Rev. Rul. 86-47

1986-1 C.B. 215, 1986-14 I.R.B. 14.

FUNDING; ADJUSTMENTS TO FUNDING STANDARD ACCOUNT FOR SPINOFF OF A PLAN

Published: April 7, 1986

Section 412.-Minimum Funding Standards

(Also Section 414; 26 CFR 1.414(l)-1.)

  Funding; adjustments to funding standard account for spinoff of a plan. Guidance is provided for adjustments to the minimum funding requirements when a single plan, having assets greater in value than the present value of plan benefits on a termination basis, spins off assets and liabilities, and when one of the resultant spunoff plans has an unfunded accrued liability and the other does not. Rev. Rul. 81-212 amplified.

ISSUES

  In the case of a spinoff of a defined benefit plan having plan assets with a fair market value in excess of the present value of all plan benefits on a termination basis (within the meaning of section 1.414(l)-1 of the Income Tax Regulations) into two separate defined benefit plans:

  (1) How is the credit balance in the funding standard account (FSA) of the plan prior to the spinoff allocated to the resultant spunoff plans?

  (2) How are the amortization bases of the FSA of the plan prior to the spinoff allocated to the resultant spunoff plans?

FACTS

  Prior to January 1, 1983, W was a defined benefit pension plan for which costs were computed using the entry age normal funding method. As of January 1,

1983, the beginning of the calendar plan year. W was spunoff to two defined benefit plans. X and Y. The assets of W were allocated between X and Y by a method not inconsistent with section 1.414(l)-1 of the regulations. The spinoff did not satisfy the de minimis rule in section 1.414(l)-1(n)(2). The allocations were made as described below:

                             Plan W         Plan X       Plan Y
FSA credit balance          $  20,000
Market value of assets        400,000      $  80,000    $ 320,000
Actuarial value of assets     374,000
Present value of plan
benefits on a termination
basis for Code section
414(l)                        180,000         58,000
Entry age normal accrued
liability                     425,000        200,000      225,000
Outstanding balance and
remaining period of
amortization bases

Base A (28 payments
remaining)                    100,000

Base B (14 payments
remaining)                    (30,000)

LAW, ANALYSIS AND HOLDINGS

ISSUE 1

  When a defined benefit plan subject to the minimum funding standards undergoes a spinoff, each of the resulting plans must begin maintaining a separate FSA. The credit of debit balance of the single plan prior to the spinoff must be allocated to the FSA's of the spunoff plans on a reasonable basis, taking into account the assets and liabilities allocated between the plans in accordance with section 1.414(l)-1 of the regulations. Thus, the sum of the credit balances of each of the spunoff plans must equal the credit balance of the plan immediately prior to the spinoff.

  Rev. Rul. 81-212, 1981-2 C.B. 99, provides a satisfactory method of allocating the credit balance between allocating the credit balance between two plans that resulted from the spinoff of a single plan. However, that revenue ruling considers only the situation where the fair market value of plan assets is not greater than the present value of plan benefits on a termination basis. In such case, the allocation of any credit balance between the two plans is uniquely determined in that there can be but one possible result. As specified in Rev. Rul. 81-212, the credit balance of the single plan before the spinoff should be allocated between the spunoff plans under the asset allocation rules of section 1.414(l)-1(n) of the regulations with the credit balance considered to be the last portion of the assets allocated. This revenue ruling, following the principles of Rev. Rul. 81-212, provides in the case of a spinoff of an overfunded plan, a uniquely determined allocation of a credit balance with respect to any given spinoff.

  In the case where, immediately prior to the spinoff, the fair market value of plan assets is greater than the present value of plan benefits on a termination basis, the credit balance of the single defined benefit plan (W) immediately before the spinoff should be allocated between the two plans (X and Y) resulting from the spinoff in the following manner:

  (a) Allocate an amount equal to the lesser of (i) the excess of the fair market value of W's assets over W's FSA credit balance, or (ii) the present value of W's plan benefits on a termination basis, between X and Y in accordance with the asset allocation rules in section 1.414(l)-1(n) of the regulations.

  (b) Allocate the credit balance of W between X and Y in proportion to the excess, for each plan, of the fair market value of assets actually allocated to each spunoff plan over the amount determined for each plan in step (a).

