Tax News

CCH (cch.taxgroup.com) reports:

The IRS has ruled that the exclusive benefit rule of Code Sec. 401(a)
is violated if the 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 from the employer to the unrelated taxpayer. This conclusion would hold even if the unrelated taxpayer had some employees covered by the plan after the transaction, or some business assets or operations were transferred, where substantially all the business risks and opportunities under the transaction are those associated with the transfer of the sponsorship of the plan.
Background
For a retirement plan to be a qualified plan under Code Sec. 401(a), the plan must be maintained by the employer for the exclusive benefit of its employees or their beneficiaries. The employer corporation in the ruling's fact pattern transferred sponsorship and responsibilities for an underfunded defined benefit plan with no ongoing accrual of benefits to its wholly-owned subsidiary, which maintained no trade or business, had no employees, and had nominal assets. The employer then transferred assets to the subsidiary in an amount equal to the plan's underfunding, plus an additional margin. The employer corporation transferred ownership of the subsidiary to an unrelated corporation, at which point the subsidiary became a member of the unrelated corporation's controlled group rather than the employer corporation's controlled group. No assets (other than the assets to fund the plan), employees or operations were transferred, and the only business risk or opportunity in the transaction for the unrelated corporation was to profit from the acquisition and operation of the plan.
Exclusive Benefits Rule Violated
After transfer of the subsidiary, the plan would no longer satisfy the exclusive benefits rule because it was no longer maintained by the employer. By itself, the transfer of the retirement plan to the employer's subsidiary would not violate the exclusive benefit rule because the subsidiary was a member of the employer corporation's controlled group and, therefore, treated as the employer under Code Sec. 414(b). However, upon the sale of the stock in the subsidiary to the unrelated corporation, the subsidiary would no longer be part of the employer's controlled group. The rule under Code Sec. 414(a), that service for a predecessor employer is treated as service for the current employer, did not change this result because the unrelated corporation's controlled group was not the employer.
CCH Comment. As a result of a transaction such as this one, the funding and portfolio risk of a plan would in effect be outsourced to another party and the funding obligation would be removed from the employer's books. The IRS arguably stretched a bit here because the exclusive benefits rule guards against diversion of benefits and under the facts of the ruling, the employees' benefits were fully funded with a cushion. Moreover, IRC language is less than crystal clear that the exclusive benefit has to be provided by the employer as opposed to some other party, especially after benefits cease to accrue. Still, a retirement plan without an employer on the hook is a sufficient novelty that it is not surprising that the IRS refused to green light this sort of deal.
Rev. Rul. 2008-45, 2008FED ¶46,532
Other References:
Code Sec. 401
CCH Reference - 2008FED ¶17,515.55
CCH Reference - 2008FED ¶17,515.72
Code Sec. 414
CCH Reference - 2008FED ¶19,150A.70
CCH Reference - 2008FED ¶19,156A.30
Tax Research Consultant
CCH Reference - TRC RETIRE: 48,150
CCH Reference - TRC RETIRE: 54,100