4.72.14  Multiemployer Plan Examination Guidelines (Cont. 1) 
Technical Requirements 
Vesting, Accruals, and Service Credit  (05-04-2001)
Partial Terminations

  1. IRC 413(b)(2) provides that the partial termination rules of IRC 411(d)(3) shall be applied as if all participants who are subject to the same benefit computation formula and who are employed by employers who are parties to the collective bargaining agreement were employed by a single employer. Reg. 1.413-1(c)(3) explains that the determination of whether a partial termination has occurred is made separately with regard to each such group, and that a partial termination in one group has no bearing on whether a partial termination has occurred in another. "Benefit computation formula" refers to the benefit that an employee earns rather than the contribution level to which his or her employer has agreed.

  2. An agent should first look at the plan’s vesting schedule. If the plan provides for full and immediate vesting of benefits, there is no violation of IRC 411(d)(3) even if there is a partial termination. Next the agent should determine if the plan has filed Form 5303 indicating that a partial termination has occurred. The agent should ask the administrator about employer withdrawals, union local shutdowns, or other events that might have triggered a partial termination. If there is significant evidence of a partial termination, the agent should refer to the rules cited above and apply the same standards used in a single-employer plan.  (05-04-2001)
Accrual Rules under IRC 411(b)

  1. Reg.1.411(b)-1(b)(2)(ii)(F) provides that a plan shall not satisfy the 133-1/3 percent accrual rule if the base for computation of retirement benefits changes solely by reason of an increase in the number of years of participation. A plan could violate this requirement if the compensation base for determining accrued benefits changes solely by reason of the completion of a specified number of years of service. While the base may be changed because of factors such as salary increases, the base may not be changed, absent such factors, by reference to length of service. For example, a plan that provides that the accrued benefits for participants with less than 30 years of service are determined with reference to career average compensation, while the accrued benefits of participants with 30 or more years of service are determined with reference to final five-year average compensation, would not satisfy the 133-1/3 percent accrual rule. See Carollo v. Cement and Concrete Workers District Council Pension Plan, 964 F. Supp. 677 (E.D. N.Y. 1997).  (05-04-2001)
Reciprocity Agreements

  1. A unique feature of some multiemployer plans is the recognition of service or benefit accruals earned by union members under another multiemployer plan. These agreements are generally known as "reciprocity agreements." For instance, the trustees of two plans maintained by local or regional affiliates of a national union may enter into a reciprocity agreement providing that each plan will apply covered service by the employee for an employer participating in the other plan toward the benefit earned under the employee’s home plan.

  2. Reciprocity agreements can be designed in numerous ways. One common design is the "money follows the man" method, under which the plan benefiting a temporary participant collects contributions from the participant’s temporary employer and transmits those contributions to the employee’s home plan. The home plan provides a benefit based on the home plan’s benefit formula. Another type of reciprocity agreement uses a prorated method under which the employee receives benefit accruals under each plan based on the relative hours of covered employment the employee performed under the plan. Under the prorated method, the benefit provided is calculated based on the hours worked under the plan divided by the total hours worked by the employee during the year. Sponsors use variations of these methods in designing reciprocity agreements to fit their needs.

  3. While reciprocity agreements raise certain issues, if they are properly designed they do not cause the signatory plans to become disqualified. For instance, IRC 401(a)(1) provides in part that a plan will be qualified if contributions are made to the trust by such employer, or employees, or both, or by another employer who is entitled to deduct his contributions. Reg. 1.401-1(a)(2) requires a qualified plan to be maintained pursuant to a definite written program. IRC 413(b)(3) provides in part that the all employees participating in a collectively bargained plan are treated as employed by each of the employers maintaining the plan for purposes of the exclusive benefit rule. The money-follows-the-man type of reciprocity, for instance, appears to violate these qualification requirements because it provides for amounts to be contributed to the employee’s home plan by a nonsignatory employer. However, if the terms of the home plan permit its trustees to enter into such agreements, the contract entered into by the trustees of the two plans may be considered to be a part of the home plan’s "definite written program." Furthermore, the temporary employer will be considered to be maintaining the home plan for the limited purposes of satisfying IRC 401(a)(1) and the exclusive benefit rule.

  4. If the trustees of the plan under audit have entered into reciprocity agreements with other plans, the plan must contain language allowing for such agreements. If the plan brings reciprocity service up to date for new members, the agent should ask the plan administrator if records are maintained that accurately reflect the information furnished by new members. If the plan administrator does not inquire about reciprocity service until the participant applies for retirement, the plan procedures should require the administrator to explain reciprocity service to the participant, ask if they have any, and verify that service with the reciprocal plan and/or temporary employer.  (05-04-2001)
Deductible Limits

  1. Generally, IRC 404 applies to single and multiemployer plans in the same manner. However, IRC 404(a)(1)(D) does not apply to multiemployer plans. (IRC 404(a)(1)(D) provides that the maximum amount deductible for certain defined benefit plans is not less than the unfunded current liability of the plan.)

  2. IRC 413(b)(7) provides that each applicable limitation provided by IRC 404(a) shall be determined as if all participants in a collectively bargained plan were employed by a single employer. The amounts contributed to the plan by a participating employer, for the portion of the taxable year which is included in the plan year, shall be considered not to exceed a limitation of IRC 404(a) if the anticipated employer contributions for such plan year do not exceed such limitation. For this purpose, anticipated employer contributions are determined in a manner consistent with the manner in which actual contributions are determined.

  3. IRC 404(a)(6) provides an exception to the general rule that an employer may only claim a deduction in the taxable year in which the amount is contributed. Under IRC 404(a)(6), a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year.

  4. Some employers have claimed deductions under IRC 404(a)(6) for contributions to multiemployer plans for the first several months of the following taxable year by arguing that they were treated the same as contributions made for the prior year. However, courts have held that such contributions were not made "on account of" the prior taxable year and therefore were not deductible under IRC 404(a)(6). See American Stores v. Commissioner, 170 F.3d 1267 (10th Cir. 1999), cert. denied 120 S.Ct. 182 (1999); Airborne Freight Corp. v. Commissioner, 153 F.3d 967 (9th Cir. 1998); Lucky Stores v. Commissioner, 153 F.3d 964 (9th Cir. 1998), cert. denied 119 S.Ct. 1755 (1999). These courts have also agreed with the Service, in dicta, that accelerating deductions is not consistent with IRC 413(b)(7) because plan administrators would be unable to arrive at meaningful figures for anticipated contributions if employers were able to attribute to a taxable year payments based on work performed after that year. Lucky Stores at 967.

  5. Trustees of multiemployer plans under which the contributions exceed the IRC 404 limits often correct the problem by adopting amendments increasing benefits. If the amendment is to have retroactive effect, however, it must satisfy the requirements of IRC 412(c)(8).  (05-04-2001)
Examination of Deduction Issues

  1. If the plan is a defined benefit plan, the aggregate deductible limit for all employers for the plan year should appear in the actuarial valuation. Communication by the plan actuary or trustees to the contributing employers of the deductible limit for each year is a good administrative practice.

  2. The agent should first compare the limit in the actuarial valuation report with the contributions received during the same plan year. Although this comparison disregards the effects of payment timing for IRC 404 and 412 purposes and the varying tax years of the contributing employers, it can provide some indication of compliance with IRC 404. The agent should also check for a pattern of contributions that exceeds the deductible limit and refer excess deductions to either the Large and Mid-sized Business or Small Business and Self Employed division as necessary, or pursue discrepancy adjustments against employers’ Forms 1120. While not a qualification problem, recurring excess contributions may lead trustees to pass recurring benefit increases that can potentially result in section 415 violations and heavy funding burdens in the future as the retiree-to-active ratio increases.

  3. If a deductibility issue cannot be resolved in a manner similar to that described in the preceding paragraph, it will be necessary to adjust the employers’ returns and assess the corresponding IRC 4972 tax. To the extent the information is readily available, make the adjustments to the employers’ returns (and assess the corresponding IRC 4972 tax) using the discrepancy adjustment procedures. If there are other employers for which the discrepancy adjustments cannot be made, refer them to the procedures relating to the Large and Mid-sized Business (LMSB) or Small Business and Self-Employed (SBSE) divisions as appropriate, in accordance with the procedures in IRM Part 4. Any questions regarding allocation of the adjustment among the employers should be directed to a field actuary.

  4. The agent should also determine whether the deductible limits of any defined contribution plans were not exceeded. A similar determination should be made regarding the deductible limits under IRC 404(a)(7) applicable to a combination of defined benefit and defined contribution plans.

  5. The agent should examine the deductible limit section of the actuarial valuation for evidence that the limit was adjusted upward using IRC 404(a)(1)(D), which is not available for multiemployer plans.  (05-04-2001)
IRC 4972 Tax Liability Issues

  1. IRC 4972 imposes on a contributing employer a tax equal to 10% of the nondeductible contributions under the plan (as determined as of the close of the taxable year of the employer). There is no exemption in the statutory language of IRC 4972 for employers contributing to a multiemployer plan from the tax imposed by IRC 4972. Because the amount of nondeductible contributions is determined with respect to the plan as a whole, and not with respect to individual employers, the amount of nondeductible contributions must be allocated among the employers maintaining the plan in order to determine each employer’s individual tax liability. No regulations have been issued providing additional guidance on the application of IRC 4972 to contributions to multiemployer plans.  (05-04-2001)
Distribution Issues

  1. There are no special distribution rules for multiemployer plans. However, certain multiemployer administrative practices can lead to distribution violations.  (05-04-2001)
IRC 401(a)(13)

  1. One issue may arise under the IRC 401(a)(13) prohibition against alienation of benefits. For example, some unions that sponsor multiemployer plans also sponsor arrangements to which retirees pay premiums for continued health coverage. When the annuity is paid from the multiemployer plan to the retiree, the plan may withhold an amount from each payment to cover the health premium. If the amount withheld exceeds the 10% exception under Reg. 1.401(a)-13(d)(1) for certain voluntary and revocable assignments, or does not meet the special rule for certain arrangements under Reg. 1.401(a)-13(e), the plan will violate IRC 401 (a)(13).

  2. An agent should ask the administrator if the plan offers such an assignment option and, if so, how it works. While reviewing retirement application files for proper benefit calculations, the agent should check for any reductions and corresponding election forms signed by the retiree. The purpose of any assignments should be stated on the election form.  (05-04-2001)
IRC 401(a)(9)

  1. Certain peculiarities of multiemployer plans — benefit portability features, itinerant participant populations, and distant communication between contributing employers and plan administrators — combine to make multiemployer plans especially vulnerable to violations of the required minimum distribution rules of IRC 401(a)(9). Consider, for instance, a plan in the construction trade, or food industry, that may cover tens of thousands of employees. Participants may move in and out of covered service with many different employers over the course of their careers, be entitled to reciprocity credit from other plans, and change addresses a number of times. Employers may be remiss in collecting necessary data, such as employees’ birth dates, and communicating that data to the plan administrator. Employees who participate only for a short time may never apply for their benefits. Absent an adequate system to ensure compliance, the plan may violate IRC 401(a)(9) on more than an occasional basis.

  2. A multiemployer plan that is poorly administered is especially vulnerable to violations of the required minimum distribution rules. The agent should ask the administrator his or her method of ensuring that plan records contain participants’ birth-dates and their latest known addresses. This information is frequently transmitted by employers to plan administrators on remittance reports that accompany their monthly contributions. An agent should also ask if the IRS/SSA locator service is regularly used.

  3. The IRC 401 (a)(9)(C) definition of required beginning date was amended in 1996 to be April 1 of the calendar year following the later of the calendar year in which the employee attains age 70-1/2 or the calendar year in which the employee retires. However, if the employee is a 5% owner within the meaning of IRC 416 with respect to the plan year ending in the calendar year in which the employee attains age 70-1/2, the required beginning date continues to be April 1 of the year following attainment of age 70-1/2. Plans were not required to be amended for this change in law, and many multiemployer plans may continue to use the old definition of required beginning date.

  4. For plans that have been amended to apply the new definition, however, two issues may arise. First, the addition of the "year of retirement" part of the required beginning date necessitates that a plan have procedures in place, if not plan language, for determining the date when an employee has retired. Multiemployer plans in particular need such language or procedures because the plan administrator’s lack of access to participants’ current employment data means there is no independent method of determining whether or not an employee has retired or is merely incurring a break in service.

  5. In practice, many plans may determine a participant’s retirement date as being the date on which a participant who is eligible to receive benefits applies for those benefits. Such a provision violates section 401(a)(9) with regard to terminated vested participants when the plan fails to begin payment even though the participant is neither still in service with a participating employer nor is younger than 70-1/2. (It should be noted,however, that this definition of retirement does not violate IRC 401(a)(14)). See Reg. section 1.401(a)-14(a).)

  6. The second issue concerns the determination of whether a participant is a 5% owner. Some multiemployer plans cover industries in which it is common for a participant to act as a self-employed contractor (thus becoming a 5% - really 100% - owner) on a job for which he or she was the successful bidder and as an employee of the successful bidder on the next job, and for both types of work to be covered employment under the plan. Thus the participant can change status many times, often within a single calendar year. Plans covering such participants should have procedures in place for determining the status of these participants for purposes of IRC 401(a)(9).  (05-04-2001)
"Thirteenth check" Distributions

  1. Some multiemployer plans distribute additional benefits to pay-status participants. These participants receive distributions in excess of the benefits they would be entitled to receive as computed under the formula contained in the plan document. This practice is commonly known as issuing a "thirteenth check" to each such participant, i.e., a check that is additional to the twelve monthly checks the participant regularly receives. A plan may contain language permitting thirteenth check distributions. An agent should look at the minutes of trustees meetings to determine if plan amendments have been executed authorizing such distributions. Because these distributions may be authorized for only a limited period of time, the authorizing amendments may never become part of a restated plan document.

  2. If a plan does not contain such language, these distributions may violate a number of Code provisions. For instance, the definitely determinable benefit requirement of Reg. 1.401-1 (b)(1) might not be satisfied because the actual benefit received would be different from what a participant could determine from the plan terms. In addition, a generous payment may exceed the IRC 415 limits or cause accruals to be impermissibly back-loaded under IRC 411(b). Also, the operation of the plan would not be in accordance with the plan document.

  3. Thirteenth checks that are part of the participant’s accrued benefit are also subject to the qualified joint and survivor requirements. If any retirees receiving thirteenth checks are noncollectively bargained, those benefits must also satisfy the nondiscrimination rules for former employees under Reg. 1.401(a)(4)-10. Finally, even if the plan is amended to provide thirteenth check distributions, if the amendments are made on a regular basis the series of amendments — even though each is ad hoc — may give rise to an expectation of a benefit that is subject to IRC 411(d)(6) protection.  (05-04-2001)
IRC 415 Limits

  1. There are a number of special rules for applying the IRC 415 limits to multiemployer plans:

    1. Reg. 1.415-2(b)(6) provides that the limitation year for multiemployer plans is the calendar year unless the plan administrator elects otherwise in accordance with the method described in Reg. 1.415-2(b)(2).

    2. Reg. 1.415-3(f)(2) provides that the $10,000 exception of IRC 415(b)(4) applies to a participant in a multiemployer plan without regard to whether that participant ever participated in one or more other plans maintained by an employer who also maintains the multiemployer plan, provided that none of the other plans was maintained as a result of collective bargaining involving the same employee representative as the multiemployer plan.

    3. Reg. 1.415-8(e) provides that two or more multiemployer plans are not aggregated for determining the benefits limited under IRC 415. A multiemployer plan is aggregated with a non-multiemployer plan for purposes of IRC 415, however, to the extent that benefits under the multiemployer plan are provided by an employer with respect to a participant in both plans. If the multiemployer plan covers union officials, the agent should determine if the officials are also covered under single-employer plans maintained by the national or local unions and if the IRC 415 levels have been exceeded for these employees. If the plans are not brought into compliance, the plans other than multiemployer plans are the first to be disqualified.

    4. Reg. 1.415-9(b)(3)(ii) provides that if there are 2 plans, neither of which has terminated during the limitation year in which the limits of IRC 415 have been exceeded as a result of the IRC 415 aggregation rules, and one of the plans is a multiemployer plan, the non-multiemployer plan is the plan disqualified.

    5. IRC 415(b)(7) contains an exception for certain collectively bargained plans to the compensation limit of IRC 415(b)(1)(B) and an adjustment of the dollar limit under IRC 415(b)(1)(A). This exception is seldom used.

