Revenue Ruling Places Limits on Pension Plan TransfersSeptember 9, 2008 The Legal Intelligencer
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 pensions 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.
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