Publication 557 |
2001 Tax Year |
501(c)(4) 501(c)(9) & 501(c)(17) -- Employees' Associations
This section describes the information to be provided upon
application for recognition of exemption by the following types of
employees' associations:
- A local association of employees whose membership
is limited to employees of a designated person or persons in a
particular municipality, and whose income will be devoted exclusively
to charitable, educational, or recreational purposes,
- A voluntary employees' beneficiary association
(including federal employees' associations) organized to pay
life, sick, accident, and similar benefits to members or their
dependents, or designated beneficiaries, if no part of the net
earnings of the association benefits any private shareholder or
individual, and
- A supplemental unemployment benefit trust whose
primary purpose is providing for payment of supplemental unemployment
benefits.
Both the application form to file and the information to provide
are discussed later under the section that describes your employee
association. Chapter 1 describes the procedures to follow in applying
for exemption.
Tax treatment of donations.
Donations to these organizations are not deductible as charitable
contributions on the donor's federal income tax return.
Local Employees' Associations (501(c)(4))
A local employees' association may apply for recognition of
exemption by filing Form 1024. The organization must submit evidence
that:
- It is of a purely local character,
- Its membership is limited to employees of a designated
person or persons in a particular locality, and
- Its net earnings will be devoted exclusively to charitable,
educational, or recreational purposes.
A local association of employees that has established a system of
paying retirement or death benefits, or both, to its members will not
qualify for exemption since the payment of these benefits is not
considered as being for charitable, educational, or recreational
purposes. Similarly, a local association of employees that is operated
primarily as a cooperative buying service for its members in order to
obtain discount prices on merchandise, services, and activities does
not qualify for exemption.
Voluntary Employees'
Beneficiary Associations
(501(c)(9))
An application for recognition of exemption as a voluntary
employees' beneficiary association must be filed on Form 1024. The
material submitted with the application must show that your
organization:
- Is a voluntary association of employees,
- Will provide for payment of life, sick, accident, or other
benefits to members or their dependents or designated beneficiaries
and substantially all of its operations are for this purpose,
and
- Will not allow any of its earnings to benefit any private
individual or shareholder except in the form of scheduled benefit
payments.
Notice requirement.
An organization will not be considered tax exempt under this
section unless the organization gives notice to the IRS that it is
applying for recognition of exempt status. The organization gives
notice by filing Form 1024. If the notice is not given by 15 months
after the end of the month in which the organization was created, the
organization will not be exempt for any period before notice is given.
The EO area manager may grant an extension of time for filing the
notice under the same procedures as those described for section
501(c)(3) organizations in chapter 3 under Application for
Recognition of Exemption.
Membership.
Membership of a section 501(c)(9) organization must consist of
individuals who are employees and have an employment-related common
bond. This common bond may be a common employer (or affiliated
employers), coverage under one or more collective bargaining
agreements, membership in a labor union, or membership in one or more
locals of a national or international labor union.
The membership of an association may include some individuals who
are not employees, provided they have an employment-related bond with
the employee-members. For example, the owner of a business whose
employees are members of the association may be a member. An
association will be considered composed of employees if 90% of its
total membership on one day of each quarter of its tax year consists
of employees.
Employees.
Employees include individuals who became entitled to membership
because they are or were employees. For example, an individual will
qualify as an employee even though the individual is on a leave of
absence or has been terminated due to retirement, disability, or
layoff.
Generally, membership is voluntary if an affirmative act
is required on the part of an employee to become a member. Conversely,
membership is involuntary if the designation as a member is due to
employee status. However, an association will be considered voluntary
if employees are required to be members of the organization as a
condition of their employment and they do not incur a detriment (such
as a payroll deduction) as a result of their membership. An employer
has not imposed involuntary membership on the employee if membership
is required as the result of a collective bargaining agreement or as
an incident of membership in a labor organization.
Payment of benefits.
The information submitted with your application must show that your
organization will pay life, sick, accident, supplemental unemployment,
or other similar benefits. The benefits may be provided directly by
your association or indirectly by your association through the
payments of premiums to an insurance company (or fees to a medical
clinic). Benefits may be in the form of medical, clinical, or hospital
services, transportation furnished for medical care, or money
payments.
Nondiscrimination requirements.
An organization that is part of a plan will not be exempt unless
the plan meets certain nondiscrimination requirements. However, if the
organization is part of a plan that is a collective bargaining
agreement that was the subject of good faith bargaining between
employee organizations and employers, the plan need not meet these
requirements for the organization to qualify as tax exempt.
A plan meets the nondiscrimination requirements only if both of the
following statements are true.
- Each class of benefits under the plan is provided under a
classification of employees that is set forth in the plan and does not
discriminate in favor of employees who are highly compensated
individuals.
- The benefits provided under each class of benefits do not
discriminate in favor of highly compensated individuals.
A life insurance, disability, severance pay, or supplemental
unemployment compensation benefit does not discriminate in favor of
highly compensated individuals merely because the benefits available
bear a uniform relationship to the total compensation, or the basic or
regular rate of compensation, of employees covered by the plan.
