Unlocking Opportunity: New Proposed Rules for Tax-Free Tribal Welfare Benefits

Treasury Building

On Friday, September 13, 2024, the Treasury issued long-awaited proposed regulations (the “Proposed Rules”) regarding the exclusion from gross income for certain Tribal general welfare (“GW”) benefits.  The Proposed Rules incorporate many of the helpful recommendations posed to Treasury by the Tribal Tax Advisory Committee (“TTAC”).  The Proposed Rules, if finalized, would also present tremendous opportunities for Tribal Nations to recharacterize existing Tribal benefit programs as tax-free general welfare payments.  For example, the Proposed Rules would expressly permit Tribal Nations to provide uniform, pro rata payments to one or more categories of Tribal citizens, their spouses, dependents, and certain others without any requirement to document any actual individual need of the recipient.

Background:

The General Welfare Exclusion Act of 2014 (the “Act”) added § 139E to the Internal Revenue Code to provide that qualified general welfare benefit payments made to or on behalf of a Tribal citizen (or any spouse or dependent) are tax-free provided that the Tribal Nation’s program is administered under specific guidelines, it does not discriminate in favor of members of the governing body of the tribe, and the benefits provided under such program:

  • are available to any tribal member who meets such guidelines,
  • are for the promotion of general welfare,
  • are not lavish or extravagant, and
  • are not compensation for services.

Although not expressly addressed in the Act, the Act’s legislative history made it clear that eligibility for the program is not intended to be based in any part on the Tribal citizen’s financial need.[1]  In addition, the Act merely provides that payments under the program must be “for the promotion of general welfare” but does not expressly describe the type of payments that may qualify.  However, in IRS Revenue Procedure 2014-35, the IRS provided non-exhaustive categories of qualifying costs, including: (1) certain housing expenses (mortgage payments, down payments, rents, utilities, repairs and maintenance, and others), (2) certain education expenses (tuition, supplies, preschool, and others), (3) certain child, elder, and disabled care expenses, and (4) certain cultural and religious expenses.  Also, although the Act provides that tax-free GW can include cash honorarium, and other consideration, for the “participation in cultural or ceremonial activities for the transmission of tribal culture,” no express examples of such qualifying cultural and/or ceremonial activities were provided.

New, Helpful Guidance under the Proposed Rules:

The Proposed Rules would provide expansive, helpful guidance to Tribal Nations.  In particular, the Proposed Rules would provide wide-ranging opportunities for Tribal Nations to redesign their government programs to help ensure exemption from federal income tax.  Key highlights of the Proposed Rules are as follows:

  • Tax-Free, Per Capita Benefits Available Irrespective of Individual Need: The Proposed Rules expressly provide that GW benefits “may be provided without regard to the financial or other need of Tribal Program Participants and may be provided on a uniform or pro-rata basis to Tribal Program Participants.”

Insight: The payments would still have to meet other GW requirements, including that that the payments are not lavish or extravagant, but any Tribal Nation providing taxable, per capita payments should consider redesigning at least a portion of the payments to uniform, per capita-style tax-free GW payments.

  • Program Must be Administered Under Specified Guidelines: The Proposed Rules expressly require specified guidelines that include, at a minimum, a description of program, the benefits provided by the program (including how benefits are determined), the eligibility requirements for the program, and the process for receiving benefits under the program.

Insight: Although not technically required to be memorialized in a written document, such written guidelines are highly recommended.  The preamble to the Proposed Rules provide that if a Tribal citizen or other recipient is contacted by the IRS and requested to substantiate his/her tax-free GW benefit, the Tribal citizen “may use the written documentation to substantiate that the benefit received is intended to be a Tribal general welfare benefit that is excludable from gross income under section 139E.”

  • Gaming Revenues May Fund GW Payments, but RAP Controls: The Proposed Rules would provide that GW benefits may be funded by any source of revenue or funds, including net gaming revenues. However, the Proposed Rules also provide that if the Indian Tribal government has an approved RAP, the provisions of the RAP determine whether a payment is a per capita payment for purposes of Federal income taxation.  However, deference will be given to the Indian Tribal government’s determination of whether net gaming revenues are being used to make payments.  The Proposed Rules provide that GW benefits may be excluded from gross income as Tribal general welfare benefits if (1) they are not designated, including under a RAP, as per capita payments by the Tribal Nation, and (2) they otherwise meet the requirements in section 139E.

Insight: Tribal Nations seeking to take full advantage of these proposed rules should review their most recent Revenue Allocation Plan on file Department of Interior.  If, for example, the RAP provides a certain percentage of distributable net revenue to be paid to the members as per capita net gaming revenues, the RAP may need to be amended in order to expressly provide that a larger portion of gaming revenues be distributable as GW benefits.

  • Substantiation – Actual Receipts of Cost Incurred are Not Required: The Proposed Rules expressly provide that a GW program could be designed such that Tribal citizens and other recipients of GW benefits are not required to submit receipts of other documentation of the individual’s cost incurred that gives rise to the GW payment. Rather, the Proposed Rules would provide that the Tribal Nation itself may substantiate that benefits meet general welfare needs or purposes by relying on data or studies corroborating the expenses.

