Pension plan receives excise-tax waiver for liquidity shortfalls after layoffs and lump sums

Plain-English summary

A single-employer defined benefit plan suffered liquidity shortfalls during four consecutive quarters after a business slowdown, large workforce reductions, and lump-sum distributions equal to most of the plan’s opening asset value. The employer could not prevent the distributions under the plan and the Code, but began making additional monthly contributions after learning of the liquidity requirements. The IRS found reasonable cause rather than willful neglect and granted a waiver of the 10 percent excise tax for the four affected quarters. It declined to rule on the 10 percent tax for a later quarter because the shortfall had been eliminated by that quarter’s end. It also declined to rule on the 100 percent tax because no shortfall existed on the last day of the fifth consecutive quarter.

Ruling snapshot

• Question: Should excise taxes be waived for pension-plan liquidity shortfalls caused by layoffs and large lump-sum distributions?
• Outcome: Mixed, the four-quarter 10 percent tax was waived and two later tax questions were declined.
• Key authorities: IRC §§ 430(j), 436(d)(4), 4971(f).

Full text (IRS public release)

Significant Index No. 4971.08-00

DEPARTMENT OF THE TREASURY 201620019
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

FEB 18 2016

SE:T:EP:RA:A2

Re: Request for Waiver of Excise Taxes under Section 4971(f)(1) of the Internal
Revenue Code for the (“Plan”)
EIN: - , (Plan No. )

Impacted Quarters Subject to 10% Excise Tax: Four calendar quarters ending
March 31, , through December 31,

Dear :

This letter constitutes notice that a waiver of the 10% excise tax due under section
4971(f)(1) of the Internal Revenue Code (“Code”) has been granted with respect to the
liquidity shortfall experienced by the Plan for the quarters ended March 31, :

June 30, , September 30, and December 31, (the “Impacted
Quarters”).

The waiver of the 10 percent taxes have been granted in accordance with section
4971(f)(4) of the Code. For the impacted Quarters for which this waiver has been
granted, the amount of the waiver is equal to 10 percent of the amount of the excess of
(1) the liquidity shortfall of the Plan (as determined under section 430(j)(4)(E) of the
Code) for each quarter, over (2) the aggregate amount of any contributions paid in the
form of liquid assets which served to reduce the liquidity shortfall for such quarter and
which was paid to the Plan between the last day of the quarter and the due date of the
required installment under section 430(j) of the Code for such quarter.

The Plan is a single employer defined benefit plan with a plan year ending December
31.

The Taxpayer is a marketer and distributor of household goods which has been in
continuous operation since 1946. Economic conditions in 2001 resulted in a significant
decline in sales volume and a significant increase in pension plan funding obligations.

As a result of the 2001 economic conditions, the Plan was amended such that new

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participants were not allowed into the plan as of April 1, 2001 and benefit accruals in
the Plan ceased effective October 1, 2001.

Starting in the fourth quarter of 2008, the Taxpayer experienced a significant slowdown
in its business. As a result of this slowdown, the Taxpayer began aggressively
restructuring its business during 2009. As a result, the number of active participants
decreased from 315 as of January 1, 2009 to 70 as of January 1, 2010. Lump sum
distributions totaled $ — million during 2009, nearly 76% of the market value of the
plan’s assets as of the beginning of the year. No lump sums were paid as of

April 1, 2011. Shortly after learning of the liquidity requirements, the Taxpayer started
contributing additional amounts to the plan, on a monthly basis.

Benefit restrictions under section 436 of the Code did not apply to the plan years
commencing January 1, 2006, due to the exception under section 436(d)(4) of the Code
for plans which provide for no benefit accruals with respect to any plan (as in effect for
the period beginning on September 1, 2005). Benefit accruals under the Plan ceased
effective October 1, 2001. The Taxpayer complied with the provisions of the Plan and
Code in paying lump sums, and thus the Taxpayer was unable to prevent the liquidity
shortfall from occurring.

Based on the information submitted with the request, the liquidity shortfall arose as a
result of the significant reductions in employees and the resulting lump sum
disbursements from the Plan. These facts indicate that the liquidity shortfall was due to
reasonable cause and not willful neglect. By contributing extra amounts to the Plan, the
Taxpayer took reasonable steps to remedy the liquidity shortfall.

Based on the information above, we conclude that the liquidity shortfalls experienced by
the Plan for the quarters ended March 31, , June 30, , September 30,

and December 31,20 were due to reasonable cause and not willful neglect and that
reasonable steps were taken to remedy such liquidity shortfalls.

It has been represented that the liquidity shortfall no longer existed as of March 31,

The Service declines to rule on the whether the 10 percent excise tax described in
section 4971(f)(1) of the Code applies for the quarter ended March 31, because
the liquidity shortfall was eliminated on that date. The calculation of the excise tax, if
any, is clearly and adequately addressed by statute.

The Service declines to rule on whether the 100 percent excise tax described in Section
4971(f)(2) of the Code applies to the Taxpayer because the Plan did not have a liquidity
shortfall on March 31, (i.e. the last day of the fifth consecutive quarter after the
liquidity shortfall first arose). The calculation of the excise tax, if any, is clearly and

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adequately addressed by statute.

This ruling is made with the understanding that all the representations made pursuant
to this request are accurate. If such representations made pursuant to this request are
not accurate, the Company may not rely upon this ruling letter.

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 Employee Plans Classification Manager in
Baltimore and your authorized representative pursuant to a power of attorney (Form
2848) on file in this office.

If you have any questions or required further assistance regarding this matter, please

contact (ID # )at( ) - or by faxat( ) -
Please address all correspondence to SE:T:EP:RA:A2.

Sincerely yours,

David M. Ziegler
Manager, EP Actuarial Group 2

cc: