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Relief for defined contribution plans with investments in life insurance companies in state liquidation proceedings.

The IRS has issued Rev. Proc. 92-16, effective Feb. 18, 1992, providing a temporary closing agreement procedure for employers making restorative payments to defined contribution plans holding investments in insurance companies involved in state delinquency proceedings. This closing agreement program will settle certain tax liabilities arising from transactions between the employer-sponsor and the trust of a qualified defined contribution plan. "Restorative payments" are conditional payments to an "affected plan" on account of assets invested in guaranteed income contracts (GICS) that have suspended or reduced payments due to state insurance delinquency proceedings.

Under Rev. Proc. 92-16, the closing agreement must provide - that restorative payments do not violate Sec. 401(a)(2), 401(a)(4) or 415; - that restorative payments will not trigger excise taxes under Secs. 4972 and 4980; - that restorative payments will not give rise to acquisition indebtedness under Sec. 514 or be treated as a below-market loan under Sec. 7872; and - for the timing of deductions under Sec. 404 for restorative payments ultimately retained in the trust.

Exclusive specific terms of the closing agreement are included with Rev. Proc. 92-16. The Service will not enter into closing agreements unless the employer has received a prohibited transaction exemption from the Department of Labor (DOL) or has an opinion of counsel stating that the employer is exempt under a DOL class exemption. The IRS will consider entering into a closing agreement with terms other than those contained in the sample agreement only if the employer took meaningful steps to implement a comparable transaction, such as receiving a DOL exemption (if necessary) or other actions before Apr. 3, 1992. Whether the employer took "meaningful steps" will be a case-by-case determination.

Requests for closing agreements must be submitted by Feb. 1, 1993. However, if the employer must receive an individual exemption from the DOL for Sec. 4975, the employer must request the agreement on or before the later of 30 days from filing the request for exemption with the DOL; or Apr. 3, 1992.

Requests under the closing agreement will be subject to Rev. Proc. 92-4, but without the user fee described in Rev. Proc. 90-17. The following additional information must be included.

* A copy of the GIC.

* A copy of the agreement under which the restorative payments are being made.

* A completed copy of the closing agreement form.

* A copy of the plan's most recent Form 5500.

* If applicable, a copy of the application for exemption submitted to the DOL or the opinion of counsel stating that a class exemption applies.

Rev. Proc. 92-16 clarifies Rev. Proc. 92-10 (which provides guidance on minimum distributions) by noting that when an employer makes a restorative payment to a plan, such assets are assets that must be used to make required minimum distributions.
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Author:Cvach, Gary Q.
Publication:The Tax Adviser
Date:Jun 1, 1992
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