SERVICE ANNOUNCES THAT TERMINATING PENSION PLANS MUST BE AMENDED TO COMPLY WITH 1986 TAX REFORM ACT TO MEET QUALIFICATIONS REQUIREMENTS.

Notice 87-57

This notice advises the sponsor of a terminating pension, profit-sharing, or stock bonus plan that such a plan must be amended to meet the qualification requirements of the Internal Revenue Code (Code) as amended by the Tax Reform Reform Act of 1986 (TRA '86) that are in effect at the time of the plan's termination in order for the termination of such plan not to adversely affect its qualified status. Furthermore, the Internal Revenue Service will review requests for determination letters with respect to terminating plans for compliance with the qualification requirements of the Code, as amended by TRA '86.

BACKGROUND

TRA '86, enacted on October 22, 1986, changed many of the qualification requirements under the Code applicable to pension, profit-sharing, and stock bonus plans. Some of the new qualification requirements are effective for plan years beginning after December 31, 1986, some are effective for plan years beginning after December 31, 1988, and others are effective retroactively. TRA '86 also contains Technical Corrections to the Tax Reform Act of 1984 (TRA '84) and to the Retirement Equity Act of 1984 (REA). Some of these technical corrections are also effective retroactively.

Section 1140 of TRA '86 provides, in general, that if any provision of subtitle A or C of Title XI of TRA '86 requires an amendment to any plan, such amendment need not be made until the first plan year beginning after December 31, 1988 (or later, in the case of certain collectively bargained plans) so long as such amendment is made retroactive and the plan is operated in accordance with the requirements of such provision as of the provision's effective date.

Notice 86-13, 1986-46 I.R.B. 17, states that, pending further notice, the Service will not review plans requesting determination and opinion letters for conformity with the qualification requirements of the Code as changed by TRA '86, except with respect to the retroactive technical corrections provisions of REA under Title XVIII of TRA '86 (Title XVIII).

Notice 87-2, 1987-2 I.R.B. 17, provides guidance in the form of model amendments that plan sponsors of individually designed plans may adopt to satisfy the provisions of TRA '86 (other than Title XVIII) that are effective prior to plan years beginning after December 31, 1988.

Notice 87-33, 1987-18 I.R.B. 7, provides guidance in the form of model amendments that sponsors of master and prototype plans may adopt to satisfy the provisions of TRA '86, exclusive of Title XVIII, that are effective for plan years beginning before January 1, 1989.

Notice 87-20, 1987-6 I.R.B. 17, provides guidance to sponsors of defined benefit plans in complying with sections 411(a)(11)(B) and 417(e)(3) of the Code, as amended by TRA '86. These sections limit the interest rate that may be used under a defined benefit plan for computing the present values and amounts of certain benefits.

Notice 87-21, 1987-6 I.R.B. 20, provides guidance to sponsors of plans regarding the new limitations on contributions and benefits under section 415 of the Code, as amended by TRA '86. The notice also states that plans generally must be amended to conform to the changes in section 415 no later than the last day of the first plan year beginning on or after January 1, 1989, or upon plan termination, if earlier.

Notice 87-28, 1987-14 I.R.B. 46, states that plans must comply in operation with the temporary REA regulations and Title XVIII. This notice also describes the conditions under which plans may delay until the dates described by section 1140 of TRA '86 the adoption of amendments that conform to the Technical Corrections to REA.

AMENDMENT UPON PLAN TERMINATION

Section 1140 of TRA '86 provides a delayed date by which plans must be amended to conform to changes in the qualification requirements, as do the notices described above. Section 1140 also requires that any plan amendment must apply retroactively to the effective date of the statutory change which necessitates such amendment. Furthermore, the plan must be operated in accordance with all applicable provisions of the Code as of the effective date for each provision.

A plan that terminates after the effective date of one or more changes made by TRA '86, but prior to the date that amendments are otherwise required under section 1140, must operate in conformity with the applicable provisions of TRA '86 from the date on which such provisions become effective with respect to the plan. Because such a terminated plan would no longer be in existence by the amendment date described by section 1140, and therefore could not be amended on that date, such plan must be amended no later than the termination to comply with those provisions of TRA '86 that have become effective with respect to the plan as of such termination. In addition, annuity contracts distributed from such terminated plans also must meet all the applicable provisions of TRA '86, including the requirements of REA, the temporary REA regulations and Title XVIII of TRA '86.

Accordingly, the Internal Revenue Service will not issue a determination letter stating that termination does not adversely affect plan qualification unless the plan has been amended to meet the requirements of TRA '86 in effect at the time of plan termination. Sponsors of terminating pension, profit-sharing, or stock bonus plans, including adopting employers of master or prototype plans whose sponsors have not adopted the model master or prototype plans whose sponsors have not adopted the model master and prototype amendments of Notice 87-33, may adopt individually designed amendments or the model plan amendments described by Notice 87-2 in order to make conforming amendments to terminating plans as required by TRA '86. However, in each case, including the case of a terminating master or prototype plan whose sponsor has adopted the model plan amendments of Notice 87-33, the plan must also be amended, as necessary, to satisfy the temporary REA regulations and Title XVIII of TRA '86.

EFFECT ON PRIOR NOTICES

Notice 86-13 is hereby modified to provide that the Service will review plans requesting determination letters on termination for compliance with qualification requirements of the Code as changed by TRA '86 that are in effect for the plan at the time of plan termination. Notice 87-20 and 87-28 are hereby clarified to require plan amendment upon termination to comply with TRA '86, including Title XVIII and the temporary REA regulations, where the plan terminates prior to the plan year beginning after December 31, 1988. This modification will apply to determination letters issued after August 31, 1987.