PLR 200851042: A second funding waiver for a textile maker, conditioned on paying the next several years in full

Plain-English summary

An employer with a defined benefit pension plan must put in a minimum amount each year. Section 412(d) lets the Service waive that requirement for a year where the employer is under substantial business hardship and applying the standard would be adverse to the participants' interests. This letter grants such a waiver, and it grants it conditionally.

The company makes narrow fabric products, elastic and non-elastic, mainly for the intimate apparel industry, selling to multinational apparel companies. Its hardship is described as a decade-long decline in demand from that market for domestically produced textiles, compounded by the bankruptcy of two customers, which took a large bite out of sales volume. The specific figures and percentages are redacted.

The letter is notable for recording that this is not the first waiver. The company had already received one for an earlier plan year, itself conditioned on making the required contributions for later years on time, and the documentation submitted with the current request shows full compliance with that condition. So this is a repeat applicant with a clean record on the previous terms, which is plainly why it is being given another.

The condition attached now is the same in form. The waiver stands only if the company makes contributions sufficient to meet the minimum funding standard for a run of later plan years, without asking for a waiver of any of them, by stated deadlines. The company agreed to that condition in a letter dated 14 July 2008. If the condition is not met, the waiver is retroactively null and void, which is a sharper consequence than it first appears: the year would revert to an unmet funding standard after the fact, exposing the accumulated deficiency. The amount waived is the contribution that would otherwise have been needed to bring the funding standard account balance to zero.

The reasoning is candid about its own uncertainty. It is obvious that the company has experienced 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. But it is not clear that a financial turnaround will take place. The company's case rests on cash flow projections showing stabilised sales and future positive net income, a reduction in production, personnel and expenses, a broader product mix, new marketing aimed at medical and industrial markets, a wider customer base, and an amendment freezing benefit accruals. The letter adds an observation of its time about the dollar being at historic lows against foreign currencies, which should help the marketability of domestically manufactured goods. Precisely because recovery is uncertain, and because the plan is only partially funded on a current liability basis, the waiver is made conditional rather than granted outright.

The letter closes with a warning about 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 remains unamortized. The Service reads that broadly: amending any other retirement plan covering the same employees to increase its liabilities counts as an amendment for this purpose, and so does establishing a new plan for them. Having been relieved of a year's contribution, the employer may not turn around and enlarge its promises elsewhere.

This letter has a near twin in the same release. Document 0851041 is the same form of conditional waiver, signed the same day by the same official, describing the same narrow fabric business in the same words, and differing only in a handful of details, including a sales decline stated there as 47 percent where the figure is redacted here. The two appear to concern the same employer, and a reader working on either should read both.

The scan is rough. The running document number in the letterhead was broken into spaced digits and has been rejoined, a stray period inside a sentence about contributions, a run-together word in the list of recovery steps, two stray margin marks and a missing space after "to" were misread and have been corrected, and the addressee block and the handwritten signature are not legible, so they are 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; the blank spaces standing in for every date, amount and percentage; and "cash-flow" hyphenated.

Ruling snapshot

• Question: Should the minimum funding standard be waived for a plan year for an employer in business hardship that had already received a waiver for an earlier year?
• Outcome: Approved, subject to a condition. The waiver is granted in accordance with section 412(d) and section 303 of ERISA, conditioned on the company making sufficient contributions to meet the minimum funding standard for a run of later plan years without requesting a waiver, by stated deadlines; the company agreed to that condition on 14 July 2008. If the condition is not met, the waiver is retroactively null and void. The Service finds substantial business hardship and that meeting the standard would compromise ongoing operations, while noting that a turnaround is not certain and the plan is only partially funded on a current liability basis.
• 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)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE 200851042
WASHINGTON, D.C. 20224

TAX EXEMPT AND SEP 24 2008

GOVERNMENT ENTITIES

DIVISION

[illegible]

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 (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.

200851042

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 % 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

200851042

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 , 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 at

Sincerely yours,

[illegible]

David M. Ziegler
Manager, EP Actuarial Group 2