Makes pension funding extension revocation prospective with a make-whole charge

Plain-English summary

A pension plan had received a conditional 10-year extension for amortizing unfunded liabilities but later failed two conditions. The IRS approved modifying its earlier rulings so the extension would cease prospectively, rather than becoming retroactively void, and required a one-time make-whole charge and related funding-account adjustments. It also stated that no section 4971 tax would apply for years in which the plan remained in critical or critical and declining status and continued meeting specified requirements. The IRS declined two alternative requests as unnecessary because it granted the requested modification.

Ruling snapshot

• Question: Could prior conditional funding-extension approvals be modified so a later condition failure ends the extension prospectively?
• Outcome: Mixed. The modification was approved, while two alternative requests were declined as unnecessary.
• Key authorities: IRC §§ 412, 431, 432, and 4971; ERISA § 302

Full text (IRS public release)

Significant Index No. 0412.00-00

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

MAY 15 2018

Number: 201832020

[handwritten notation: T. EP. RA, A2]

In re: [redacted] (Plan)

EIN: [redacted], Plan [redacted]

Initial Approval = [redacted]

Modification = [redacted]

Amendment = [redacted]

Dear [redacted]:

This letter is in response to your request of April 13, 2017 for the following rulings with
regard to the above Plan:

(1) That the Initial Approval and Modification granting conditional approval for a 10-
year extension for amortizing the unfunded liabilities described in section
412(b)(2)(B) of the Internal Revenue Code (Code) and section 302(b)(2)(B) of
the Employee Retirement Income Security Act of 1974 (prior to amendment by
the Pension Protection Act of 2006), be modified to provide that if any of the
conditions set forth in either the Initial Approval or Modification are not satisfied,
the approval to extend the amortization periods of the unfunded liabilities shall
not apply to any plan year ending on or after the date the condition is not
satisfied.

(2) That, because the Plan has been in critical and declining status since
January 1, [redacted], and because the plan sponsor has adopted and complied with
a rehabilitation plan as required under section 432 of the Code, effective
January 1, [redacted], the Fund’s contributing employers are not subject to the
minimum funding requirements set forth in section 412(b)(1) of the Code.

(3) That, should the Internal Revenue Service (Service) choose not to grant the
relief requested in paragraphs (1) and (2) above, the Service rule that the
Amendment is neither reasonable nor de minimis under section 412(c)(7) of the
Code, and therefore renders the Service’s prior grants of relief under section
412 of the Code void prospectively, effective January 1, [redacted].

Request (1)

Approval to modify the Initial Approval and Modification has been granted. These
rulings have been modified to:

(a) Replace the language in the Initial Approval stating that, “If any one of these
conditions is not satisfied, the approval to extend the amortization periods for
amortizing the unfunded liabilities would be retroactively null and void,” with “If
any one of these conditions is not satisfied, the approval to extend the periods
for amortizing the unfunded liabilities shall not apply to any plan year ending
after the date the condition is not satisfied.”

(b) Eliminate the language in the Modification stating that “If any one of these
conditions is not satisfied, the approval to extend the amortization periods of
the unfunded liabilities would be null and void, retroactive to January 1,
[redacted],” with “If any one of these conditions is not satisfied, the approval to extend the
periods for amortizing the unfunded liabilities shall not apply to any plan year
ending after the date the condition is not satisfied.”

Based on information submitted with your request, we understand that the Plan first
failed to meet two of the conditions in the Modification effective beginning with the
[redacted] plan year. Therefore, the approval to extend the amortization periods for amortizing the
unfunded liabilities does not apply to the [redacted] plan year and all subsequent plan years.

As discussed, for the first plan year in which the amortization extension is no longer
applicable, the Plan’s funding standard account must be redetermined as if the
extension had never been granted, and the resulting shortfall must be added to the
funding standard account as a one-time “make-whole” charge.

Accordingly, the following steps must be taken in determining the funding standard
account as of the beginning of the plan year in which it becomes prospectively null and
void (the “Revocation Date,” based on information submitted with your request, is
January 1, [redacted]).

1. Effective as of the Revocation Date, the remaining balance of each extended
   amortization base is redetermined as the balance that would exist if the
   extension had not been granted (hereinafter, the “Redetermined Prospective
   Revocation Balance”). For this purpose, if as of the Revocation Date, the base
   would have been fully amortized had the extension not been granted, the
   Redetermined Prospective Revocation Balance on account of such base as of
   the Revocation Date shall equal $0.

2. There is a one-time charge to the funding standard account at the Revocation
   Date on account of each extended amortization base equal to the excess of (A)
   over (B), where:

A. Is the actual balance of the extended amortization bases determined as if
the amortization extension were still in effect on the Revocation Date.
Note that the balance of each extended amortization base is determined
as the prior year’s balance less the prior year’s extended amortization
payment, with the result brought forward with interest at the prior year’s
IRC 6621(b) rate.

B. Is the Redetermined Prospective Revocation Balance.

The funding standard account includes interest on this one-time charge to the
end of the plan year, using the valuation interest rate for the plan year that
includes the Revocation Date.

3. The annual amortization charge at the Revocation Date for each amortization
   base that was previously extended shall be redetermined by amortizing each
   Redetermined Prospective Revocation Balance over the remaining amortization
   period, determined without regard to the extension previously granted under
   section 412(e) of the Code. The resulting amortization charges would be
   determined using the applicable valuation interest rate at the Revocation Date.
   Note that if the Redetermined Prospective Revocation Balance of an extended
   base is $0, there is no amortization charge with respect to such base at the
   Revocation Date.

4. At the Revocation Date, the reconciliation account shall be redetermined as if the
   amortization extension had never been approved.

This modification carries out the purposes of ERISA, and protects participants. Based
on the information submitted with your request, the failure to provide this modification to
the extension would be a substantial risk to the continuation of the plan and would be
adverse to participants' interests.

According to information submitted with your request, the Plan has been in critical
status as described in section 432(b)(2) of the Code since the [redacted] plan year, and has
been in critical and declining status as described in section 432(b)(6) since the [redacted]
plan year. Please note that the funding standard account described in section 431(b) of
the Code must continue to be maintained, regardless of whether or not the plan is in
critical status.

It is our understanding that the Plan had not failed any of the requirements in
paragraphs (2), (3), or (4) of section 4971(g) of the Code as of the time your request
was submitted. Accordingly, no tax under section 4971 shall be imposed for the
[redacted] plan year and all subsequent plan years in which the Plan is in critical (or critical and
declining) status and has not failed any of the requirements in paragraphs (2), (3), or (4)
of section 4971(g) of the Code.

Request (2)

The Service declines to rule on whether the Fund’s contributing employers are subject
to the minimum funding requirements set forth in section 412(b)(1) of the Code while the
Plan is in critical status. We believe that this request is unnecessary because the
Service is ruling favorably on request (1) above.

Request (3)

The Service declines to rule on your request to rule that the Amendment is neither
reasonable nor de minimis under section 412(c)(7) of the Code. This request is
unnecessary because the Service is ruling favorably on request (1) above.

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

If you require further assistance in this matter, please contact [redacted]
(ID# [redacted]) at ([redacted]) [redacted].

Sincerely yours,

David M. Ziegler, Manager Employee
Plans Actuarial Group 2

cc: Manager, EP Classification
Baltimore, Maryland

Manager, EP Compliance Unit
Chicago, Illinois