PLR 200851041: A funding waiver for a narrow fabric maker whose sales fell 47 percent, conditioned on paying later years in full

Plain-English summary

A conditional waiver of the minimum funding standard under section 412(d), granted to a manufacturer of narrow fabric products for the intimate apparel industry.

The employer's difficulty is a long one. Demand from the intimate apparel market for domestically produced textiles fell across the preceding decade, and the bankruptcy of two customers took sales volume down by 47 percent over the period described. Against that the company offered a recovery plan: cutting production, personnel and expenses, broadening its product mix, marketing into new medical and industrial markets, widening its customer base, and amending the plan to stop benefit accruals. Its cash flow projections show sales stabilising and positive net income ahead, and it points to the dollar being at historic lows against other currencies as something that should help the marketability of goods made at home.

The Service's assessment is measured rather than enthusiastic. It is obvious that the company has suffered a substantial business hardship, and it is clear that it could not meet the funding standard for the year without compromising its ability to keep operating. Whether the turnaround actually happens is not clear. That uncertainty, together with the plan being only partly funded on a current liability basis, is why the relief comes with strings rather than on its own.

The condition is that the company contribute enough to meet the minimum funding standard for a run of later plan years, running through 2012, without seeking a waiver for any of them, by stated deadlines. The company agreed to this in a letter dated 14 July 2008. Failing the condition makes the waiver retroactively null and void, so the relieved year would reopen as an unmet funding standard rather than simply ending the relief going forward. This is also not the company's first waiver: an earlier one carried the same kind of condition, and the documentation submitted with this request shows full compliance with it.

The closing warning concerns section 412(f) and section 304(b) of ERISA, which attach consequences if the plan is amended to increase benefits or change the rate of accrual or vesting while any part of the waived deficiency is still unamortized. The Service reads that reach widely. Amending any other retirement plan covering the same employees so as to increase its liabilities counts as such an amendment, and so does setting up a new plan for them. An employer excused from funding this plan cannot enlarge its promises through another one.

There is a practical instruction at the end that is easy to overlook: when the Form 5500 is filed for the waived year, the date of this letter goes on Schedule B, so a copy should go to the enrolled actuary who completes it.

This document has a near twin in the same release. Document 0851042 is the same conditional waiver in the same words, signed the same day by the same official, describing the same narrow fabric business, and referring to the same agreement letter of 14 July 2008. The pair is worth reading together for a second reason. The redactions do not match. This letter prints a sales decline of 47 percent, an end date of 2012 for the conditioned years, and a plan year ending 30 September, each of which its twin blanks out; the twin in turn leaves visible a sentence about increased costs that is cut differently here. Neither copy is complete on its own, and neither redaction pass appears to have been made with the other in view.

The scan is rough. The index-number line in the letterhead, the running document number split into spaced digits, the date stamp, a dozen stray margin marks and run-together or broken words, a stray period inside two statutory references, and a backslash misread inside the citation to section 6110(k)(3) have been corrected, and the handwritten signature is not legible, so it is marked [illegible]. Left as released: "In order to affect a recovery of its business", where the letter means effect; the sentence beginning "from increased from $ in to $ in", which the redaction has left without a subject; and the blank spaces standing in for dates and amounts.

Ruling snapshot

• Question: Should the minimum funding standard be waived for a plan year for a textile manufacturer in business hardship that had already received and complied with an earlier conditional waiver?
• Outcome: Approved, subject to a condition. Granted under section 412(d) and section 303 of ERISA, conditioned on contributions sufficient to meet the minimum funding standard for later plan years through 2012, without a further waiver request, by stated deadlines; the company agreed on 14 July 2008. Failure makes the waiver retroactively null and void. The amount waived equals the contribution that would otherwise be required to bring the funding standard account balance to zero.
• Key authorities: IRC sections 412(d) and 412(f); sections 303 and 304(b) of ERISA; Form 5500 Schedule B.

Full text (IRS public release)

Significant Index No. 0412.06-00

DEPARTMENT OF THE TREASURY 200851041

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

GOVERNMENT ENTITIES

TAX EXEMPT AND SEP 24 2008

DIVISION

Company =
Dear

This letter constitutes notice that your request for a waiver of the minimum funding standard for the Plan for the plan year ending , has been granted subject to the condition that the Company makes sufficient contributions to meet the minimum funding standard for the Plan for the plan years ending ; through , 2012 (without requesting a waiver of the minimum funding standard), by , through , respectively.

You agreed to this condition in a letter dated July 14, 2008. If the condition is not met, the waiver for the plan year ending , is retroactively null and void.

This conditional waiver has been granted in accordance with section 412(d) of 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 equal to the contribution that would otherwise be required to reduce the balance in the funding standard account to zero as of

The Company received a waiver of the minimum funding standard for the Plan for the

plan year ending , subject to the condition that contributions required to satisfy the minimum funding standard for the Plan for the plan years ending
, and , be timely made. Documentation provided with the

current request shows full compliance with this condition.

200851041

The Company is a manufacturer of narrow fabric products, both elastic and non-elastic, primarily for the intimate apparel industry. Its major customers are multinational apparel companies. The current financial hardship was brought on by a decline during the last decade in demand by the intimate apparel market for domestically produced textiles. from increased from $ in to $ in . The Company's sales volume fell 47% from to due in part to the bankruptcy of two customers.

In order to affect a recovery of its business, the Company has taken a number of steps: to improve its financial condition. These steps included:

(1) a reduction in production, personnel and expenses estimated to save more than
$ on an annual basis;

(2) a broadening of its product mix;

(3) new marketing initiatives aimed toward new medical and industrial markets; (4) a widening of its customer base; and (5) the amendment of the Plan to cease benefit accruals as of

The Company's cash-flow projections show stabilized sales and a positive net income in future years. The Company believes it has a reasonable plan in place for keeping the business successful. Furthermore, current economic conditions in the U.S., where the dollar is at historic lows relative to foreign currencies, should improve the marketability of products manufactured domestically.

_ It is obvious from the financial information provided by the Company that it has experienced a substantial business hardship. While it is not clear that a financial turnaround will take place, it is clear that the Company will not be able to meet the minimum funding standard for the plan year ending , without compromising its ability to maintain ongoing operations. Because the Company’s financial recovery is not certain, and because the plan is only % funded on a current liability basis, the request for a waiver of the minimum funding standard for the Plan for the plan year ending , has been granted subject to the condition described above.

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 deficiencies remain unamortized. Please note that any amendment to a profit sharing plan or any other retirement plans (covering employees covered by the Plan) 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. Similarly, the establishment of

200851041

a new profit sharing plan or any other retirement plan by the Company (covering employees covered by the Plan) 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 ending September 30, , the date of this

letter should be entered on Schedule B (Actuarial Information). For this reason, we

suggest that you furnish a copy of this letter to the enrolled actuary who is responsible for the completion of the Schedule B.

We have sent a copy of this letter to the Manager, :
to the Manager, . _ and to your
authorized representative pursuant to a power of attorney on file in this office.

If you require further assistance in this matter, please contact ’

Sincerely yours,

[illegible]

David M. Ziegler
Manager, EP Actuarial Group 2