    Example 6: An officer of a regional union participates in two multiemployer defined contribution plans: one maintained by the regional union and various collectively bargained employers, and the other maintained by an affiliated local union and various collectively bargained employers. The officer also participates in a noncollectively bargained defined contribution plan maintained for the staff of the regional union. Pursuant to Reg. 1.415-8(e), only contributions to the staff plan must be aggregated with contributions to the regional plan for determining whether the contributions to the regional defined contribution plan exceed the limitation under IRC 415(c). Similarly, only contributions to the staff plan must be aggregated with contributions to the local plan for determining whether the contributions to the local exceed the limitation under IRC 415(c). However, the contributions to both multiemployer plans must be aggregated with the contributions to the staff plan for determining if the staff plan contributions exceed the limitations under IRC 415(c).

  2. Reg. 1.415-1(e)(2) provides two alternatives for applying the IRC 415 limits to participants in multiemployer plans:

    1. Under the first alternative, for purposes of applying the limitations of IRC 415 with respect to a participant of an employer maintaining the plan, benefits or contributions attributable to the participant from all of the employers maintaining the plan must be taken into account. In other words, the limitations are applied to the aggregate benefits or contributions of the participant and based on the participant’s aggregate compensation. The total compensation received by the participant from all of the employers maintaining the plan may be taken into account.

    2. Under the second alternative, only the benefits or contributions provided by the employer of the participant are taken into account. Here the limitations are applied on an employer by employer basis taking into account only the compensation and the benefits or contributions attributable to service with that employer. The benefit provided by the employer equals the excess of the plan benefit over the plan benefit computed as if the participant had no covered service with that employer.

    Example 7: Participant A has a plan benefit equal to $375 per month, due to 5 years of service each with Employers X, Y, and Z, and the benefit provided by Employers X, Y, and Z is $20 (per month per year of service), $25, and $30, respectively. The benefit provided by Employer X is equal to $100, i.e., the excess of (i) $375 per month over (ii) $275 (the sum of 5 times $25 plus 5 times $30). Under the second alternative, only A’s $100 benefit for service with Employer X is taken into account when determining whether A’s benefit exceeds the limits of IRC 415 (solely with respect to A’s service with Employer X). A’s benefits for service with Employers Y and Z would also be computed and compared to A’s benefit limitations under IRC 415 to test whether IRC 415 is satisfied with respect to A’s service with Employers Y and Z.

  3. The IRC 415 compensation percentage limits may sometimes be exceeded due to the flat benefit formulas common among multiemployer plans, in which benefits or contributions are determined without regard to compensation. In defined benefit plans, the reductions in the dollar limitation for early benefit commencement can also cause problems. In defined contributions plan, the 25% limit may prove troublesome in a low-wage industry.

  4. Because multiemployer plan contributions are not necessarily related to compensation, contributions to a defined contribution plan on behalf of the lowest paid participants could exceed the percentage of compensation limits, especially in plans that provide relatively high allocations in comparison to wages earned. The agent should read the applicable collective bargaining agreements to determine: (a) the highest possible hourly contribution rate and (b) the lowest possible hourly wage for employees covered by those agreements. Generally, if (a) divided by (b) is 25% or less, there is no problem.

  5. A similar problem can occur in defined benefit plans that are designed with flat benefit formulas unrelated to compensation. If plans provide for generous flat benefit formulas, benefits for participants with long service and lower compensation levels may exceed the compensation limitation under IRC 415(b)(1)(B). The agent should also determine whether benefits for highly compensated employees who participate in plans with unreduced early retirement benefits exceed the dollar limitation under IRC 415(b)(1)(A).

    Example 8 (defined benefit computation limit): A defined benefit multiemployer pension plan provides for a flat benefit formula of $40 per month at retirement age for each year of service. Because the benefit formula applies to all years of service, a retiree who has completed 35 years of service will receive a monthly benefit equal to $1,400 (or an annual benefit of $16,800) under the benefit formula. The retiree has not worked for several years, and his average high 3 year compensation (as defined in IRC 415(b)(3) is $14,000. The retiree’s maximum benefit under the compensation limitation of IRC 415(b)(1 )(B) is limited to $14,000, and the plan would fail to comply with IRC 415 if benefits in excess of $14,000 were paid out to the retiree.

    Example 9 (defined contribution limits): Employees in a craft industry are covered by a multiemployer, money purchase pension plan. The plan document contains the required IRC 415 language. The governing collective bargaining agreements reveal a journeyman wage of $20 per hour, and an apprenticeship wage scale starting at 40% of the journeyman’s, or $8 per hour. The agreements also show a required contribution of $3 per hour of regular, non-overtime, covered work for each participant regardless of status. The annual additions to the plan do not violate the dollar limit of IRC 415(c)(1)(A), nor is the percentage limit of IRC 415(c)(1)(B) violated for the journeyman allocations. However, it is possible for contributions to the account of an apprentice who is paid at the lowest end of the wage scale, and who receives no overtime or other non-regular pay, to violate the percentage limit:

    Contribution = $6,240 ($3 x 40 hrs x 52 wks);
    Compensation = $16,640 ($8 x 40 hrs x 52 wks);
    IRC 415(c)(1)(B) limit = $4,160 (25% of $16,640).

    Because the contribution of $6,240 exceeds the apprentice’s IRC 415(c)(1)(B) limit of $4,160, the plan fails to comply with IRC 415.

    Example 10 (defined benefit dollar limitation): A defined benefit multiemployer pension plan, covering a trade where early retirement is common, provides compensation-based benefits. An unreduced early retirement annuity benefit, equal to 100% of average high-3 consecutive year compensation, is provided to those participants who have at least 30 years of service and are at least 50 years of age. In 1997, an unmarried participant in the plan with average high-3 consecutive year compensation of $40,000. The employee’s annual benefit, as calculated under the terms of the plan, is $40,000. However, the dollar limitation of IRC 415(b)(1)(A) in 1997 is $125,000. For this participant, for benefits commencing in 1997 at age 50, the reduced dollar limitation is $38,119. Therefore, the annual benefit payable to the participant upon early retirement at age 50 must be limited to $38,119 in order for the plan to comply with IRC 415. (This example assumes that a social security retirement age of 66, 5% interest, and the applicable mortality table under Rev. Rul. 95-6, 1995-1 C.B. 80. Note that, because the benefit is a nondecreasing annuity payable for the participant’s life, the example assumes the form of the benefit is not subject to IRC 417(e)(3).) This participant’s benefit may be recalculated in future years as the dollar limitation increases if the plan provides for IRC 415 COLA adjustments to retiree benefits.  (05-04-2001)
Minimum Funding

  1. The following is a description of funding rules for multiemployer plans.  (05-04-2001)
Reasonable Funding Methods

  1. IRC 412(c)(3) provides that costs and liabilities under a multiemployer plan must be determined using actuarial assumptions and methods which, in the aggregate, are reasonable. See Reg. 1.412(c)(3)-1 for a description of reasonable actuarial funding methods. These regulations apply to all defined benefit plans subject to IRC 412, including multiemployer plans.

  2. The plan population and its characteristics must satisfy Reg. 1.412(c)(3)-1(c)(3) for the funding method to be reasonable. In plans covering large numbers of employers and employees in high turnover industries such as retailing and food service, the plan actuary may conclude that it is reasonable to rely on estimates rather than raw census data provided by the contributing employers. In this case the agent should ask the plan actuary for the rationale behind any estimates and consult with the field actuary.  (05-04-2001)
Retroactive Plan Amendments under IRC 412(c)(8)

  1. IRC 412(c)(8) provides that, in the case of a multiemployer plan, any amendment applying to a plan year that (a) is adopted no later than two years after the close of such plan year, (b) does not reduce the accrued benefit of any participant determined as of the beginning of the first plan year to which the amendment applies, and (c) does not reduce the accrued benefit of any participant determined as of the time of adoption except to the extent required by the circumstances, shall, at the election of the plan administrator, be deemed to have been made on the first day of such plan year.

  2. With respect to funding, the plan administrator is required to make an election in order for the retroactive amendment to be deemed to have been made on the first day of the plan year to which the amendment applies for purposes of computing costs for the year under IRC 412. For 1995 and later years the plan administrator makes the election directly on the plan's annual information return, Form 5500, Schedule R. (In earlier years, a statement of election was attached to the Form 5500, if the plan was a money purchase plan, or the Schedule B if the plan was a defined benefit plan.) The statement of election should follow the format described in Temp. Reg. 11.412(c)-7. See also the appropriate line of the Form 5500 relating to the statement of election.

