PLR 1123050: IRS partially waives excise tax for a late pension-plan notice

Plain-English summary

The IRS partially waived the excise tax that applied after a tax-exempt social service agency failed to timely send a section 204(h) notice when it converted a money purchase pension plan to a profit-sharing plan. The agency relied on its service providers and was unaware of the notice requirement during some periods. The IRS waived the tax for the periods when the agency lacked knowledge and acted promptly after learning of the requirement. It did not waive the tax for the period when an employee knew about the failure but took no corrective action before leaving the agency.

Ruling snapshot

• Question: Should the excise tax under IRC § 4980F be waived for the agency's failure to timely provide a section 204(h) notice?
• Outcome: Mixed. The tax was waived for some periods but not for the period of known inaction.
• Key authorities: IRC §§ 4980F, 6110; Treas. Reg. § 54.4980F-1.

Full text (IRS public release)

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

LEGEND:
Company A:
Provider B:
Provider C:
Date 1:
Date 2:
Date 3:
Date 4:
Date 5:
Date 6:

Plan Year 1:
Year 2:
Amount 1:
X Days:

Y Days:

Z Days:

AA Days
Amount 5:

Plan X:

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

201123050

Uniform Issue List: 4980F.00-00

MAR 1 6 2011

991123050 .

Page 2
Plan Z:
Employee T:
Dear

This is in response to the February 4, 2009, letter submitted on your behalf by
your authorized representative, as supplemented by correspondence dated May
14, 2009, and September 25, 2009, in which you request a waiver of the excise
tax under section 4980F(c)(4) of the Internal Revenue Code (the “Code”) as it
applies to Plan Z.

FACTS

The following facts and representations have been submitted under penalty of
perjury in support of the ruling requested:

Company A is a tax-exempt social service agency. The mission of Company A is
to help individuals and families by offering assistance to them through an array of
social, health, cultural, and educational programs.

Prior to Year 2, Company A maintained Plan X, a defined contribution money
purchase pension plan intended to be qualified under section 401(a) of the
Internal Revenue Code. Plan X was established approximately thirty years ago
on Date 1. The terms of Plan X required Company A to make a fixed, non-
discretionary annual contribution in the amount of Amount 1.

Prior to Year 2, Company A retained Provider B to administer Plan X. Company
A changed service providers in Year 2 from Provider B to Provider C.

On Date 2, on the advice of Provider C, Company A converted Plan X to Plan Z,
a defined contribution profit sharing plan that allowed for discretionary annual
contributions to be made to the plan. Since Date 2 and until the date of this
ruling request, there has been no reduction in the amount of the annual
contributions and Company A has continued to make annual contributions to
Plan Z in the amount of Amount 1.

On Date 3, Company A issued a notice to employees of Company A that was
intended to comply with section 4980F(e) of the Internal Revenue Code ("204(h)
notice"). This notice was required as a result of the conversion of Plan X to Plan
Z.

The number of days between Date 2, the date of conversion of Plan X to Plan Z
and Date 3, the date of the issuance of the section 204(h) notice, is X Days.

You, through your authorized representative, assert that the 204(h) notice was
not timely sent because of your reliance upon Providers B and C, who are both

201123050

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experienced service providers and who failed to advise you of the necessity for
sending the 204(h) notice.

Employee T of Company A was responsible for monitoring the administration of
Plan X leading up to the conversion. Employee T was responsible for working
with Provider B and Provider C prior to, during, and after the conversion of Plan
X to Plan Z. Neither Provider B nor Provider C counseled Employee T on the
need to send a notice of conversion or 204(h) notice to the participants of Plan X
at any time. On Date 4, Employee T first became aware of the Company's failure
to send a 204(h) notice regarding the plan conversion while discussing an
unrelated matter with outside counsel. The outside counsel is unaffiliated with
either Provider B or Provider C. The number of days between Date 2, the date of
conversion, and Date 4 is Y Days.

Employee T took no action to correct the failure to send the 204(h) notice nor did
she make any other employee of Company aware of the failure to provide the
204(h) notice. Employee T’s employment with Company A terminated on Date 5.
The number of days between the Date 4, the date Employee T first learned of the
failure to send the 204(h) notice and Date 5, the date of her termination with
Company A, is Z Days.

On Date 6, AA Days after Employee T had left Company A's employ, Employee
T's replacement became aware of the need to send out a notice of conversion to
the participants of Plan X. On Date 3, less than 30 days later, Company A sent
out the notice of conversion.

You assert that imposing a tax on Company A under section 4980F of the Code
would lead to a reduction of the programs and services provided by Company A
and cause undue harm to the charitable recipients of the services and programs
provided for by Company A.

You have documented the financial and operating status of Company A.
Company A has operated at a net loss in recent history. Company A has
recently reduced its programs and outreach due to Company A's distressed
financial condition. You assert that the financial distress shared by the nation
has had a similarly deleterious impact upon Company A’s financial status.

ISSUE

Based on the above, you, through your authorized representative, request the
following letter ruling:

(1) That the tax imposed under section 4980F of the Code be waived under
the provisions of section 4980F(c)(4) of the Code with respect to
Company A’s failure to timely provide the section 204(h) notice with
respect to its conversion of Plan X to Plan Z.

