Tax Court Approves Post-Retirement Benefits Funding
The Tax Court recently held in Wells Fargo & Co. v. Comm., that the present value of projected post-retirement medical benefits, for employees who are retired at the time the reserve is created, may be deducted in the year the reserve is created.
In 1991, Norwest Corp. (a multi-bank holding company now known as Wells Fargo) established and funded a trust to provide post-retirement medical benefits for active and retired employees. Norwests contribution to the trust was based on actuarial calculations of the present value of future post-retirement medical benefits for active ($14,096,473) and retired ($27,759,057) employees.
The companys actuaries also determined that the amount for retired employees was fully deductible in 1991. Norwest contributed $30,689,717 to the post-retirement medical trust in 1991 and claimed a deduction for the contribution on its consolidated return as an addition to a “qualified asset account” under IRC Section 419A(b).
The Service determined that Norwests method of computing the contribution for post-retirement benefits was improper because it purportedly resulted in a contribution that exceeded the account limit for a post-retirement reserve under IRC Section 419A(c)(2).
The account limit includes the amount of an additional 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 and life insurance benefits.
The Service argued that the cost of the post-retirement benefit must be spread over the remaining working lives of the covered employees and since retirees have no remaining working lives, the cost must be spread over the remaining working lives of the active employees (under the aggregate cost method).