Guest Article

(From the December 30, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Eligibility for Participation in Group Trusts Is Expanded

A new IRS ruling allows the assets of custodial accounts, retirement income accounts, and governmental retiree benefit plans to be pooled in a group trust under Revenue Ruling 81-100, as modified.

Plans Currently Eligible to Participate

Revenue Ruling 81-100, as previously modified by Revenue Ruling 2004-67, permits the assets of qualified plans under Code § 401(a), individual retirement accounts under Code § 408(e), and eligible governmental plans under Code § 457(b), to be pooled in a group trust if certain requirements are satisfied. In that case, the group trust is exempt from taxation under Code § 501(a) with regard to the funds belonging to participating trusts described in § 401(a), under Code § 408(e) with regard to the funds belonging to individual retirement accounts ("IRAs"), and under Code § 457(g) with regard to funds belonging to eligible governmental plan trusts or custodial accounts under § 457(b). The conditions require that the group trust: (1) be adopted as part of each adopting employer's plan or each adopting IRA, (2) expressly limit participation to the identified types of arrangements, (3) prohibit the corpus or income belonging to any participating entity from being used or diverted to any purpose other than for the exclusive benefit of the employees or beneficiaries entitled to benefits under such entity, (4) prohibit the assignment by any adopting entity of its interest in the group trust, and (5) be created and maintained as a domestic trust in the United States.

Additional Eligible Plans and More Stringent Requirements

Subsequently, the IRS received inquiries regarding whether other entities could invest in a group trust. The IRS responded with Revenue Ruling 2011-1, which further modifies Revenue Ruling 81-100 to provide that, on or after January 10, 2011, the assets of qualified plans under Code § 401(a), IRAs, and eligible governmental plans under Code § 457(b) may be pooled in a group trust under Revenue Ruling 81-100 with the assets of custodial accounts under Code § 403(b)(7), retirement income accounts under Code § 403(b)(9), and Code § 401(a)(24) governmental plans without affecting the tax status of the group trust or each of the separate plans, as long as certain conditions are met. (The Revenue Ruling observed, however, that a custodial account under Code § 403(b)(7) will generally be commingled in a group trust that solely contains the assets of other custodial accounts under Code § 403(b)(7) because of the restrictions of Treasury Regulation § 1.403(b)-8(d)(2)(i).) The Revenue Ruling also imposes additional conditions on group trusts which, among other things, require that the group trust instrument provide for separate accounts to be maintained to reflect the interest of each participating entity in the group trust.

Model Amendments with Reliance

Two model amendments are provided - one for group trusts that do not currently satisfy the separate account requirement, and one for group trusts that intend to permit other eligible entities to participate. In terms of reliance, the Revenue Ruling states that, if the group trust instrument provides that amendments to the group trust will automatically pass through to the participating entities, and the trustee of the group trust is otherwise entitled to rely on a favorable determination letter issued before January 10, 2011 regarding the eligibility of the group trust under Revenue Ruling 81-100, the trustee will not lose its right to rely on the letter merely because it adopts either of the model amendments on a word-for-word basis (or adopts an amendment that is substantially similar in all material respects).

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2010, Deloitte.