Guest Article

(From the January 17, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Controlled Group May Retain Qualified Replacement Plan after Sale of Plan Sponsor

In a recently issued private letter ruling, the IRS examined the requirements of Code § 4980 as they apply to the sale of a subsidiary that sponsors a "qualified replacement plan" where the parent proposes to sell the subsidiary and retain the plan within the seller's controlled group.

Under the facts of PLR 201143034, in 2009 a subsidiary terminated a defined benefit plan and transferred excess assets from that plan to a defined contribution plan it sponsored, satisfying the requirements of a "qualified replacement plan" under Code § 4980. That same year the parent company requested a ruling from the IRS in which it proposed to sell the corporate subsidiary but retain the qualified replacement plan (by changing the plan sponsor to another member of the controlled group). At the time of the IRS ruling in 2011, the plan covered 80 employees of the subsidiary and 260 employees of other members of the controlled group. The IRS ruled that the transaction would not cause the plan to fail to be a qualified replacement plan. Specifically, the IRS ruled that the transaction would not cause the plan to fail the 95-percent test under Code § 4980 because, of the active participants in the previously-terminated defined benefit plan who would remain employed within the seller's controlled group after the sale of the subsidiary, at least 95 percent would be active employees under the plan.

Code § 4980 applies an excise tax on any employer reversion from a qualified plan (i.e., cash or other property received directly or indirectly by the employer from a qualified plan). The tax is 20 percent of the reversion amount, but is increased to 50 percent unless the employer establishes or maintains a "qualified replacement plan" (or the terminated plan is amended to provide certain benefit increases). To be a "qualified replacement plan" several requirements must be met. Among those is the requirement under Code § 4980(d)(2)(A) that:

No regulations have been adopted to implement Code § 4980. At issue in the letter ruling was whether the 95-percent test would be impacted by the fact that the replacement plan and its suspense account would remain with the seller, while the subsidiary that maintained the qualified replacement plan and who's terminated defined benefit plan generated the excess assets was being sold and its employees terminated from the controlled group. Under the IRS ruling it did not. The 95-percent test was satisfied because the measuring point was after the sale of the subsidiary, the IRS reasoned. At least 95 percent of those participants who participated in the terminated defined benefit plan and who remained active employees of the controlled group after the sale of the subsidiary would remain active participants in the replacement plan.

When the subsidiary's defined benefit plan was terminated in 2009, approximately $2.7 million in excess assets was transferred to a suspense account in the subsidiary's 401(k) defined contribution plan. $1.3 million was allocated among the plan participants as an employer contribution for 2009, and $1.5 million was allocated as an employer contribution for 2010. The IRS concluded that after the sale of the subsidiary the remainder of the suspense account would continue to be allocated no less rapidly than ratably over the seven-plan-year period beginning with the year of the transfer, thereby satisfying a separate requirement for "qualified replacement plans" under Code § 4980(d)(2)(C).

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, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2012, Deloitte.