PLR 200328041: Conditional $24.3 million pension funding waiver granted

Plain-English summary

A company facing operating losses and reduced liquidity requested a waiver of its defined benefit pension plan's 2003 minimum funding requirement. The IRS granted a conditional waiver of $24.3 million, the portion tied to a quarterly installment due April 15, 2003. Within 90 days, the company had to execute documents for an arrangement satisfactory to the Pension Benefit Guaranty Corporation to secure repayment; otherwise the waiver would be void retroactively. The letter warns that unpaid installments may still draw interest charges and liens unless further waivers are granted. It also points to limits on benefit increases while the waived amount remains unamortized.

Ruling snapshot

• Question: Could the company defer part of its 2003 pension minimum funding obligation?
• Outcome: Approved conditionally for $24.3 million.
• Key authorities: IRC §§ 412(d), 412(m), 412(n), 412(f); ERISA §§ 303, 304; Notice 89-52.

Full text (IRS public release)

200328041

Significant Index No. 0412.06-00 Third Party Contacts — Employees of the

Company (Nov. 2002 — Feb. 2003)
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

APR 15 2003
T:EP:RA:T:2

In re:

Company =
Dear

This letter constitutes notice that a conditional waiver of a portion of the minimum funding standard has been granted for the above-named pension plan for the plan year beginning January 1, 2003.

This conditional waiver has been granted in accordance with section 412(d) of the Internal Revenue Code (the “Code”) and section 303 of the Employee Retirement Income Security Act of 1974 (ERISA). The amount for which this conditional waiver has been granted is $24.3 million, which is the portion of the minimum funding standard for the 2003 plan year (after the payment of the amount required under section 412(b)(2)(C) of the Code to amortize any waivers for prior plan years) that otherwise (in the absence of any waiver for the 2003 plan year) would be equal to the quarterly installment under section 412(m)(4) due to be paid under section 412(m)(3) not later than April 15, 2003.

The Company, formerly operated as a division of another [redacted] purchased its major operating assets from the steel company in 1984 through a leveraged employee stock ownership plan [redacted] transaction. Through the
[redacted], the Company was employee owned until 1989, when the Company’s stock began trading publicly. The Company is a major integrated producer of
[redacted], with principal product lines consisting of [redacted] and [redacted]. In recent years, the U.S. [redacted] has been in a state of crisis characterized by record operating losses, more than two dozen bankruptcies, and the permanent closure of a significant amount of productive capacity. During this time the Company, like most U.S.

200328041

producers, has sustained significant operating losses and decreased liquidity as a result of adverse market conditions resulting from a slowing economy, depressed product selling prices, and high levels of foreign imports. The Company experienced net losses for the fiscal years ending December 31, 2000 through 2002, and reported both negative working capital and negative net worth for the fiscal years 2001 and 2002.

The Company commenced a restructuring in the spring of 2001 to fundamentally reposition its business to focus on higher margin value-added products. The restructuring included reductions in workforce, streamlining management, entering into financing programs with vendors to improve liquidity, increasing liquidity and borrowing availability by refinancing the Company’s working capital facilities through a senior credit facility, restructuring long-term debt, and lowering debt service costs.

As part of its recovery efforts the Company has secured concessions from its bargaining unit employees, including cancellation of a planned $1 per hour wage increase that would have gone into effect in April 2003, an immediate 5 percent pay and wage reduction, a six-month postponement of 50 percent of vacation pay that would have been payable to certain employees in February 2003, and freezing of Plan benefit accruals, intended to become effective on or about

April 30, 2003. The same pay reduction and Plan freeze will also be applicable on the same dates to all of the Company's salaried employees. The Company plans to reposition its business by pursuing the acquisition of strategic assets

from other [redacted] that are working to reposition their business, and pursuing other asset acquisitions that meet the Company’s goal of exiting the [redacted]. The Company expects its proprietary technology to
[redacted] with a polymer film to be a major source of growth. The Company has substantial obligations related to its employee post-retirement plans for medical and life insurance benefits and pensions. The Company has stated that it is currently holding meetings with its pre-age 65 retirees to discuss significant reductions in future health care costs.

The above-named defined benefit Plan was originally effective [redacted].

Plan contributions for the plan years [redacted] exceeded the minimum funding

requirement for those years, and the resulting large credit balances in the funding

standard account were sufficient to meet minimum funding requirements for the
[redacted] plan years. The minimum funding requirements for the 2002 and
[redacted] plan years include approximate additional funding charges of
[redacted] for [redacted] and [redacted] (estimated) for [redacted]. As of January 1, 2002, the ratio of market value of assets to accrued liability is approximately [redacted] percent. The

2002 actuarial report for the Plan gives investment losses and the retirement of

nearly [redacted] participants with enhanced benefits in [redacted] and early [redacted] as a

result of corporate restructuring, as primary causes of decreases in the Plan’s funded status.

200328041

This waiver has been granted subject to the following condition, which you have agreed to:

Within 90 days from the date of this letter, all necessary documents to provide an arrangement that is satisfactory to the Pension Benefit Guaranty Corporation (PBGC) to secure the repayment of the waived amount will be executed.

If the Company fails to meet the above condition, this waiver is retroactively null and void.

Q&A-8 of Notice 89-52, 1989-1 C.B. 692, provides that the determination of 90% of the current year’s minimum funding requirement should generally be made assuming that no waiver will be granted for the current plan year. In this instance, a waiver of the entire minimum funding requirement for 2003 (after the payment of the amount required under section 412(b)(2)(C) of the Code to amortize any waivers for prior plan years) was requested. Only a portion of the minimum funding requirement for 2003 has been waived at this time. It is anticipated that the Company will request modification of the amount waived later in 2003. However, Q&A-8 of Notice 89-52 further provides that “If any amount is disregarded in anticipation of a waiver of such amount for the current plan year, and such waiver is subsequently denied, the rules regarding interest charges and liens under section 412(m)(1) and (n) apply.” Therefore, if the Company does not request and obtain further modification(s) of the amount waived until the entire 2003 minimum funding requirement (after the payment of the amount required under section 412(b)(2)(C) of the Code to amortize any waivers for prior plan years) is waived, then the interest charges under section 412(m)(1) and liens under section 412(n) will apply to any amounts of required quarterly installments that have not been paid timely.

Because a waiver of the minimum funding standard has been granted for the 2002 plan year, in computing the 2003 quarterly contribution in the instant case, the determination of 90% of the current year’s minimum funding requirement should take into account the waiver amortization payment required in the 2003 plan year for the 2002 waiver.

Your attention is called to section 412(f) of the Code and section 304 of ERISA which describes the consequences which result in the event the plan is amended to increase benefits, to change the rate in the accrual of benefits, or to change the rate of vesting while any portion of the waived amount remains unamortized. Please note that any amendment to other retirement (or profit sharing) plans maintained by the Company to increase the liabilities of those plans would be considered an amendment for purposes of section 412(f) of the Code and section 304(b) of ERISA.

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4

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited by others as precedent.

When filing Form 5500 for the plan year ending December 31, 2003, the date of this letter should be entered on Schedule B (Actuarial Information). We have sent a copy of this letter to the [redacted] Classification, in
[redacted], and to your authorized representatives (Form 2848) on file with this office.

If you have any questions concerning this letter, please contact
[redacted]. In any correspondence
relating to this letter, please refer to [redacted] as well.

Sincerely,

Carol D. Gold, Director
Employee Plans

CC:

cc: