Temporary business hardship supports conditional pension funding waiver

Plain-English summary

A privately owned circuit-board-products manufacturer requested a waiver of its remaining 2015 minimum required pension contribution. It reported a sharp revenue decline, increased operating expenses, lost market share to foreign competitors, and cash flow barely sufficient for employees, vendors, and lenders. The company had also hired new leadership, raised prices, reduced costs and product complexity, and projected improved cash flow. The IRS concluded that the company faced a temporary substantial business hardship and that a waiver served plan participants' interests. It granted the waiver subject to seven conditions, including continued quarterly and annual contributions, restrictions on benefit increases, preservation of the 2015 allocation, proof of payments to the IRS and PBGC, and nullification of the waiver if any condition was not met.

Ruling snapshot

• Question: Does the company's temporary substantial business hardship justify waiving the remaining unpaid minimum required contribution for the plan's 2015 plan year?
• Outcome: approved subject to seven stated conditions
• Key authorities: IRC §§ 412(c) and 430(j); ERISA § 302(c)(7)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201703002 Third Party Communication: None
Release Date: 1/20/2017 Date of Communication: Not Applicable
Index Number: 412.06-00
Person To Contact:
------------------, ID No. ------------------
------------------------------- Telephone Number:
-------------------------------------------------- ----------------------
----------------------- Refer Reply To:
-------------------------------------------- CC:TEGE:EB:QP1
---------------------------- PLR-112542-16
Date:
In re: ----------------------------------------------------- October 04, 2016

Company = ----------------------
Plan = ---------------------------------------------
Amount = --------------

Dear ----------------:

This letter responds to your letter dated March 11, 2016, as supplemented by
correspondence dated June 21, 2016, in which you request a waiver for the remaining
unpaid minimum required contribution (Amount) for the Plan for plan year ending
December 31, 2015.

Facts

The Company is a privately owned manufacturer of products that are used to fabricate
circuit boards. The Company represents that it has recently suffered a temporary
substantial business hardship due to its inability to qualify new products, issues
involving product development, and the impact of competition in high margin product
segments. The business hardship is shown by a significant decline in revenue in 2015
with a corresponding increase in operating expenses. In addition, the Company has
lost a significant amount of market share in its industry to foreign competition. Its
incoming cash flows for the year of the requested waiver are only minimally sufficient to
satisfy obligations to its employees, vendors, and lenders.

The Company has implemented a series of actions to facilitate its long term
improvement. This includes hiring new leadership, increasing prices, reducing operating
expenses and material costs, and reducing product complexity. In particular, the
Company is taking these measures in order to better compete with its foreign
competitors, which have been taking market share from the Company due to lower
PLR-112542-16 2

operating costs. The financial projections submitted with its funding waiver application
support the Company’s assertions that the measures that it is taking can be reasonably
expected to generate improved cash flows adequate to satisfy the Plan’s funding
obligation in the near future.

Law and Analysis

Section 412(c)(1) of the Code provides generally that if an employer is unable to satisfy
the minimum funding standard for a plan year without temporary substantial business
hardship and application of the standard would be adverse to the interests of plan
participants in the aggregate, the minimum funding standard requirements may be
waived for the year with respect to all or any portion of the minimum funding standard.

Section 412(c)(2) of the Code provides that the factors taken into account in
determining a temporary substantial business hardship include whether or not the
employer is operating at an economic loss, there is substantial unemployment or
underemployment in the trade or business and in the industry concerned, the sales and
profits of the industry concerned are depressed or declining, and it is reasonable to
expect that the plan will be continued only if the waiver is granted.

In this case, the Company has established that it is experiencing a substantial business
hardship that satisfies the requirements for a waiver. Specifically, it has experienced
significant declines in revenue and positive cash flows in a short period of time, caused,
in part, by pressure from competitors. In addition, as described above, the Company
has also taken steps to mitigate the hardship so that is reasonable to conclude that the
hardship is temporary and that granting the requested waiver is in the interests of plan
participants.

Accordingly, a waiver of Amount for the 2015 plan year has been granted subject to the
following conditions:

1. The Company makes contributions equal to the required quarterly contributions
   to the Plan while the Plan is subject to a waiver of the minimum funding standard.
   For this purpose, the total amount of each quarterly contribution will be
   determined in accordance with section 430(j)(3)(D) and section 430(j)(3)(E) of
   the Code;

2. Under section 412(c)(7), the Company is restricted from amending the Plan to
   increase benefits and/or Plan liabilities while a waiver under section 412(c) is in
   effect with respect to the Plan, except to any extent otherwise permitted under
   Code Section 412(c)(7)(B), in which case the Company must copy PBGC on any
   correspondence with the IRS regarding notification of or application for such an
   exception;
   PLR-112542-16 3

3. The Company makes timely contributions to the Plan in an amount sufficient to
   meet the minimum funding requirements for the Plan for the plan years ending
   December 31, 2016, through December 31, 2020;

4. Any contribution which is allocated to the 2015 plan year as stated in the
   Company’s 2015 minimum funding waiver application must remain allocated to
   the 2015 plan year;

5. No contributions made to the Plan for the 2015 plan year are added to the
   prefunding balance of the Plan;

6. In a timely manner, the Company provides proof of payment of all contributions
   described above to the Service and PBGC using the fax number or address
   below.

   IRS - EP Classification: TEGE:EP:7693

   ---

   Box 74, 400 North 8th Street, Room 998
   Richmond, VA 23219
   Fax: 877-801-3614

7. The failure to satisfy any of these conditions renders this waiver null and void.

Section 412(c)(7) of the Code and section 302(c)(7) of ERISA describe the
consequences that result in the event either of the Plans is amended to increase
benefits, change the rate in the accrual of benefits or change the rate of vesting, while
any portion of the waived funding deficiency remains unamortized. Any amendment to a
profit sharing plan or any other retirement plan (covering employees covered by the
Plans) maintained by the Company, to increase, or any action by the Company or its
authorized agents or designees (such as a Board of Directors or Board of Trustees) that
has the effect of increasing the liabilities of those plans is considered an amendment for
purposes of section 412(c) of the Code and section 302(c)(7) of ERISA. Similarly, the
establishment of a new profit sharing plan or any other retirement plan by the Company
(covering employees covered by the Plans) is considered an amendment for purposes
of section 412(c)(7) of the Code and section 302(c)(7) of ERISA.

This ruling applies solely to the minimum funding standard for the 2015 plan year and
no inference from this ruling should be taken with regard to any future request for a
waiver of the minimum funding standard.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.
PLR-112542-16 4

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

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                   Sincerely,



                                   William Hulteng
                                   Acting Branch Chief
                                   Qualified Plans Branch 1
                                   Office of the Associate Chief Counsel
                                   (Tax Exempt & Government Entities)

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