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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.
The IRS has issued guidance restricting the transfer of frozen defined benefit plan assets to unrelated taxpayers without the transfer of other assets, operations, or employees because such transfers violate the exclusive benefit rule of Code Sec. 401(a) . The guidance is meant to curb abuses caused by the direct or indirect transfer of frozen DB plan assets to unrelated third-parties. Contemporaneously, the Treasury, Labor, and Commerce Departments, and the PBGC have issued a framework of principles designed to guide the development of legislation permitting such transactions in circumstances in which a transaction is in the best interest of plan participants, beneficiaries, employers, and the pension insurance system.
The IRS posed the following facts in a revenue ruling. Corporation A maintains an underfunded defined benefit plan with no ongoing accrual of benefits ( i.e., “a frozen DB plan”). Corporation A transfers sponsorship of the plan to Subsidiary B, a wholly-owned subsidiary of Corporation A, which does not maintain any trade or business, has no employees, and only nominal assets. The plan document is amended to make Subsidiary B the plan sponsor and for Subsidiary B to assume Corporation A’s responsibilities under the plan.
As part of the transaction, Corporation A transfers cash and marketable securities to Subsidiary B roughly equal to the plan’s underfunding, plus an additional margin. Shortly after the transfer, the ownership of at least 80 percent of Subsidiary B’s stock is transferred to Corporation C, an unrelated corporation. Consequently, Subsidiary B is no longer part of Corporation A’s controlled group, but has become part of Corporation C’s controlled group. The transfer was not made in connection with the transfer of business assets (other than the cash or marketable securities originally transferred to Subsidiary B). The only business risk or opportunity is for Corporation C to profit from the acquisition and operation of the plan.
Code Sec. 401(a) provides that, in order for a plan to be qualified, it must be maintained for the exclusive benefit of its employees or their beneficiaries. Further, Code Sec. 414(a) requires that when an employer maintains a plan of a predecessor employer, service for the predecessor is treated as service for the employer. The transfer of plan assets alone, however, does not create employer status for a taxpayer that is not otherwise an employer. In a frozen DB plan, service after the plan is frozen is irrelevant because it does not accrue any benefits.
Additionally, Code Sec. 414(b) provides that all employees of all corporations who are members of a controlled group of corporations must be treated as employed by a single employer. Thus, according to the revenue ruling, when Subsidiary B ceases being a member of the Corporation A controlled group, the plan does not satisfy the exclusive benefit rule of Code Sec. 401(a) because it is no longer maintained by an employer to provide retirement benefits for its employees and their beneficiaries. The same conclusion would be reached even if the new controlled group has some employees covered by the plan after the transaction, or where some business assets or operations are transferred but substantially all the business risks and opportunities under the transaction are related to the transfer of the sponsorship of the plan.
Finally, the revenue ruling concluded that the exclusive benefit rule of Code Sec. 401(a) is violated if the sponsorship of the qualified retirement plan is transferred from an employer to an unrelated taxpayer and the transfer of the sponsorship of the plan is not related to a transfer of business assets, operations, or employees from the employer to the unrelated taxpayer.
The revenue ruling was released at the same time as a legislative framework of principles developed by the Departments of Treasury, Labor, Commerce, and the PBGC that would permit the transfer of pension assets to an unrelated taxpayer where the transaction is in the best interest of plan participants, beneficiaries, employers, and the pension insurance system.
Under the legislative framework, a pension plan (or a portion of a plan) under which benefits are no longer accruing (i.e., a frozen plan) could be transferred to an entity unrelated to the employer (or former employer) of the participants in the plan, provided that certain conditions are met.
The Agencies agreed that the conditions of transfer would reflect the following fundamental requirements:
- Plan participants, their representatives, and ERISA regulators would be required to receive advance notice of a plan transfer, and the parties to the transaction would be required to provide regulators information necessary to review and approve the proposed transaction.
- Only financially strong entities in well-regulated sectors would be permitted to acquire a pension plan in a plan transfer transaction.
- The parties to the transaction would be required to demonstrate that participants’ benefits and the pension insurance system would be exposed to less risk as a result of the transfer, and that the transfer would be in the best interests of the participants and beneficiaries.
- Limitations on transfers would be imposed to limit undue concentration of risk.
- Transferees and members of their controlled groups would assume full responsibility for the liabilities of transferred plans and would comply with post-transaction reporting and fiduciary requirements.
- Subsequent transfer transactions would be subject to the rules applicable to the original transfer transactions.
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