The Wagner Law Group Receives PLR on Complicated Defined Benefit Plan Issues
The Wagner Law Group requested a Private Letter Ruling ("PLR") on behalf of a client ("Taxpayer") that terminated its defined benefit pension plan ("DB Plan") even though the DB Plan had a yet-to-be determined contingent liability ("Liability") related to an outstanding lawsuit in which the DB Plan is a defendant (amongst many). The DB Plan received a favorable determination letter with respect to its termination prior to the PLR request. Additionally, the DB Plan assets exceed the sum of its benefit obligations and the anticipated maximum potential Liability.
The Taxpayer also maintains a tax-qualified defined contribution plan (the "DC Plan") with a primary discretionary employer contribution of 0 - 3 percent of compensation, for which at least 95% of the DB Plan's participants are eligible. The DC Plan also has a secondary employer discretionary contribution (not made unless a 3% primary discretionary contribution has been made) for 0 - 6 percent of compensation. Less than 95% of the DB Plan's participants are eligible for the secondary discretionary employer contribution as a result of the ineligibility of a certain group of highly compensated employees for that contribution.
It was the Taxpayer's desire to transfer any assets in excess of the DB Plan's benefit obligations to the DC Plan (as a "qualified replacement plan") so that such excess assets would not be subject to taxation under section 4980 of the Internal Revenue Code (the "Code") with respect to qualified plan assets reverting to a plan sponsor. The outcome of the outstanding litigation, however, including the exact amount of the Liability and date as of which the Liability would be determined, was outside the control of the Taxpayer. The Taxpayer adopted board resolutions committing to retain enough assets in the DB Plan to satisfy the anticipated maximum potential Liability, transfer any amount in excess of the anticipated maximum potential Liability (and not less than 25% of the DB Plan's total excess assets) to the DC Plan as soon as administratively feasible, and, subsequent to the resolution of the outstanding litigation and satisfaction of the Liability, transfer any further remaining assets to the DC Plan as soon as administratively feasible.
Rulings from the IRS were therefore requested, as follows:
- That the retention of assets in the DB Plan for purposes of satisfying the Liability after all benefit distributions have been completed for a period unknown would not void the DB Plan's termination or cause its trust to be treated as a wasting trust.
- That benefit distributions made following the receipt of a favorable determination letter from the IRS with respect to the DB Plan's termination would be treated as having been made as a result of the DB Plan's termination even though assets would continue to remain in the DB Plan for an undetermined period of time.
3. That the DB plan would not be required to be updated for otherwise applicable changes in the law or regulations occurring after the Termination Date.
4. That during the period after which the DB Plan has completed all of its benefit distributions but still retains assets to satisfy the Liability, the DB Plan's trust would continue to be a tax-exempt trust under sections 401(a) and 501(a) of the Code and not deemed a reversion under section 4980 of the Code.
5. That no annual Form 5500 or any other annual returns required under the Code would have to be submitted for the DB Plan for any plan year after which all of the DB Plan's benefit obligations were satisfied.
6. That the initial transfer of assets from the DB Plan to the DC Plan in an amount equal to at least 25% of the amount remaining in the DB Plan after all benefit distributions have been completed, would be considered a transfer of assets to a qualified replacement plan under section 4980 of the Code even though assets remain in the DB Plan's trust for purposes of satisfying the Liability.
7. That any assets transferred from the DB Plan to the DC Plan after the Liability has been satisfied would not be deemed a reversion under Section 4980 of the Code and would be afforded its own 7-plan-year allocation period permitted under the Code for such transfers, beginning with the plan year in which the transfer of such assets occurs.
8. That the DC Plan would be considered a qualified replacement plan under Section 4980 of the Code notwithstanding the fact that less than 95% of the DB Plan's participants are eligible for the secondary discretionary employer contributions under the DC Plan.
9. That if the participation requirements for a qualified replacement plan under the Code were met by the DC Plan at the time of the initial transfer of assets before satisfaction of the Liability, such requirements would be deemed to have been met upon the second transfer of assets occurring after the satisfaction of the Liability.
The IRS ruled that, because the timing of the payment of the Liability is not in the Taxpayer's control, (i) the retention of assets for an unknown period of time would not result in the DB Plan's trust being deemed a wasting trust or serve to void the Plan's termination, and (ii) the DB Plan would retain its tax-favored status. It further ruled that the distribution of benefits to participants would be considered distributions as a result of the DB Plan's termination and the DB Plan would not have to be updated further for changes in applicable law or regulations occurring after the Termination Date. The above rulings were contingent on the transfer of any amounts remaining in the DB Plan following the satisfaction of the Liability to the DC Plan as soon as administratively feasible.
The IRS also ruled that while the DB Plan would not be required to submit a Schedule SB to Form 5500, Single-Employer Defined Benefit Plan Actuarial Information, for any years subsequent to the plan year containing the DB Plan's Termination Date, Forms 5500, Annual Return/Report of Employee Benefit Plan, will be required for the DB Plan for any year in which assets remain in its trust, as well as Form 8955-SSA, Annual Registration Statement Identifying Separate Participants With Deferred Vested Benefits, for any year in which there are participants with deferred vested benefits to be reported.
With respect to the transfer of the DB Plan's assets to the DC Plan, the IRS again ruled in accordance with the request by stating that the DC Plan would be considered a qualified replacement plan under the Code as long as 95% of the DB Plan's participants remain employed with the Taxpayer following the DB Plan's termination and are eligible to receive the DC Plan's primary discretionary employer contribution, regardless of the fact that less than 95% of the DB Plan's participants are eligible for the DC Plan's secondary discretionary employer contribution. The IRS further favorably ruled that the transfer of at least 25% of the assets remaining in the DB Plan after the distribution of benefits to the DC Plan would allow the Taxpayer to avoid the tax on reversion of plan assets under Section 4980 of the Code, even though assets would still remain in the DB Plan in order to satisfy the Liability. The IRS also ruled that the transfer of any assets remaining in the DB Plan to the DC Plan after satisfaction of the Liability would not constitute a reversion of plan assets to the Taxpayer and would be eligible for its own 7-plan-year allocation period beginning in the year in which the transfer occurs. Finally, the IRS ruled that if the participation requirements of a qualified replacement plan are met at the time of the initial transfer of assets to the DC Plan, those requirements will be deemed to have been met upon the occurrence of the second transfer.
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