  3. A retroactive amendment under IRC 412(c)(8) that either increases or decreases benefits under the plan may be taken into account for funding purposes. The Secretary of the Treasury has delegated to the IRS Employee Plans Division the authority to approve or disapprove amendments that reduce accrued benefits. (Reorganization Plan No. 4, effective December 31, 1978, transferred the authority of the Secretary of Labor under IRC 412(c)(8) to the Secretary of the Treasury. See Prop. Reg. 1.412(c)(8)-1.) Absent IRS approval, a plan amendment that decreases accrued benefits will violate IRC 411(d)(6). Rev. Proc. 94-42, 1994-1 C.B. 717, provides current procedures for plans submitting a ruling request to the National Office under IRC 412(c)(8). An approved amendment that reduces the accrued benefit of any participant may be deemed to have been made on the first day of the plan year to which the amendment applies.

  4. An amendment that retroactively increases accrued benefits (or decreases, with required approval) must be adopted no later than two years after the close of the plan year to which the amendment applies. Note that, where an amendment retroactively increasing plan benefits is adopted within two years after the end of the plan year, it is generally not taken into account for funding purposes as of the retroactive effective date, but it may be taken into account if the sponsor files an election under IRC 412(c)(8). Generally, in the case of a retroactive benefit increase, an application to the Secretary of Treasury is not required. If contributions exceed the deductible limit as originally calculated or as adjusted downward upon examination, the plan sponsor may elect to amend the plan retroactively to increase the defined benefit, and thus the deductible limit, enough to cover the contributions actually made. The agent should check the plan's Form 5500, Schedule R, to determine that a proper election was made.

  5. The agent should check the valuation reports for the current and prior years to determine if a funding waiver or an extension under 412(e) was in effect and, if so, check whether a plan amendment was adopted which increased the liabilities of the plan. If the liabilities of the plan were increased for any of the above-listed reasons, the agent should determine whether the plan received a private letter ruling issued by the National Office stating that such increase in liabilities was reasonable and de minimis.

  6. The agent should inspect the union contract and the actuarial valuations and verify with the plan actuary whether future increases are regularly included. The agent should note any benefit increases scheduled to take effect in future years and determine for each plan year whether or not they were recognized and included in that year's cost calculation. The effect of future increases may either be included in current costs or deferred until the years when the increases go into effect. However, the choice made is part of the funding method and cannot be changed without the approval of the Director, EP Rulings and Agreements or automatic approval under an applicable revenue procedure.  (05-04-2001)
Shortfall Method

  1. The shortfall method was promulgated in 1980 in Reg. 1.412(c)(1)-2. The shortfall method is a method of determining charges to the funding standard account by adapting the underlying funding method of certain collectively bargained plans. The only plans that may use the shortfall method are plans that are collectively bargained (single-employer as well as multiemployer), in which contributions to the plan are made at a rate specified under the terms of a legally binding agreement applicable to the plan.

  2. The shortfall method modifies regular funding methods to take into account the funding method typical of multiemployer plans, in which contribution rates are specified in the collective bargaining agreements. On a short-term basis, this funding mechanism does not reflect a plan's actual experience, such as the effect of work-force fluctuations, actual investment return, or actual mortality experience. Because contributions to the plan are determined by the number of units or hours actually worked, the shortfall method allows a funding shortfall, in a year in which the number of units or hours worked was less than expected, to be made up in future years. Conversely, the shortfall method allows a funding surplus in a year in which the number of units or hours worked was more than expected to be made up in future years.

  3. Under the shortfall method, the basic charge to the funding standard account is based on the estimate of the number of hours or units worked, and includes an amortization of the difference between the regular net charges to the funding standard account and the net charge under the shortfall method. Thus, the shortfall method prevents an accumulated funding deficiency in a year in which the collective bargaining agreement requires contributions that otherwise would be insufficient to satisfy the minimum funding requirement.

  4. The shortfall method is solely intended to correct for year-to-year fluctuations in the hours of service (or units of production) on which the actual employer contributions are based. The shortfall method is not intended to correct funding shortfalls that may result if the bargained contribution rate is set at too low a level to fund the benefit liabilities adequately.

  5. Under the shortfall method, the charges to the funding standard account are computed on the basis of an estimated number of units of service or production for which a certain amount per unit is to be charged. The plan actuary is responsible for this estimate, which must be based on the past experience of the plan and reasonable expectations of the plan for the plan year. Expectations will not be considered reasonable if, for example, they fail to reflect a consistent and substantial decline in actual base units that has occurred in recent years and is expected to continue. However, the determination of reasonableness is independent of determinations made under IRC 412(c)(3) of the reasonableness of actuarial assumptions. An estimated unit charge is calculated by dividing an "annual computation charge" (the otherwise applicable net charges under IRC 412(b)(2) and 412(b)(3)(B), plus any prior shortfall amortization charge or credit amount, but disregarding any credit balance or funding deficiency) by the estimated number of units (hours, tons, etc.) produced. This estimated unit charge is then multiplied by the actual number of units produced. The resulting amount is the amount charged to the funding standard account on Schedule B to Form 5500, rather than the annual computation charge from which the unit charge was calculated. The excess of the amount charged over the annual computation charge becomes a shortfall gain (if positive) or a shortfall loss (if negative).

  6. For a multiemployer plan, the amortization of a shortfall gain or loss must begin in the earlier of two years: the fifth plan year following the plan year in which the shortfall gain or loss arose, or the first plan year beginning after the latest scheduled expiration date of a collective bargaining agreement in effect with respect to the plan during the plan year in which the shortfall gain or loss arose. A contract expiring on the last day of a plan year is deemed renewed for the same period of years as the succeeding contract. The amortization must end with the 20th plan year following the plan year in which the shortfall gain or loss arose, as provided under Reg. 1.412(c)(1)-2(g)(2)(ii).

    Example 11: The 2000 "annual computation charge" of a plan choosing to use the shortfall method is $120,000. The number of hours of covered employment for 2000 was estimated, as of the 2000 valuation date, to be 150,000 hours. The estimated unit charge applicable to 2000 is then computed to be $.80 per hour of covered employment (120,000/1 50,000 = $.80). During 2000, there were 125,000 actual hours of covered employment. Thus, the net shortfall charge for the plan year is 125,000 x $.80 which equals $100,000. In this case, the excess of the shortfall charge ($100,000) over the "annual computation charge" used to calculate the unit charge ($120,000) is negative, meaning there is a shortfall loss of $20,000 which would be amortized as a shortfall charge base of $20,000, over the period of years described above.

  7. To elect the shortfall method, the plan administrator should follow the rules in Reg. 1.412(c)(1)-2(i)(1). These rules require a statement on an attachment to Form 5500 for a plan year stating that the shortfall method is adopted for that plan year. In addition, unless the shortfall method was adopted in the late 1970's or early 1980's (when the shortfall regulation was published and IRC 412 first applied to plans), the plan administrator will need to obtain approval from the Service to use the shortfall method under IRC 412(c)(5)(A). Approval is also required if the shortfall method is discontinued. In addition, in accordance with Rev. Proc. 2000-40, 2000-42 I.R.B. 357, approval to change automatically from one underlying funding method to another is not granted unless the new underlying funding method also makes use of the shortfall method. Use of the shortfall method should be indicated on the plan's Schedules B and actuarial valuations.  (05-04-2001)
Special Rules under IRC 412

  1. This section describes special rules under IRC 412 for multiemployer plans.  (05-04-2001)
Amortization Periods for Multiemployer Plans

  1. MPPAA changed some of the amortization periods used in the funding standard account under IRC 412(b) for multiemployer plans. In addition, certain amortization periods used for multiemployer plans are different from the amortization periods used for single-employer plans.

  2. Prior to the enactment of MPPAA, a multiemployer plan which was in existence on January 1, 1974 amortized its unfunded liability (and any changes in unfunded liabilities due to plan amendments) over a period of 40 years (starting on the first day of the first plan year to which IRC 412 applies). Experience gains and losses were amortized over 20-year periods, changes in liabilities due to changes in actuarial assumptions were amortized over 30-year periods, and waivers of the minimum funding standard were amortized over 15-year periods.

  3. The enactment of MPPAA changed the amortization period both for the initial unfunded liability of a new plan, and any changes in the unfunded liabilities of an existing plan due to a plan amendment, from 40 years to 30 years. The amortization period for experience gains and losses was reduced from 20 years to 15 years. Amortization periods due to changes in actuarial assumptions and minimum funding waivers remained at 30 years and 15 years, respectively. Essentially, MPPAA changed the amortization periods for multiemployer plan to the same periods then in effect for single-employer plans. (Some of the amortization periods required for single-employer plans were later changed by OBRA '87. These changes did not affect multiemployer plans.)

  4. There are special amortization periods for certain charges and credits that arose before the enactment of MPPAA. A plan may continue to amortize certain bases in accordance with these rules for many years, including years after the enactment of MPPAA. Under IRC 412(b)(6), a multiemployer plan that comes into existence after January 1, 1974, and that establishes an unfunded liability or creates a increase or decrease in the unfunded liabilities of the plan from plan amendments, amortizes such amounts over a 40 year period, if the amounts arose in plan years beginning before the date MPPAA was enacted. In addition, experience gains and losses of multiemployer plans are amortized over 20 year periods, if the gain or loss arose in a plan year beginning before the enactment date of MPPAA. Experience gains and losses of multiemployer plans that arose in plan years beginning after the enactment date of MPPAA are amortized over 15 years.

  5. IRC 412(l) does not apply to multiemployer plans. Accordingly, the funding standard account in Schedule B (Form 5500) should not include an additional funding charge. If it does, the minimum funding requirement is overstated.  (05-04-2001)
Funding Waiver Provisions

  1. Several rules with regard to funding waivers are different for multiemployer plans. Most of these differences arose with the enactment of OBRA '87. The amortization period is 15 years for multiemployer plans, rather than 5 years. The interest rate used to amortize a waiver for a multiemployer plan is the rate determined under IRC 6621(b) for waiver requests submitted to the National Office after April 7, 1986 (the effective date of SEPPAA). The rates under IRC 6621 are published quarterly in revenue rulings in the Internal Revenue Bulletin. The rates used for the amortization of funding waivers may be derived by subtracting 2 percentage points from the overpayment rates listed in these revenue rulings (equivalently, one could subtract 3 percentage points from the underpayment rates). For instance, Rev. Rul. 94-39, 1994-1 C.B. 296, lists the underpayment and overpayment interest rates for calendar quarters from January 1, 1987 through September 30, 1994 (rates prior to 1987 are listed for semi-annual periods, and are the same for both underpayments and overpayments). In contrast, the rate used for a single-employer plan is the greater of (1) 150% of the federal mid-term rate (as in effect under IRC 1274 for the first month of such plan year), or (2) the rate of interest used under the plan in determining costs.

  2. The statutory maximum number of waivers is also different for multiemployer plans. A multiemployer plan may not receive waivers for more than 5 of any 15 consecutive plan years, while a single-employer plan may not receive waivers for more than 3 of any 15 consecutive plan years. Additionally, a multiemployer plan generally has one year after the end of the plan year to request a waiver, while single-employer plans must submit requests for waivers within 2 months after the end of the plan year for which the waiver is requested.

  3. An employer generally must demonstrate substantial business hardship in order for a funding waiver to be granted. However, the statutory criteria are slightly different for multiemployer and single-employer plans. Under IRC 412(d)(1), a multiemployer plan must demonstrate that 10 percent or more of the number of employers contributing to or under the plan are unable to satisfy the minimum funding standard for a plan year without substantial business hardship.  (05-04-2001)
Additional Funding Requirement under 412(l) and Quarterly Contribution Requirement under 412(m)

  1. The additional funding requirement under IRC 412(l) and the quarterly contribution requirement under 412(m) apply only to plans that are not multiemployer plans. IRC 412(l) requires additional contributions by certain plans which have unfunded current liabilities, and IRC 412(m) concerns quarterly contribution requirements for plans other than multiemployer plans.  (05-04-2001)
Reasonableness of Actuarial Assumptions

  1. Under IRC 412(c)(3), all costs, liabilities, rates of interest, and other factors under the plan shall be determined on the basis of actuarial assumptions and methods which, in the case of a multiemployer plan, are reasonable in the aggregate. In the case of a plan other than a multiemployer plan, each of these factors must be individually reasonable, or in the aggregate result in a total contribution equivalent to that which would be determined if each such assumption and method were reasonable.  (05-04-2001)
Valuation of Plan Assets

  1. Under IRC 412(c)(2)(A), the value of a plan's assets must be determined on the basis of "any reasonable actuarial method of valuation which takes into account fair market value." Under IRC 412(c)(2)(B), the plan administrator of a multiemployer plan may elect to value a bond or other debt instrument that is not in default at book value, rather than market value. The determination on the basis of book value means the bond is valued on an amortized basis running from initial cost at purchase to par value at maturity or earliest call date.  (05-04-2001)
Exception from Security Requirement upon Adoption of Plan Amendment Resulting in Significant Underfunding

  1. Multiemployer plans are exempt from IRC 401(a)(29). IRC 401(a)(29) requires the contributing sponsor of a plan to provide security to the plan, if the plan has a funded current liability percentage of less than 60% and an amendment is adopted that increases the current liability under the plan.  (05-04-2001)
Application of Minimum Funding Standards to a Terminated Multiemployer Plan

  1. IRC 412(j) provides that minimum funding standards of IRC 412 apply to a terminated multiemployer plan until the last day of the plan year in which the plan year terminates, within the meaning of section 4041A(a)(2) of ERISA. Section 4041A(a)(2) of ERISA provides that a multiemployer plan termination occurs as the result of the withdrawal of every employer from the plan or the cessation of the obligation of all employers to contribute under the plan.  (05-04-2001)
IRC 4971 Tax Liability Issues

  1. IRC 4971(a) provides that a tax of 5% is imposed in the case of a multiemployer plan that has an accumulated funding deficiency (for plans other than multiemployer plans the tax rate is 10%).

  2. IRC 413(b)(6) provides that for a plan year, the liability under IRC 4971 for collectively bargained plans of each employer who maintains the plan shall be determined first on the basis of their respective delinquencies in meeting required employer contributions under the plan, and then on the basis of their respective liabilities for contributions under the plan.

  3. The tax under IRC 4971 relates to an accumulated funding deficiency under a plan. However, the funding deficiency is determined with respect to the plan as a whole, not with respect to individual employers. Therefore, the deficiency must be allocated among employers adopting the plan in order to determine their individual excise tax liability. In general, the Service will use Prop. Reg. 54.4971-3 as a guide for allocating the excise tax. In the case of a multiemployer plan, if the employer adopting the plan is a member of a controlled group within the meaning of IRC 414(b), (c), (m), or (o) the employer shall not be jointly and severally liable for taxes imposed under IRC 4971 on other members of the controlled group.

  4. A funding deficiency under a plan may be attributable entirely to the delinquency of one or several employers in making required contributions to the plan under the terms of the collective bargaining agreement. If only one employer is delinquent, that delinquent employer is solely liable for the IRC 4971 tax. If more than one employer is delinquent in its contributions, the IRC 4971 tax will generally be allocated in proportion to each employer's share of the delinquency. See Prop. Reg. 54.4971-3(b)(2).

  5. A funding deficiency may sometimes result not from any delinquent contributions, as described above, but from the aggregate failure of employers to avoid an accumulated funding deficiency. If the employers contribute exactly what they are required to contribute in accordance with the collective bargaining agreement, but the contributions are not sufficient to satisfy the minimum funding requirement, the funding deficiency arises from a failure in the aggregate of the employers to satisfy the funding requirement. This can occur, for example, when the net charges of the funding standard account exceed the cumulative contributions required for all employers maintaining the plan under the collective bargaining agreement for the year because some employers have withdrawn from the plan and withdrawal liability payments may not cover the gap. In the case of an aggregate failure to avoid a deficiency, the Service will generally allocate the tax to an individual employer by multiplying the total tax attributable to the aggregate failure by a fraction. The fraction is equal to the contribution the employer is required to make for the plan year divided by the total contribution all employers are required to make for the plan year. See Prop. Reg. 54.4971-3(b)(3).  (05-04-2001)
Withdrawal liability

  1. An employer who withdraws from a plan remains liable for the tax imposed under IRC 4971 with respect to the portion of an accumulated funding deficiency attributable to that employer for plan years up to and including the year of withdrawal. The employer is not liable for taxes imposed with respect to accumulated funding deficiencies for plan years subsequent to withdrawal. Withdrawal liability payments made by withdrawn employers are, however, credited to the funding standard account as contributions and, accordingly, can help to prevent an accumulated funding deficiency. Where a withdrawing employer fails to make withdrawal liability payments (due to bankruptcy or some other reason) employers remaining in the plan may have to increase their contributions to avoid a funding deficiency. See Prop. Reg. 54.4971-3(e).  (05-04-2001)
Plans in Reorganization and Insolvent Plans

  1. A multiemployer plan that is in serious financial difficulty may be returned to financial health through "reorganization" as described in IRC 418 through 418E. If a plan is in reorganization for a particular plan year, its minimum funding requirement may be modified under 418B. Certain accrued benefits may be allowed to be cut back to the level guaranteed by the PBGC. See IRC 418D.