For purposes of determining whether a plan meets the
nondiscrimination requirements, the employer may elect to exclude all
disability or severance payments payable to individuals who are in pay
status as of January 1, 1985. This will not apply to any increase in
such payment by any plan amendment adopted after June 22, 1984.
If a plan provides a benefit for which there is a nondiscrimination
provision provided under Chapter 1 of the Internal Revenue Code as a
condition of that benefit being excluded from gross income, these
nondiscrimination requirements do not apply. The benefit will be
considered nondiscriminatory only if it meets the nondiscrimination
provision of the applicable Code section. For example, benefits
provided under a medical reimbursement plan would meet the
nondiscrimination requirements for an association, if the benefits
meet the nondiscrimination requirements of Code section 105(h)(3) and
105(h)(4).
Excluded employees.
Certain employees who are not covered by a plan may be excluded
from consideration in applying these requirements. These include
employees:
- Who have not completed 3 years of service,
- Who have not attained age 21,
- Who are seasonal or less than half-time employees,
- Who are not in the plan and who are included in a unit of
employees covered by a collective bargaining agreement if the class of
benefits involved was the subject of good faith bargaining, or
- Who are nonresident aliens and who receive no earned income
from the employer that is United States source income.
Highly compensated individual.
A highly compensated individual is one who:
- Owned 5 percent or more of the employer at any time during
the current year or the preceding year,
- Received more than $80,000 (adjusted for inflation) in
compensation from the employer for the preceding year, and
- Was among the top 20% of employees by compensation for the
preceding year.
But the employer can choose not to have (3) apply.
Aggregation rules.
The employer may choose to treat two or more plans as one plan for
purposes of meeting the nondiscrimination requirements. Employees of
controlled groups of corporations, trades or businesses under common
control, or members of an affiliated service group, are treated as
employees of a single employer. Leased employees are treated as
employees of the recipient.
One employee.
A trust created to provide benefits to one employee will not
qualify as a voluntary employees' beneficiary association
under section 501(c)(9).
Supplemental
Unemployment Benefit
Trusts (501(c)(17))
A trust or trusts forming part of a written plan (established and
maintained by an employer, his or her employees, or both) providing
solely for the payment of supplemental unemployment compensation
benefits must file the application for recognition of exemption on
Form 1024. The trust must be a valid, existing trust under local law
and must be evidenced by an executed document. A conformed copy of the
plan of which the trust is a part should be attached to the
application.
Notice requirement.
An organization will not be considered tax exempt under this
section unless the organization gives notice to the IRS that it is
applying for recognition of exempt status. The organization gives
notice by filing Form 1024. If the notice is not given by 15 months
after the end of the month in which the organization was created, the
organization will not be exempt for any period before such notice is
given. The EO area manager may grant an extension of time for filing
the notice under the same procedures as those described for section
501(c)(3) organizations in chapter 3 under Application for
Recognition of Exemption.
Types of payments.
You must show that the supplemental unemployment compensation
benefits will be benefits paid to an employee because of the
employee's involuntary separation from employment (whether or not the
separation is temporary) resulting directly from a reduction-in-force,
discontinuance of a plant or operation, or other similar conditions.
In addition, sickness and accident benefits (but not vacation,
retirement, or death benefits) may be included in the plan if these
are subordinate to the unemployment compensation benefits.
Diversion of funds.
It must be impossible under the plan (at any time before the
satisfaction of all liabilities with respect to employees under the
plan) to use or to divert any of the corpus or income of the trust to
any purpose other than the payment of supplemental unemployment
compensation benefits (or sickness or accident benefits to the extent
just explained).
Discrimination in benefits.
Neither the terms of the plan nor the actual payment of benefits
may be discriminatory in favor of the company's officers,
stockholders, supervisors, or highly paid employees. However, a plan
is not discriminatory merely because benefits bear a uniform
relationship to compensation or the rate of compensation.
Reestablishing exemption.
If your organization is a supplemental unemployment benefit trust
and has received a denial of exemption because it engaged in a
prohibited transaction, as defined by section 503(b), it may file a
claim for exemption in any tax year following the tax year in which
the notice of denial was issued. It must file the claim on Form 1024.
The organization must include a written declaration that it will not
knowingly again engage in a prohibited transaction. An authorized
principal officer of your organization must make this declaration
under the penalties of perjury.
If your organization has satisfied all requirements as a
supplemental unemployment benefit trust described in section
501(c)(17), it will be notified in writing that it has been recognized
as exempt. However, the organization will be exempt only for those tax
years after the tax year in which the claim for exemption (Form 1024)
is filed. Tax year in this case means the established annual
accounting period of the organization or, if the organization has not
established an annual accounting period, the calendar year. For more
information about the requirements for reestablishing an exemption
previously denied, contact the IRS.
Previous| First | Next
Publication Index | IRS-Forms Main | Home
|