PLR 9949047: Pension plan receives a conditional minimum funding waiver

Plain-English summary

A plan sponsor sought relief from its minimum funding obligation for a plan year after a sharp decline in business tied to falling oil prices. The IRS granted a waiver for the year ending December 31, 1998, subject to conditions. The sponsor had to adopt the attached plan amendment and keep up later funding or fully amortize the waived amount. If the plan ended before January 2004, contributions had to bring participants' actual account balances up to their adjusted balances. Failure to meet the conditions would make the waiver retroactively void. The letter did not decide whether the required amendment would affect the plan's qualified status.

Ruling snapshot

• Question: Would the IRS waive the plan's minimum funding standard for the 1998 plan year?
• Outcome: Approved conditionally, subject to plan amendment and funding requirements.
• Key authorities: IRC § 412(d); ERISA § 303; Rev. Rul. 78-223; Rev. Proc. 94-41.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Significant Index No. 0412.06-00
199949047

Washington, DC 20224

Person to Contact:
Telephone Number:

Refer Reply to:

OP:E:EP:A:2
Date:
SEP 15 1999

In re:

This letter constitutes notice that the request of February 22, 1999 for a waiver of the minimum funding standard for the plan year ending December 31, 1998 has been granted subject to the following conditions:

(1) The plan is amended to include the provisions in Attachment I to this letter.

(2) If the plan terminates prior to January 1, 2004, sufficient contributions will be made and allocated so that at the time of termination each participant's “actual account balance” will be equal to his or her “adjusted account balance”, as such terms are defined in Attachment I.

(3) The minimum funding standard is satisfied for plan years beginning from January 1, 1999 through January 1, 2003, or sufficient contributions are made to the plan to fully amortize the unamortized balance of the waiver.

Your authorized representative agreed to these conditions. If they are not satisfied, the waiver is retroactively null and void.

This conditional waiver has been granted in accordance with section 412(d) of the Code and section 303 of the Employee Retirement Income Security Act of 1974 (ERISA). Except for the amount determined under section 412(b)(2)(C) of the Code, the amount for which this waiver has been granted is the contribution that would otherwise be required to reduce the balance in the funding standard account to zero as of December 31, 1998.

The plan sponsor is a wholesale and retail

The customer base is composed mostly of
companies and associated service companies, with some customers as well as

some wholesale and retail customers. As a result of the decline in oil prices beginning in

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late 1998 and continuing into early 1999, the number of being drilled in the plan sponsor’s business area dropped dramatically. The sale of to the drilling industry has plummeted, and total sales by the plan sponsor dropped over 50% in one year. Faced with this financial hardship, the plan sponsor is unable to meet its funding obligations for the plan year ending December 31, 1998.

As a result of this business hardship, the plan sponsor has made a number of changes to improve its financial situation. Specifically, it has cut staff and amended the plan to cease benefit accruals after December 31, 1998. The plan sponsor has also represented that it intends to keep the plan in effect until the funding deficiency is corrected. Hence, we have granted a waiver of the minimum funding standard for the plan for the plan year ending December 31, 1998, subject to the conditions specified above.

When a defined contribution plan receives a waiver of the minimum funding requirements, the plan, in accordance with Rev. Rul. 78-223, must be amended to reflect the waiver if the plan does not otherwise provide for such waiver.

Section 3.02 of Rev. Proc. 94-41 provides that the applicant requesting a waiver need not submit an amendment designed to satisfy Rev. Rul. 78-223. If no amendment is submitted, the IRS may issue a ruling letter granting a conditional funding waiver requiring the adoption of an amendment supplied by the IRS. Because no plan amendment accompanied your request, we are granting the waiver subject to your adoption of the enclosed proposed amendment. If that amendment is not adopted within a reasonable time, this waiver is retroactively null and void. However, if you disagree with our amendment or would like to modify it in any way, we will consider any such request if such request is submitted in writing no later than 60 days from the date of this letter. Your letter should clearly state the exact changes you propose.

This letter is not a ruling as to the effect the plan amendment may have on the qualified status of the plan.

Your attention is called to the following:

(1) Section 412(f)(1) of the Code describes the consequences which result in the event the plan is amended to increase benefits, to change the rate in the accrual of benefits, or to change the rate of vesting while any portion of the waived funding deficiency remains unamortized.

(2) Section 412(d) of the Code, as amended by section 9306(c)(1) of the Omnibus Budget Reconciliation Act of 1987, provides that the amortization charge described in section 412(b)(2)(C) must be computed by using an interest rate determined under a new standard. This provision is applicable to a request for a waiver made after December 17, 1987.

(3) Section 412(b)(2)(C) of the Code, as amended by section 9307(a)(1) of the Omnibus Budget Reconciliation Act of 1987, requires that, for plan years beginning after

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(3) 199949047

December 31, 1987, each waived funding deficiency must be amortized by equal annual installments over a period of 5 years. This provision is applicable to an amortization base established in a plan year beginning after December 31, 1987, as in this case for the waiver granted for the plan year ending December 31, 1998.

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

When filing Form 5500 for the plan year ending December 31, 1998, the date of this letter should be entered on Schedule B (Actuarial Information). For this reason, we suggest that you

furnish a copy of this letter to the individual who is responsible for the completion of the Schedule B.

