4103 / What special rules apply if postretirement medical or life insurance benefits are provided to a key employee through a welfare benefit fund?

Separate Account Required

In the first year a reserve for postretirement medical or life insurance benefits, including any other death benefits, is taken into account in determining the applicable account limit ( Q 4097), a separate account must be established for any medical or life insurance benefits provided after retirement with respect to a key employee. The separate account must be maintained for all subsequent taxable years. Medical or life insurance benefits provided with respect to an employee after retirement must be paid from that separate account only.¹

A key employee is one who at any time during the plan year or any preceding plan year is or was a key employee ( Q 3931) as defined for top-heavy qualified retirement plans.² A separate account is to include amounts contributed to the plan with respect to service after the employee becomes a key employee as well as a reasonable allocation, determined under applicable regulations, of amounts contributed on his or her behalf before the individual became a key employee.³

Annual Additions

Any amount allocated to an account of a key employee for postretirement medical benefits must be counted as an annual addition for purposes of the IRC Section 415 dollar limit, but not for determining the percentage of compensation, as if it were a contribution to a qualified defined contribution plan; all welfare benefit funds of the employer are treated as one fund for this purpose.⁴

Therefore, the amount allocated to a key employee’s account can have a significant effect on the qualification of any pension, profit sharing, or stock bonus plan in which the employee is a participant. Presumably, amounts allocated for periods before the employee became a key employee can be disregarded.