Foreign retirement fund is a nonexempt employees' trust

Plain-English summary

A retirement fund organized as a trust under foreign law held separate accounts funded by employers, employees, and investment income. Contributions were irrevocable, assets could not revert to an employer, members were fully vested, and distributions generally were limited to retirement, death, disability, or financial hardship. The request covered members whose employer contributions exceeded their employee contributions. The IRS concluded that the fund was a nonexempt employees' trust under section 402(b). It did not decide the tax treatment of any particular beneficiary or any benefits under the Code or the applicable income tax treaty.

Ruling snapshot

• Question: Was the foreign retirement fund a nonexempt employees' trust described in section 402(b)?
• Outcome: approved
• Key authorities: IRC §§ 83, 402(b), 501(a); Treas. Reg. §§ 1.83-3, 1.83-8, 1.402(b)-1, and 301.7701-4

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201749007                                            Third Party Communication: None
Release Date: 12/8/2017                                      Date of Communication: Not Applicable
Index Number: 402.00-00, 402.02-00
                                                             Person To Contact:
--------------------------------                             --------------------------, ID No. ----------------
----------------------------------------------------         -----------------
-----------------------                                      Telephone Number:
-------------------------------------                        ----------------------
-----------------------------------                          Refer Reply To:
-------------                                                CC:TEGE:EB:EC
                                                             PLR-114270-16
                                                             Date:
                                                             September 08, 2017




Fund A                = ----------------------------------------------
Country A             = ------------------------------------------------------------------------------------------
Trustee               = --------------------------------------------




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

This responds to your representative’s letter of --------------------, and subsequent
correspondence, requesting a ruling that Fund A is classified as a nonexempt
employees’ trust described under § 402(b) of the Internal Revenue Code (Code).

The following facts and representations have been submitted under penalties of perjury
in support of your request:

Fund A is organized as a trust under the laws of Country A. Certain employers in
Country A maintain retirement plans with Fund A to provide retirement benefits to their
employees. Individuals may also create their own accounts with Fund A. Fund A
operates according to a trust document, the laws of Country A, and policies set by the
Trustee. Fund A is not exempt under § 501(a) of the Code.

The Trustee is required by law to exercise its power in the best interests of Fund A’s
members. Contributions to Fund A are irrevocable, and no part of Fund A’s principal or
income may revert to any employer or be used for any purpose other than providing
benefits described under the trust document. A member of Fund A may not unilaterally
assign or transfer his benefits under Fund A (other than to a spouse). A member’s
account is not subject to claims from creditors or any other party.
PLR-114270-16                                 2

Fund A derives its funds from employer contributions, employee contributions, and
income from investments. Each member has a separate account to which contributions
and income are allocated. Under the laws of Country A, an employer generally must
contribute a certain percentage of each employee’s wages to Fund A. For the vast
majority of members, employer contributions exceed employee contributions.

Members are 100 percent vested in their account balances at all times. Members can
direct the investment of their account balances by choosing from a list of investment
options selected by the Trustee. Assets held in members’ accounts may only be
distributed in certain circumstances, including retirement, death, disability, or financial
hardship. A distribution may be paid as a lump sum or an annuity.

Fund A has received a private letter ruling concluding that it is a trust for federal income
tax purposes under § 301.7701-4(a). See PLR ----------------.

You have asked us to rule that Fund A will be treated as a nonexempt employees’ trust
described under § 402(b) of the Code. Your request is made only with respect to
members whose employer contributions exceed employee contributions.

Section 402(b)(1) of the Code provides, in general, that contributions made by an
employer to an employees’ trust that is not exempt under § 501(a) are includible in the
gross income of the employee in accordance with § 83, with the value of the employee’s
interest in the trust substituted for the fair market value of the property for purposes of
applying § 83.

Section 83 of the Code provides that the excess of the fair market value of property
transferred in connection with the performance of services over the amount (if any) paid
for the property is includible in the gross income of the person who performed the
services for the first taxable year in which the property becomes transferable or is not
subject to a substantial risk of forfeiture. Section 1.83-3(e) of the Income Tax
Regulations provides that, for purposes of § 83 of the Code, the term “property” includes
real or personal property other than money or an unfunded and unsecured promise to
pay money or property in the future. Property also includes a beneficial interest in
assets (including money) transferred or set aside from claims of the transferor’s
creditors, for example, in a trust or escrow account. However, to the extent a transfer to
a trust is subject to § 402(b), § 83 applies to such a transfer only as provided for in
§ 402(b). See § 1.83-8(a).

Section 402(b)(2) provides that the amount actually distributed or made available to an
employee by a nonexempt employees’ trust shall be taxable in the taxable year in which
distributed or made available to the employee under § 72 (relating to annuities), except
that distributions of income of the trust before the annuity starting date (as defined in
§ 72(c)(4)) shall be included in the employee’s gross income without regard to
§ 72(e)(5) (relating to amounts not received as annuities).
PLR-114270-16                                 3


Section 402(b)(4)(A) of the Code provides that if one of the reasons a trust is not
exempt from tax under § 501(a) is the failure of the plan of which it is a part to meet the
requirements of § 401(a)(26) or § 410(b), then a highly compensated employee (as
defined in § 414(q)) shall, in lieu of the amount determined under § 402(b)(1) or (2),
include in gross income for the taxable year with or within which the taxable year of the
trust ends an amount equal to the employee’s vested accrued benefit (other than the
employee’s investment in the contract) as of the close of the taxable year of the trust.
Since this amount is includible in income in lieu of the amount determined under
§ 402(b)(1) or (2), it is includible only in the case of a trust to which § 402(b)(1) would
otherwise apply.

Section 402(b)(3) provides that the beneficiary of a nonexempt employee’s trust
described in § 402(b)(1) shall not be considered the owner of any portion of such trust
under subpart E of part I of subchapter J. Section 1.402(b)-1(b)(6) of the Income Tax
Regulations provides, however, that where contributions made by the employee to a
trust are not incidental when compared to contributions made by the employer, if the
applicable requirements of such subpart E are satisfied, the beneficiary is treated as the
owner of the portion of the trust attributable to the employee’s contributions. For this
purpose, employee contributions are not incidental when compared to employer
contributions if the total employee contributions as of any date exceed the employer
contributions on behalf of the employee as of that date.

Based upon the information submitted and the representations made, we conclude that
Fund A is a nonexempt employees’ trust described under § 402(b) of the Code.

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we make no determination concerning whether
Fund A or its beneficiaries are entitled to any benefits under the Code or under the
income tax treaty entered into by Country A and the United States concerning income
derived from the United States. In addition, we make no determination as to the federal
tax consequences of the application of § 402(b) to any particular beneficiary of Fund A.
If Fund A is significantly modified, this ruling will not necessarily remain applicable.

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, copies of this letter are
being sent to your authorized representatives.

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, as specified in Rev. Proc. 2017-1, 2017-1 I.R.B. 1,
PLR-114270-16                                4

§ 7.01(15)(b). This office has not verified any of the material submitted in support of the
request for ruling, and such material is subject to verification on examination. The
Associate office will revoke or modify a letter ruling and apply the revocation
retroactively if there has been a misstatement or omission of controlling facts; the facts
at the time of the transaction are materially different from the controlling facts on which
the ruling was based; or, in the case of a transaction involving a continuing action or
series of actions, the controlling facts change during the course of the transaction. See
Rev. Proc. 2017-1, § 11.05.



                                      Sincerely,



                                      John Richards
                                      Senior Technician Reviewer
                                      Executive Compensation Branch
                                      (Tax Exempt & Government Entities)




cc: