TaxNewsFlash-Exempt Organizations

August 8, 2008
No. 2008-74

PRINTABLE VERSION

Transfer of Retirement Plan to Unrelated Employer Violates Exclusive Benefit Rule

The IRS this week released an advance copy of Rev. Rul. 2008-45 which provides that the “exclusive benefit rule” under section 401(a) is violated if the sponsorship of a qualified retirement plan is transferred from an employer to an unrelated taxpayer and the transfer of the plan’s sponsorship is not in connection with a transfer of business assets, operations, or employees from the employer to the unrelated taxpayer.

For an electronic version of the revenue ruling (four pages): Rev. Rul. 2008-45

Summary

The facts considered by the IRS in Rev. Rul. 2008-45 are summarized as follows:

Corporation A maintains an underfunded defined benefit plan with no ongoing accrual of benefits.

Corporation A transfers sponsorship of the plan to Subsidiary B (a wholly owned subsidiary). Subsidiary B does not have 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 to provide for Subsidiary B to assume Corporation A’s responsibilities under the plan.

In connection with the transfer of the plan sponsorship, Corporation A also transfers cash and marketable securities to Subsidiary B in an amount equal to the amount of the plan’s underfunding (determined using certain assumptions) plus an additional margin.

Shortly thereafter, ownership of at least 80% of Subsidiary B’s stock is transferred to Corporation C (an unrelated corporation). Subsidiary B is no longer a member of the Corporation A controlled group (under section 414(b)) but is now a member of the Corporation C controlled group.

The transfer to Corporation C is not in connection with the transfer of business assets (other than cash or marketable securities transferred to Subsidiary B), operations, or employees from Corporation A’s controlled group to Corporation C’s controlled group. The only business risk or opportunity in the transaction for Corporation C is to profit from the acquisition and operation of the plan.

The IRS concluded for purposes of the exclusive benefit rule under section 401(a), Subsidiary B will no longer be treated as an employer with respect to the employees of the Corporation A controlled group when it is no longer a member of that controlled group. Accordingly, when Subsidiary B is no longer a member of the Corporation A controlled group, the plan does not satisfy the exclusive benefit rule because it is not maintained by an employer to provide retirement benefits for its employees and their beneficiaries.

Rev. Rul. 2008-45 will appear in Internal Revenue Bulletin 2008-34, dated August 25, 2008.

For more information, contact Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax), at (202) 533-3084 or rspeizma@kpmg.com

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