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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
From Spencer's Benefits Reports: In Rev. Rul. 2008-45, the Internal Revenue Service holds that if sponsorship of a qualified retirement plan is transferred from an employer to an unrelated taxpayer and the transfer is not in connection with a transfer of business assets, operations, or employees, then the transfer violates the exclusive benefit rule of IRC Sec. 401(a)(2).
In the situation addressed by Rev. Rul. 2008-45, Corporation A maintains an underfunded defined benefit plan with no ongoing accrual of benefits. Corporation A transfers sponsorship of the plan to Subsidiary B, a wholly-owned subsidiary of Corporation A. Subsidiary B does not maintain any trade or business, has no employees, and has nominal assets. As part of the transfer, the plan document is amended to substitute Subsidiary B as the plan sponsor and to provide for Subsidiary B to assume Corporation A’s responsibilities under the plan. In connection with the transfer of the plan sponsorship, Corporation A also transfers cash and marketable securities to Subsidiary B. The amount of the transferred assets is equal to the amount of the plan’s underfunding, as determined with reference to specified actuarial assumptions, plus an additional margin.
Shortly after the sponsorship of the plan and these assets are transferred to Subsidiary B, ownership of at least 80% of Subsidiary B’s stock is transferred to Corporation C, an unrelated corporation. After this transaction, Subsidiary B is no longer a member of the Corporation A controlled group, but instead is a member of the Corporation C controlled group. The transaction is not in connection with the transfer of business assets (other than cash or marketable securities transferred to Subsidiary B), operations. The only business risk or opportunity in the transaction for Corporation C is potential profit from the acquisition and operation of the plan.
Rev. Rul. 2008-45 initially notes that Sec. 401(a)(2) provides that a stock bonus, pension, or profit-sharing plan must be maintained for the exclusive benefit of its employees or their beneficiaries. Reg. Sec. 1.401-1(a)(2)(i) further provides that a qualified retirement plan is a definite written program that is established by an employer to provide for the livelihood of employees or their beneficiaries after the retirement of the employees. As specified by IRC Sec. 414(a), in the case in which the employer maintains a plan of a predecessor employer, service for such predecessor is treated as service for the employer.
The IRS goes on to explain, “Unlike other situations where the sponsorship of a plan is transferred in connection with the acquisition of business assets or operations, Subsidiary B does not maintain a business and its assets only compensate Corporation C for assuming Corporation A’s responsibility under the plan to make contributions to the plan. Therefore, any profit or loss to Corporation C resulting from the transaction would be solely from the use of the assets that are transferred to its controlled group in connection with the acquisition and operation of the plan.
“In accordance with section 414(b), all employees of all corporations which are members of a controlled group of corporations are treated as employed by a single employer. Accordingly, even though Subsidiary B has no employees of its own, it is treated as an employer with respect to the employees of the Corporation A controlled group while it is part of that controlled group. For purposes of the exclusive benefit rule of section 401(a)(2), however, Subsidiary B will no longer be treated as an employer with respect to the employees of the Corporation A controlled group when it is no longer a member of that controlled group. Accordingly, when Subsidiary B is no longer a member of the Corporation A controlled group, the plan does not satisfy the exclusive benefit rule of section 401(a)(2) because it is not maintained by an employer to provide retirement benefits for its employees and their beneficiaries. This conclusion would be the same even if the new controlled group has some employees covered by the plan after the transaction, or some business assets or operations are transferred, where substantially all the business risks and opportunities under the transaction are those associated with the transfer of the sponsorship of the plan.”
For further information on Rev. Rul. 2008-45, email Robert M. Walsh at RetirementPlanQuestions@irs.gov.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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