PLR 1230035: IRS grants associated businesses a conditional pension funding waiver

Plain-English summary

Associated businesses asked the IRS to waive the minimum funding standard for a pension plan. The businesses were experiencing financial hardship after declining sales and profits, excess facility costs, and an inventory shortfall. The IRS granted the waiver for a redacted plan year, subject to conditions requiring the company to meet the minimum funding standard for later plan years and make required quarterly contributions. The waiver would become retroactively null and void if the conditions were not satisfied.

Ruling snapshot

• Question: May the plan receive a conditional waiver of the minimum funding standard for a redacted plan year?
• Outcome: Approved, subject to conditions
• Key authorities: IRC §§ 412(d), 412(f), 430(j), and 6110(k)(3); ERISA §§ 303 and 304(b)

Full text (IRS public release)

Significant Index No. 0412.06-00

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

TAX EXEMPT AND GOVERNMENT ENTITIES
DIVISION

JAN 2 8 2009

[illegible handwritten notation]

Re:

Associated Businesses

Company =

Customer =

Retail Division =

Real Estate Holding Company =

Dear

This letter constitutes notice that a waiver of the minimum funding standard for the
above-named Plan for the plan year ending November 30, , has been granted
subject to the following conditions:

(1) The Company meets the minimum funding standard for the Plan for the plan
years ending November 30, 2008, through November 30, 2012 (without
applying for a waiver of the minimum funding standard).

(2) The Company makes all required quarterly contributions under section 430(j) of
the Internal Revenue Code to the Plan for the plan years ending
November 30, 2009, through November 30, 2012, in a timely manner.

The Company's Chief Financial Officer agreed to these conditions in a letter dated
November 25, 2008. If these conditions are not satisfied, the waiver is retroactively null
and void.

201230035

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This conditional waiver has been granted in accordance with section 412(d) of the
Internal Revenue 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 the contribution that would otherwise be required to reduce the balance in the funding
standard account to zero as of November 30, 2007.

The Company manufactures cutlery products, and the Customer provides all of the
sales, marketing, and distribution functions. The Retail Division operates two stores,
and the Real Estate Holding Company owns the property where the Company and
associated businesses operate.

In 1999, the Customer began to expand its product lines with outside vendors and
purchased and/or invested substantial capital to grow the business. In 2003, the
Customer relocated to a separate location with a plan to expand this facility to
eventually accommodate the manufacturing functions. This location was under a lease
to buy agreement, and in 2005, the building was purchased, with a mortgage taken out
to finance the building. Shortly thereafter, sales and profits began to decline and the
expense of carrying two facilities began to hinder cash flow. This property is currently
listed for sale with the intent of relocating office and distribution functions to the current
manufacturing location. The proceeds of the sale will first go to pay off the mortgage on
the property and then to correct a default overdraft position with the operating line of
credit.

In December 2006, a physical inventory was performed, and a large six-figure inventory
discrepancy shortfall was discovered. Amended financial results were prepared, and
tax refunds were received by the Company and the president. These funds were
applied toward the minimum funding requirements of the Plan for the plan year that
ended November 30, 2006.

Employees with all of the Associated Business have been laid-off to reduce wage costs.
Product lines have been reviewed for profitability, and two product lines purchased from
outside vendors that were not profitable have been discontinued. Slow moving
inventory on hand has been reduced through discounted bulk purchase programs to
generate cash, and inventory levels in general have been reduced to conserve cash.

Supplier costs have been reviewed and as a result less expensive sources that will
improve margins have been identified. Extended payment terms have been
implemented with several key vendors. The Company has worked closely with its bank,
and since 2007, the bank has extended additional funds to the Company's credit facility.
This additional credit has been used to support the rebuilding of the Company in 2007
and will need to be repaid in 2008.

It is obvious from the financial information provided by the Company that it has
experienced, and continues to experience, a substantial business hardship. Plan

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benefit accruals ceased in the third quarter of 2003, and future funding requirements
that became effective January 1, 2008, under section 430 of the Code, (which will first
apply to the plan year that begins December 1, 2008) will not include any contributions
attributable to additional future benefits. Because the Plan will only be required to fund
the amounts of the waived funding deficiency for the plan year ended
November 30, , and the shortfall between assets and liabilities calculated under
section 430 of the Code as of December 1, 2008, and subsequent valuation dates (the
“funding shortfall”) if the Plan can make the future contributions, it should be well funded
within 7 years. Hence the funding waiver for the plan year ending November 30, ,
has been granted subject to the conditions set forth 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 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 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 a new
profit sharing plan or any other retirement plan by the Company (covering employees
covered by this 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 November 30, , 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

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If you require further assistance in this matter, please contact

Sincerely yours,

David M. Ziegler, Manager
Employee Plans Actuarial Group 2