Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

Technicalities
Under the provisions of IRC section 419/419A, the employer is only allowed to deduct in a given
fiscal year the lesser of: 1) Cash PAID to the fund, 2) "Qualified Cost" amount, or 3) "Eat-up
Rule" amount.
1. Cash PAID to the fund is just that, irrespective of the method of accounting employed by the
employer, only the amount substantiated as cash paid to the fund is considered.
2. Qualified Cost is defined by the following formula:
Qualified Direct Costs (QDC)
+ Qualified Asset Account Addition (QAAA)
- After tax income (ATI)
Qualified Cost
The subcomponents of Qualified Cost are further defined:
(QDC) =
(QAAA) =
Benefits paid through the fund for the year calculated on a cash basis.
Additions to certain reserves: The only amounts permitted as additions to
reserves are amounts for a) incurred but unpaid claims and b) post-retirement life
and medical benefits. These are described in IRC section 419A.
3. The "Eat up rule" amount is described in detail at Treas. Reg. section 1.419-1T, Q/A 5(b).
Exceptions
There are two major exceptions to the 419/419A rules:
1. Collectively Bargained benefits per IRC section 419A(f)(5)(A)
Per Treas. Reg. section 1.419A-2T:
a. Arms-length negotiations
b. Benefits must be negotiated
2. Certain 10 or more employer plans per IRC section 419A (f)(6)
Sources of Information
For an explanation of how IRC sections 419/419A work, a reading of the General Signal case is
suggested. See General Signal Corporation v. Commissioner, (103 T.C. No. 14). Again, the
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