| 85-2 |
| January 14, 1985 |
| REFERENCE: |
| 4021 Plans Covered |
| 4021(a)(1) Plans Covered. Tax Qualification in Practice |
| 4021(a)(2) Plans Covered. Tax Qualification by IRS Determination |
| OPINION: |
| This is in response to your inquiry concerning whether the arrangement constituted a single pension plan or an aggregate of |
| separate pension plans. A Notice of Intent to Terminate has been filed with the Pension Benefit Guaranty Corporation |
| ("PBGC") for the Plan of your client, A Company, as a separate Plan termination. However, you now assert that (1) at |
| least through 1978 Plan operated as a single plan, (2) the group of automobile dealers known as the X group did not |
| authorize the adoption of separate plans and (3) even assuming that separate plans were created after 1978, the spin-off |
| did not comply with Treasury Regulation § 1.414(1)-1(n), which sets forth rules on the allocation of assets in spunoff |
| plans. In the alternative, you suggest that the X group of employers was treated as maintaining a single plan at least |
| through 1978. The Association, the plan administrator, maintains that Plan was an aggregate of separate plans from |
| inception. Upon careful review of the Plan records and documents provided to the PBGC, we conclude that, although the |
| weight of evidence favors the view that Plan was a single plan prior to the adoption of the restated master plan document |
| by all participating employers during the year 1977, the restated plan document created an aggregate of single plans and |
| the allocation of assets among those separate plans was valid. |
| Our conclusion as to the nature of an entity -- whether it is a single plan or an aggregate of single plans -- is based on its |
| structure and how it actually operates on an ongoing basis. We look to the documents governing the entity and to relevant |
| evidence of how it has operated and continues to operate. Such evidence may include the reasonable expectations and |
| intent of the parties. The availability of funds held by an entity to provide benefits is a central factor in our analysis. If |
| the evidence shows that benefit payments are effectively restricted, by whatever means, so that there is a minimal risk |
| that funds attributable to the contributions of one employer will be used to pay the benefits of another employer's |
| employee-participants, then the entity is an aggregate of single plans, because all assets are not available to pay all |
| benefits. Where the plan document is clear as to the intent of the parties, we will generally be guided by such express |
| While the appropriate characterization of Plan, prior to the adoption of the restated plan, is not entirely free from doubt, the |
| plan provisions, together with other evidence, lead us to conclude that, as originally adopted and maintained (until the |
| adoption of such restated plan), Plan was a single plan. However, the restated plan that was adopted by all contributing |
| employers in 1977 clearly established that Association and the contributing employers intended that Plan thereafter be |
| treated as an aggregate of single plans. |
| Prior to the adoption of the restated plan, Article IV, Section 6 of the plan document provided that upon discontinuance of |
| an employer's contributions the Trustees had "the right to reduce benefits for retired or vested employees of an employer |
| in accordance with sound actuarial principles." Under this provision, any such reduction of benefits was not specifically |
| related to the assets contributed by the withdrawing employer. Thus, while this provision was never applied by the |
| Trustees, n1 there was the possibility that all assets in the trust might be used to pay benefits of employees of an |
| employer who withdrew without sufficient assets in his account to provide his employees' benefits. This conclusion is |
| reinforced by Associations treatment of the three employer withdrawals from Plan prior to September 1976. In each of |
| these cases, none of the employees of the employers who discontinued participation had vested benefits at the date of |
| withdrawal. In none of these cases did Association recognize the existence of separate plans by providing any of the |
| participants' accrued benefits to the extent funded, nor did Association return the withdrawing employers' account |
| n1 The restated plan was adopted by Association in September, 1976. Prior to September 1976, only three employers |
| withdrew from Plan and the circumstances of such withdrawals did not occasion the application of the cut-back provision. |
| Further, the presence of Article IV, Section 6 - the cut-back provision - appears to negate a construction that Article VI, |
| Section 8 of the plan document, headed "Termination of Plan", was intended to apply to a withdrawal of an employer, |
| leading us to conclude that Article VI, Section 8 was intended to apply on the termination of the entire Plan arrangement. |
| In such event Article VI, Section 8 provides for the allocation of all plan assets to pay all plan benefits without regard to |
| the assets separately attributable to each employer. See also Article II, Section 7 of the trust agreement. n2 |
| n2 Article II, Section 7 reads as follows: |
|
Section 7. Diversion of Fund Corpus Income. In the event of the termination of the Plan, no part of the Fund corpus or |
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income shall, prior to the satisfaction of all liabilities to employees or pensioners, be used for, or diverted to, purposes |
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other than the exclusive benefit of the participants in the Plan or their beneficiaries. Reversion to, or diversion for, any |
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Employer Unit shall not occur regardless of whether by the operation or natural termination of this Fund, by power of |
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revocation or amendment, by the happening of a contingency, or by any other means prior to the satisfaction of all such |
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liabilities referred to above. Any excess in the Fund after the satisfaction of all such liabilities shall be returned to the |
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Employer Units in any equitable manner as determined by the Termination Committee. |
|
We recognize that other plan provisions may be interpreted as meaning that Plan was an aggregate of single plans from |
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inception. For example, Article II, Section 3A refers to "the termination of the Employer Unit's Plan" and suggests that a |
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distribution to participants might be made at such time. To ascertain the terms of such distribution, one would have to look |
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to Article VI, Section 8 discussed hereinabove. Further, the Plan trust agreement provided for assignment of units in the |
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trust fund to each participating employer and for the allocation of expenses to each employer's account. Trust Agreement, |
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Article IV, Sections 4-6. We also note that separate accounts were maintained by Association for each participating |
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employer, with the separate accounts being credited with the employer's contributions and debited for benefit payments to |
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such employer's employee-participants and for a share of expenses. n3 Nevertheless, while recognizing that plan |
