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Dec. 21, 2010


EMPLOYEE BENEFITS E-UPDATE

IRS Expands Rules for Tax-Exempt Group Trusts

          On Dec. 16, 2010, the Internal Revenue Service (IRS) issued Revenue Ruling 2011-1, which modifies the general rules for group trusts described in Revenue Ruling 81-100, 1981-1 C.B. 326, as clarified and modified by Revenue Ruling 2004-67, 2004-2 C.B. 28.  Specifically, this guidance addresses the conditions under which the assets of qualified plans under Internal Revenue Code (Code) Section 401(a), individual retirement accounts (IRAs) under Code Section 408, and eligible governmental plans under Code Section 457(b) may be pooled in a group trust.  The revenue ruling also permits custodial accounts under Code Section 403(b)(7), retirement income accounts under Code Section 403(b)(9), and governmental retiree benefit plans under Code Section 401(a)(24) to participate in such group trusts if certain requirements are met.  Model language is provided which group trusts may use to comply with the new provisions.  The Revenue Ruling revises the transition relief under Revenue Ruling 2008-40, 2008-2 C.B. 166, regarding plans qualifying under Section 1165 of the Puerto Rico Internal Revenue Code.

Overview of New Guidance

          In addition to the requirements set forth in Revenue Ruling 81-100, Revenue Ruling 2011-1 requires that each entity adopting the group trust be:

  • tax-exempt under Code Section 501(a) or not subject to federal income tax; and
  • be part of a plan that satisfies an exclusive benefit rule (i.e., it is impossible for any part of the corpus or income of the plan to be used for, or diverted to, purposes other than for the exclusive benefit of the plan participants and their beneficiaries).

The guidance also requires that the group trust separately account for the interest of each entity adopting the group trust.

          Revenue Ruling 2011-1 clarifies that a governmental plan described in Code Section 401(a)(24) may include both a governmental plan that provides pension benefits and a governmental plan that provides other employee benefits for retirees, such as retiree welfare benefits.  Therefore, a governmental plan providing retiree welfare benefits will be treated as a Code Section 401(a)(24) plan and may invest in a group trust.  This should allow many Code Section 115 and OPEB retiree health trusts to participate in group trusts.

Model Amendments

          Revenue Ruling 2011-1 provides two model amendments group trusts may adopt to comply with the provisions of the revenue ruling.  Model Amendment 1 is for a group trust that received a determination letter from the IRS prior to Jan. 10, 2011, but that does not satisfy the separate account requirement noted above.  Although group trusts in this category will generally satisfy the separate account requirement in operation, the sponsor of the group trust must amend its group trust instrument by Jan. 10, 2012, to specifically provide for separate accounts as required under Revenue Ruling 2011-1.

          Model Amendment 2 is for a group trust that received a determination letter from the IRS prior to Jan. 10, 2011, and that intends to permit custodial accounts under Section 403(b)(7), retirement income accounts under Section 403(b)(9), or Section 401(a)(24) governmental retirement plans to participate in the group trust.  If a group trust does not satisfy the separate account requirement and intends to permit custodial accounts under Section 403(b)(7), retirement income accounts under Section 403(b)(9), or Section 401(a)(24) governmental retirement plans to participate in the group trust, the group trust should adopt both model amendments.

Reliance on Existing Determination Letter

          It is important to note that if a group trust document provides that amendments to the group trust will automatically pass-through to the group trust retiree benefit plan, and the trustee of the group trust is otherwise entitled to rely on a favorable determination letter issued to it prior to Jan. 10, 2011, the trustee may adopt Model Amendment 1 or Model Amendment 2 on a word-for-word basis (or adopt an amendment that is substantially similar in all material respects) and continue to rely on the previously issued determination letter regarding its group trust without filing a request with the IRS for a new determination letter.  However, a group trust that has received a favorable determination letter but does not contain such a pass-through provision may not adopt Model Amendment 1 or Model Amendment 2 and automatically continue to rely on its determination letter.  In other words, such a group trust will need to adopt appropriate language and file a request with the IRS for a new determination letter.

Comments Requested

          The IRS is requesting comments by April 11, 2011, on whether annuity contracts and/or other tax-favored accounts held by Section 401(a) or Section 403(b) plans, such as pooled separate accounts treated as trusts under Code Section 401(f), should be permitted to invest in group trusts.

          For more information regarding how the expanded group trust requirements in Revenue Ruling 2011-1 impact your tax-exempt group trust, please contact Mary Beth Braitman, Terry A.M. Mumford, Lisa E. Harrison or the Ice Miller Employee Benefits attorney with whom you work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

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