26 U.S.C. § 419 — Treatment of funded welfare benefit plans

(a) General rule. Normally, an employer's contributions to a "welfare benefit fund" can't be deducted under other tax rules. But if they would otherwise be deductible, they can be deducted under this section instead, for the year they're paid, subject to the limit in (b).

(b) Limitation. The deduction allowed under (a) can't be more than the fund's "qualified cost" for that year.

(c) Qualified cost. Generally, "qualified cost" for a year is the "qualified direct cost" for that year, plus any addition to a "qualified asset account^*" (limited by section 419A(b)), reduced by the fund's "after-tax income" for that year. "Qualified direct cost" means what the employer could have deducted if it had paid for the benefits directly using cash-basis accounting instead of through the fund; a benefit counts as "provided" when it would show up in the employee's taxable income if the employer gave it directly, or would except for a tax rule excluding it from income. For a child care facility, instead of normal depreciation, its cost is deducted evenly over 60 months starting the month it opens; "child care facility" means qualifying property used mainly as a child care center for employees' children, but not property that isn't depreciable or that's located outside the United States. "After-tax income" means the fund's gross income minus deductions directly tied to earning that income and the tax the fund itself owes for the year; in figuring gross income, money from employees counts but money from the employer doesn't. No item can be counted more than once when figuring qualified cost.

(d) Carryover of excess contributions. If the employer's contributions for a year are more than the (b) limit, the extra is treated as if it were paid the next year instead.

(e) Welfare benefit fund. A "welfare benefit fund" is any fund that's part of an employer's plan and that provides "welfare benefits" to employees or their beneficiaries. "Welfare benefit" means any benefit except ones covered by three other specific tax rules (sections 83(h), 404, and 404A). "Fund" means: certain tax-exempt organizations listed in section 501(c)(7), (9), or (17); any trust, corporation^*, or other taxable organization; or, to the extent regulations say so, an account an employer's money is held in by someone else. Despite that last category, "fund" doesn't include money held by an insurance company under a life insurance contract^*, or under a "qualified nonguaranteed contract" - one with no guaranteed renewal, where the only non-insurance payments available are unguaranteed refunds or dividends based on factors other than benefits actually paid, and only if the employer reports any such refund or dividend as income in the year the policy year ends.

(f) Method of contributions having the effect of a plan. Even without a formal "plan," if the employer's contributions or benefits work like one in effect, this section still applies as if there were a plan.

(g) Extension to plans for independent contractors. If a fund would count as a welfare benefit fund except that the people involved aren't technically "employees," this section still applies: the person paying for the fund is treated as the employer, and the person receiving the services is treated as the employee^*.