Insight: This means that a Tribal Nation providing a GW benefit for rent or mortgage assistance may be able to determine each recipient’s benefit by studying area housing costs, as opposed to requiring submission of mortgage and/or rent bills.

  • Deference to Tribes in Identifying Type and Amount of General Welfare Needed: The Proposed Rules would give the Tribal Nation sole discretion to determine whether a particular benefit is for the promotion of general welfare and that the IRS will defer to the Indian Tribal Government’s determination that a benefit is for the promotion of general welfare.

Insight: The Proposed Rules would provide Tribal Nations with flexibility to determine qualifying general welfare benefits beyond those types/ categories described in IRS Revenue Procedure 2014-35, in appropriate circumstances.  For example, the Proposed Rules acknowledge that GW benefits may include wellness or other medical/well-being related payments.

  • No Individualized Determination of Need: The Proposed Rules would grant the Tribal Nation sole discretion as to whether or not to consider individual need in designing a general welfare program. Also, the Proposed Rules would expressly provide that Tribal general welfare benefits may be provided without regard to the financial or other need of Tribal program participants.

Insight: The Proposed Rules would permit Tribal Nations to design GW programs that provide per capita style distributions to all Tribal citizens (or some other objective category) for common, broad-based needs of Tribal citizens on the whole.  Examples may include housing assistance costs, utility payments, wellness needs, among many more.

  • Wellness, Other Non-Medical Benefits Generally Permitted: The Proposed Rules would allow GW benefits to include payments for items that further the general health of the individual.

Insight: The Proposed Rules would allow Tribal Nations to provide GW benefits for costs that further the general health of the individual, even if the costs are not qualifying medical expenses under section 213 of the Interna Revenue Code.  For example, the preamble to the Proposed Rules provides that GW benefits may include payments “for care by an unlicensed spouse or relative.”

  • Lavish or Extravagant Based Upon Facts and Circumstances, Deference: : The Proposed Rules would provide that whether a benefit is “lavish or extravagant” would be based on the facts and circumstances at the time the benefit is provided. Relevant facts and circumstances would include a Tribe’s culture and cultural practices, history, geographic area, traditions, resources, and economic conditions or factors. Also, the rules would provide a presumption that a benefit is not lavish or extravagant if it is described in, and provided in accordance with, the written specified guidelines of the Indian Tribal government program.

Insight: This Proposed Rule would provide a large incentive for Tribal Nations to carefully develop written guidelines to implement and administer their GW programs.  GW programs operated under such written guidelines will be presumed to not be lavish and/or extravagant.

  • Exemption for Honorarium, Items of Cultural Significance for Participation in Cultural or Ceremonial Activities:  The Proposed Rules would provide that the IRS will defer to the Indian Tribal government’s determination of whether an activity is a cultural or ceremonial activity for the transmission of Tribal culture, as well as what qualifies as an item of “ cultural significance.”  Also, the recipient may be a member of a Tribe that is different from the Tribe that establishes or maintains the program.

Insight: The Proposed Rules would allow tax-free honorariums to citizens of other Tribes that, for example, provide drumming or ceremonial services to the Tribe.

  • Certain Issues Not Addressed: Significant issues surrounding GW programs that are not addressed in the Proposed Rules include:
    1. GW interaction with other federal programs: For example, the issue of whether a Tribal general welfare benefit is taken into account for purposes of determining other Federal benefits is not addressed.
    2. Minors Trust: The Proposed Rules do not address the application of general welfare exclusion to amounts placed in grantor trusts on behalf of Tribal citizens who are minors.

Takeaway Thoughts:

The Proposed Rules are a large step forward by the Treasury with respect to the  General Welfare Exclusion Act of 2014. The Proposed Rules would grant broad discretion to Tribal Nations to identify each Tribe’s unique general welfare assistance needs, as well as the best approaches for the administration of a particular Tribe’s program.  All Tribes should examine their particular governmental programs, especially those that provide taxable distributions to Tribal citizens and their families, and determine the extent to which such programs can be redesigned in order to provide similar distributions on a tax-free basis.  For example, Tribal Nations that provide per capita distributions of gaming revenues can likely redesign some or all of such distributions to provide qualifying tax-free, general welfare benefits on a per capita basis.  Such a change may, however, require an amendment to the Tribal Nation’s Revenue Allocation Plan on file with DOI, as well as other changes, including the completion of studies or preparation of other documentation supporting such a widespread need.  In addition, Tribe’s making one-time or other non-recurring payments (for example, distribution of settlements, judgments, or grant proceeds) could likely also design such payments to be on a tax-free, general welfare basis.  In any case, Tribal Nations looking to design GW programs under the new, Proposed Rules should carefully consider the development of written guidelines that demonstrate compliance with the requirements under these Proposed Rules.

[1] See Colloquy on H.R. 3043 and S. 1507 among Senator Moran, Senator Wyden and Senator Heitkamp, Congressional Record S5686 (Sept. 17, 2014) “. . . . in no event will the IRS require an individualized determination of financial need where a Tribal program meets all other requirements of [the law].”