Revenue Ruling Places Limits on Pension Plan Transfers

In Revenue Ruling 2008-45 last month, the Internal Revenue Service held that the transfer of the sponsorship of a qualified retirement plan from an employer to an unrelated taxpayer violates the exclusive benefit rule contained in Section 401(a) of the Internal Revenue Code, if such a transfer is not made in connection with a transfer of business assets, operations or employees. It is anticipated that this ruling will shut down the growing financial market for the transfer of frozen defined benefit pension plans.

The factual scenario of Rev. Rul. 2008-45 is typical for transactions of this nature: Corporation A maintains an underfunded defined benefit pension plan for its employees, but it has been frozen so there will be no future benefit accruals. Corporation A transfers sponsorship of the plan to Subsidiary B, a wholly-owned subsidiary of Corporation A. Subsidiary B does not maintain any trade or business, has no employees and has nominal assets. As part of the transfer, the plan document is amended to substitute Subsidiary B as the plan sponsor, and Corporation A also transfers cash and marketable securities to Subsidiary B in an amount equal to the plan’s underfunding. Shortly after the sponsorship of the plan and related assets are transferred to Subsidiary B, ownership of Subsidiary B’s stock is transferred by Corporation A to Corporation C, an unrelated corporation.

In Rev. Rul. 2008-45, the IRS concludes that the above transaction violates the “exclusive benefit rule” of Code Section 401(a) which provides that every qualified retirement plan, including defined benefit pension plans, must be maintained by an employer for the exclusive benefit of its employees or their beneficiaries. Similar language is contained in Treasury Regulation Sections 1.401-1(a)(2)(i) and (3)(ii). The IRS concludes that, under the facts described, the transferred pension plan is no longer maintained by an employer for the exclusive benefit of its employees or their beneficiaries since both Subsidiary B and its acquirer, Corporation C, do not maintain any trade or business in which the pension plan participants or their beneficiaries are employed. In essence, it is the view of the IRS that the pension plan is now maintained by Corporation C for some purpose other than for providing benefits to plan participants and their beneficiaries.