If you haven’t already, now is the time to update your tribe’s general welfare benefits (GWB) policies and procedures to ascertain and document whether benefits are tax-exempt to your members.
Most tribes are aware that both Congress and the IRS developed new guidance in 2014 regarding when and if GWB provided to tribal members are taxable. While there are differences between these two forms of guidance, they provide much needed clarity in helping tribes structure programs so as to qualify as tax-exempt to members.
Some quick background: Last summer, the IRS issued Revenue Procedure 2014-35, superseding and expanding on Notice 2012-75, which provided guidance on tribal programs that would be excluded from tribal members’ taxable income. Then in September, the 2014 Tribal General Welfare Exclusion Act (Public Law 113-168) (Act) was passed, which added section 139E to the Internal Revenue Code and excluded from gross income the value of any GWB provided by an Indian tribe to its members.
In general, the Act provides that GWB will be excluded from income, if the benefits are administered under specified guidelines and don’t discriminate in favor of members of the governing body of the tribe. GWB must also meet these criteria:
- Available to any tribal member who meets such guidelines
- For the promotion of general welfare
- Aren’t lavish or extravagant
- Aren’t compensation for services
The terms general welfare and lavish or extravagant aren’t defined, although the IRS is charged with issuing regulations on the latter.
To allow tribes time to adopt policies consistent with the new rules, Section 4 of the Act suspended all IRS audits and examinations of tribes and members until the training and education provisions of the Act are completed. Therefore, now is the time for all tribal governments to review and update GWB program policies to conform to the 2014 guidance, especially to clearly define needs-based programs.
Although safe harbor rules presume that the need requirement is automatically met for the specific programs listed in Rev. Proc. 2014-35 (certain housing, educational, elder, emergency transportation, cultural, religious, and other programs), tribal governments still need to document eligibility criteria for other programs. Again, these benefits cannot be lavish or extravagant, or compensatory. As a final step, tribes may want to have tax or legal advisors review the tribe’s GWB policies to help evaluate whether they will meet the intent of the Act and the Rev. Proc.
It should be noted that the Act doesn’t supersede or repeal the Rev. Proc., which means both may be used even though there are some differences. Rev. Proc. 2014-35 contains similar general guidance as the Act, and provides examples of specific programs that are considered tax-exempt.
Fortunately, the Act specifically provides a special rule of statutory construction—that any ambiguity in the construction will be resolved in favor of Indian tribal governments. Also, the definition of qualified recipients has been modified by the Act, providing coverage for any spouse or dependent.
We're Here to Help
It’s imperative that tribes take advantage of the window of opportunity provided by Congress to review and update their GWB program policies to conform to the new guidance. During this window, IRS audits and examinations of tribes and members are suspended until training and education provisions are completed. Careful attention to detail could help support that benefits to members remain nontaxable. Contact your Moss Adams professional at firstname.lastname@example.org to help your tribe interpret the provisions of the IRS’s Revenue Procedure 2014-35 and the Act.
Tell the IRS What You Think About GWB Rules
The IRS recently issued Notice 2015-34, which clarifies that tribes may continue to rely on Rev. Proc 2014-35’s safe harbor provisions. The notice also requests comments from the public on several other aspects of the Act, including what is defined as lavish or extravagant, what types of tribal customs or practices should be considered part of GWB and therefore tax-exempt, and what constitutes tax-exempt honoraria for cultural or ceremonial activities. This presents a great opportunity for tribes to provide input to the IRS on these important issues. Comments can be emailed to email@example.com, and will be accepted by the IRS until October 15, 2015.