IRS PROVIDES DETERMINATION LETTER PROCEDURES REGARDING RETIREE HEALTH ACCOUNTS.

Rev. Proc. 92-24

SECTION 1. PURPOSE

This revenue procedure modifies Rev. Proc. 92-6, 1992-1 I.R.B. 105, to provide procedures for requesting determination letters on the effect on a plan's qualified status under section 401(a) of the Internal Revenue Code of plan language that permits, pursuant to section 420 of the Code, the transfer of assets in a defined benefit plan to a health benefits account described in section 401(h).

SEC. 2. BACKGROUND

01 The Omnibus Budget Reconciliation Act of 1990 (OBRA '90), Pub. L. 101-508, added section 420 to the Code. In general, section 420 permits the transfer of assets in an overfunded defined benefit plan (other than a multiemployer plan) to a health benefits account described in section 401(h) if certain requirements are satisfied. If the requirements are satisfied, the transfer will not cause a plan to fail to satisfy section 401(a)(2) or section 401(h), the transferred amount shall not be included in the employer's gross income, the transfer shall not be treated as an employer reversion for purposes of section 4980, and the transferred amount shall not be treated as a prohibited transaction under section 4975 of the Code.

02 Rev. Proc. 92-6, 1992-1 I.R.B. 105, and Rev. Proc. 91-66, 1991-50 I.R.B. 16, set forth the procedures of the Service for issuing determination letters on the qualified status of pension, profitsharing, stock bonus, annuity, and employee stock ownership plans under sections 401(a), 403(a), 409, and 4975(e)(7) of the Code.

03 Rev. Proc. 90-17, 1990-1 C.B. 479, sets forth the procedures for user fees for ruling and determination letter requests.

SEC. 3. PROCEDURE

01 A plan sponsor may request a determination letter on the effect of plan language designed to comply with section 420 of the Code on the plan's qualified status under section 401(a) by following the procedures contained in this revenue procedure.

02 The general procedures of Rev. Proc. 92-6 for requesting determination letters apply to requests involving section 420 of the Code.

03 The general procedures of Rev. Proc. 90-17 for payment of user fees apply to determination letter requests involving section 420 of the Code. Determination letter requests should be accompanied by a properly completed Form 8717, User Fee for Employee Plan Determination Letter Request, and by a check or money order for the appropriate fee.

04 The Key District Offices of the Service, as described in section 19.06 of Rev. Proc. 92-6, will consider the qualified status of plan language designed to comply with section 420 of the Code only if the plan sponsor requests such consideration in a cover letter to the application. The cover letter must specifically state (i) whether consideration is being requested only with regard to section 420, or (ii) whether consideration is being requested with regard to section 420 in addition to other matters under section 401(a). The Service will not consider section 420 unless such consideration is specifically requested in the cover letter to the determination letter application.

05 The plan document must include the provisions described below. The cover letter must specifically state the location of a plan provision that satisfies each of the following requirements. The checklist at the end of this revenue procedure may be used to identify the location of relevant plan provisions.

(1) The plan must include a health benefits account as described in section 401(h) of the Code.

(2) The plan must provide that transfers shall be limited to transfers of "excess assets" as defined in section 420(e)(2).

(3) The plan must provide that only one transfer may be made in a taxable year. However, for purposes of determining whether the rule in the preceding sentence is met, a plan may provide that a transfer will not be taken into account if it is a transfer that:

(a) is made after the close of the taxable year preceding the employer's first taxable year beginning after December 31, 1990, and before the earlier of (i) the due date (including extensions) for the filing of the return of tax for such preceding taxable year, or (ii) the date such return is filed; and

(b) does not exceed the expenditures of the employer for "qualified current retiree health liabilities" as defined in section 420(e)(1) for such preceding taxable year.

(4) The plan must provide that the amount transferred shall not exceed the amount which is reasonably estimated to be the amount the employer will pay out (whether directly or through reimbursement) of the health benefits account during the taxable year of the transfer for qualified current retiree health liabilities.

(5) The plan must provide that no transfer will be made in any taxable year beginning after December 31, 1995.

(6) The plan must provide that any assets transferred, and any income allocable to such assets, shall be used only to pay qualified current retiree health liabilities for the taxable year of transfer.

(7) The plan must provide that any amounts transferred to a health benefits account (and income attributable to such amounts) which are not used to pay qualified current retiree health liabilities shall be transferred back to the defined benefit portion of the plan.

(8) The plan must provide that the amounts paid out of a health benefits account will be treated as paid first out of transferred assets and income attributable to those assets.

(9) The plan must provide that the accrued pension benefits for participants and beneficiaries must become nonforfeitable as if the plan had terminated immediately prior to the transfer (or in the case of a participant who separated during the 1-year period ending on the date of transfer, immediately before such separation). In the case of a transfer described in section 420(b)(4) relating to 1990, the plan must provide that the accrued benefit of a participant who separated from service during the taxable year to which such transfer relates will be recomputed and treated as nonforfeitable immediately before such separation.

(10) The plan must provide that a transfer will be permitted only if each group health plan or arrangement under which health benefits are provided states that the "applicable employer cost" for each taxable year during the "cost maintenance period" shall not be less than the higher of the applicable employer costs for each of the 2 taxable years immediately preceding the taxable year of the qualified transfer. The plan must define "applicable employee cost" and "cost maintenance period" consistently with section 420(c)(3)(B) and (D). The plan may provide that costs may be determined separately with respect to individuals eligible for benefits under Title XVIII of the Social Security Act at any time during the taxable year and with respect to individuals not so eligible.

(11) The plan must provide that transferred assets cannot be used for key employees as that term is defined in section 416(i)(1).

