SERVICE CLARIFIES POSITION ON QUALIFIED PLAN REVERSIONS.

Rev. Rul. 91-4

PURPOSE

The purpose of this revenue ruling is to obsolete Rev. Rul. 60- 276, 1960-1 C.B. 150, and to supersede Rev. Rul. 77-200, 1977-1 C.B. 98, for reversions occurring on or after December 22, 1987, the date of enactment of section 9343 of the Omnibus Budget Reconciliation Act of 1987. ("OBRA 87"), Pub. L. 100-203.

ISSUE

Under what circumstances may a qualified pension, profit-sharing or stock bonus plan permit reversion of employer contributions?

A plan permits reversion of employer contributions under the conditions described in section 403(c)(2) of the Employee Retirement Income Security Act of 1974 ("ERISA"), Pub. L. 93-406, as amended by section 9343(c) of OBRA 87.

LAW AND ANALYSIS

Section 401(a)(2) of the Internal Revenue Code of 1986 generally requires a trust instrument forming part of a pension, profit-sharing or stock bonus plan to prohibit the diversion of corpus or income for purposes other than the exclusive benefit of the employees or their beneficiaries. Section 403(c)(1) of ERISA contains a similar prohibition against diversion of the assets of a plan.

Section 403(c)(2) of ERISA, for which there is no parallel provision in the Internal Revenue Code, generally provided, provided to its amendment by OBRA 87, that the general prohibition against diversion does not preclude the return of a contribution made by an employer to a plan if: (1) the contribution is made by reason of a mistake of fact (section 403(c)(2)(A); (2) the contribution is conditioned on qualification of the plan under the Internal Revenue Code and the plan does not so qualify (section 403(c)(2)(B); or (3) the contribution is conditioned on its deductibility under section 404 of the Code (section 403(c)(2)(C)). The return to the employer of the amount involved must generally be made within one year of the mistaken payment of the contribution, the date of denial of qualification, or disallowance of the deduction.

In Rev. Rul. 60-276, the Service held that a provision permitting the reversion of the entire assets of a plan on the failure of the plan to qualify initially under the Code would be allowed. In Rev. Rul. 77-200, the Service held that plan language providing for the return of employer contributions under the circumstances specified in section 403(c)(2)(A) and (C) of ERISA could also be included in a plan intended to qualify under the Internal Revenue Code.

The Tax Court, in Calfee, Halter, & Griswold v. Commissioner, 88 T.C. 641 (1987), held that a plan may qualify under section 401(a) of the Code if it permits reversions under pre-OBRA 87 section 403(c)(2)(B) of ERISA, even if such reversions are not limited to initial qualification of a plan. In reaching this conclusion, the Tax Court assumed that the standards and guidelines in Title I of ERISA were applicable in interpreting the Code.

In enacting section 9343 of OBRA 87, Congress legislatively overturned the holding in Calfee, Halter, & Griswold. It amended section 403(c)(2)(B) of ERISA to provide for the return of employer contributions under that section only if: (1) the return of the contribution is conditioned on initial qualification of the plan; (2) the plan received an adverse determination with respect to its initial qualification; and (3) the application for determination is made within the time prescribed by law for filing the employer's return for the taxable year in which such plan was adopted, or such later date as the Secretary of the Treasury may prescribe. Section 9343 also provided that, except to the extent provided by the Code or the Secretary of the Treasury, Titles I and IV of ERISA are not applicable to interpreting the Code. Both amendments were effective on the date of enactment of OBRA 87, December 22, 1987.

Section 1.401(b)-1 of the Income Tax Regulations provides a remedial amendment period for disqualifying provisions. Any such section 401(b) remedial amendment period is a later date as the Secretary may prescribe for filing the application for determination.

HOLDING

Pursuant to this revenue ruling, language providing for a return of contributions in the circumstances specified in section 403(c)(2)(A), (B) and (C) of ERISA, as amended by OBRA 87, may be included in a plan intended to qualify under the Internal Revenue Code. Thus, plans that are amended to include such language will not fail to satisfy section 401(a)(2) of the Code solely as the result of such an amendment. For example, a plan provision permitting the reversion of the entire assets of the plan on failure of the plan to qualify initially under the Internal Revenue Code will be allowed only under the circumstances described in section 403(c)(2)(B)of ERISA.

The determination of whether a reversion due to a mistake of fact or the disallowance of a deduction with respect to a contribution that was conditioned on its deductibility is made under circumstances specified in section 403(c)(2)(A) and (C) of ERISA, and therefore will not adversely affect the qualification of an existing plan, will continue to be made on a case by case basis. In general, such reversions will be permissible only if the surrounding facts and circumstances indicate that the contribution of the amount that subsequently reverts to the employer is attributable to a good faith mistake of fact, or in the case of the disallowance of the deduction, a good faith mistake in determining the deductibility of the contribution. A reversion under such circumstances will not be treated as a forfeiture in violation of section 411(a) of the Code, even if the resulting adjustment is made to the account of a participant that is partly or entirely nonforfeitable.

The maximum amount that may be returned to the employer in the case of a mistake of fact or the disallowance of a deduction is the excess of (1) the amount contributed, over, as relevant, (2) (A) the amount that would have been contributed had no mistake of fact occurred, or (B) the amount that would have been contributed had the contribution been limited to the amount that is deductible after any disallowance by the Service. Earnings attributable to the excess contribution may not be returned to the employer, but losses attributable thereto must reduce the amount to be so returned. Furthermore, if the withdrawal of the amount attributable to the mistaken or nondeductible contribution would cause the balance of the individual account of any participant to be reduced to less than the balance which would have been in the account had the mistaken or nondeductible amount not been contributed, then the amount to be returned to the employer must be limited so as to avoid such reduction. In the case of a reversion due to initial disqualification of a plan, the entire assets of the plan attributable to employer contributions may be returned to the employer.

EFFECTIVE DATE

Plans have until the end of the section 401(b) remedial amendment period to amended retroactively to conform with OBRA 87. Operation of a plan in a manner inconsistent with section 403(c)(2)(B) of ERISA, as amended by section 9343 of OBRA 87, on or after December 22, 1987, the effective date of section 9343, will cause the plan to fail to satisfy section 401(a) of the Code.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 60-276 is obsoleted. Rev. Rul. 77-200 is superseded for reversions of employer contributions occurring on or after the date of enactment of section 9343 of OBRA 87.

DRAFTING INFORMATION

The principal author of this revenue ruling is Jane Kesten of the Employee Plans Technical and Actuarial Division. For further information concerning this revenue ruling, please contact the Employee Plans Technical and Actuarial Division's taxpayer assistance telephone service between the hours of 1:30 p.m. and 4:00 p.m., Eastern Time, Monday through Thursday on (202) 566-6783/6784 (not a toll-free number). Ms. Kesten's telephone number is (202) 343-0729 (also not a toll-free number).