Strategic Sale of Overfunded DB Plan

[Guest billyj]

I am looking for general guidance on the sale of an overfunded pension plan to a non-related third party (a third party that is an active business with an underfunded plan - not a financial firm contemplated by Rev Rule 2008-45).

I am aware that TAM 9650002 suggests in some circumstances (e.g. a deemed asset sale) the excess assets (to the extent of deductible contributions) should be included in the seller's income under the tax benefit rule. However, I have not seen any further guidance on this (in case law or IRS guidance). Does anyone know what is currently occurring with respect to strategic sales of overfunded db plans? Is the IRS attempting to enforce this position in the context of strategic sales? I would think I would have seen subsequent case law challenging the IRS's position but I haven't.

What is the going rate for the excess assets in a pension plan?

I am also aware of Rev Rule 2008-45 providing that the sale of an overfunded plan to an unrelated taxpayer where the transfer of the plan is not in connection with a transfer of business operations violates the exclusive benefit rule. I have not seen anything further on this either. In my opinion, selling a defunct entity whose sole asset is an overfunded db plan to an entity with active business operations when the overfunded plan is merged with the underfunded plan following the sale actually furthers compliance with Seciton 401(a)'s exclusive benefit rule - especially when the selling corp no longer has any active participants and the buyer does.

So Im wondering if the IRS is trying to actively enforce these positions with respect to strategic sales or if they are just letting this guidance hang out there to try and discourage the transactions.

Any thoughts?

Thank you.

[Ron Snyder]

Just noticed your post with no responses. As you aver, this is a tricky area. Yes, IRS has provided a ruling which addresses some situations which were questionable to begin with. But they are easily worked around as you suggest. There are a handful of models floating around. 1) The underfunded plan acquires the entity sponsoring the plan and then merges the overfunded plan into the underfunded acquiring plan. The corporation is then closed. 2) Corporation with underfunded plan acquires corporation with overfunded plan. Plans are merged. Other models are also possible.

A client of mine participated in such a transaction, the sale of a medical PC to a hospital with an underfunded DB plan. This would seem to be a perfect fit under the rules. General guidance? Here is mine:

1) Obtain the best advice possible, an AV-rated attorney who specializes in qualified plans.

2) Remember the price of an overfunded plan without such action is an 80%+ tax rate.

3) If a sale of the stock of the sponsoring corporation is not presently possible, split the corporation into separate entities, a parent with with the nontransferable assets and a subsidiary with the payroll and transferable assets as the other.

4) Make sure the business are related in some way, ie, that there is an apparent business purpose for the transaction other than (in addition to) the pension plan.

5) The purchase price of the goodwill represented by the excess plan assets is 80-85% of the excess.

Note: few plans are overfunded anymore, so these are now rare.

Undoubtedly, IRS will attempt to enforce the rules if he facts are drawn to their attention. However, a transaction done and reported prudently is not likely to draw scrutiny from the IRS.