  In the situation presented in this revenue ruling, the fair market value of W's assets minus W's FSA credit balance is greater than the present value of W's plan benefits on a termination basis. Therefore, the amount to be allocated in step (a) between X and Y is equal to the present value of W's plan benefits on a termination basis (i.e., $180,000). The required allocation in step (a) of such $180,000 using the rules of section 1.414(l)-1(n) of the regulations is $58,000 to X and $122,000 to Y. The excess of the fair market value of W's assets over the present value of W's plan benefits on a termination basis is $220,000. The excess of the fair market value of assets actually allocated to X ($80,000) over the amount allocated to X under step (a) ($58,000) is $22,000. The corresponding excess for Y is $198,000 (i.e., $320,000 minus $122,000). Under step (b), W's credit balance ($20,000) is allocated between X and Y in proportion to such excess amounts. Thus, a credit balance of $2,000 ($20,000 times the ratio of $22,000 to $220,000) is allocated to Y is $18,000 ($20,000 times the ratio of $198,000 to $220,000).

ISSUE 2

  The allocation of W's amortization bases between X and Y must reasonably reflect the assets and liabilities of the two plans. Thus, the sum of the outstanding balances of W's amortization bases with a particular amortization period must equal the sum of the outstanding balances of the amortization bases with the same amortization period allocated to X and Y.

  Rev. Rul. 81-212 provides a satisfactory method of allocating the amortization bases of a single defined benefit plan between two plans that result from a spinoff. However, that revenue ruling considers only the situation where each spunoff plan has an unfunded accrued liability, i.e., where, for each spunoff plan, the accrued liability is greater than the actuarial value of assets. In such case, the outstanding portion of each amortization base of the single plan before the spinoff is allocated between the plans resulting from the spinoff in proportion to the excess, for each spunoff plan, of (i) the accrued liability of the spunoff plan over (ii) the actuarial value of assets of the spunoff plan decreased by the credit balance or increased by the funding deficiency of such plan. Rev. Rul. 81-212 does not address the situation where one or both of the two spunoff plans do not have an unfunded accrued liability.

  As stated in Rev. Rul. 81-212, the actuarial value of assets of W ($375,000) should be allocated between X and Y in proportion to the fair market value of assets allocated to the two plans. Therefore, the actuarial value of assets of X is $75,000 ($375,000 times the ratio of $80,000 to $400,000), and X's unfunded accrued liability is $125,000 ($200,000 minus $75,000). The actuarial value of assets of Y is $300,000 ($375,000 times the ratio of $320,000 to

$400,000). and Y has no unfunded accrued liability ($300,000 is greater than Y's accrued liability of $225,000).

  Because X has an unfunded accrued liability and Y has no unfunded accrued liability, all of W's amortization bases should be allocated to X, retaining the remaining amortization period of each base. In addition, a new amortization base must be established for X. The outstanding balance of the new base is (1) the unfunded accrued liability of X ($125,000), minus (2) the sum of the outstanding balances of all amortization bases (treating the outstanding balances of credit bases under section 412(b)(3)(B) of the Internal Revenue Code as negative numbers) allocated to X, plus (3) the $2,000 credit balance of X previously computed under Issue 1. The amortization period of the new base will be the greater of (a) the amortization period of the base that would result if all amortization gases in the FSA of X prior to the establishment of the new base were combined and offset in accordance with section 412(b)(4) of the Code, and (b) 15 years. (It is not necessary to combine and offset the bases of X. It is only necessary to determine the amortization period that would result from combining and offsetting the bases.)

  The net sum of the outstanding balances of the bases in W's FSA allocated to X is $70,000 ($100,000 minus $30,000). Therefore, the outstanding balance of the new base established as a result of the spinoff is $57,000 ($125,000 -

$70,000 + $2,000). If the two amortization bases of X prior to the

establishment of the new base were offset, the resulting base would have an amortization period of 28 years. Thus, the amortization period of the new base is 28 years (i.e., the greater of 28 and 15 years).

  For Y, the actuarial value of assets is greater than the accrued liability. No amortization bases of W are allocated to Y and none should be established as a result of the spinoff. Also, no amortization bases should be established in Y in subsequent years until the accrued liability of Y is greater than the actual value of assets.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 81-212 is amplified.

Rev. Rul. 86-47, 1986-1 C.B. 215, 1986-14 I.R.B. 14.