GATT and Reversion

[Guest Rosalind]

We filed a DB plan termination that involves a reversion to the employer with the IRS for a determination letter. The IRS is now saying that any portion of the reversion that is due to using GATT rates (rather than the PBGC rates which were in the pre-GATT plan) is not due to "erroneous actuarial computation" and therefore cannot be part of the reversion. Apparently the only authority for this is an internal IRS memo from 1995. (The employer is a tax-exempt organization, so the excise tax is irrelevant.)

Has anyone else came accross this? Help!

(P.S. I posted this same question on the plan termination board.)

[Mike Preston]

It is a violation of 401(a)(2) to adopt an amendment which increases a reversion, even if that amendment would otherwise be given protection from violating 411(d)(6).

The IRS is right.

[mbozek]

I am not familiar with the IRS memo that you refer to and I would question its authority if it is not a formal position of the service. I thought the IRS is required to publish all of its applicable rulings in order to apply them to taxpayer situations. Is this memo part of the IRS guidelines on plan terminations? I would question the IRS logic of stating that GATT rates are some how different from other rates that give rise to erronious actuarial computations. Also I question the statement that adopting an amendment that increases a reversion is prohibited by 401(a)(2) since this would prevent any amendment to cease or reduce benefit accruals which would not violate the cutback rule.

[Mike Preston]

You are correct in that it precludes amedments that reduce benefit accruals, even if those amendments do not violate 411d6.

But the cessation of benefit accruals is not impacted.

The modification to GATT, if it causes an increase in the reversion is an amendment prohibited by 401(a)(2). I think it is pretty clear based on the wording of the statute.

I know I've heard the IRS say the same thing at conferences. I'm pretty sure something was issued in early 95 that identified this issue. However, you don't really need a ruling to be issued for the IRS to state that they intend, should the occassion arise, to apply a statute as written.

[Mike Preston]

See 1.402(B)(1), which states in relevant part:

"If, however, the surplus of $50,000 had been accumulated as a result of a change in the benefit provisions or in the eligibility requirements of the plan, the $50,000 could not revert to the employer because such surplus would not be the result of an erroneous actuarial computation. "

An amendment which changes the 417(e) rates to the GATT rates is clearly a "change in the benefit provisions".

[MGB]

What bothers me about this is how would you interpret this in the future? Is this just a temporary issue? In other words, would you compare lump sums at date of termination using GATT rates with the PBGC lump sums using the accrued benefit at effective date of amendment? (This becomes a wear-away and eventually goes away except for vested terms.)

OR

Would you forever have to use PBGC upon plan termination?

It would seem that the language of the amendment would affect this determination. I.e., if the amendment clearly defined the change as a wear-away situation, then the first would apply. But, if the amendment just cuts off the PBGC rates at a point in time making use of 411(d)(6) relief, wouldn't that be construed as needing to keep the PBGC rates forever in the event of a plan termination?

I can argue this both ways and don't have a clear feeling on this one.

[mbozek]

Q- are the changes to the GATT rates an elective change by the employer to increase a reversion as the regulation implies or are they required because of a statutory change in the law? If the latter I dont see how this is an elective change in benefits to increase the reversion. It seems obviously contradictory to require that a plan change to the GATT rate in order to terminate and then say that such an an amendment is a change in benefits. I would question the IRS authority under a general regulation that was last revised before 417(e) was enacted/amended in 1994 to require a minimum lump sum be paid and retain counsel. Otherwise the client can just increase the benefits to lower the amount of the reversion to meet the IRS demands.

[Mike Preston]

I'd go with the former.