Transfers from money purchase plan to profit-sharing plan.
Employer X maintains a qualified money purchase pension plan (Plan A) that covers all of X's employees and that provides for distributions only on retirement, death, disability, severance plan termination. X's employees are organized into Division 1 and Division 2. In 1994, X established a discretionary profit-sharing plan (Plan B) for the Division 2 employees. Plan B includes all the optional forms of benefit available under Plan A (including the joint and survivor annuity option) but (unlike A) also permits in-service distributions of vested benefits that have been in the participant's account for at least two years. X amends Plans A and B to transfer the assets and liabilities of the Division 2 employees from Plan A to Plan B in a spinoff/merger, with no amendment of B's distribution provisions.
According to the IRS, a merger of assets and liabilities of a qualified money purchase pension plan with the assets and liabilities of a qualified profit-sharing plan does not divest the assets and liabilities of the money purchase plan of their attributes as pension assets and liabilities. Thus, to satisfy Sec. 401(a), the assets and liabilities transferred from Plan A to B must remain subject to the restrictions on distributions from a qualified money purchase pension plan. Because a money purchase pension plan cannot provide for in-service distributions, and because Plan B permits such distributions, the application of B's in-service distribution provision to the accrued benefits transferred from Plan A results in the merged plan failing to satisfy Sec. 401(a).
To remain qualified, Plan B must be amended to provide that, on and after the transfer, the accrued benefits attributable to the assets and liabilities transferred from Plan A the account balances and post-transfer earnings) will be distributable only on or after events permissible under qualified pension plans. implementing this amendment would require an acceptable separate accounting between (1) the accrued benefits attributable to the assets and liabilities transferred from Plan A and (2) all other benefits under Plan B. What's more, the amendment must be adopted on or before the date of the transfer. Reason: The right to take an in-service distribution is a Sec. 411(d)(6) protected benefit; thus, if Plan B is amended to eliminate that right with respect to accrued benefits, the amendment would violate the Sec. 411(d)(6) anti-cutback rules.
According to the Service, the result of this ruling would be the same - whether or not the transfer constitutes a partial termination under Sec. 411(d)(3); - if X had transferred the assets and liabilities of some, but not all, of the Division 2 employees; - if X had merged Plan A (in its entirety) with Plan B, and extended Plan B's distribution provisions to the accrued benefits attributable to benefits from Plan A; or - if Plan B had been a stock bonus plan.
Employer Y maintains a qualified money purchase pension plan (Plan C) that provides for distributions only on retirement, death, disability, severance or plan termination. In 1994, Y terminates Plan C and establishes a profit-sharing plan (Plan D. Plan D allows employees to elect, at any time, to take a distribution of accrued benefits attributable to any amount rolled over to Plan D.
On termination, Plan C is amended to provide an additional distribution option, allowing employees to elect to receive an immediate single-sum distribution of their account balances. Employees who make that election can also elect to have the distribution paid to Plan D in a direct rollover (to the extent the distribution is an eligible rollover distribution). Employee S makes both those elections.
In applying the qualification requirements of Sec. 401(a), the direct rollover of S's account balance to Plan D is considered a distribution and rollover - not a transfer of assets and liabilities under Sec. 414(1) (Temp. Regs. Sec. 1.401(A)(31)-1T). And once assets are properly distributed from a qualified plan, they are no longer qualified plan assets. Thus, the IRS concluded that the application of Plan D's immediate distribution provision to the amount S rolled over from Plan C does not cause Plan D to fail to satisfy Sec. 401(a). Further, Plan D does not have to provide the same optional forms of benefit for the rollover amounts provided under Plan C.
Rev. Rul. 94-76 allows profit-sharing and stock bonus plans to be amended to eliminate an optional form of benefit provided for in the plan before Dec. 12, 1994, solely with respect to benefits attributable to assets and liabilities transferred from a money purchase plan, to the extent the optional form of benefit permits in-service distributions. The amendment must be adopted by the last day of the first plan year beginning on or after Dec. 12, 1994, and must be effective no later than the first day of that plan year or, if later, 90 days after Dec. 12, 1994.
Further, a profit-sharing or stock bonus plan will not fail to be qualified merely because it (1) contained a provision on or before Dec. 12, 1994 that allows in-service distributions and (2) applies that provision to benefits attributable to amounts transferred from a qualified money purchase plan, provided the profit-sharing or stock bonus plan is amended by the end of the first plan year beginning on or after Dec. 12, 1994 to preclude such distributions for benefits attributable to amounts transferred from the money purchase plan. The amendment must be effective no later than the first day of that plan year, or, if later, 90 days after Dec. 12, 1994.
Plans entitled to extended reliance under Rev. Proc. 89-9, 89-13 or 93-39 will not be denied the relief in Rev. Rul. 94-76 merely because the plan is amended after the deadline, if - the plan is amended by the last day of the first plan year following the year in which the extended reliance period ends; - the amendments are effective no later than the first day of that plan year and no earlier than the first day of the plan year in which the amendments are adopted; and - no transfers to the plan from a money purchase plan occur after the date of the most recent determination letter and before the date the amendments are adopted.
The relief provisions do not apply if the Service has notified the employer before Dec. 12, 1994 that its profit-sharing or stock bonus plan does not satisfy Sec. 401(a) because it allowed in-service distributions for benefits attributable to amounts transferred from a money purchase pension plan.