  2. IRC 418(b) provides rules for determining whether a plan is in reorganization. If the "reorganization index" is greater than zero for a plan year, a plan is in reorganization for that plan year. The reorganization index is defined as the excess of the "vested benefits charge" over the "net charge to the funding standard account." The vested benefits charge is the annual amount required to amortize the unfunded vested benefits over a period of 10 years (for persons in pay status) and over a period of 25 years (for all other plan participants). The net charge to the funding standard account is the sum of the regular charges and credits under the funding standard account, including normal cost and amortizations of unfunded liabilities, plan amendments, gains and losses, etc. Thus, if the contribution required under the regular funding standard account is less than the contribution required if unfunded vested benefits were paid over 10 years for persons in pay status and 25 years for all other persons, the plan will be in reorganization.

  3. IRC 418A provides that the plan sponsor notify participants if the plan is in reorganization or accrued benefits are reduced. IRC 418B(b)(1) provides rules for determining the minimum contribution requirement for a plan in reorganization. Generally, the minimum contribution requirement is equal to the vested benefits charge plus any increase in the normal cost for the plan year (determined under the entry age normal method) that is attributable to plan amendments adopted while the plan was in reorganization, minus any overburden credit. IRC 418C provides rules for determining a plan's overburden credit. The overburden credit provides relief from the minimum contribution requirement in certain situations (e.g., where retired participants outnumber active participants, resulting in an increased vested benefits charge). IRC 418D provides rules that allow certain accrued benefits to be cut back to the level guaranteed by the PBGC. However, accrued benefits generally may not be reduced below the accrued benefit level that existed 5 years prior to the date of reorganization.

  4. A plan is insolvent under IRC 418E if the plan's available resources (cash, marketable assets, contributions, withdrawal liability payments, and earnings) are not sufficient to pay benefits under the plan as they become due during a particular plan year. If an insolvent plan finds that its required benefit payments for that year exceed its available resources, benefit payments must be reduced to the "resource benefit level," the highest level of monthly benefits that can be paid out of the plan's available resources. However, benefit payments must not be reduced below the level of basic benefits guaranteed by the PBGC. A plan that is insolvent may not necessarily be in reorganization status, although this is rarely the case.  (05-04-2001)
Prohibited Transactions

  1. Soon after the passage of ERISA, DOL and the Service issued two Prohibited Transaction Exemptions tailored to prohibited transactions arising in multiemployer plans under IRC 4975(c)(1) and the parallel provision of Title I of ERISA. See Prohibited Transaction Exemptions (PTEs) 76-1, 1976-1 C.B. 357, and 77-10, 1977-2 C.B. 435

  2. As noted above at IRM (service crediting), the failure to make required contributions can violate a number of provisions. In addition to the problems associated with refusal to credit service, a plan fiduciary's failure to enforce contribution requirements can be a prohibited transaction. Plan fiduciaries may hesitate to enforce timely contribution for fear of jeopardizing collection of the full amount due. However, if reasonable efforts are not made to collect delinquent contributions pursuant to established procedures, or the failure to collect is the result of an arrangement, express or implied, between plan fiduciaries and the delinquent employer, failure to collect the contribution may be deemed a prohibited transaction. See Part A of PTE 76-1.

  3. The agent should determine total employer liability for the relevant period, based on the contribution obligations imposed by the contract, and verify payments or deposits. The agent should note all accounts receivable, including those of the union sponsor if the union has employees participating in the plan, and determine if the plan has procedures on the collection of delinquent contributions and whether they were followed. The agent should review any field audit reports and correspondence for indications of long-standing delinquencies and actions taken to eliminate them. Any material long-standing delinquencies will likely be discussed in the trustee minutes.

  4. Part B of PTE 76-1 provides a limited exemption from IRC 4975(c)(1) for certain construction loans made by multiemployer plans maintained in the building trades to participating employers, if certain conditions are met. The exemption does not extend to longer-term mortgages.

  5. Multiemployer plans, especially smaller ones, often rent space in buildings owned by the sponsoring union. Part C of PTE 76-1 provides a limited exemption from IRC 4975(c)(1) for the leasing, sharing, or sale of office space, administrative services, and goods between the plan and disqualified persons such as the plan's union sponsor, if certain conditions are met. PTE 77-10 provides an exemption from section 406(b)(2) of Title I of ERISA for the same transactions. The agent should check plan returns, balance sheets, records of plan assets, and investment transactions for the years under examination for evidence of plan involvement with the sponsoring union. The agent should be alert to evidence that the retirement plan is bearing administrative costs that are more properly allocated to related benefit plans. Any agreements between the plan and the union, or between the retirement plan and related plans, must comply with PTE 76-1 and 77-10. Alternatively, the plan may have received an individual exemption from DOL.

  6. In reviewing the plan's balance sheet, the agent should be alert to evidence that assets have been shifted from one trust to another. Some multiemployer plan trustees may believe that shifting assets among pension and welfare trusts is permitted, because collective bargaining agreements often treat employer contributions under the agreement as one pot of money to be used for a variety of purposes. However, with the limited exception of assignments permitted under IRC 401(a)(13)(A), shifting assets once they are deposited in the qualified trust is a prohibited transaction. Redirecting contributions away from a retirement plan before they are deposited in the plan trust is also a prohibited transaction if the contributions are employee contributions or elective deferrals. That is because section 2510.3-102(a) provides that such contributions are plan assets for purposes of the prohibited transaction rules of IRC 4975.

  7. The agent should also take a look at the plan's 401(h) account, if any. Because of the increased pressure on funding health care benefits that all employers have faced in recent years, a 401(h) account may be a significant part of the plan. Multiemployer plans are not allowed to engage in section 420 transfers of retirement assets to 401(h) accounts.  (05-04-2001)
Top-heavy Rules

  1. Reg. 1.416-1, T-38, provides that a collectively bargained plan need not include the top-heavy provisions if, in operation, the plan is not top-heavy, and if it covers only collectively bargained employees or employees of the sponsoring union. In determining whether the plan is not top-heavy in operation for purposes of T-38, IRC 416(g) and the regulations thereunder are applied to the entire multiemployer plan.

  2. Any multiemployer plan that covers other noncollectively bargained employees, such as noncollectively bargained employees of a contributing employer, does not meet the requirements of Reg. 1.416-1, T-38, and must contain language satisfying IRC 416. This requirement dovetails with the application of IRC 416, as the top-heavy provisions are applied on an aggregated basis (either required or permissive) to all of the plans maintained by an employer.

  3. Q&A T-2 and T-3 of Reg. 1.416-1 provide guidance on how the top-heavy rules are applied to multiemployer plans. T-2 provides that a multiemployer plan is treated as a plan of a contributing employer only to the extent that benefits under the plan are provided to employees of the employer because of service with that employer. T-3 provides that collectively bargained plans are treated like other plans maintained by an employer for purposes of determining the composition of a required aggregation group or a permissive aggregation group. However, collectively bargained employees do not benefit from the special vesting and top-heavy minimum requirements.

