PLR 1219038: IRS approves a conditional minimum funding waiver

Plain-English summary

The sponsor of a frozen pension plan asked the IRS to waive a minimum funding requirement after financial difficulties and poor plan investment returns. The IRS approved a conditional waiver for the plan year ended May 31, 2009. The sponsor had to make specified quarterly and future contributions, pay applicable excise taxes, avoid amendments that increased plan benefits or liabilities while the waived deficiency remained unamortized, and provide proof of payment. 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 ended May 31, 2009?
• Outcome: Approved
• Key authorities: IRC §§ 412(c), 430(j)(3), 4971(a); ERISA § 302(c)

Full text (IRS public release)

201219038

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

FEB 14 2012

UIL Code: 412.06-00

In re: ***

Sponsor = ***
Plan = ***
Competitor = ***
LLC = ***

State A = ***
State B = ***
Area = ***

Year 1 = ***
Year 2 = ***

Dear ***:

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

1. Starting with the quarterly contribution due on March 15, 2012, 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) of the Internal Revenue Code (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 May
   31, 2012, through 2014, by February 15, 2013 through 2015 respectively (without
   applying for a waiver of the minimum funding standard);

3. The 10% excise tax due under section 4971(a) of the Code on any accumulated
   funding deficiency that occurred prior to the plan year beginning June 1, 2008,
   201219038

and on any unpaid minimum required contribution for plan years subsequent to
the plan year ended May 31, [illegible] is satisfied in a timely manner.

4. 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).

5. The Sponsor provides proof of payment of all contributions described above in a
   timely manner to ** of the Service using the fax number or address
   below:

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 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 May 31, 2009.

Formed in 1934, the Sponsor was a prosperous wine and liquor distributor in State A
until first encountering financial difficulties in mid-Year 1. Over the years the Sponsor
had expanded its operations by acquiring distributors in several other states. However,
in April Year 2, the Sponsor ceased all business operations in State A. In Year 1,
Competitor entered the Area market. The Sponsor alleges that the increased
competition by such a large entity, with much more available capital and relationships
with large suppliers of top wine and liquor brands throughout the US, combined with
massive consolidation in the industry at both the distributor and supplies levels, caused
the Sponsor to lose many of its marquis suppliers.

The Sponsor represents that this led to a “snowball effect” in which more of the
Sponsor's suppliers terminated their relationships with the Sponsor and its subsidiary
responsible for wine and liquor distribution in the Area market. This led to the Sponsor
suffering a combined $ [illegible] million loss for the fiscal years ended May 31, Year 1 and
May 31, Year 2 which resulted in a restructuring that left Sponsor with control of only
one operating subsidiary, LLC, a successful wholesale wine and liquor distributor
operating solely in State B.

201219038

Sponsor cites (1) its corporate restructuring and attendant financial difficulties caused
by its loss of market share due to Competitor's entrance into the Area market and (2)
poor Plan investment returns during the economic downturn in 2008 and 2009 as
reasons it is seeking the requested waiver.

Since restructuring, the Sponsor has stabilized into a smaller outfit, but one that shows
signs of quickly returning to sustained profitability. The Sponsor has taken steps to
reduce Plan costs (and the costs of other retirement plans in its controlled group),
control overall costs, and increase revenue.

To reduce Plan costs, the Plan was frozen as of December 31, 2000, and as of the plan
year beginning June 1, [illegible] the Plan had no active participants. Further, Sponsor has
discontinued all matching and employer contributions to its 401(k) plan, resulting in
annual savings of roughly $ [illegible]. To control overall costs, the Sponsor has
drastically cut its expenses (including by more than $ [illegible] million in the last fiscal quarter of
the waiver year) by downsizing the sales management team and warehouse personnel
and reducing executive compensation. Finally, the Sponsor has detailed several efforts
to increase revenue and profitability. In addition to an improving economy which
Sponsor expects will increase demand on wine and spirits, and thus increase its
distribution of those products, the Sponsor has successfully launched distribution of a
brisk-selling and highly profitable new vodka, has expanded its distribution of several
other profitable brands and is actively pursuing acquisition targets to expand its reach in
State B. 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, it reasonably expects that it will generate enough cash to
resume funding the minimum funding standard beginning in the plan year ended May
31, [illegible]

Your attention is called to section 412(c) 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. Any
amendment (or authorized action — such as a board action implementing a discretionary
increase in employer matching contributions — by the governing body currently
permitted under relevant plan documentation) to a profit sharing plan or any other
retirement plans (covering employees covered by the Plan) maintained by the Sponsor
or any entity under its control to increase the liabilities of those plans is considered an
amendment of the Plan for purposes of section 412(c) of the Code and 302(c)(7) of
ERISA. Similarly, the establishment of a new profit sharing plan or any other retirement
plan by the Sponsor or any entity under its control (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.

201219038

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 May 31, [illegible], 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 Sponsor's Power of Attorney. *
****, and to ********
**.

If you require further assistance in this matter, please contact ** at
(202) -**.

Sincerely,

[illegible] for William Hulteng, Manager
Employee Plans Technical

cc:

SE:T:EP:RA:T/***