Rev. Rul. 86-48

1986-1 C.B. 216, 1986-14 I.R.B. 6.

SPINOFF; TRANSFERS; BENEFITS ON A TERMINATION BASIS

Published: April 7, 1986

Section 414.-Definitions and Special Rules, 26 CFR 11.414(c)-1: Commonly controlled trades or businesses. Whether an integrated pension plan jointly maintained by employers who are not considered as a single employer under section 414(b), (c), or (m) of the Code will automatically fail to qualify under section 40(a) because all compensation received by each employee from the employers is considered as total compensation for the purpose of determining excess contributions and plan benefits. See Rev. Rul. 86-51, page 4

26 CFR 1.414(l)-1: Mergers and consolidations of plans or transfers of plan assets.

(Also Section 411; 1.411(d)-3.)

  Spinoff; transfers; benefits on a termination basis. A defined benefit plan may fail to satisfy the spinoff requirements under section 414(l) of the Code if plan benefits included under section 411(d)(6)(B) or required under section

417(c) are not included in the determination of 'benefits on termination basis' within the meaning of section 1.414(l)-1(b)(5) and (n)(1) of the regulations.

ISSUE

  Must plan benefits that are (a) included in participants' accrued benefits under section 411(d)(6)(B) of the Internal Revenue Code or (b) required under sections 401(a)(11)(A)(ii) and 417(c) be included in the determination of

'benefits on a termination basis' within the meaning of section 1.414(l)-

1(b)(5) and (n)(1) of the Income Tax Regulations?

FACTS

  An employer maintained a nonmultiemployer defined benefit plan qualified under section 401(a) of the Code which was spunoff into two defined benefit plans as described in section 1.414(l)-1(b)(4) of the regulations. However, the benefits on a termination basis in the plan immediately prior to the spinoff was determined without regard to the benefits of participants that are (a) early retirement benefits, retirement-type subsidies and optional forms of benefits included in participants' accrued benefits under section 411(d)(6)(B) or (b) qualified preretirement survivor annuities required under sections

401(a)(11)(A)(ii) and 417(c).

LAW AND ANALYSIS

  Section 414(l) of the Code provides that a plan will not qualify under section 401, in the case of any transfer of assets or liabilities of such plan to any other plan, unless each participant in the plan would (if the plan then terminated) receive a benefit immediately after the transfer of that is equal to or greater than the benefit the participant would have been entitled to receive immediately before the transfer (if the plan had then terminated).

  Section 1.414(l)-1(n)(1) of the regulations provides that the spinoff of a defined benefit plan will satisfy the requirements of section 414(l) of the Code if all the accrued benefits of each participant are allocated to only one of the spunoff plans and the value of the assets allocated to each spunoff plan is not less than the present value of the 'benefits on a termination basis' in the plan prior to the spinoff for all participants in that spunoff plan.

  Section 1.414(l)-1(b)(5) of the regulations defined the term 'benefits on a termination basis' as the benefits that would be provided exclusively by the plan assets pursuant to section 4044 of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 1974-3 C.B. 1, and the regulations thereunder if the plan had terminated.

  Sections 403(d), 4021, and 4044(a) of ERISA provide that in the case of the termination of a nonmultiemployer defined benefit plan, the assets of the plan must be allocated to participants and beneficiaries of the plan in a specified order of six different categories of benefits. The six categories of benefits include all of the participants' benefits under the plan, whether forfeitable or nonforfeitable.

  Section 401(a)(2) of the Code and section 1.401-2 of the regulations provide that, upon termination of a defined benefit plan, both the fixed and contingent liabilities of the plan to employees and beneficiaries (i.e., the vested and nonvested benefits of participants and beneficiaries) must be satisfied before the employer may recover any assets of the plan.  Rev. Rul. 85-6, 1985-1 C.B. 133, provides guidance on the determination of the liabilities that must be satisfied upon plan termination prior to such a reversion.

  Section 411(d)(6)(A) of the Code provides that a plan qualified under section 401 may not be amended (other than exceptions not relevant here) to reduce the accrued benefit of any participant. Section 411(d)(6)(B)(i) provides that a plan amendment that has the effect of eliminating or reducing an early retirement benefit, retirement-type subsidy or optional form of benefit (including any qualified joint and survivor annuity benefit required under sections 401(a)(11)(A)(i) and 417(b)) with respect to benefits attributable to service before the amendment will be treated as reducing accrued benefits. Rev. Rul. 85-6 provides that a defined benefit plan will fail to satisfy the requirements under section 411(d)(6) upon plan termination unless an early retirement subsidy that was provided prior to plan termination is provided for participants who satisfy the pretermination subsidy requirements after the termination of the plan.

  Section 401(a)(11)(A)(ii) and 417(c) of the Code provide that a qualified preretirement survivor annuity must be provided to the surviving spouse of a vested participant who dies before the annuity starting date.

  To satisfy the requirements of section 1.414(l)-1(a)(1) of the regulations where a nonmultiemployer defined benefit plan is spunoff, each participant's total benefits that continue after the spinoff must be allocated to one of the spunoff plans and the value of such total benefits under each plan that would be provided by plan assets in accordance with section 4044 of ERISA. A participant's total benefits in the categories under section 4044 include (a) early retirement benefits, retirement-type subsidies and optional forms of benefits, described under section 411(d)(6)(B) of the Code that are part of the accrued benefit under section 411(d)(6) and (b) qualified preretirement survivor annuity benefits required under section 401(a)(11)(A)(ii), in each case, without regard to whether the participant has satisfied all of the conditions for such benefit as of the spinoff. These same benefits also must be taken into account under section 401(a)(2) and section 1.401-2 in determining the liabilities that must be satisfied upon plan termination before the employer may recover any plan assets.

  In this case, the total benefits of participants were not taken into account to determine 'benefits on a termination basis' with respect to the spinoff. Thus, the spinoff may fail to satisfy the requirements of section 1.414(l)-1(n)(1) of the regulations and section 414(l) of the Code.

HOLDING

  The plan benefits that are (a) included in participants' accrued benefits under section 411(d)(6)(B) of the Code or (b) required under section

401(a)(11)(A)(ii) and 417(c) must be included in the determination of 'benefits on a termination basis' within the meaning of section 1.414(l)-1(b)(5) and

(n)(1) of the regulations.

Rev. Rul. 86-48, 1986-1 C.B. 216, 1986-14 I.R.B. 6.