PLR 200502048: Pension funding waiver granted with payment and security conditions

Plain-English summary

A health care company sought relief from its defined benefit pension plan's minimum funding requirement after rising care costs and limited payment increases strained its finances. The IRS granted a conditional waiver under section 412(d). The company had to make required contributions for two later plan years on time and give the plan a security interest acceptable to the Pension Benefit Guaranty Corporation within 120 days. If either condition failed, the waiver would be retroactively void. The letter also cautioned that benefit or vesting changes while the waived deficiency remained could have consequences under section 412(f) and ERISA.

Ruling snapshot

• Question: Could the company's pension plan receive a waiver of its minimum funding requirement for the specified plan year?
• Outcome: Approved conditionally: later contributions and security for the waived amount were required.
• Key authorities: IRC §§ 412(d), 412(f); ERISA §§ 303, 304(b).

Full text (IRS public release)

Significant Index No. 0412.06-00

DEPARTMENT OF THE TREASURY 200502048

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

OCT 22 2004

SE:T:EP:RA:T:A1

In re:

Dear

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 June 30, [illegible]

This conditional waiver for the plan year ended June 30, [illegible] 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 July 1 to June 30 fiscal year. Payments from Medicare and Medicaid have not kept up with the pace of health care costs. In addition, the Company has had an inability to obtain rate increases from it's major insurance company payors. The Company’s costs for bad debt and unreimbursed charitable care (the Company accepts all patients regardless of their ability to pay) has increased from the fiscal year ending June 30 [illegible] to the fiscal year ending June

30, [illegible].

In response to the aforementioned financial difficulties the Company has negotiated improved payment arrangements with its two largest insurance company payors. The Company has limited its operating costs by limiting the replacement of employees who have left the company, and closely managing salary and wage increases. The company also anticipates increased payments from Medicare and Medicaid. The Company is in the midst of a $[illegible] capital funding campaign.

200502048

As of July 1, [illegible], the value of the assets of the plan was equal to 67% of the plan's current liability. Because the prospects for recovery are uncertain and 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 June 30, [illegible], and June 30, [illegible] shall be timely made within the meaning of section 412(c)(10) of the Code (without a waiver being granted for such years.)

(2) Within 120 days of the date of this letter, the Company shall provide a security interest to the plan, that is acceptable to the Pension Benefit Guaranty Corporation to secure the waived amount.

If these conditions are not satisfied, the waiver is retroactively null and void. You agreed to these conditions in a letter dated October 7, 2004.

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 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 or to the company’s profit sharing plan, 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.

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 June 30, [illegible], 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 the power of attorney (Form 2848) on file. A copy of this letter is being sent to the Manager, Employee Plans Classification in [illegible]. A copy of this letter should be furnished to the enrolled actuary for the plan.

200502048

If you have any questions on this ruling letter, please contact [illegible].

Sincerely,

Carol D. Gold
Director, Employee Plans