    Example 12: A multiemployer plan covers 100 employees, including 10 collectively bargained and 3 noncollectively bargained employees of one contributing employer. One of these 3 noncollectively bargained employees is a key employee, who also participates in another, noncollectively bargained plan maintained by the same contributing employer. For purposes of top-heavy testing for that employer, the key employee's required aggregation group includes the 13 multiemployer plan participants who have benefits under the plan attributable to service with that employer. The other participants in the multiemployer plan, regardless of whether they are collectively bargained or not, are not included in the required aggregation group. If it is determined that the plans in the required aggregation group are top-heavy, the 3 noncollectively bargained employees of that employer who participate in the multiemployer plan are entitled to receive the required top-heavy minimum, and their benefits are entitled to vest at least as rapidly as the top-heavy vesting schedules require. No other participants in the multiemployer plan are entitled to either the top-heavy minimum or faster vesting.  (05-04-2001)
Return of Contributions

  1. ERISA section 403(c)(2) describes a number of circumstances under which plan fiduciaries may permit the return of contributions to employers without violating the exclusive purpose rule of section 403(c)(1). These include the return of (A) contributions made in mistake of fact or law, (B) contributions conditioned upon the initial qualification of the plan, and (C) contributions conditioned on deductibility. Section 403(c)(2)(A)(ii) repeats the language used in IRC 401(a)(2). Withdrawal liability payments to a multiemployer plan may also be returned under these provisions.

  2. IRC 401(a)(2) provides that the return of mistaken contributions from multiemployer plans, within six months of the date the plan administrator determines the contribution was made by a mistake of fact or law (other than a mistake relating to whether the plan is an IRC 401(a) plan or the associated trust exempt under IRC 501(a)), shall not be construed as a violation of the exclusive benefit rule of IRC 401(a)(2) and its prohibition against reversions. Rev. Rul. 91-4, 1991-1 C.B. 57, holds that a plan may provide for the return of contributions in accordance with any of the exceptions described in ERISA section 403(c)(2) without violating IRC 401 (a)(2).

  3. For multiemployer plans, contributions or withdrawal liability payments are most often returned to an employer on account of mistake of fact or law. Proposed reg. 1.401(a)-3 also provides guidance on the return of mistaken contributions. For purposes of determining whether the mistaken contribution is returned within the six-month period described in IRC 401(a)(2), it is sufficient that the employer establish a right to a refund of that amount by filing a claim with the plan administrator within six months from the date in which the plan administrator determines that a mistake occurred. The amount to be returned to the employer is the excess of the amount contributed over the amount that would have been contributed had no mistake occurred. Any earnings attributable to the mistaken contribution must be retained by the plan, while any losses must reduce the amount to be returned. In no event may a participant's account be reduced to an amount less than that amount which would properly have been in that participant's account had no mistake occurred. The amount returned is includible in the employer's income in the taxable year in which it is returned if the mistaken contribution resulted in a tax benefit in a prior year.

    Example 13: Contributions are made to the trust of a multiemployer plan. Under the terms of the plan and the collective bargaining agreements, individuals owning more than a 10% ownership interest in a contributing employer are not eligible to receive benefits under the plan and contributions are not required on their behalf. Over several years, contributions have been made to the trust on behalf of 10% owners under the mistaken belief that such contributions were required. Because these contributions were based on a mistake of law as to the proper interpretation of the eligibility requirements of the plan and collective bargaining agreements, the employers who made the mistaken contributions may obtain a refund of the excess contributions. If, instead of mistaking the eligibility requirements of the plan, an employer made a computational error in calculating the amount to be contributed, the arithmetical error would be a mistake of fact and the employer could receive a receive a refund on that basis.  (05-04-2001)
IRC 401(k) Plans

  1. In recent years, an increasing number of new multiemployer plans are cash or deferred arrangements (CODAs) under IRC 401(k). The regulations under IRC 401(k) provide special rules for collectively bargained plans. These rules are generally designed to conform the requirements of IRC 401(k) to those qualification rules that are different for collectively bargained plans, particularly the nondiscrimination rules.

  2. Reg. 1.401(k)-1(g)(11) discusses the application of the coverage rules under IRC 410(b) to single and multiemployer collectively bargained plans. 1.401(k)-1(g)(11)(ii)(B) provides that a plan that benefits both collectively bargained and noncollectively bargained employees is treated as separate plans. This subparagraph (B) applies separately with respect to each collective bargaining unit. At the option of the employer (or the plan administrator if the plan is a multiemployer plan), two or more separate collective bargaining units may be treated as a single collective bargaining unit, provided that the combinations of units are determined on a basis that is reasonable and reasonably consistent from year to year.

    1. For instance, if a plan benefits employees covered under two different collective bargaining agreements, along with a group of noncollectively bargained employees, the employer (or the plan administrator) may treat the plan as comprising three separate plans.

    2. Alternatively, the two collective bargaining units may be aggregated so that the plan is treated as comprising two separate plans — one benefiting the collectively bargained employees and the other the noncollectively bargained employees.

  3. If the plan is a multiemployer plan, the portion of the plan that is maintained pursuant to a collective bargaining agreement within the meaning of Reg. sec. 1.413-1(a)(2) is treated as a single plan maintained by a single employer that employs all the employees benefiting under the same benefit computation formula and covered pursuant to that collective bargaining agreement. The noncollectively bargained portion of the plan is treated as maintained by one or more employers, depending on whether the noncollectively bargained employees are employed by one or more employers.

  4. Reg. sec. 1.401(k)-1 (a)(7) describes certain consequences to CODAs maintained pursuant to collective bargaining agreements when they become nonqualified. The regulation provides that employer contributions to a nonqualified CODA are treated as satisfying IRC 401(a)(4) if the arrangement is part of a collectively bargained plan that automatically satisfies the requirements of IRC 410(b). See IRM Elective contributions under the arrangement are generally treated as employer contributions; however, for purposes of IRC 402(a), they are treated as employee contributions and not excludable from gross income.

    Example 14: Employers A and B are contributing employers to a multiemployer 401(k) plan on behalf of their collectively bargained employees. Employer A and Employer B maintain workforces that are compensated at the same rate, and both have chosen a benefit computation formula allowing their employees to elect deferrals up to 7% of compensation including overtime. Because the plan administrator has elected to aggregate employees under collective bargaining agreements that benefit under the same computation formula, the portion of the plan benefiting the employees of Employer A and Employer B is treated as a single plan. On account of overtime, several of Employer A's employees (but none of Employer B's) are highly compensated for the year and all elect to defer the full 7% allowed under the plan. None of the employees of Employer B, or the nonhighly compensated employees of Employer A, elect to defer more than 4% of their compensation. Because contributions from Employer A on behalf of its employees cause the portion of the plan that covers employees of Employer A and Employer B to fail the actual deferral percentage test of IRC 401(k)(3), the CODA becomes nonqualified. The contributions of Employer A and Employer B on behalf of their employees are considered to be nondiscriminatory under IRC 401(a)(4) and are generally treated as employer contributions under the plan. However, the elective contributions must be included in income by the employees of both Employer A and Employer B.

  5. Reg. section 54.4979-1(a)(2) provides that, in the case of a collectively bargained plan, all employers who are parties to the collective bargaining agreement and whose employees are participants in the plan are jointly and severally liable for the tax owed under IRC 4979 for excess contributions to a 401(k) plan.

  6. One of the difficulties for plan administrators of multiemployer 401(k) plans is obtaining accurate compensation data for participants from the various contributing employers for purposes of conducting the average deferral percentage ( "ADP" ) test. Employers may not be forthcoming in response to an administrator's request for compensation data as it is generally regarded as proprietary information. One practice used by some plan administrators is to multiply the hours worked during the year by the participant by the negotiated hourly wage under the current collective bargaining agreement covering that participant. Another source of information is the contribution remittance reports filed by each employer with the plan. However, the Service does not permit ADP testing using data that is not accurate with regard to each participant. If the plan administrator performs the ADP test using a method that only approximates each participant's compensation data then a back-up method for verifying the accuracy of the data must also be used.  (05-04-2001)
Closing Agreements

  1. Some taxpayers have argued that a multiemployer retirement trust need not be associated with a plan that satisfies IRC 401(a) in order to be exempt from taxation, because it is nonetheless an exempt labor organization under IRC 501(c)(5). While this argument was upheld by the Second Circuit in Morganbesser v. United States, 984 F.2d 560 (2d Cir. 1993), the Service did not acquiesce (see Action on Decision CC-1995-016 (December 8, 1995), 1995-52 I.R.B. 4) and other appellate courts have ruled in favor of the Service (Stichting Pensioenfonds Voor de Gezondheid, Geestelijke en Maatschappelijke Belangen v. United States, 129 F.3d 195 (D.C. Cir. 1997), cert. denied 119 S.Ct. 43 (1998); Tupper v. United States, 134 F.3d 444 (1st Cir. 1998)). Reg. Sec. 1.501(c)(5)-1(b), effective December 21, 1995, reflects the Service's position that IRC 501(a) provides the only source of exemption from federal income tax for a trust associated with a retirement plan.

