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Subpart D limits an employer's deduction for contributions to a
welfare benefit plan. The Congress enacted subpart D because it
was concerned with the law under which employers received current
deductions for contributions to welfare benefit plans, while the
benefiting employees excluded these amounts from their current
income. As stated by the House Ways and Means Committee, in
proposing a change to the prior law,
The committee has concluded that the favorable tax
treatment of employer contributions to welfare benefit
plans, as compared with employer payments of wages and
salary, is inappropriate in view of the favorable tax
treatment already provided to employees, i.e., the
exclusion of many of these benefits from adjusted gross
income. In addition, the committee believes that the
current rules under which employers may take deductions
for plan contributions far in advance of when the
benefits are paid allows excessive tax-free
accumulation of funds.
The committee's concern has been caused by recent
discussion among tax practitioners as to the tax-
shelter potential of welfare benefit plans.
Commentators have pointed out that the combination of
advance deductions for contributions and the
availability of tax exemption for certain employee
benefit organizations (such as the voluntary employees'
beneficiary association or VEBA) provides tax treatment
very similar to that provided to qualified pension
plans, but with far fewer restrictions. * * *
In one article on the use of employee benefit
plans as a tax shelter, an example is given of how a
small professional corporation may utilize the tax
benefits of a severance pay plan funded by a VEBA. In
this example, the employees of the corporation are two
doctors, ages 50 and 55, with annual salaries of
$150,000 and $200,000, respectively, and three other
workers, ages 20 to 36, with annual salaries of $10,000
to $18,000. The example indicates that the corporation
could make tax deductible annual contributions to a
tax-exempt VEBA of more than $55,000 annually under
terms that would make it unlikely that the three lower-
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