PLR 200501023: Pension funding waiver granted subject to bankruptcy conditions

Plain-English summary

A company in Chapter 11 bankruptcy received a conditional waiver of its pension plan's minimum funding standard for the 2003 plan year. The company described financial hardship after an accident and said it could not contribute until the bankruptcy court approved its reorganization. The IRS conditioned the waiver on court approval, a contribution of the waived amount within 90 days after that approval, and specified credit balances in later plan years. If approval or the conditions failed, the waiver would be retroactively void. The letter also warned about restrictions on increasing plan benefits while the waived amount remained unamortized.

Ruling snapshot

• Question: Could the company's pension plan receive a minimum funding waiver for 2003?
• Outcome: Approved conditionally, subject to bankruptcy court approval and specified funding requirements.
• Key authorities: IRC § 412; ERISA §§ 303, 304(b).

Full text (IRS public release)

Significant Index No. 0412.06-00
200501023

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

OCT 14 2004

[illegible]

In re:

This letter constitutes notice that a conditional waiver of the minimum funding standard has been granted for the above-named pension plan for the plan year ending December 31, 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 the conditional waiver has been granted is the contribution that would otherwise be required to reduce the balance in the funding standard account of the plan to zero as of the end of the plan year for which the waiver has been granted.

[redacted] (“Company”) operates in the single business activity of
[redacted]. The Company has experienced
temporary substantial business hardship as evidenced by losses in income in each of the last four fiscal years. The Company filed under Chapter 11 of the Bankruptcy Code on [redacted]. The Company has a hearing in Bankruptcy Court scheduled in early
[redacted], at which time they expect receive final approval for a plan of reorganization filed with the court. The Company has been unable to make contributions to the Plan until the Bankruptcy Court approves a plan of reorganization.

The underlying reason for the Company's hardship stems from an accident which occurred in [redacted], whereby the Company's [redacted]. The Company has experienced financial hardship resulting from the accident due to amounts paid on claims made against it, costs incurred for new safety measures required by law, and reduced revenue due to the shutdown of a significant portion of its [redacted], currently operating at [redacted]% capacity.

The emergence from bankruptcy will improve the Company’s cash flow and profitability going forward. The Company’s losses have decreased significantly on a year-to-year basis from [redacted] through [redacted] with a year to-date profit through June 30, [redacted]. The
[redacted] revenues were approximately [redacted]% higher than the prior two years, and the

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highest that they’ve been over the previous eight years. The Company is working to achieve 100% capacity with its [redacted] which will further increase profits and revenues.

As of January 1, 2003, the Plan was approximately 83 percent funded on a current liability basis. The Plan has been frozen since August 15, [redacted].

This waiver has been granted conditioned upon the Company obtaining the approval of the Bankruptcy Court to satisfy the conditions below. In a letter dated October 14, 2004, you agreed to these conditions.

1. Within 90-days from the date that the Plan of Reorganization is approved
   by the Bankruptcy Court, the Company (as reorganized pursuant to the Plan of Reorganization) will contribute to the Plan the amount for which the conditional waiver has been granted.

2. At the end of each plan year from [redacted] through [redacted] the funding
   standard account for the Plan will have a credit balance that is not less than the outstanding balance of the amortization base with respect to the waived amount that is established and maintained under section 412(b)(2) of the Code.

If the Company does not receive the Court’s approval or if the Company fails to meet the above conditions, this waiver is retroactively null and void.

Your attention is called to section 412(f) of the Code and section 304(b) of ERISA which describe 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 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 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, [redacted], the date of this letter should be entered on Schedule B (Actuarial Information). We have sent a copy of this letter to the EP Classification Manager in [redacted].
[redacted] pursuant to a power of attorney (Form 2848) on file with this office.

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If you have any questions concerning this matter, please contact [redacted].

Sincerely,

E. Ann Trichilo, Acting Manager
Employee Plans Actuarial Group 2