CYCLE B Submission Period 02/01/2012 01/31/2013

Employee Benefit Plans

Note: Plans submitted during the Cycle B submission period must satisfy the applicable changes in plan qualification requirements listed in Section IV of Notice 2011-97, 2011-52 I.R.B. 923 (the 2011 Cumulative List).

Explanation No. 13

Section 401(h) Determination of Qualification

The purpose of Worksheet Number 13 (Form 13069) and this explanation is to identify major problems with respect to the requirements of Internal Revenue Code section 401(h) in plans with retiree medical benefit features. However, there may be issues not mentioned in the worksheet that could affect the plan's qualification. This worksheet is to be completed if the applicant has specifically requested consideration of either section 401(h) or section 420, relating to transfers of assets in a defined benefit plan to a section 401(h) medical benefits account. Generally, a "Yes" answer to a question on the worksheet indicates a favorable conclusion while a "No" answer signals a problem concerning the plan qualification. This rule may be altered by specific instructions for a given question. Please explain any "No" answer in the space provided on the worksheet.

This publication contains copies of: Form 13069, Worksheet 13 Form 13070, Deficiency Checksheet 13 These forms are included as examples only and should not be completed and returned to the Internal Revenue Service.

The sections cited at the end of each paragraph of explanation are to the Internal Revenue Code and the Income Tax Regulations.

The technical principles in this publication may be changed by future regulations or guidelines.

Publication 11433 (Rev. 6-2012) Catalog Number 48816E Department of the Treasury Internal Revenue Service www.irs.gov

CYCLE B Submission Period 02/01/2012 01/31/2013

I. BENEFITS Line a, b. When a determination under section 420 on the transfer of excess assets to retiree health accounts has been requested, the plan must contain provisions that meet the requirements of section 401(h) in order for the plan to meet section 420. Section 420(e)(3) Line c, d. A pension or annuity plan may provide retiree medical benefits, through a section 401(h) account, including payment of benefits for sickness, accident, hospitalization and medical expenses. The plan must specify the medical benefits described in section 401(h) which will be available and must contain provisions for determining the amount which will be paid. Other benefits may not be provided from a qualified account under section 401(h). The requirements of section 401(h) must be met with respect to any retiree medical account under a pension or annuity plan for such plan to qualify under sections 401(h) and section 401(a). Section 401(h); Treas. Regs. 1.401-1(b)(1)(i), 1.40114(a) and (c)(1).

II. SUBORDINATIION Line a. This requirement was codified in section 401(h) by the Omnibus Budget Reconciliation Act of 1989. The plan section or plan amendment adopting the medical benefits account should be reviewed to ensure that the plan language specifically provides that only contributions after the later of the adoption date or the effective date are considered for the subordination test. If the plan section or plan amendment references an effective date prior to the date the medical benefits account was established (the adoption date), the plan should be amended to reflect a date which is the later of the adoption date or the effective date. Under the subordination limitation, past service amortizations and life insurance protection reduce the amount that may be contributed to the medical benefits account. Life insurance protection includes any benefit paid under the plan on behalf of an employee-participant as a result of the employee-participant's death to the extent such payment exceeds the amount of the reserve to provide retirement benefits existing at his death. (Treas. Reg. 1.401-14(c)(1) has not been revised to reflect the changes made by OBRA '89.) Section 401(h)(1) and Treas. Reg.. 1.401-14(c)(1)(i).

Line e. The plan must provide that medical benefits are only provided for retired employees, their spouses and dependents. To be "retired" for purposes of eligibility to receive medical benefits described in section 401(h), an employee must be eligible to receive retirement benefits provided under the pension plan, or else be retired by an III. SEPARATE ACCOUNTS employer providing such medical benefits by reason of permanent disability. For purposes of the preceding sentence, an employee (even one who is past normal Line a. Where medical benefits described in section retirement age) is not considered to be "eligible to receive 401(h) are provided under a qualified pension or retirement benefits provided under the plan" if he is still annuity plan, the plan must provide that a separate employed by the employer and a separation from account must be established and maintained with employment is a condition for receiving the retirement respect to contributions to fund such benefits. The benefits. Although the specific requirements of sections 1.401(a)(4)-1 throughseparation required by this section is for -13 of the regulations directly apply to the retirement portion of a plan recordkeeping purposes only. Consequently, the funds in the medical benefits account need not be that provides medical benefits described under section 401(h), the separately invested. portion of the plan that is providing the medical benefits described Section 401(h)(2) and Treas. Reg. 1.401-14(c)(2). under section 401(h) must not discriminate in favor of highly compensated employees with respect to coverage and with respect to the contributions or benefits. Line b, c. Key employees. Section 401 (h); Treas. Regs. 1.401-14(a), (b) (1) and (2) Section 401(h)(6). and 1.401(a)(4)-1(c)(14).

Line f. Contributions to provide the medical benefits described in section 401(h) may be made either on a contributory or noncontributory basis, without regard to whether the contributions to fund the retirement benefits are made on a similar basis. Thus, for example, the contributions to fund the medical benefits may be provided for entirely out of employer contributions even though the retirement benefits under the plan are determined on the basis of both employer and employee contributions or vice versa.

CYCLE B Submission Period 02/01/2012 01/31/2013

IV. REASONABLE AND ASCERTAINABLE PROVISIONS Line a, b. The contributions for medical benefits provided by the section 401(h) account must be reasonable and ascertainable, and the plan must contain provisions for determining the amount which will be paid. These requirements will not be satisfied unless the terms of the plan specify the amount of benefits and the time period with respect to which benefits will be paid. Where there are other potential sources of payment of medical benefits such as a welfare benefit fund or the general funds of the employer, the plan must be specific as to how the benefits payable from the section 401(h) account are coordinated with benefits payable from other sources. The plan may not allow for employer discretion in the timing and amount of benefit payments. The employer must, at the time a contribution is made, designate that portion of such contribution allocable to the funding of medical benefits. Section 401(h)(3) and Treas. Reg. 1.401-14(c) (1) and (3).

V. MISCELLANEOUS Line a. A plan which, for example, under its terms, permits funds in the retiree medical benefits account to be used for any retirement benefit provided under the plan does not satisfy the requirements of section 401(h) and will not qualify under section 401(a). However, the payment of any necessary or appropriate expenses attributable to the administration of the medical benefits account does not affect the qualification of the plan. Section 401(h)(4) and Treas. Reg. 1.401-14(c)(4). Line b. The plan must expressly provide that any amounts that are contributed to fund medical benefits described in section 401(h) and that remain in the medical benefits account upon the satisfaction of all liabilities arising out of the operation of the medical benefits portion of the plan are to be returned to the employer. Section 401(h)(5) and Treas. Reg. 1.401-14(c)(5).

CYCLE B Submission Period 02/01/2012 01/31/2013

Employee Benefit Plan Section 401(h) (Worksheet Number 13 Determination of Qualification) INSTRUCTIONS - All items must be completed. A Yes answer generally indicates a favorable conclusion is warranted, while a No answer indicates a problem exists. Please use the space on the worksheet to explain any No answer. See Publication 11433, Explanation Number 13, for guidance in completing this form The technical principles in this worksheet may be changed by future regulations or guidelines Name of Plan

I.

Benefits

co is m fo pl rm et ed is or pro re vid tu ed rn a ed s to an th ex e am In te ple rn al on R ly ev an en d ue sh Se oul rv d n ic o e. t b e

Plan Reference Yes Plan Reference Yes Plan Reference Yes

No

N/A

a. Has the applicant requested consideration under section 401(h) or 420? If Yes, see section 16 and appendix of Rev. Proc. 2006-6, 2006-1 I.R.B. 204, and complete the remainder of this worksheet. If No, do not complete the remainder of this worksheet. [1375] b. Does the plan contain a medical benefits account within the meaning of section 401(h)? If Yes, complete the remainder of this worksheet. If No, secure amendments to include the section 401(h) account provisions or request an explanation from the applicant. [1375]

c. Is the section 401(h) account part of a pension or annuity plan (including a money purchase pension plan)? [1376] d. Does the plan specify the medical benefits that will be available and contain provisions for determining the amount that will be paid? [1376]

e. Does the medical benefits account specify who will benefit and limit eligible persons to retired employees, their spouses and their dependents? [1377] f. Does the plan specify either that contributions to such account are provided entirely from employer contributions or that they will be paid from employer and employee contributions? [1378] II. Subordination

No

N/A

a. Does the plan provide that retiree medical benefits are subordinate to the retirement benefits such that the aggregate actual contributions for medical benefits, when added to actual contributions for life insurance protection under the plan, do not exceed 25 percent of the total actual contributions to the plan (other than contributions to fund past service credits) after the later of the adoption or effective date of the plan amendment establishing the section 401(h) account? [1379] III. Separate Accounts

No

N/A

Form 13069 (Rev. 06-2012) (Page 1)

Th

a. Does the plan provide that the section 401(h) arrangement is a separate account established and maintained for such benefits? [1380] b. Does the plan provide that in the case of an employee who is a key employee, a separate account is established and maintained for benefits payable to such employee (and his spouse and dependents) and such benefits (to the extent attributable to plan years beginning after March 31, 1984, for which the employee is a key employee) are only payable to such employee (and his spouse and dependents) from such separate account? [1381]

Department of Treasury - Internal Revenue Service

CYCLE B Submission Period 02/01/2012 01/31/2013

III. Separate Accounts Continued c. Does the plan provide that the term key employee means any employee, who at any time during the plan year or any preceding plan year during which contributions were made on behalf of such employee, is or was a key employee as defined in section 416(i)? [1381] IV. Reasonable and Ascertainable Provisions Plan Reference Yes No N/A Plan Reference Yes No N/A

a. Does the plan provide for employer contributions to the medical benefits account that are reasonable and ascertainable? [1382] V. Miscellaneous

co is m fo pl rm et ed is or pro re vid tu ed rn a ed s to an th ex e am In te ple rn al on R ly ev an en d ue sh Se oul rv d n ic o e. t b e

Plan Reference Yes

No

N/A

a. Does the plan provide that it is impossible, at any time prior to the satisfaction of all liabilities under the plan to provide section 401(h) medical benefits, for any part of the corpus or income of such separate account to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of such benefits? [1383]

b. Does the plan expressly provide that, notwithstanding the provisions of section 401(a)(2), upon the satisfaction of all liabilities under the plan to provide section 401(h) medical benefits, any amount remaining in such separate account must be returned to the employer? [1384] c. Does the plan expressly provide that in the event an individuals interest in the medical benefits account is forfeited prior to termination of the plan an amount equal to the amount of the forfeiture must be applied as soon as possible to reduce employer contributions to fund the medical benefits? [1385]

Form 13069 (Rev. 06-2012) (Page 2)

Th

Department of Treasury - Internal Revenue Service

CYCLE B Submission Period 02/01/2012 01/31/2013 Form 13070 (June 2012) For IRS Use
1.a.b.

Department of Treasury Internal Revenue Service

Date

Employee Plans Deficiency Checksheet Attachment #13 Section 401(h)

Please furnish the amendment(s) requested in the section(s) checked

For a section 420 transfer of excess assets to retiree health accounts, the plan must be amended to include provisions for a medical benefits account within the meaning of section 401(h). IRC section 420(e)(3).

co is m fo pl rm et ed is or pro re vid tu ed rn a ed s to an th ex e am In te ple rn al on R ly ev an en d ue sh Se oul rv d n ic o e. t b e

1.c.d. I.e. I.f. II.a. III.a. III.b.c. IV.a.

A pension or annuity plan containing a section 401(h) account may only provide medical benefits including payment of benefits for sickness, accident, hospitalization and medical expenses. Section _______ of the plan should be amended to specify the medical benefits which will be available, the amount which will be paid and when the payments will occur. IRC section 401(h); Treas. Regs. 1.401-1(b)(1)(i); 1.401-14(a) and (c)(1).

Section_______ of the plan should be amended to specify who is eligible to receive medical benefits from the section 401(h) account. Note that benefits may only be provided to retired employees, their spouses and their dependents. IRC section 401(h); Treas. Regs. 1.401-14(a), (b)(1) and (b)(2).

Section ________ of the plan should be amended to provide whether contributions to the section 401(h) account are provided entirely from employer contributions or whether they will be paid from employer and employee contributions. Treas. Reg. 1.401-14(b)(3). Section _______ of the plan should be amended to provide that the aggregate actual contributions for retiree medical benefits, when added to the actual contributions for life insurance under the plan, are limited to 25 percent of the total actual contributions made to the plan (other than contributions to fund past service credits) after the later of the adoption or effective date of the section 401(h) arrangement (note that the date of adoption is the date the employer signs or executes the section 401(h) amendment). IRC section 401(h); Treas. Reg. 1.401-14(c)(1)(i).

Section ________ of the plan should be amended to provide that a separate account is established and maintained with respect to contributions to fund medical benefits under the section 401(h) arrangement. IRC section 401(h)(2); Treas. Reg. 1.401-14(c)(2).

Section _______ of the plan should be amended to provide that in the case of an employee who is a key employee (as defined in IRC section 416(i)), a separate account is established and maintained for benefits payable to such employee (and his spouse and dependents) and such benefits (to the extent attributable to plan years beginning after March 31, 1984, for which the employee is a key employee) are only payable to such employee (and his spouse and dependents) from such separate account. IRC section 401(h)(6). Section ________ of the plan should be amended to provide that the employers contributions to the medical benefits account are reasonable and ascertainable and that the employer must, at the time a contribution is made, designate that portion of such contribution allocable to the funding of medical benefits. In addition, section of the plan should be amended to specify the amounts of benefits, the priority and the time period with respect to which benefits which will be paid from each source, when other sources of payment for such medical benefits exist, such as a welfare benefit fund (for example, a section 501(c)(9) voluntary employees beneficiary association) or the general funds of the employer. IRC section 401(h)(3); Treas. Reg. 1.401-14(c)(1) and (3).

Th

Form 13070 (Rev. 06-2012) (page 1)

Cat. No. 31858H

Department of Treasury Internal Revenue Service

CYCLE B Submission Period 02/01/2012 01/31/2013

V.a.

Section _______ of the plan should be amended to provide that it is impossible, at anytime prior to the satisfaction of all liabilities under the plan to provide section 401(h) medical benefits, for any part of the corpus or income of such separate account to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of such benefits. IRC section 401(h)(4); Treas. Reg. 1.401-14(c)(4). Section _______ of the plan should be amended to provide, notwithstanding the provisions of section 401(a)(2), that upon the satisfaction of all liabilities under the plan to provide section 401(h) medical benefits, any amount remaining in such separate account must be returned to the employer. IRC section 401(h)(5); Treas. Reg. 1.401-14(c)(5). Section ________ of the plan should be amended to provide that in the event an individuals interest in the medical benefits account is forfeited prior to termination of the plan an amount equal to the amount of the forfeiture must be applied as soon as possible to reduce employer contributions to fund the medical benefits. Treas. Reg. 1.401-14(c)(6).

co is m fo pl rm et ed is or pro re vid tu ed rn a ed s to an th ex e am In te ple rn al on R ly ev an en d ue sh Se oul rv d n ic o e. t b e

V.b. V.c.

Th

Form 13070 (Rev. 06-2012) (page 2)

Cat. No. 31858H

Department of Treasury Internal Revenue Service