Pension fund could convert direct rollovers into annuities

Plain-English summary

Two related multiemployer funds asked whether a defined benefit pension fund could accept direct rollovers from a defined contribution annuity fund and convert them into immediate annuities. The proposed benefit would be actuarially equivalent to the amount rolled over using the section 417(e) interest rate and mortality table, and the rollover would be treated as a mandatory employee contribution. The pension fund would exclude the rollover-based annuity from the participant's annual benefit under section 415 and restrict rollovers if its funded status deteriorated. The IRS concluded that the arrangement would satisfy sections 411 and 415 on the stated conditions. The ruling also required the rollover-derived accrued benefit to remain nonforfeitable.

Ruling snapshot

• Question: Could the defined benefit fund accept direct rollovers from the related defined contribution fund and provide actuarially equivalent annuities without violating sections 411 and 415?
• Outcome: Approved, subject to the stated rollover, actuarial, vesting, and funding-status conditions.
• Key authorities: IRC §§ 401, 402, 411, 415, 417, and 432; Rev. Rul. 2012-4.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201643024 Third Party Communication: None
Release Date: 10/21/2016 Date of Communication: Not Applicable

Index Number: 411.00-00, 415.00-00

Person To Contact:
Telephone Number:

Refer Reply To:
CC:TEGE:EB:QP1

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Date:
July 18, 2016

In Re:

Pension Fund A =
Annuity Fund B =

Plan C =

Dear:

This letter is in response to correspondence, dated August 2, 2013, submitted on behalf
of Pension Fund A and Annuity Fund B (collectively “the Funds”) by their authorized
representatives, requesting a ruling to permit Pension Fund A to accept direct rollovers
of eligible rollover distributions from Annuity Fund B and to provide annuities resulting
from those direct rollovers.

The following facts and representations are submitted under penalties of perjury in
support of your request:

Pension Fund A is a multiemployer defined benefit pension trust, and Annuity Fund B is
a multiemployer defined contribution pension trust. The Funds represent that both
Pension Fund A and Annuity Fund B were established under a series of collective
bargaining agreements between the same participating employers and the same local
unions. The Funds represent that in general, participants and beneficiaries in Pension
Fund A are also participants and beneficiaries in Annuity Fund B.

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The Funds represent that neither Pension Fund A nor Annuity Fund B is a governmental
plan, a non-electing church plan, or another plan to which § 411 of the Internal Revenue
Code does not apply under § 411(e)(1). Annuity Fund B represents that it does not
permit after-tax participant contributions.

Pension Fund A represents that it is neither in “endangered” or “critical” funded status
(as defined in § 432), but that it is in the “green zone” funded status. Accordingly,
Pension Fund A is not under a funding improvement plan or a rehabilitation plan.

Pension Fund A represent that the Board of Trustees of Pension Fund A wishes to
amend Plan C (the pension plan that is funded by Pension Fund A) to permit individuals
who establish that they are participants in both Pension Fund A and Annuity Fund B to
roll over eligible rollover distributions (as defined in § 402(c)(4)) from Annuity Fund B to
Pension Fund A.

Pension Fund A represents that the Board of Trustees will amend Plan C to accept
transfers or rollovers from Annuity Fund B, if certain conditions are met. Pension Fund
A proposes that an amendment to Plan C would include the following conditions:

The transfer from Annuity Fund B to Pension Fund A must be completed within three
days before the participant begins to receive monthly benefits from Pension Fund A;

Pension Fund A shall determine the benefits resulting from the rollover in the form of an
annuity that is the actuarial equivalent of the amount rolled over, where actuarial
equivalence is determined using the applicable interest rate and mortality table under

§ 417(e). In the event of a delay between the transfer or rollover and the annuity
starting date, interest on the rollover contribution is accumulated in accordance with the
requirements of § 411(c)(2)(C)(iii). If the participant lives longer than the life expectancy
under the mortality table used to calculate the annuity and there are no offsetting
actuarial gains, or the plan earns less than the interest rate used to calculate the
annuity, Pension Fund A will be required to provide the additional benefits;

The rollover amount will augment the monthly benefit form that the participant
previously selected for the original benefit to be provided by Pension Fund A, and the
participant will not be entitled to a different benefit form based on the rolled-over
amount;

The amounts rolled over from Annuity Fund B will be nonforfeitable, and the rolled-over
contributions will be required as a condition precedent of receiving any additional
monthly benefits from Pension Fund A;

