PLR 200349006: Pension plan receives a conditional funding waiver

Plain-English summary

A company with declining sales, losses, and a pension plan whose assets were below its current liability sought relief from the minimum funding standard. The IRS granted a conditional waiver under IRC § 412(d) for the plan year ended November 30, 2002. The company had to make the required contributions for the next two plan years on time and secure the waived amount in a manner acceptable to the Pension Benefit Guaranty Corporation. Failure to meet those conditions would make the waiver retroactively void. The IRS also modified a prior waiver for the plan year ended November 30, 2001, because the company had not met one of its original conditions.

Ruling snapshot

• Question: Could the pension plan receive relief from its minimum funding requirement for the 2002 plan year?
• Outcome: Approved a conditional waiver and modified the prior year's waiver.
• Key authorities: IRC § 412(c)(10), (d), (f); ERISA §§ 303, 304(b).

Full text (IRS public release)

Significant Index No. 0412.06-00 200349006

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION SEP 10 2003

T:EP:RA:T:A1

In re:

This letter constitutes notice that with respect to the above-named defined benefit pension plan we have granted a conditional waiver of the minimum funding standard for the plan year ended November 30, 2002. This letter also constitutes notice that we have modified the conditions set forth in our letter of May 3, 2002, for the waiver of the minimum funding standard for the plan year ended November 30, 2001.

This conditional waiver for the plan year ended November 30, 2002, has been granted in accordance with section 412(d) of the Internal Revenue Code and section 303 of the Employee Retirement Income Security Act of 1974 (ERISA). The waived amount is the contribution which would otherwise be required to reduce the balance in the funding standard account to zero as of the end of the plan year for which this conditional waiver has been granted.

The company has a December 1 to November 30 fiscal year. The Company had negative earnings for the fiscal years ended November 30, 2000, and November 30, 2001, and de minimus positive earnings for the fiscal year ended November 30, 2002. However, the Company reports negative earnings for the first two quarters of the fiscal year ending November 30, 2003. In addition, working capital was negative at the end of the fiscal years ended November 30, 2000, November 30, 2001, and November 30, 2002. Net sales have also shown a general decline over the last three fiscal years and the Company is currently operating at 65% capacity utilization.

In response to the aforementioned financial difficulties the Company has developed a strategy that aggressively seeks to gain market share in certain areas where the Company already has a good reputation but where the Company had not previously sought growth. Because of the Company’s excess capacity, significant growth is possible without the need for additional capital investments. Thus, if significant sales growth is achieved, the Company will be able to achieve a return to profitability.

200349006

As of December 1, 2001, the value of the assets of the plan was equal to 64% of the plan’s current liability. Because the prospects for recovery are uncertain and because the plan is under-funded, we are granting this waiver subject to the following conditions:

(1) The contributions required to satisfy the minimum funding standard for the plan years ending November 30, 2003, and November 30, 2004, shall be timely made within the meaning of section 412(c)(10) of the Code (without a waiver being granted for such years).

(2) The waiver of the minimum funding standard for the plan year ended November 30, 2002, shall be secured, within twelve months of the date of this letter, in a manner acceptable to the Pension Benefit Guaranty Corporation.

If these conditions are not satisfied, the waiver is retroactively null and void. You agreed to these conditions in a letter dated September 9, 2003 (which was transmitted by facsimile).

Please note that nothing in this letter precludes a request for a modification of these conditions. Please also note that should such a request be made, a new user fee will be required, and that the facts and circumstances at the time of such request as well as the facts and circumstances at the time of the initial request will be examined.

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

This letter also modifies our ruling letter dated May 3, 2002, granting a conditional waiver for the plan year ended November 30, 2001. Under the term of the May 3, 2002, letter the waiver for the plan year ended November 30, 2001 was subject to the condition that the contributions required to satisfy the minimum funding standard for the plan years ending November 30, 2002, and November 30, 2003, were to be timely made as defined in section 412(c)(10) of the Code (without a waiver being granted for such years). The Company did not satisfy that condition. Accordingly, our letter of May 3, 2002, is modified to read as follows:

200349006

The contributions required to satisfy the minimum funding standard for the plan year ending November 30, 2003, are to be timely made as defined in section 412(c)(10) of the Code (without a waiver being granted for such year).

This ruling is directed only to the taxpayer 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 ended November 30, 2002, the date of this letter should be entered on Schedule B (Actuarial Information). A copy of this letter is being sent to your authorized representative in accordance with a power of attorney (Form 2848) on file. A copy of this letter is also being sent to the Manager, Employee Plans Classification in A copy of this letter should be furnished to the enrolled actuary for the plan.

If you have any questions on this ruling letter, please contact

Sincerely,

Carol D. Gold
Director, Employee Plans