SEC. 4. SCOPE OF DETERMINATION LETTER

01 The Service will not consider the effect of language intended to comply with section 420 of the Code with respect to a request for a determination letter unless the plan sponsor specifically requests such consideration according to the requirements of this revenue procedure.

02 A determination letter issued with respect to a request under this revenue procedure only considers whether the plan language adversely affects the plan's qualified status under section 401(a) of the Code. Thus, no reliance is provided with regard to the application of section 404 (deductions for employer contributions), or section 412 (minimum funding requirements). Furthermore, no reliance is provided with regard to the employer's estimate of the amount that will be paid for qualified current retiree health liabilities for a given year.

03 Although a favorable determination letter does not cover the items described in section 4.02 above, a ruling letter may be requested according to the procedures of Rev. Proc. 92-4, 1992-1 I.R.B. 66, on the tax consequences of specific transactions (for example, whether a specific transfer results in a reversion under section 4980 of the Code or whether certain amounts are deductible under section 404). However, a ruling letter will not be issued with regard to an employer's estimate of the amount that will be paid for qualified current retiree health liabilities for a given year.

SEC. 5. EXTENSION OF REMEDIAL AMENDMENT PERIOD

Pursuant to section 1.401(b)-1(e) of the Income Tax Regulations, a plan sponsor that adopted a plan amendment effective on or after October 27, 1990 (the date of enactment of OBRA '90), to permit the transfer of assets in a defined benefit plan to a health benefits account in that plan, may amend that plan to meet the requirements of section 420 of the Code until the later of 1) the last day of the last plan year beginning before January 1, 1993, or 2) the remedial amendment period with respect to the amendment to permit the transfer, without regard to the extension under this section.

SEC. 6. EFFECT ON PRIOR REVENUE PROCEDURES

Rev. Proc. 92-6 is modified to permit requests for determination letters as described in this revenue procedure.

DRAFTING INFORMATION

The principal author of this revenue procedure is Jane Kesten of the Employee Plans Technical and Actuarial Division. For further information regarding this revenue procedure, please contact the Employee Plans Technical and Actuarial telephone assistance service between the hours of 1:30 to 4:00 p.m. Eastern time, Monday through Thursday, on (202) 566-6873/6874 (not a toll-free number). Ms. Kesten's telephone number is (202) 343-0729 (also not a toll-free call).

CHECKLIST

INSTRUCTIONS

As part of your determination letter request, you are encouraged to complete this checklist and attach it to your request. This will aid the Service in quickly locating the relevant plan provisions for making a determination on whether the plan language is satisfactory.

Plan language designed to comply with section 420 of the Code is not permitted in a multiemployer plan.

ITEM CIRCLE SECTION

1. Does the Plan contain a medical benefits account within the meaning of section 401(h) of the Code? If the medical benefits account is a new provision, items "a" through "h" should be completed. YES NO _______

a. Does the medical benefits account specify the medical benefits that will be available and contain provisions for determining the amount which will be paid? YES NO _______

b. Does the medical benefits account specify who will benefit? YES NO _______

c. Does the medical benefits account indicate that such benefits, when added to any life insurance protection in the plan, will be subordinate to retirement benefits? YES NO _______

d. Does the medical benefits account maintain separate accounts with respect to contributions to key employees (as defined in section 416(i)(1)), to fund such benefits? YES NO _______

e. Does the medical benefits account state that amounts contributed must be reasonable and ascertainable? YES NO _______

f. Does the medical benefits account provide for the impossibility of diversion prior to satisfaction of liabilities (other than item "7" below)? YES NO _______

g. Does the medical benefits account provide for reversion upon satisfaction of all liabilities (other than item "7" below)? YES NO _______

h. Does the medical benefits account provide that forfeitures must be applied as soon as possible to reduce employer contributions to fund the medical benefits? YES NO _______

2. Does the Plan limit transfers to "Excess Assets" as defined in section 420(e)(2) of the Code? YES NO _______

3. Does the Plan provide that only one transfer may be made in a taxable year (except with regard to transfers relating to prior years pursuant to section 420(b)(4) of the Code)? YES NO _______

4. Does the Plan provide that the amount transferred shall not exceed the amount reasonably estimated to be paid for qualified current retiree health liabilities? YES NO _______

5. Does the Plan provide that no transfer will be made in any taxable year beginning after December 31, 1995? YES NO _______

6. Does the Plan provide that transferred assets and income attributable to such assets shall be used only to pay qualified current retiree health liabilities for the taxable year of transfer? YES NO _______

7. Does the Plan provide that any amounts transferred (plus income) that are not used to pay qualified current retiree health liabilities shall be transferred back to the defined benefit portion of the Plan? YES NO _______

8. Does the Plan provide that amounts paid out of a health benefits account will be treated as paid first out of transferred assets and income attributable to those assets? YES NO _______

9. Does the Plan provide that participants' accrued benefits become nonforfeitable on a termination basis (i) immediately prior to transfer, or (ii) in the case or a participant who separated within 1 year before the transfer, immediately before such separation? YES NO _______

a. In the case of transfers described in section 420(b)(4) of the Code relating to 1990, does the Plan provide that benefits will be recomputed and become nonforfeitable for participants who separated from service in such prior year as described in section 420(c)(2)? YES NO _______

10. Does the Plan provide that transfers will be permitted only if each group health plan or arrangement provides that the "applicable employer cost" during the "cost maintenance period" shall not be less than the higher of the applicable employer costs for each of the 2 taxable year immediately preceding the taxable year of the transfer? YES NO _______

a. Does the Plan define "applicable employer cost" and "cost maintenance period" consistently with section 420(c)(3) of the Code? YES NO _______

11. Does the Plan provide that transferred assets cannot a used for key employees? YES NO _______