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The amounts rolled over from Annuity Fund B will be treated as mandatory contributions
for purposes of § 411(c), and the accrued benefit derived from such amounts will be
determined in accordance with § 411(c);

Pension Fund A will exclude the amounts rolled over from Annuity Fund B from the
participant’s annual benefit for purposes of § 415(b); and

The Funds also represent that Pension Fund A will not accept rollovers from Annuity
Fund B if Pension Fund A’s actuary has certified that the plan is in critical status (as
defined in § 432(b)(2)). Furthermore, in the event Pension Fund A is certified to be in
“endangered status” under § 432(b)(1), rollovers from Annuity Fund B will only be
accepted to the extent that Pension Fund A’s actuary certifies that the benefits payable
on account of amounts rolled over will be consistent with the required funding
improvement plan and paid for out of contributions not required by the funding
improvement plan to meet the applicable benchmark, in accordance with the schedule
contemplated in the funding improvement plan.

The Funds have requested a ruling that the proposed amendment to Plan C, under
which Pension Fund A would accept a direct rollover of an eligible rollover distribution
from Annuity Fund B satisfies §§ 411 and 415, when Pension Fund A provides an
annuity resulting from the direct rollover that is determined by converting the amount
directly rolled over into an annuity that is the actuarial equivalent of the amount rolled
over, using the applicable interest rate and mortality table under § 417(e).

Section 401(a)(7) requires that a qualified plan satisfy the requirements of § 411.

Section 401(a)(16) requires that a qualified plan not provide for benefits or contributions
that exceed the limitations of § 415.

Section 401(a)(31) requires that a participant in a qualified plan be permitted to elect to
have a distribution made in the form of a direct rollover to another eligible retirement
plan if the distribution qualifies as an eligible rollover distribution.

Section 401(a)(31)(D) defines the term “eligible rollover distribution,” for purposes of

§ 401(a)(31), as having the meaning set forth in § 402(f)(2)(A). Section 402(f)(2)(A),
referring to § 402(c)(4), defines the term “eligible rollover distribution,” for purposes of a
§ 401(a) qualified plan, as any distribution to an employee of all or any portion of the
balance to the credit of the employee in a qualified trust, except that such term shall not
include: (A) any distribution which is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life expectancy) of the
employee or the joint lives (or joint life expectancies) of the employee and the
employee's designated beneficiary, or for a specified period of 10 years or more; (B)

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any distribution to the extent such distribution is required under § 401(a)(9); or (C) any
distribution which is made upon hardship of the employee.

Section 401(a)(31)(E) defines the term “eligible retirement plan,” for purposes of
§ 401(a)(31), as having the same meaning given such term by § 402(c)(8)(B), except
that a qualified trust shall be considered an eligible retirement plan only if it is a defined

contribution plan, the terms of which permit acceptance of rollover distributions. Section
402(c)(8)(B) otherwise defines the term “eligible retirement plan” to include a qualified
trust.

Section 411(a)(1) requires that the accrued benefit derived from an employee’s
contributions be nonforfeitable.

Section 411(c)(2) prescribes rules for the determination of the accrued benefit derived
from employee contributions.

Section 411(c)(2)(B) provides that, in the case of a qualified defined benefit plan, the
accrued benefit derived from the contributions made by an employee is equal to the
accumulated contributions expressed as an annual benefit commencing at normal
retirement age, using an interest rate which would be used under the plan under

§ 417(e)(3) (as of the determination date).

Section 411(c)(2)(C) defines accumulated contributions as the mandatory contributions
made by the employee, increased by interest. With respect to periods during plan years
beginning on or after January 1, 1988, the interest is determined using the rate of 120
percent of the Federal mid-term rate under § 1274 for the first month of each plan year
for the period ending on the date the determination is being made, and using the
interest rate under § 417(e)(3) for the period between the determination date and the
normal retirement age. Under § 411(c)(2)(C) and § 1.411(c)-1(c)(4) of the Income Tax
Regulations, mandatory contributions are defined as amounts contributed to the plan by
the employee which are required as a condition of employment, as a condition of
participation in the plan, or as a condition of obtaining benefits (or additional benefits)
under the plan attributable to employer contributions.

