PLR 1243021: IRS waives excise tax for late notices to alternate payees and unions

Plain-English summary

A company froze future pension benefit accruals and gave the required notices to affected employees, but not to certain alternate payees and unions. The company said it relied on experienced pension and employee-benefit advisers who did not identify those additional notice recipients. After outside counsel found the omission, the company sent the notices within 30 days. The IRS waived the excise tax under IRC § 4980F(c)(2) for the period during which the company was unaware of the notice failure.

Ruling snapshot

• Question: May the company avoid the IRC § 4980F excise tax for failing to timely give section 204(h) notices to alternate payees and unions?
• Outcome: Approved
• Key authorities: IRC § 4980F(c)(2); IRC § 4980F(e); IRC § 6110(k)(3)

Full text (IRS public release)

201243021

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

AUG 01 2012

Uniform Issue List: 4980F-00

T.EP.RA.T2

Legend:

Company = ***
Plan = ****
Date 1 = ***
Date 2 = ***
Date 3 = ***
Date 4 = **
Date 5 = **
Date 6 = **
Date 7 = ***
Date 8 = ***
Date 9 = **
Date 10 = ****

201243021

Page 2

Date 11 = **
Date 12 = **
Date 13 = **
Counsel C = ****
Consulting
Firm F = ****
Consulting
Firm B = *****

Dear **,

This is in response to your request dated July 8, 2011, in which you request a Private
Letter Ruling to waive the excise tax under section 4980F of the Internal Revenue Code
(“Code”) as it applies to Plan.

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

Company is a manufacturer of industrial and automotive products.

On Date 1, Company amended the Plan to freeze benefit accruals for non-unionized
employees effective Date 2. Pursuant to advice from Counsel C (a law firm
experienced in pension and employee benefits law) and Consulting Firm F (a pension
and employee benefits consulting firm), Company provided active employees with a
Notice of Cessation of Future Benefit Accruals in accordance of 204(h) of ERISA and
IRC 4980F (a “204(h) notice”). The 204(h) notices were delivered to approximately
1167 affected employees on or about Date 3. Neither Counsel C nor Consulting Firm F
advised Company that alternate payees were also required to be provided 204(h)
notices.

On Date 4, Company and the union representing employees at another plant agreed to
freeze benefit accruals for unionized employees effective Date 5. Pursuant to advice
from Consulting Firm F, approximately 88 affected employees received 204(h) notices
on or about Date 6. Consulting Firm F did not advise Company that alternate payees
and the union representing the affected employees were also required to be provided
204(h) notices.

On Date 7, Company and the union representing employees at another plant agreed to
freeze benefits for unionized employees effective Date 8. Pursuant to advice from the
Consulting Firm F as well as Consulting Firm B (another pension and employee benefits
consulting firm) approximately 31 affected employees received 204(h) notices on or
about Date 9. Neither Consulting Firm F nor B advised Company that alternate payees
and the union representing the affected employees were also entitled to 204(h) notices.

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On Date 10, outside counsel to Company discovered that Company had not provided
alternate payees with the required 204(h) notices. This was conveyed to a Company
representative on the same day. Also, on Date 11, outside counsel to Company
discovered that Company had not provided the unions representing affected employees
with 204(h) notices. This discovery was conveyed to a Company representative on
Date 12.

Company immediately undertook steps to remedy the failure to notify alternate payees
and the unions. Company determined that there were 17 alternate payees whose
affiliated participants were active employees at the time of the respective freezes, and
two individuals whose status as alternate payees is uncertain. In addition, Company
determined that it would provide 204(h) notices to the two unions representing
participants with respect to the effective Date 5 and Date 8 freezes.

The notices were mailed on Date 13 to the last known address of each alternate payee
and the unions. Date 13 was less than 30 days after Date 10.

Issue

Based on the facts and representations stated above, Company requests a ruling that
the tax imposed under section 4980F of the Code be waived under the provisions of
section 4980F(C)(2) with respect to the Company's failure to timely provide the section
204(h) notice to alternate payees and the unions with respect to freezing the benefits
under the plan.

Applicable Law

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).

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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 a
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) of the Code 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.

Analysis

Based on the facts provided, Plan is an applicable pension plan for the purposes of
section 4980F(e)(1) of the Code. Further, the facts indicate that Company exercised
reasonable diligence to provide 204(h) notices to affected employees. In this case,
Company was unaware that it was required to provide notice to alternative payees and
the unions, and it exercised reasonable diligence to comply with the notice requirement
by providing notice to the applicable individuals within 30 days of discovering its failure
to do so. Company reasonably relied on several experienced pension and employee
benefit plan service providers who provided advice containing incomplete information as
to who is required to receive notice regarding the freezing of benefits under the Plan.
Company made a good faith effort to provide notice to each affected employee, and if
the professionals that were consulted had advised them to provide the notices to the
alternate employees and the unions, Company would have timely provided the notices
to those parties as well. Also, Company provided notice to each alternate payee within
30 days after it realized its error, which falls within the timeframe set forth in the
exception to the imposition of the tax under section 4980F(c)(2) of the Code.

Once Company's outside counsel realized the need to provide 204(h) notices for
alternate payees, Company took prompt action and delivered notices expeditiously.
Thus, from the dates that the benefit accruals for each respective group of employees
was frozen through Date 10, the date outside counsel informed Company that it had not
sent 204(h) notices to all required parties, Company was not aware of the necessity to
provide the section 204(h) notice to alternate payees and the respective unions

201243021

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involved; and once aware, took timely and appropriate action to provide the notices.
Thus, Company's failure to timely provide the required 204(h) notices to alternate
payees and unions was due to Company's reasonable reliance on experienced service
providers and justifies a waiver of the excise tax penalty for the period.

Conclusion

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

The tax imposed under section 4980F of the Code is waived under the provisions of
section 4980F(c)(2) of the Code for the periods during which Company was unaware of
the necessity for making the election to alternative payees and the unions.

No opinion is expressed as to the qualification of the Plan 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 Company who requested it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

A copy of this letter has been sent to your authorized representative in accordance with
a power of attorney on file in this office.

If you wish to inquire about this ruling, please contact * * at () -**.
Please address all correspondence to SE:T:EP:RA:T2.

Sincerely,

Donzel Littlejohn, Manager,
Employee Plans Technical Group 2

Enclosures:
Deleted copy of ruling letter
Notice of Intention to Disclose