The IRS National Office recently released a legal memorandum (No. 202534004) to a field office on a technical issue under IRS Code section 419A(c)(2), relating to pre-funding post-retirement medical benefits in a welfare benefit fund.  In a nutshell, the memorandum holds that funding an allowable post-retirement medical reserve may NOT take into account periods of coverage before an actual severance from employment.  It appears that the plan in question specified an (unstated) “retirement age” that could be prior to when an employee actually stopped working.

The position in this legal memo is not particularly surprising given the language of the statute. But, it potentially reflects a more restrictive position than the IRS has previously followed in rulings describing allowable funding policies for Code section 401(h) post-retirement medical benefit funding.  In that area, the IRS has allowed plans to pay medical benefits from 401(h) accounts to employees who are eligible to receive pension benefits under the plan but continue to work past age 59½, where the plan specifically designates that such employees would be “deemed” to be “retired employees” under the plan.  See, e.g., LTR 202305001 and Groom Alert dated February 21, 2023.  

Employers (and their advisors) funding post-retirement benefits should consider the IRS positions under these rulings, depending on which funding vehicle they are using.