PLR 1029026: IRS approves a conditional minimum-funding waiver for a community hospital

Plain-English summary

The IRS approved a waiver of a plan's minimum funding standard for the plan year ending December 31, 2009. The waiver was conditional on timely quarterly contributions, later contributions sufficient to meet minimum funding requirements for specified plan years, restrictions on increasing plan benefits or liabilities while the waived deficiency remained unamortized, and proof of payment. The plan sponsor was a not-for-profit community hospital that attributed its financial difficulties to an economic downturn, lower patient volumes, more uncompensated care, lower revenue per patient, and poor plan investment performance. The waiver would be retroactively null and void if any condition was not satisfied.

Ruling snapshot

• Question: Could the sponsor receive a conditional waiver of the plan's minimum funding standard for the plan year ending December 31, 2009?
• Outcome: approved, subject to conditions
• Key authorities: IRC §§ 412(c), 412(c)(7), 430(j)(3)(D), and 430(j)(3)(E); ERISA §§ 302(c) and 302(c)(7); IRC § 6110(k)(3)

Full text (IRS public release)

[illegible]gnificant Index No. 412.06-00
201029026

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

APR 28 2010

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

T:EP:RA:UK

In re:
Sponsor =
Plan =
Area =

Dear

This letter constitutes notice that a waiver of the minimum funding standard for the Plan for the
plan year ending December 31, 2009 has been approved subject to the following conditions:

1. Starting with the quarterly contribution due on July 15, 2010, the Sponsor makes the
   required quarterly contributions to the Plan in a timely fashion while the Plan is 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.

2. The Sponsor makes contributions to the Plan in amounts sufficient to (a) meet the
   minimum funding requirements for the Plan for the plan years ending
   December 30, 2010, through 2014, by September 15, 2011, through 2015, respectively
   (without applying for a waiver of the minimum funding standard).

3. Under section 412(c) of the Code, the Sponsor is restricted from amending the Plan to
   increase benefits and/or Plan liabilities while any portion of the waived funding
   deficiency remains unamortized, with only certain exceptions as defined in section
   412(c)(7)(B).

4. The Sponsor provides proof of payment of all contributions described above in a timely
   manner to the Service using the fax numbers or addresses below. Information must be
   provided to [illegible] of the Service using the address below:

Sponsor agreed to these conditions in its letter dated April 12, 2010. If any one of these
conditions is not satisfied, the waiver is retroactively null and void.

This conditional waiver has been granted in accordance with section 412(c) of the Internal
Revenue Code and section 302(c) of the Employee Retirement Income Security Act of 1974
(“ERISA”). The amount for which this conditional waiver has been granted is the contribution
that would otherwise be required to reduce the balance in the funding standard account to zero as
of December 31, 2009.

The Sponsor is a not-for-profit community operated hospital that was founded more than 100
years ago. The Sponsor’s primary business is to provide healthcare services to the residents of
the Area, without regard to a patient’s ability to pay. The Sponsor’s current financial difficulties
stem largely from a severe economic downturn in the Area. As a result of this economic
downturn (1) patient volumes have declined because more patients are putting off or delaying
healthcare, (2) the number of uninsured and underinsured patients have increased causing a rise
in uncompensated care and bad debts, (3) an increase in medical assistance patients has resulted
in lower revenue for each patient treated by the Sponsor, and (4) the investments of the Plan have
performed poorly thus increasing the Plan’s funding obligations.

The Sponsor is currently focused on reducing Plan costs, controlling overall costs, and increasing
revenue. To reduce Plan costs the Sponsor amended the Plan effective December 31, 2009, to
freeze benefit accruals and, in lieu of future benefit accruals, established a defined contribution
plan effective January 1, 2010 with less costly employer contributions. To control its overall
costs, the Sponsor is implementing staffing adjustments and reductions, and is applying other
operational efficiencies. The Sponsor is also in the process of completing several capital projects
to increase its pool of patients and the depth of its services, both of which will likely increase
revenue. The Sponsor asserts that because of the cost cutting measures it has taken, the potential
revenue increasing efforts it has made, plus signs of an improving economic environment in the
Area, it reasonably expects that it will generate enough cash to fund the 2009 minimum funding
standard over a 5-year period.

Your attention is called to section 412(c)(7) of the Code and section 302(c)(7) 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 change the rate of vesting, while any portion of the
waived funding deficiency remains unamortized. Please note that any amendment to a profit
sharing plan or any other retirement plans (covering employees covered by this plan) maintained
by the Sponsor to increase the liabilities of those plans would be considered an amendment for

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purposes of section 412(c) of the Code and section 302(c)(7) of ERISA. Similarly, the
establishment of a new profit sharing plan or any other retirement plan by the Sponsor (covering
employees covered by this plan) would be considered an amendment for purposes of section
412(c) of the Code and section 302(c)(7) 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 December 31, 2009, the date of this letter
should be entered on Schedule SB (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 SB.

We have sent a copy of this letter to the [illegible] to
the [illegible] and to your attorney.

If you require further assistance in this matter, please contact

Sincerely,

[illegible]
William Hulteng, Manager
Employee Plans Technical