's members as specified in the agreement are funded
exclusively by the employers' contributions and accumulated
earnings. A also provides information to union members about their
retirement benefits and assists them with administrative tasks
associated with the benefits. Most of A's activities are devoted to
these functions. From time to time, A also participates in the
renegotiation of the collective bargaining agreement. A's principal
activity is to receive, hold, invest, disburse, or otherwise manage
funds associated with a retirement savings plan. In addition, A does
not satisfy all the requirements of the exception described in
paragraph (b)(2) of this section. (For example, A accepts
contributions from employers.) Therefore, A is not a labor
organization described in section 501(c)(5).
* * * * *
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
Approved: July 8, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-19814 Filed 7-28-97; 8:45 am]
BILLING CODE 4830-01-U
