Under what circumstances can federal income tax deductions be taken by a for-profit employer with respect to IBNR welfare benefit liabilities (for example, is it necessary that the funding of the IBNR be "set aside" in a trust holding plan assets per ERISA Section 403(a))? A corollary question is whether the contribution must be paid in cash (or is the acknowledgment of the liabililty by the fund sufficient to take the deduction)?

Sections 409 and 409A don't authorize tax deductions; they simply limit them.
Tax deductions under §409 for current expenses realized during a taxpayer's year; the funds need to be expended rather than just set aside.
Tax deductions under §409A are permitted for "qualified additions" to a "qualified asset account". Those amounts are tax deductible to the extent that they are within the limitations provided, either under the safe harbor or as determined actuarially. However, as you imply, those assets must be separated from the general assets of the corporation. They could be paid to an insurance company or to a trustee as a way of their becoming deductible.
As with all expenses, the contribution payments must be made in order to be deductible; acknowledgment of a liability is never enough to obtain a tax deduction.

Sections 419 and 419A don't authorize tax deductions; they simply limit them. Now that we have the nits out of the way, please help me understand Q & A-3 c in the Temporary regulations, in particular, the next to last sentence. Both E & Y and GT are currently of the opinion that a fully insured arrangement with a noncancellable residual liability for claims incurred before cancellation constitutes a fund. Their arguments (which I don't agree with) are to the effect that since the residual liability is owed no matter what at cancellation (next year or 10 years hence), it is currently deductible without an infusion of cash to the plan.

I would argue that the residual liability constitutes both a plan asset and a plan liability. Since ERISA Sectin 403(a) requires that plan assets be held in trust, failure to fund in cash is equaivalent to losing the deduction.

What say you, guru?