LAW

Page 4

Section 4980F of the Code was added by the Economic Growth and Tax Relief
Reconciliation Act of 2001 ("EGTRRA "). Section 659(a)(1) of EGTRRA provides
that section 4980F of the Code applies to plan amendments taking effect on or
after June 7, 2001.

Section 4980F(a) of the Code imposes a tax on the failure of any applicable
pension plan to meet the requirements of Section 4980F(e) with respect to any
applicable individual.

Section 4980F(b)(1) of the Code states that the amount of the tax imposed by the
failure to comply with subsection (a) shall be $100 for each day of
noncompliance.

Section 4980F(c)(1) of the Code provides that no tax shall be imposed by section
4980F(a) on any failure during any period for which it is established to the
Satisfaction of the Secretary that any person subject to liability for such tax did
not know that the failure existed and exercised reasonable diligence to meet the
requirements of section 4980F(e).

Section 4980F(c)(2) of the Code provides that no tax shall be imposed by section
4980F(a) on any failure if (A) any person subject to liability for the tax exercises
reasonable diligence to meet the requirements of section 4980F(e), and (B) such
person provides the notice described in Section 4980F(e) during the 30-day
period beginning on the first day such person knew, or exercising reasonable
diligence would have known, that such failure existed.

Section 4980F(c)(4) of the Code provides that in the case of a failure that is due
to reasonable cause and not to willful neglect, the Secretary may waive part or all
of the tax imposed by section 4980F(a) to the extent that the payment of such tax
would be excessive or otherwise inequitable relative to the failure involved.

Section 4980F(e)(3) of the Code provides that the notice required in section
4980F(e)(1) shall be provided within a reasonable time before the effective date
of the plan amendment.

Section 4980F(e)(1) provides that if an "applicable pension plan" is amended to
provide for a significant reduction in the rate of future accrual, the plan
administrator shall provide the notice described in paragraph (2) to each
applicable individual.

Section 54.4980F-1, Question and Answer 8(b), of the Income Tax Regulations
provides that an amendment converting a money purchase plan to a profit
sharing plan is in all cases, deemed to be an amendment that provides for a
significant reduction in the rate of future benefit accrual.

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ANALYIS

The Internal Revenue Code provides for a waiver of the tax imposed under Code
section 4980F when the failure to send a notice is due to reasonable cause. In this
instance, Company A was required by section 4980F(e)(1) to provide a section
204(h) notice upon the conversion of Plan X, a money purchase pension plan, to
Plan Z, a profit sharing plan. Neither Provider B nor Provider C advised Company
A of the necessity for such a notice. Thus, we believe that the notice was not
timely provided due to the taxpayer's reasonable reliance upon experienced
service providers and justifies a waiver of the excise penalty for the period when
Company A was unaware of the need to send out the notice i.e., from the date of
the conversion, Date 2 to Date 4, when Employee T was advised of the necessity
for the 204(h) notice or Y Days.

However, on Date 4, Company A, through its Employee T, became aware of the
need to provide the notice. Employee T failed to provide the 204(h) notice or
advise any other employee of the necessity for the notice. Employee T terminated
her employment on Date 5. The number of days during this period is Z Days. No
reasonable cause exists for failure to provide the section 204(h) notice during the
said Z Days period of time. Applying the $100 per day tax causes Company A to
owe a tax for this lapse in the amount of Amount 5.

Once the replacement for Employee T realized the need for the 204(h) notice, the
notice was promptly provided to affected plan participants. Thus, we believe that
from the date of Employee T's termination of employment with Company A on Date 5, through the date that the section 204(h) notice was sent to plan participants on
Date 3, Company A again was not aware of the necessity for the 204(h) notice

and, once aware, took timely and appropriate action to provide the section 204(h)
notice within 30 days of Date 6. Thus, with respect to this period, good cause

exists which justifies a waiver of the excise tax penalty for the period.

CONCLUSION

Thus, with respect to your ruling requests, we conclude as follows:

(1) The tax imposed under section 4980F of the Code is waived under the
provisions of section 4980F(c)(4) of the Code for the periods during which
Company A was unaware of the necessity for making the election to the
extent described above (i.e. from Date 2 to Date 4 and from Date 5 to
Date 3.) However, the tax is not waived for the period beginning with Date
4 and ending with Date 5 or Z Days.

No opinion is expressed as to the tax treatment of the transaction described
herein under the provisions of any other section of either the Code or regulations
which may be applicable thereto.

This letter is directed only to the taxpayer who requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited as precedent.

201123050

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Pursuant to the power of attorney on file with this office, you are receiving the

original of this letter ruling and your representative is receiving a copy of the letter
ruling.

If you wish to inquire about this ruling, please contact the undersigned at( ) -
. Please address all correspondence to SE:T:EP:RA:T3.

Sincerely,

, Acting Manager,
Employee Plans Technical Group 3
Enclosures:

Deleted Copy of this Letter
Notice of Intention to Disclose, Notice 437

cc: