Revenue Ruling 2004-11

[Belgarath]

I have an interpretation question. I've always just assumed the 410(b)(6)© exception to coverage testing was taken literally - so if you don't amend or change your plan during the transition period, you'd automatically pass. However, after reading 2004-11, I'm not so sure. It repeatedly refers to a "significant change in the plan or in the coverage of the plan."

Take the following example: Corp A sponsors plan B. Corp. A, in 2003, purchases Corp C, but does nothing to its plan, relying on the "free pass" for coverage during the entire transition period. However, let's look at this census scenario in plan A - 1 HC, 20 NHC. You need 14 NHC to pass 70% test, which you do before the acquisition/merger. Then in the plan year 2004 following the merger, you drop to 8 NHC covered, because the plan has a 1000 hour/last day requirement, and several folks go part time. I do not think the free pass applies. But it might be argued that if you drop to 13, this isn't "significant."

But maybe I'm looking for trouble where none exists, and the free pass still applies. It just seems wrong. Any opinions? Thanks.

[Guest merlin]

Belgarath,

I put your question to a local ERISA atty as well as the Technical Answer Group. Neither could cite anything official, but both were of the opinion that this kind of situation was not what the Service had in mind wrt negating the free pass. The RR solicits questions for further guidance. Maybe this is one such question.

[Belgarath]

Thanks Merlin. We had some discussion about this yesterday, and had reached the same conclusion. So absent any further clarification from the Service, I'll take the conservative approach.

[E as in ERISA]

My understanding has always been that the issue is whether the plan by its terms would cover the additional employees coming into the group as a result of the transaction.

For example, Corp A sponsors Plan B. It defines the employer as all companies within the controlled group, and all employees of the employer are eligible. When Corp A purchases Corp C, then the plan by its terms covers employees of Corp C. There's no free pass. The 410(b)(6)© exception doesn't work because you have a significant change in the coverage...based on the terms of the plan itself.

Compare that to a situation where Corp X sponsors Plan Y. It defines the employer as Corp X and all employees of the employer are eligible. When Corp X purchases Corp Z, there is no change in the coverage of the plan. The 410(b)(6)© exception applies. (It also works if the plan defines the employer as all companies in the controlled group that are "adopting employers" -- if Z doesn't adopt the plan).

If you have the first situation (Corp A with Plan B), then it needs to be amended prior to the transaction.

[Guest Harry O]

I would have thought the situation described by Katherine would qualify for transition relief. The statute says the relief applies as long as "the coverage under such plan is not significantly changed during the transition period (OTHER THAN BY REASON OF THE CHANGE IN MEMBERS OF A GROUP)." The coverage under Katherine's plan was significantly changed solely because there was a change in the controlled group. My two cents . . .

[E as in ERISA]

I know what you're saying. I haven't particularly researched it. I'm only repeating what I've been told --- but it was on very good authority... So the way I've interpreted it, is that the "denominator" for coverage testing purposes -- the total employees within the group -- is naturally allowed to change as a result of the transaction. However, the numerator -- the number of employees that would qualify for the plan -- doesn't change solely as a result of the transaction. It depends on the plan terms.