  2. Accordingly, in revocations arising in venues other than the Second Circuit, agents should determine the tax effects upon disqualification of a multiemployer plan as though the trust were not eligible for exemption under IRC 501(c)(5). Thus, not only will participants in such a plan be liable for taxes owed under IRC 402(b) and contributing employers be able to claim deductions only to the extent available under IRC 404(a)(5) (for nonqualified plan contributions), but the trust income for the open years in which the plan was disqualified will also be subject to taxation. Likewise, taxes owed on the trust income should be included in calculating the maximum payment amount for a multiemployer plan that is the subject of negotiation under the Audit Closing Agreement Program. In audits of multiemployer plans based in the Second Circuit for open years following the effective date of section 1.501(c)(5)-1(b) of the regulations (December 21, 1995), agents should determine the tax effects of disqualification in the same manner as for multiemployer plans located in other venues. For open years prior to the regulation's effective date, however, agents may take Morganbesser into account as a litigating hazard for plans located within the Second Circuit to the extent consistent with the Service's policies regarding Actions on Decisions.

  3. The annual technical advice revenue procedure (Rev. Proc. 2001-5, 2001-1 I.R.B. 164, at section 4.04), provides that proposed adverse and proposed revocation letters on collectively bargained plans are the subject of mandatory technical advice requests. Accordingly, a multiemployer plan trust may not be disqualified until it has been submitted to the National Office for technical advice in accordance with the revenue procedure.

  4. In March of 1995 guidance was issued on the payment of CAP sanctions from trust assets, an issue that may arise when negotiating closing agreements for multiemployer plans. As a rule, CAP sanctions should be paid by parties other than the trust. Exceptions are allowed only in very narrow circumstances. The text of the field directive appears at IRM 7.9.2, EPCRS.

  5. In examinations of single-employer plans, an agent is used to dealing with a corporate officer (if the employer maintaining the plan is a corporation) who is also a plan trustee, and who can bind both the employer and the trust to an agreement, a statute extension, or a power of attorney. There is rarely a single individual with all these powers in the multiemployer plan hierarchy. As a result, an agent may reasonably expect a delay in extensions or the adoption of corrective plan amendments, etc., until after the joint board has convened. No trustee can execute a statute extension, power of attorney or tax agreement on behalf of a contributing corporation unless the trustee has the appropriate standing as an officer/employee of that corporation. No single trustee can bind the trust in this way unless that trustee has been delegated such authority by the board.

Exhibit 4.72.14-1  (05-04-2001)
Chart of Effective Dates and Remedial Amendment Periods

Legislative Source Code Provision Effective Date Amendment Date RAP Source
TEFRA 235(g)(2) 415 LY > earlier of 1/1/86 or Tcba


Tcba is the termination date of the last collective bargaining agreement in effect as of the date of enactment of the statute, unless otherwise specified. TEFRA was enacted 9/3/82.

10 mo. > PYE of yr of Eff. Date 1.401(b)-1(c) Not. 83-10, Q&A T-2
TEFRA 242, DEFRA 521 (c)(5) 401(a)(9) Earlier of PY > 1/1/88 or Tcba


DEFRA was enacted 7/18/84.

1994 PYE Prop. Reg. 1.401(a)(9)-1, Q&A-4
REA 302(b), TRA '86 1898 401 (a)(11) 41 1(a)(11) Earlier of 7/1/88 or PY > Tcba


REA was enacted 8/23/84. TRA ;‘86 sec. 1898 extended the effective date of the REA provisions for collectively bargained plans to 7/1/88, with the exception of QDROs, 411(d)(6), and 417 (except that the provision relating to spousal consent to changes in benefit form is effective for plan years beginning after 10/22/86).



This date only applies if the effective date for these provisions is determined to be earlier than 6/30/86, as measured by the last effective collective bargaining agreement. This is also true for amendments implementing IRC 417

Not. 86-3
REA 302(b) and 303(c)(3), TRA ‘86 1 0898 417 Earlier of 1/1/87 or PY > Tcba


REA 303(c)(3) provides that elections after 12/31/84 not to take a joint and survivor annuity are subject to IRC 417(a)(2).

6/30/86 Not. 86-3
REA 303(a), TRA ‘86 1898 410(a)(5)(E) 411(a)(6)(E) Earlier of 7/1/88 or PY > Tcba PY > earlier of 1/1/87 or first date plan amended for REA


It is unlikely that this date would be later than the effective date of the provisions unless the plan had a plan year beginning later than July 1.

REA 303(b)
REA 302(d)(2), TRA ‘86 1898 401(a)(25) 411 (d)(6) 4/1/85 6/30/86 Not. 86-3
TRA '86 111 2(e)(2)-(4), TAMRA 1011 (h)(6)- (9) 410(b) 401 (a)(26) PY > later of 1/1/89 or Tcba in effect on 2/28/86, but < 1/1/91.


TRA '86 was enacted 10/22/86.

PYE 1994


However, if the plan is maintained by a government or tax-exempt entity the remedial amendment treatment described in Notices 94-13 and 96-64, and Rev. Proc. 99-23, applies.

Rev. Pr. 95-12
TRA '86 1111(c), TAMRA 101 1(g)(4) 401 (a)(5) 401(l) PY > later of 1/1/89 or Tcba in effect on 2/28/86, but < 1/1/91 PYE 1994 Rev. Pr. 95-12
TRA '86 111 3(f)(2)- (4), O BRA ‘89 7861 (a)(3)-(4) 410(a) PY > later of 1/1/89 or Tcba in effect on 2/28/86, but < 1/1/91 PYE 1994 Rev. Pr. 95-12
TRA '86 11 16(f)(2)- (7), TAMRA 101 1(k)(8)- (10) 401(k) (except for 401(k)(3)) PY > later of 1/1/89 or Tcba in effect on 2/28/86, but < 1/1/91 PYE 1994 Rev. Pr. 95-12
TRA '86 111 6(f)(2)- (7), TAMRA 1011 (k)(8)- (10) 401(k)(3) PY > earlier of 1/1/89 or Tcba in effect on 2/28/86 PYE 1994 Rev. Pr. 95-12
TRA '86 111 7(d)(2)- (4), TAMRA 101 1(l)(12) 401(m) PY > earlier of 1/1/89 or Tcba in effect on 2/28/86


If the plan is a collectively bargained 403(b) plan, the effective date is the same as for 410(b) above.

PYE 1994 Rev. Pr. 95-12
TRA '86 1106(I), TAMRA 1011(d)(5) and 6062(a) 415 LY > 10/1/91 PYE 1994 Rev. Pr. 95-12
TRA '86 1113 411(a)(2) PY > later of 1/1/89 or Tcba in effect on 2/28/86, but < 1/1/91 PYE 1994 Rev. Pr. 95-12
TRA '86 1105 402(g) PY > later of 1/1/89 or PYE 1994 Rev. Pr. 95-12
    Tcba in effect on 2/28/86, but < 1/1/91


TAMRA modified "Tcba" to mean the termination of the collective bargaining agreement covering the individual subject to the 402(g) limit. The probable effect of the TAMRA change was to require multiemployer plans to look at the first of the collective bargaining agreements terminating after 2/28/86 rather than the last in order to determine the appropriate effective date for 402(g).

UCA 522(a)(1) 401 (a)(31) 402(f) 3405(c) Distributions > 12/31/92 Later of PYE 1994 or the filing date, incl. ext., for 1120 UCA 523 Rev. Pr. 95-12
OBRA ‘93 13212(d)(2) 401(a)(17) PY >later of 1/1/94 or Tcba, but < 1/1/97.


OBRA '93 was enacted on 8/10/93

Later of last day of 10th month > PYE 1994 or the PYE Tcba. Rev. Pr. 95-12
SBJPA 1442(a)(2) 411 (a)(2) PY > the later of 1/1/97 or Tcba, but < 1/1/99.


SBJPA was enacted on 8/20/96.

PYE 2000 Rev. Pr. 97-41 Rev. Pr. 99-23

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