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provisions may be contradictory to some extent, on balance we conclude that the weight of the evidence favors an |
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interpretation that Plan was a single plan prior to the adoption of the restated plan. |
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n3 Our sampling of the separate account records indicates that negative balances were created in certain accounts from |
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time to time but that the negative balances were treated as loans, were subsequently made positive through the |
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employer's contributions and did not result in the use of assets contributed by one employer to pay benefits of employees |
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of another employer. On the other hand, it seems clear that at least upon adopting the restated plan it was the intent of |
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the parties that Plan be an aggregate of single plans. We emphasize that all particiing employers adopted the restated plan |
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during the year 1977, and the document shows a clear intent on the part of the participating employers that Plan was to be |
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an aggregate of single plans. Section 5.3 of the amended plan document provides that benefits of an employer's |
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employees be conditioned on "the sufficiency of plan assets in the event the Employer terminates this Plan." Clearly, this |
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provision relates to the withdrawal from Plan by an employer, characterizes such event as the termination of the |
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employer's plan and limits benefits of employees of such terminating employer to the asset balance of the terminating |
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employer. Article X, Section 10.1A. further provides that an employer's withdrawal constitutes a termination of a separate |
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plan. Section 10.1A states that if "the Employer decides to terminate the Plan and distribute the assets held in trust", his |
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employees' interests' "shall be determined on the basis of each Participant's vested accrued benefit to the extent funded." |
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Section 10.1A also provides that a notice of intent to terminate shall be filed with the PBGC. Beginning in December, |
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1976, 26 notices of intent to terminate separate employer plans were filed with the PBGC. |
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In addition, other provisions show that the restated plan created an aggregate of single plans. For example, Article II, |
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Section 2.1 provides that "This Plan and Trust shall be established by an Employer." "Employer" is defined as the business |
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that executes a Joinder Agreement. Section 1.9. "Plan" means |
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Pension Plan and the Joinder Agreement executed by the Employer." Section 1.19. |
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You assert, however, that the Form 5500-C and actuarial reports prepared through 1978 indicate an intent that the risk for |
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benefit payments for all participants be shared among all employers, since each employer's contributions were not based |
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strictly on its individual liabilities. As to the Form 5500-C, we note that this form was filed with respect to each employer, |
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which is an additional indication of the existence of separate plans. We recognize that actuarial valuations and the |
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actuarial information contained in each Form 5500-C were prepared, prior to that of January 1, 1979, for the entire group of |
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participating employers. The actuarial valuations prior to 1979 were prepared to determine the cents per hour contribution |
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of three groups of participating employers based on the benefit formula adopted by the employer. This procedure resulted |
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in the overfunding of some of the individual plans and the underfunding of others. While, by itself, this funding procedure |
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is indicative of a single plan, in view of the express intent of the plan document, we conclude that the funding method |
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employed is not determinative of Plan's structure. n4 In the final analysis, the contributions made by each employer were |
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computed for its own pool of employees on a cents per hour basis, were credited to the separate account maintained for |
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each employer, and by the terms of the plan were not available to pay benefits of employers of any other employer. n5 |
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n4 We interpret certain post-September 1976 statements in the actuarial reports and correspondence in this case to the |
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effect that the plan was being treated as a single plan as relating to the actuarial approach used in determining the basis |
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for an employer's contributions and not to whether the actual contributions made by an employer could be used to pay |
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benefits of employees of another employer. |
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n5 While the 1977 Form 5500-C contained the statement that all assets in the Fund were available to pay benefits of all |
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employees, the weight of the evidence does not support this statement. As indicated earlier in this letter, the restated plan |
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showed a clear intent to treat Plan as an aggregate of single plans and payment of benefits of all employees out of all |
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Plan assets would have been inconsistent with such intent. Absent a showing that, after the adoption of the restated plan, |
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assets contributed by one employer were actually used to pay benefits of employees of another employer, we do not find |
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the statement enough to overcome the stated intent of the plan document. You have cited, as support for a finding that a |
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single plan existed, Plan's attempt to resolve the problem of the underfunding attributable to the failure to record the past |
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service of employees who transferred employment among the X group of employer prior to 1977. As we understand it, |
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this information was not provided to Assoc. by the X dealers until Association undertook the verification of employment |