A copy of this letter is being sent to the Key District Office in as well as to your authorized representative pursuant to a power of attorney (Form 2848) on file. If

you have any questions concerning this ruling, please contact the individual referenced above.

Sincerely yours,

Martin L. Pippins
Chief, Actuarial Branch 2 (Acting)

Enclosure

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199949047

ATTACHMENT I

The employer, if unable to satisfy the minimum funding standard for a given plan year, may apply to the Internal Revenue Service for a waiver of the minimum funding standard. If the waiver is granted, the following provisions apply.

1. The valuation date for a given plan year is the last day of
   each plan year.

2. An adjusted account balance shall be maintained for each plan
   participant whose actual account balance is less than or equal to his or her adjusted account balance.

(a) For the plan year for which the first waiver is granted, the adjusted account balance as of the valuation date for each affected plan participant equals

(1) the participant's actual account balance, plus

(2) the amount that such participant would have
received if the amount waived had been
contributed.

(b) For each plan year following the plan year for which a waiver is granted, the adjusted account balance of each participant affected by such waiver (calculated as of the valuation date for that year) equals:

(1) the adjusted account balance as of the valuation
date in the prior plan year, plus

(2) the amount equal to the actual investment return
credited or charged to the participant's actual
account balance plus

(3) the amount equal to 5% of the excess of the amount
in (1) over the participant's actual account balance
calculated as of the same date, plus

(4) the amount equal to such participant's allocated
share of the employer's required contribution
(whether or not waived) for the plan year (deter-
mined without regard to adjusted waiver payments
and discretionary contributions), minus

(5) the amount of the participant's adjusted account
balance forfeited during the plan year under the
plan's provisions.

199949047

For a given plan year the employer is required to contribute a Certain amount in order to satisfy the minimum funding standard for such plan year. For each plan year which follows a plan year for which a waiver of the minimum funding standard was granted the amount equals:

(1) the amount due in accordance with the plan's
contribution formula (without regard to this
section), plus

(2) the adjusted waiver amount.
The adjusted waiver amount for a given plan year equals:

(1) the sum of the amounts necessary to amortize
each waived funding deficiency over a period of
5 plan years (15 plan years for waivers granted
for plan years beginning prior to January 1, 1987)
measured from the valuation date of the plan year
for which the corresponding waiver was granted at
t%* interest, compounded annually, minus

(2) the sum of the amounts necessary to amortize the
total of each year's forfeitures (which have arisen
since the first waiver was granted) over a period
of 5 plan years (15 plan years for forfeitures
occurring in plan years beginning prior to January 1,
1988) measured from the valuation date of the plan
year in which the corresponding forfeitures arose
at 5% interest, compounded annually.

An amount equal to the adjusted waiver amount must be contributed only until each actual account balance equals the adjusted account balance. Any plan provision which provides that employer contributions shall be reduced immediately by forfeitures is revoked until each participant's actual account balance equals that participant's adjusted account balance.

Discretionary employer contributions, which are in addition to the amounts contributed to satisfy the minimum funding standard can be made in any given plan year. However, the total employer contribution for the plan year cannot exceed the then remaining underfunded amount (the sum of the adjusted account balances minus the total plan assets).

4. The adjusted waiver payments, discretionary contributions and the
   forfeitures of actual account balances for the current plan year shall be allocated as of that year's valuation date to the actual account balance of the affected plan participants.

Each time a waiver is granted, an Original Waiver Amount (OWA) will be determined for each affected plan participant. The OWA equals the participant's portion of the amount which was waived.

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Commencing with the valuation date of the plan for which a waiver is granted, a Remaining Original Waiver Amount (ROWA) must be calculated for each affected plan participant. As of such valuation date the OWA equals the ROWA. On the valuation date of a succeeding plan year the ROWA equals the prior plan year's ROWA multiplied by (1 + t), minus the forfeiture of amounts in the prior year's ROWA incurred in the current plan year, minus the allocation with respect to the OWA for the current plan year. For each waiver that is granted

one OWA and a corresponding ROWA will be established for each affected plan participant.

The sum of the adjusted waiver payments, discretionary contributions and forfeitures of the actual account balances for a given plan year are allocated to those participants who have ROWA's by multiplying the sum of these three amounts by the fraction:

(i) the numerator of which equals the sum of OWA's
for a particular participant, and

(ii) the denominator of which equals the sum of the
OWA's for all participants.

To determine the portion of this allocation which is to be assigned to a given ROWA multiply the allocation by the corresponding OWA, then divide by the sum of the OWA's for the particular participant.

If the calculation of a ROWA results in a value which is less than zero, then

(1) the ROWA is set equal to zero,
(2) the corresponding OWA is set equal to zero, and

(3) the excess payments will be reallocated to the
remaining ROWA's.

5. A distribution is determined by multiplying a participant's vested
   percentage by his or her adjusted account balance. However, distributions from the plan may not exceed a participant's actual account balance. If

so limited, plan participants shall receive subsequent distributions derived from future adjusted waiver payments.

• t is the interest rate determined, on the first day of the plan year, in
  accordance with section 412(d)(1) of the Internal Revenue Code (as in effect at the time the waiver was requested).

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