By Scott W. Rankin, Senior Vice President
Benefit Trust Company



Public entities wishing to pre-fund Other Post-Employment Benefits (“OPEB”) in order to comply with GASB 45 are required to establish irrevocable trusts to hold and invest funds to meet their future obligations. Many are selecting IRC Section 115 trusts due to their simplicity, low cost, and ease of administration as compared to IRC Section 501(c)(9) Voluntary Employee Benefit Associations, or VEBAs. Public entities and their employees are rightfully concerned that any trust established for this purpose maintain tax exempt status so as to avoid paying income tax on trust earnings.

Section 115 of the Internal Revenue Code provides a tax exemption for revenue derived from the exercise of any essential governmental function. The IRS has ruled on numerous occasions through various Private Letter Rulings that setting aside and investing funds to pay for retirees’ post-employment benefits is an essential government function, and that trusts establish for this purpose are to be afforded tax exempt status. The IRS views the Section 115 trust simply as a funding vehicle established for the purpose of funding retiree benefits under the myriad of separate employee benefit plans it has in the past or in the future may establish. In other words, this Section 115 trust is no different from the perspective of the IRS than a public entity trust established for any other rightful purpose.

So if you have established a Section 115 trust to prepare for future OPEB liabilities, should you seek a Private Letter Ruling to confirm the trust’s tax exempt status? And what is a Private Letter Ruling? Simply stated, a Private Letter Ruling (“PLR”) is a written response issued by the IRS National Office in response to a formal request to rule on the taxable nature of a proposed or completed transaction. A PLR may only be relied upon by the party to whom it is issued, though non-related parties may consider PLRs probative of the IRS’s position on a particular class of transactions. A PLR will no longer be honored after a change in the tax law, or if at any time it is determined that the transaction was not accurately represented to the IRS at the time of the PLR application.

As regards a Section 115 trust established to hold and invest funds for future OPEB liabilities, though the construction may be simple and the precedent for IRS acceptance ample, the safest and most conservative approach is to obtain a PLR in your name from the IRS that applies specifically to the trust you have adopted. That said, unlike a VEBA a PLR is not required by the IRS in order to take advantage of the Section 115 tax exemption, and no harm whatsoever comes to retirees who receive benefits that are funded by a Section 115 trust which has not received a PLR because the Section 115 trust is merely the funding vehicle rather than the benefit plan itself. In fact, if such a trust were later to be found in violation of Section 115, it would be the trust that would owe back taxes rather than any benefit becoming taxable to a retiree.

The decision to obtain a PLR is an individual decision dependent upon the concerns and sensitivities of the public entity adopting the Section 115 trust. Having a PLR in the file can be advantageous from the perspective of public relations and may eventually be helpful in dealings with the IRS, though we are not aware of a single Section 115 trust properly drafted and adopted for this purpose that has been invalidated. PLRs are not expensive to obtain, and the expense can legally be paid by the trust itself.

© 2007 Keenan & Associates License No. 0451271