Comment on FR Doc # E7-16084

November 19, 2007 CC:PA:LPD:PR (REG 148393-06) Internal Revenue Service P.O. Box 7604 Ben Franklin Station Room 5203 Washington, D.C. 20044 Re: Comments on Proposed Regulations ? Accident and Health Benefits Under Qualified Plans Dear Sirs and Mesdames: The American Benefits Council (the Council) appreciates the opportunity to comment on the proposed regulation (72 Fed. Reg. 46421, Aug. 20, 2007,) and supports the need to clarify the tax treatment of accident and health insurance under qualified plans. The Council is a public policy organization representing principally Fortune 500 companies and other organizations that assist employers of all sizes in providing benefits to employees. Collectively, the Council?s members either sponsor directly or provide services to retirement and health plans that cover more than 100 million Americans. With regard to the proposed regulation, we are concerned that it could affect a wide variety of common practices that our members use to provide and protect the retirement income of disabled employees under qualified plans. These practices include: ? the provision of continued employer-funded defined benefit pension accruals for employees on long-term disability, ? the provision of continued defined contribution plan accruals for employees on long-term disability ? with funding from employer contributions, the purchase of a special long-term disability policy designed for DC plans, or from a companion welfare benefit trust. We are concerned that the proposal could conceivably tax employees currently on the ?coverage? of such disability contingencies. We are also concerned that the proposal could impose a variety of complex qualified plan limitations on these practices. The Preamble invites comments on the need for limited exceptions in this area, such as provisions that have the effect of a waiver of premium for disability. We believe all of the above-described practices fall in this category. In this regard, the concept of waiver of premium originated in the insurance field as a mechanism for a policyholder to continue his or her insurance protection in the event of disability. However, self-insured plans (such as employer funded pension accruals or amounts funded through a welfare trust) that provide comparable protection should be treated the same for this purpose. We do not believe the proposal was intended to affect defined benefit plan accruals (technically permitted as ?qualified disability benefits?), but they might well impact the defined contribution plan practices described above. Favorable clarification of all of these issues is desirable. For example, it appears that the proposal (Prop. Reg. ? 1.402(a)-1(e)(1)(l) could impute current tax on plan participants covered by the plan provision for continued accruals to their accounts. It further appears that the proposal (Prop. Reg. ? 1.402(a)-1(e)(ii)) would deem disabled participants to constructively receive the amounts that will be paid into their accounts in order for them to then be subjected to the numerous qualified plan rules for participant contributions. These potential outcomes conflict with the results of certain letter rulings on insured LTD programs (see LTR 200031060 and LTR 200235043) and add considerable complexity. The Council cannot identify any basis for subjecting these disability protection features to the concepts that Treasury and the Service have developed to address the treatment of health insurance. We are concerned that this proposed regulatory approach will prevent employers from continuing to maintain or add disability protection features to their qualified plans. Instead, the regulations should be designed to encourage the provision of disability protection in individual account plans through all of the methods in use today. The Council believes such encouragement is consistent with good tax and retirement policy because ? the focus of this protection is to maintain long-term retirement savings, not the provision of a current benefit, ? unlike health insurance, the amounts must be paid into the disabled participant's account ? regardless of the source in an insurance policy, a welfare trust or the employer?s own funds ? and will accumulate and be taxed in full on distribution, ? there should be no difference in the tax treatment of these practices based on whether the employer, the plan, or the participant has paid for the ?waiver? protection. Accordingly, the Council strongly recommends that the final regulations make it clear that the prescribed tax consequences (e.g., taxation of current coverage/premiums or deemed receipt/contributions of funds for disability accruals) do not apply to various disability waiver practices. This could be done by adding the following provision: ?For purposes of these rules, an arrangement that continues the funding of accruals under a defined benefit plan or a defined contribution plan through a waiver of contributions or premium provisions shall not be considered to involve accident or health insurance or benefits, provided that such amounts must be paid directly to the plan. An employee covered under such arrangement shall not be subject to tax by reason of such coverage and amounts paid into the participant?s account shall not be subject to current tax or otherwise treated as employer or participant contributions.? * * * We appreciate your attention to this letter and would be pleased to respond to any questions you may have. Sincerely, Lynn D. Dudley Vice President, Retirement Policy