IRS determination 200936050: Hospital receives conditional waivers of minimum funding standards

Plain-English summary

The IRS granted a hospital's requests for waivers of the minimum funding standard for its Retirement, Pension, and Administrative Plans. The waivers were conditioned on collateral, timely future contributions, proof of payment, and other funding safeguards. The hospital had experienced work stoppages and delayed Medicaid payments that created a temporary business hardship, while the plans were relatively well funded and the hospital's financial outlook had improved. The letter also explains that the waivers would become retroactively void if any condition was not met.

Ruling snapshot

• Question: May the hospital receive conditional waivers of the minimum funding standard for its defined-benefit plans?
• Outcome: Approved, subject to stated conditions
• Key authorities: IRC §§ 412(c)(7), 412(d), and 430(j)(3); ERISA §§ 303 and 304(b).

Full text (IRS public release)

Significant Index No. 0412.06-00

200936050

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

JUN 08 2009

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

SE:T:EP:RA:T2

Re:

Dear

This letter constitutes notice that the Hospital's request for waivers of the minimum funding standard for the Retirement, Pension, and Administrative Plans for the plan years ending June 30, 20[illegible], have been granted subject to the following conditions:

(1) Collateral acceptable to the Pension Benefit Guaranty Corporation (“PBGC”) is provided to the Plans for the full amount of the waivers by the later of (a) 120 days from the date of the ruling letter or (b) the earlier of (i) the date the PBGC notifies the Service in writing that this condition has not been met or (ii) 360 days from the date of the ruling letter;

(2) The Hospital provides the PBGC with a copy of any ruling request it makes under section 412(c)(7)(B) of the Internal Revenue Code (“Code”);

(3) Starting with the quarterly contribution due on July 15, 20[illegible], the Hospital makes the required quarterly contributions to the Plans in a timely fashion while the Plans are subject to a waiver of the minimum funding standard. For this purpose, the total amount of each quarterly contribution will be determined in accordance with section 430(j)(3)(D) and section 430(j)(3)(E) of the Code, and can be comprised of several installments made prior to the respective due date of the quarterly contribution;

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(4) The Hospital makes contributions to the Plans in amounts sufficient to meet the minimum funding requirements for the Plans for the plan years ending June 30, 20[illegible], through 20[illegible], by March 15, 20[illegible] through 20[illegible], respectively (without applying for a waiver of the minimum funding standard);

(5) If the Service determines that pre-2008 funding waiver amortizations are not carried over as a separate amortization base for post-2007 plan years, the Hospital will make excess annual contributions to the Plans as if the waiver amortizations were carried over as a separate base, such that the waiver will be paid off in five years. The pre-funding balance shall be increased by these additional contributions and maintained until the end of the 5-year period at which time there must be an election to reduce the prefunding balance by the accumulated amount of the excess contributions;

(6) The Hospital provides proof of payment of all contributions described above in a timely manner, to the Service and to the PBGC using the fax numbers or addresses below.

Information must be provided to both [illegible] of the Service and to [illegible] of the PBGC (or other individuals designated by the respective agencies), using the addresses or fax numbers below:

Internal Revenue Service
EP Classification
1100 Commerce St. 4923 DAL
Dallas, TX 75242
Fax: 214-413-5507

Pension Benefit Guaranty Corporation
DISC
1200 K Street, N.W.
Washington, DC 20005
Fax: (202) 842-2643

Your authorized representative agreed to these conditions in a letter dated May 20, 2009. If any one of these conditions is not met, the funding waivers for the Retirement, Pension, and Administrative Plans for the plan years ending June 30, 20[illegible] are retroactively null and void.

These conditional waivers have been granted in accordance with section 412(d) of the Code and section 303 of Employee Retirement Income Security Act of 1974 (“ERISA”). The amount for which these conditional waivers have been granted is equal to the contributions that would otherwise be required to reduce the balance in the funding standard account of each Plan to zero as of June 30, 20[illegible]

The Retirement, Pension and Administrative Plans are non-contributory defined benefit pension plans. Effective January 1, 2007, the Administrative Plan was closed to new participants, and the Retirement Plan was closed to non-nurse participants. Effective October 10, 2007, the Retirement Plan was also closed to certain union-represented nurse participants. In lieu of future benefit accruals to the Administrative and Retirement Plans, the option to participate in a defined contribution plan was made

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available to non-nurse active participants as of January 1, 20[illegible], and to certain union-represented nurse participants as of April 1, 20[illegible]

The Hospital operates ten hospitals in the Region that provide in-patient and out-patient services. The Hospital also offers other healthcare services through clinics and home health care agencies, and engages in the retail sale of medical and pharmaceutical supplies and medical equipment. The majority of the Hospital’s employees are collectively-bargained.

During the 20[illegible] calendar year, the two unions representing the Hospital’s collectively-bargained employees called for work stoppages. The first strike in the spring of 20[illegible] lasted 21 days and the second strike in the fall of 20[illegible] lasted 89 days. The Hospital estimates that $[illegible] in revenue was lost as a result of the two strikes.

In July 20[illegible], the Medicaid program in the Region converted to a new transaction processor. As a result of the conversion, the payment of approximately $[illegible] in net claims payable to the Hospital was delayed. Combined with the work stoppages noted above, the Hospital experienced a significant cash flow problem.

It is clear that the Hospital has suffered a temporary substantial business hardship resulting from the two work stoppages and the conversion to a new Medicaid transaction processor in 20[illegible]. Furthermore, the Hospital has provided cash-flow projections for the fiscal years ending June 30, 20[illegible] through 20[illegible], that show that it should have sufficient funds to met the Plans’ minimum contribution requirements, including the amortization payments if the funding waivers are granted.

The Plans are relatively well-funded and the prospects for the Hospital’s financial recovery now appear good because new collective-bargaining agreements have been reached with the unions representing the employees that went on strike and work stoppages are unlikely to recur during the period in which the waivers are being amortized. Therefore, the Hospital’s requests for waivers of the minimum funding standard for the Retirement, Pension, and Administrative Plans for the plan years ending June 30, 20[illegible], have been granted subject to the conditions listed above.

Your attention is called to section 412(c)(7) of the Code and section 304(b) of ERISA which describe the consequences that would result in the event the Plans are 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 Plans) maintained by the Hospital, to increase the liabilities of those plans would be considered an amendment for purposes of section 412(c)(7) of the Code and section 304(b) of ERISA. Similarly, the establishment of a new profit sharing plan or any other retirement plan by the Hospital (covering

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employees covered by the Plans) would be considered an amendment for purposes of section 412(c)(7) 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.

We have sent a copy of this letter to the and to your authorized representative pursuant to a power of attorney on file in this office. We suggest that you furnish a copy of this letter to the enrolled actuary who is responsible for the completion of the Schedule B.

If you require further assistance in this matter, please contact

Sincerely yours,

Andrew E. Zuckerman, Director
Employee Plans Rulings & Agreements