Section 411(c)(3) requires that, if the accrued benefit derived from employee
contributions is to be determined with respect to a benefit other than an annual benefit
in the form of a single life annuity (without ancillary benefits) commencing at normal
retirement age, the accrued benefit derived from contributions made by the employee
must be the actuarial equivalent of the amount determined under § 411(c)(2).

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Section 415(a)(1)(A) provides that, in the case of a qualified defined benefit plan, the
associated trust will not be a qualified trust if the plan provides benefits with respect to a
participant in excess of the limitations under § 415(b).

Section 415(b)(1) prescribes limitations that are based on the annual benefit determined
under § 415(b)(2).

Section 415(b)(2)(B) provides for adjustments, in accordance with regulations, to the
benefit determined under the plan if employees contribute or make rollover contributions
to the plan.

Section 412 contains minimum funding rules that generally apply to pension plans.
Section 431 sets forth the funding rules that apply specifically to multiemployer defined
benefit plans. Section 432 provides additional funding rules for multiemployer plans that
are in endangered status, critical status or critical and declining status. Section
432(a)(1) provides that in the case of a multiemployer plan in effect on July 16, 2006, if
the plan is in endangered status, the plan sponsor shall adopt and implement a funding
improvement plan in accordance with § 432(c). Section 432(a)(2) provides that in the
case of a multiemployer plan in effect on July 16, 2006, if the plan is in critical status,
the plan sponsor shall adopt and implement a rehabilitation plan in accordance with

§ 432(e).

Section 432(b)(1) describes how to determine if a multiemployer plan is in endangered
status for a plan year. Section 432(b)(2) describes how to determine if a multiemployer
plan is in critical status for a plan year.

Section 1.401(a)(31)-1, A-2 explains that, although § 401(a)(31)(D) limits the types of
qualified trusts that are treated as eligible retirement plans to defined contribution plans
that accept eligible rollover distributions, a plan is permitted, at a participant's election,
to make a direct rollover to any type of eligible retirement plan (as defined in section
402(c)(8)(B)), including a defined benefit plan.

Section 1.401(a)(31)-1, A-13, provides that a qualified plan is not required to accept
rollovers or it can provide that it will accept rollovers under limited circumstances.

Section 1.401(a)(31)-1, A-15 provides that, for purposes of applying the plan
qualification requirements of § 401(a), a direct rollover is a distribution and rollover of
the eligible rollover distribution (rather than a transfer of assets and liabilities).

Section 1.411(a)-4T provides that adjustments in benefits, such as adjustments in
excess of reasonable actuarial assumptions, can result in an impermissible forfeiture of
participants’ rights.

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Section 1.411(a)-4(b)(1)(ii) provides that the benefit derived from employee
contributions is not treated as forfeitable merely because, after commencement of
annuity payments, the participant dies without receiving payments equal in amount to
the nonforfeitable accrued benefit derived from mandatory contributions determined at
the time of commencement.

Section 1.415(b)-1(b)(1) prescribes rules for the determination of the annual benefit for
purposes of § 415(b). Under § 1.415(b)-1(b)(1)(ii), the annual benefit does not include
the annual benefit attributable to rollover contributions as described in § 401(a)(31).

Section 1.415(b)-1(b)(2) provides rules for the determination of the annual benefit
attributable to rollover contributions. Under § 1.415(b)-1(b)(2)(iii), the annual benefit

attributable to rollover contributions is determined by applying the factors applicable to
mandatory employee contributions as described in §§ 411(c)(2)(B) and (C) and the
regulations thereunder.

Revenue Ruling 2012-4, 2012-8 I.R.B. 386, provides that a qualified defined benefit
plan that accepts a direct rollover of an employee’s or former employee's benefit from a
qualified defined contribution plan maintained by the same employer does not violate
§§ 411 or 415 if the defined benefit plan provides an annuity resulting from the direct
rollover that is determined by converting the amount directly rolled over into an
actuarially equivalent immediate annuity using the applicable interest rate and
applicable mortality table under § 417(e).

Revenue Ruling 2012-4 further provides that if the qualified defined benefit plan
receiving a direct rollover were to use a more favorable actuarial basis (such as a higher
interest rate than the § 417(e)(3)(C) applicable interest rate or a mortality table with
shorter life expectancies than the applicable § 417(e)(3)(B) mortality table) for purposes
of calculating the annuity resulting from the rollover amount, or otherwise provided for a
larger annuity than the annuity derived from employee contributions as determined
under § 411(c), then the portion of the benefit under the qualified defined benefit plan
resulting from the amount directly rolled over that exceeds the benefit derived from that
rolled over amount under the rules of § 411(c)(2)(B) is not treated as the benefit derived
from the employee’s own contributions, and the excess portion would be included in the
annual benefit, for purposes of § 415(b).

In this case, the Funds propose permitting participants in Annuity Fund B to elect to
have amounts transferred from Annuity Fund B directly to Pension Fund A. Pension
Fund A and Annuity Fund B are each eligible retirement plans, within the meaning of

§ 401(a)(31)(E). Amounts that are proposed to be transferred constitute eligible rollover
distributions, as defined in § 401(a)(31)(D). Therefore, each employee’s elective

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transfer of amounts from Annuity Fund B to Pension Fund A constitutes a direct rollover
within the meaning of § 401(a)(31).

Under § 1.401(a)(31)-1, A-15, an amount directly rolled over from Annuity Fund B to
Pension Fund A is treated as if it were distributed to a participant from Annuity Fund B
and then rolled over into Pension Fund A. Accordingly, this amount is treated as
contributed by the participant to Pension Fund A. Furthermore the contribution is
required as a condition of receiving additional benefits under Plan C attributable to
employer contributions. For example, if the employee lives longer than the life
expectancy under the mortality table used to calculate the annuity and there are no
offsetting actuarial gains or Pension Fund A earns less than the interest rate used to
calculate the annuity, the contributing employers would be required to make
contributions to provide the additional benefits. Thus, under § 1.411(c)-1(c)(4), the
amounts directly rolled over are treated as mandatory contributions for purposes of
§ 411(c) and the accrued benefit derived from those amounts, determined under the
rules of § 411(c), must be nonforfeitable.

The benefit resulting from amounts rolled over to Pension Fund A is provided as an
immediate annuity and is determined as the actuarial equivalent of the amount rolled
over from Annuity Fund B, where actuarial equivalence is determined using the
applicable interest rate and mortality table under § 417(e). Furthermore, in the event of
a delay between the rollover and the annuity starting date, interest on the rollover
contribution is accumulated in accordance with the requirements of § 411(c)(2)(C)(iii).
Thus, Pension Fund A satisfies the requirements of § 411(c)(2) with respect to the
rollover.

Accordingly, Pension Fund A’s provisions relating to the benefit resulting from the
amount directly rolled over satisfy the requirement of § 411(a)(1) that the benefit derived
from an employee’s own contributions be nonforfeitable. In addition, a participant's
Pension Fund A benefit resulting from the amount directly rolled over is excluded from
the participant’s annual benefit for purposes of § 415(b). This is consistent with

§ 1.415(b)-1(b) in that the annual benefit for purposes of § 415(b) excludes the benefit
attributable to rollover contributions, determined using the rules of §§ 411(c)(2)(B) and
(C), and the Pension Fund A benefit resulting from the amount directly rolled over is
determined using the rules of §§ 411(c)(2)(B) and (C).

Because Pension Fund A proposes to limit its ability to accept rollovers from Annuity
Fund B if Pension Fund A is in endangered status, as defined in § 432, and to prohibit
rollovers from Annuity Fund B if Pension Fund A is in critical status, as defined in § 432,
the adverse impact on Pension Fund A resulting from such rollovers and payment of
additional benefits is limited.

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Under the facts presented, Pension Fund A will not violate §§ 411 or 415 on account of
accepting a direct transfer or rollover of a participant’s or a former participant’s benefit
from Annuity Fund B, on the condition that Pension Fund A provides an annuity
resulting from the rollover that is determined by converting the amount directly rolled
over into an actuarially equivalent immediate annuity using the applicable interest rate
and applicable mortality table under § 417(e).

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent. The ruling contained in this letter is
based upon information and representations submitted by the taxpayers and
accompanied by penalty of perjury statements executed by appropriate parties. While
this office has not verified any of the material submitted in support of the letter ruling, it
is subject to verification on examination. A copy of this letter ruling has been submitted
to your authorized representative under the provisions of a power of attorney and
declaration of representative, or other proper authorization, currently on file with the
Internal Revenue Service.

Sincerely,

William B. Hulteng

Acting Branch Chief

Qualified Plans Branch 1

(Tax Exempt and Government Entities)