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records in 1977. Association considered the alternatives of funding the liability for the deficiency (1) by a one-time |
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assessment on all X employers, to be allocated based on the number of the employer's participants and contribution hours |
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and the "generation of the original liabilities", or (2) by increasing the hourly contribution rate of all X employers. Ultimately |
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Association recommended the first alternative and assessed all X employers for a share of the underfunding. You |
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suggest that this assessment was inconsistent with the position that Plan was an aggregate of single plans, because an |
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allocation of liabilities prepared by Association showed that the deficiency "belonged" to only five employers. The |
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assessments were, however, credited to each contributing employer's separate account and not used to pay benefits of |
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employees of any other employer, except to the extent that funds reflecting transferred past service liability were later |
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transferred to the accounts of the employers who ultimately were charged with the payment of benefits attributable to |
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such past service liability. This treatment is not inconsistent with the existence of an aggregate of single plans and does |
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not alter our conclusion. |
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Finally, you contend that, in changing from a single plan to an aggregate of single plans, Association failed to comply with |
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Section 208 of Title I of ERISA and IRC § 414(1) (the parallel provision to ERISA Sec. 208). We understand that you |
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requested a determination from the Internal Revenue Service on this question and that Internal Revenue Service declined |
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to rule on the ground the question related to a completed transaction. |
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Section 208 of Title I of ERISA provides in pertinent part as follows: |
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A pension plan may not merge or consolidate with, or transfer its assets or liabilities to, any other plan after the date of the |
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enactment of this Act, unless each participant in the plan would (if the plan then terminated) receive a benefit immediately |
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after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled than |
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the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the plan |
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had then terminated) . . . . |
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At the time of the adoption of the restated plan, Plan's assets were not allocated to participants' benefits on a termination |
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basis. However, Regulations (Treas. Reg. § 1.414(1)-1) under Section 208 and IRC § 414(1) include a special temporary |
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rule whereby a single plan that had previously had a separate accounting of Plan assets among component employers |
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could be split up in accordance with its historical asset maintenance, if the plan administrator acted by July 1, 1978. See, |
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Treas. Reg. § 1.414(1)-1(n)(3). From the inception of Plan, Association maintained a separate accounting of each |
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employer's assets. Thus, the separate accounting requirement of the special temporary rule was met. |
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The special temporary rule also requires that the assets that are separately accounted for and the liabilities with respect to |
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each group of employees be allocated to the separate plan for the group of employees. What constitutes an "allocation" is |
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not specified in the regulation. Both before and after the adoption of the restated plan, all Plan assets were held in a |
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single trust. With respect to the allocation of assets requirement, we do not construe this to mean that assets must be |
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transferred to separate trusts under the separate plans. Therefore the maintenance of separate account records for each |
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employer would appear to satisfy the asset allocation requirement. Further, Plan's actuarial valuation as of August 1, |
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1976, contained a separate listing of each employer's liabilities, which, in our view, satisfied the requirement for the |
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allocation of liabilities in the special temporary rule. n6 |
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n6 We note that Plan's next actuarial valuation did not value employers' liabilities separately. However, this information |
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was readily available in Association's records and, indeed, was essential to the filings with PBGC of the 26 notices of |
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intent to terminate referred to above. |
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If you should desire reconsideration of this determination, you may file a request for reconsideration addressed to: |
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Legal Department, Pension Benefit Guaranty Corporation, 2020 K Street, NW, Mail Code 250, Washington, DC 20006 All |
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of the requirements pertinent to a request for reconsideration are set forth in Subparts A and C of the PBGC's |
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Administrative Review regulation (a copy of which is enclosed). |
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A purpose of the reconsideration process is the examination of information not already submitted and of issues not |
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already raised. If you do not file a request for reconsideration, it is possible that any judicial review of this determination |
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will be limited to grounds that the PBGC has had an opportunity to consider. |
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You must file the request for reconsideration within 30 days after the date of this determination. An extension of time |
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within which to file may be available; § 2606.4 of the enclosed regulation contains the provisions governing extensions of |
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I hope this answers your inquiry. Should you have any questions concerning this matter, please contact * * * of this |
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office at (202) 254-4895. |
|
Thomas Veal |
|
Acting Director, Legal Department |