IRS denies minimum-funding waiver for financially distressed academic institution

Plain-English summary

The IRS denied a nonprofit academic institution’s request for a waiver of the minimum funding standard for its pension plan. The institution reported permanent financial distress, including liabilities exceeding assets, declining operating cash flows, lower enrollment, difficulty raising unrestricted funds, and uncertainty about its ability to continue as a going concern. The IRS concluded that the hardship was not temporary and that the sponsor could not make future payments sufficient to cover both waiver amortization and the plan’s ongoing costs. The letter also advised that excise taxes under IRC § 4971(a) were due and that Form 5330 should be filed.

Ruling snapshot

• Question: Whether the sponsor qualified for a waiver of the minimum funding standard for the plan year ending in June.
• Outcome: Denied.
• Key authorities: IRC §§ 412 and 4971(a).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224 201316025

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

JAN 22 2013

SE:T:EP:RA:T2

Significant Index Number: 412.06-00

In Re: Request for Waiver of the Minimum Funding Standard for ****
** (Plan No. *)
EIN: -**

Sponsor = ***
Plan = *****

Dear **:

This letter is to inform you that your request for a waiver of the minimum funding
standard for the above-named plan for the plan year ending June [illegible], 20[illegible], is denied.

The Sponsor is a non-profit academic institution. The facts of the Sponsor’s situation
show that it is experiencing significant permanent financial distress. This is shown in
the excess of current liabilities over current assets, and a steep decline in operating
cash flows. While the Sponsor has adjusted payroll, reduced expenses, and devised a
comprehensive financial plan in an attempt to improve its financial situation, its financial
resources have diminished greatly due to declining enrollment and an overall economic
downturn. The Sponsor states also that it has struggled in its efforts to raise unrestricted
funds, and its financial statements and recent issues involving its accreditation indicate
that uncertainty exists about the College’s ability to continue as a going concern.

You were notified in a letter dated December [illegible], 20[illegible], that your request had been
tentatively denied. A Conference of Right was held on January [illegible], 20[illegible].

After considering all financial information the Sponsor has supplied, we have
determined that its business hardship is not temporary. Furthermore, even if the
funding waiver were granted, the Sponsor’s financial submission illustrates that it would
not be able to make periodic payments to the Plan sufficient to cover both the
amortization payments on the funding waiver plus the future ongoing cost of the Plan.
Therefore, because the Sponsor’s financial hardship does not appear to be temporary,
and it is unable to satisfy future minimum funding requirements, your request for a
waiver of the minimum funding standard for the plan year ending June [illegible], 20[illegible], is
denied.

201316025

You should note that excise taxes under section 4971(a) of the Internal Revenue Code
(“Code”) are currently due on the minimum funding requirement for the Plan year ending
June [illegible], 20[illegible]. You should file a Form 5330 as soon as possible to report and pay
the taxes.

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.

We have sent a copy of this letter to the Manager, EP Classification in Baltimore,
Maryland, to the Manager, EP Compliance Unit in Chicago, Illinois.

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

Sincerely yours,

William Hulteng
Manager, Employee Plans Technical

CC: