Pension plan amendments approved as reasonable and de minimis

Plain-English summary

A company in Chapter 11 bankruptcy asked whether amendments to its pension plan were reasonable and caused only de minimis increases in plan liabilities. The amendments traded some benefit increases for lower medical costs and other work-rule changes, and the reported liability increases were small. The IRS ruled that the amendments met the reasonable and de minimis standard under IRC § 401(a)(33) and ERISA § 204(i), so the bankruptcy-related prohibition did not apply. It did not address separate funding restrictions under IRC § 436(c) and ERISA § 206(g)(2).

Ruling snapshot

• Question: Whether proposed pension plan amendments were reasonable and caused only de minimis increases in plan liabilities.
• Outcome: Approved, subject to the facts and representations in the ruling.
• Key authorities: IRC § 401(a)(33); ERISA § 204(i); IRC § 436(c); ERISA § 206(g)(2).

Full text (IRS public release)

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

December 8, 2009

UIL: 401.00-00

Re:

Plan =
Local A =

Local B =

Local C =

Local D =

Dear

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

201234036

WASHINGTON, D.C. 20224

T:EP:RA:A2

This is in response to a request for a letter ruling dated August 13, 2009, submitted on
behalf of the Company by its authorized representative, requesting a determination that
the proposed amendments to the Plan are reasonable and provide for only de minimis
increases in Plan liabilities within the meaning of Section 401(a)(33) of the Internal
Revenue Code (the “Code”) and Section 204(i) of the Employee Retirement Income
Security Act of 1974 (“ERISA”).

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

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The Taxpayer is a manufacturer, supplier, and recycler of paper and corrugated
packaging products. The Taxpayer has locations throughout the country and negotiates
with a variety of unions with respect to the level of benefits under the Plan.

On January 26, 2009, the Taxpayer filed a voluntary petition under Chapter 11 of the
US Bankruptcy Code. The Taxpayer continues to operate its business as debtor-in-
possession. The Taxpayer has current and future liabilities under the Plan.

The Plan is a single plan, consisting of six plan documents and supplements thereto.
Benefit factors for a location are determined pursuant to collective bargaining between
the Taxpayer and the union representing the employees at that location. As part of the
collective bargaining process the Taxpayer and applicable unions enter into a
Memorandum of Agreement (“MOA”) which is a binding amendment to a collective
bargaining agreement that has been approved by the Taxpayer and the applicable
union(s).

On January 29, 2009, the Taxpayer entered into a MOA covering Local A. The Local A
MOA eliminated Plan benefits for employees hired after January 1, 2009, changed to a
medical plan that is less costly and made work rule changes such as eliminating double
time on Sunday. Additionally, it increased the benefit factor for applicable employees.

On February 11, 2009, the Taxpayer entered into a MOA covering Local B. The Local B
MOA eliminated Plan benefits for employees hired after March 1, 2009, changed to a
medical plan that is less costly and made work rule changes such as eliminating double
time on Sunday. In addition, it increased the benefit factor for applicable employees.

On March 12, 2009, the Taxpayer entered into a MOA covering Local C. The Local C
MOA provides that employees hired after February 1, 2012, will not be eligible to
participate in the Plan. Further, it changed to a medical plan that is less costly and
made work rule changes such as eliminating double time on Sunday. In addition, it
increased the benefit factor for applicable employees.

On May 1, 2009, the Taxpayer entered into a MOA covering Local D. The Local D MOA
provides that employees hired after March 1, 2009, are not eligible to participate in the
Plan. Further, it changed to a medical plan that is less costly and made work rule
changes such as eliminating double time on Sunday. In addition, it increased the
pension benefit factor for applicable employees, contingent upon the Secretary's
approval.

Information submitted with the request indicates that the aggregate increase in target
liability attributable to the amendments is less than 0.04%, and the aggregate increase
in target normal cost is 0.16%.

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Section 204(i)(1) of ERISA provides that in the case of a plan maintained by an
employer that is a debtor under title 11, United States Code, or similar Federal or State
law, no amendment of the plan which increases the liabilities of the plan by reason of
(A) any increase in benefits, (B) any change in the accrual of benefits, or (C) any
change in the rate at which benefits become nonforfeitable under the plan, with respect
to employees of the debtor, shall be effective prior to the effective date of such
employer's plan of reorganization.

Section 204(i)(2) of ERISA provides that Section 204(i)(1) shall not apply to certain plan
amendments, including any plan amendment that the Secretary of the Treasury
determines to be reasonable and that provides for only de minimis increases in the
liabilities of the plan with respect to employees of the debtor.

Section 401(a)(33)(A) of the Code provides that a plan is not a qualified plan if an
amendment is adopted while the employer is a debtor in a case under title 11, United
States Code, or similar Federal or State law, if such amendment increases liabilities of
the plan by reason of (i) any increase in benefits, (ii) any change in accrual of benefits,
or (iii) any change in the rate at which benefits become nonforfeitable under the plan,
with respect to employees of the debtor, and such amendment is effective prior to the
effective date of such employer's plan of organization.

Section 401(a)(33)(B) of the Code provides that Section 401(a)(33) will not apply to
certain plan amendments, including (in accordance with section 401(a)(33)(B)(ii)) any
plan amendment if the Secretary for the Treasurer determines that such amendment is
reasonable and provides for only de minimis increases in the liabilities of the plan with
respect to employees of the debtor.

Section 206(g)(2) of ERISA and section 436(c) of the Code impose additional
restrictions on amendments to underfunded plans. In general, these restrictions prevent

amendments to the plan if such amendments would cause relevant funding levels to
drop below 80%.

The information presented and the documentation submitted by the Taxpayer are
consistent with their claim that the amendments are reasonable. The increases in the
benefit factors were negotiated within the collective bargaining process during which the
parties agreed to changes in other benefits and work rules that will result in a net
savings to the Taxpayer.

The actuarial information provided indicates that the aggregate increase in target liability
and in target normal cost attributable to the amendments is negligible.

Based on the information submitted, the amendments outlined in this letter are
reasonable and, in aggregate, provide for only de minimis increases in the liabilities of
the Plan with respect to the employees of the Company. Therefore, the prohibition on

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benefit increases while the plan sponsor is in bankruptcy under section 204(i)(1) of
ERISA and section 401(a)(33) of the Code does not apply to these amendments.

This ruling considers only the application of section 204(i)(1) of ERISA and section
401(a)(33) of the Code to the amendments described above, and does not consider any
other issues that may arise in connection with the Plan or the proposed amendment.
Specifically, this ruling does not address whether the Plan is in compliance with
restrictions on plan amendments under section 206(g)(2) of ERISA or section 436(c) of
the Code.

This ruling letter is directed only to the taxpayer requesting it. Code section 6110(k)(3)
provides that it may not be used or cited as precedent.

Pursuant to the power of attorney on file with this office, a copy of this letter ruling is
being sent to your authorized representative. If you wish to inquire about this ruling,
please contact

Sincerely,

David M. Ziegler
Manager, EP Actuarial Group 2