Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202408002 Release Date: 2/23/2024 Index Number: 401.29-00, 415.01-00, 72.00 - 00
Third Party Com munication: None Date of Communication: Not Applicable Perso n To Contact: -------------------------- , ID No. Telephone Number: -------------------- Refer Rep ly To: CC:EEE:EB:QP 3 PLR - 110780-23 Date: Nov ember 20, 2023 State A County B Plan C Plan D Retirement System E Date F Date G
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Dear -------------- :
This letter is in response to correspondence dated May 15, 2023, and supplemented on November 15 , 2023, submitted by County B, in which a request for a letter ruling was submitted with respect to the federal income tax consequences of an elective plan-to - plan transfer of assets from P l an C to Plan D .
The following facts and representations have been submitted under penalties of perjury in support of the request:
County B is a coun ty in State A. C ounty B established and maintains Ret irement System E, a defined benefit plan that is a governmental plan within the meaning of section 414(d) of the Internal Revenue Code and a qualified plan within the meaning of section 401(a) . Retiremen t System E conta ins several different component plans , including a traditional defined benefit plan a n d Plan D , a cash balance plan .
County B also established and maintains Plan C, a defined contribution plan that is a governmental plan within the meanin g of section 414(d) and a qualified plan within the m eaning of section 401(a).
Both Plan C and Plan D were established after 1986.
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2
E mployees who are eligible to participate in Plans C and D include, but are not limited to, regular full-time or part-time employees who were hired on or after , and who either work in non-union-represented p o sitions or who work in certain un ion - represented positions .
Plan C was established before Plan D . Before Plan D was established, employees now eligible for Plan D participated in Plan C . When Plan D wa s established, eligible employees had the option , during a specified period, to ma ke a one-time irrevocable election to terminate participation in Plan C and participate in Plan D . Employees who made this election had their account balance transferred from Plan C to Plan D . Employees who did not make th i s election continued to participate in Plan C .
Eligible full-time employees hired after Date F and before Date G , and full-time non - union-repre sented employees hired after Date G , automatically participate in Plan C unless they affirmatively elect to pa r ticipate in Plan D . Specified f ull-time union - represented employees hired after Date G automatically participate in Plan D unless they elect to p articipate in Plan C .
Part-time employees can elect to parti cipate in a retirement plan for which they are e l igible and cannot di scontinue participation in that plan once elected .
Employee contributions are deducted from employee salaries before the co mputation of applicable taxes and, as the terms of the plan s p rovide, are treated as employer contributions un d er section 414(h)(2) . Under both Plan C and Plan D, employees make employee contributions at the same rate. The allocations resulting from employ er contributions that are made under Plan C are made at the sa me rate as the pay credits that are credited und e r Plan D. Except in certain situations not relevant to this ruling request, the definition of compensation is the same under both Plan C and Plan D . Employees do not have the option to choose to receive thes e contributed amounts as salary .
Under Plan C, employees elect inve stment options and receive earnings on their selected investments . Under Plan D, interest is accrued daily and credited month ly at an annualized rate of ------ %.
County B intends to amend the County B code to provide employees who are currently participating in Plan C with an opportunity to elect to participate in Plan D and transfer their account balance to Plan D . Employees making the election would have a plan-to - plan transfer of their account balance directly from Plan C to Plan D . No amount will be made available or distributed to an employee . The opportunity to make an election will be limited to a specific time period es tablished by County B . After the transfer from Plan C to Plan D, an individual’s Plan D account will equal the a mount tran sferred from Plan C .
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3 Based on the above facts and representations, you request the following ruling s in connection with the additio nal opportunity for an eligible employee to elect to change reti rement plan participation and transfer account b alances fr om Plan C to Plan D –
1. The election by an eligible employee between Plan C and Plan D will not constitute a cash or deferred arrang ement within the meaning of section 401(k);
2. The transfer of assets from Plan C to Plan D will not result i n taxation to an employee under sections 72(t) , 401(k) , or 402 ; and
3 . Assets transferred from Plan C to Plan D will not be subject to the limi tations on benefits under section 415(b) .
Section 72 provide s generally that gross income includes any amou n t received as an annuity (whether for a period certain or during one or more lives) under an annuity, endowment, or life insurance contract.
Se ction 72(t) provides for an additional tax on any amount receive d from a “qualified retirement plan” (as define d i n section 4974(c), which includes plans described in section 401(a)). The additional tax for the taxable year in which such amount is received is equal to 10 percent of the portion of such amount which is i ncludible in gross income, unless one or more o f t he exceptions enumerated in section 72(t)(2) applies.
Section 401(a) provides that a trust created or organized in the United States and for ming a part of a qualified stock bonus, pension, or profit shari ng plan of an employer constitutes a qualified t ru st only if the various requirements set out in section 401(a) are met.
Section 401(a)(16) requires that a qualified plan not provide for ben efits or contributions that exceed the limitations of section 41 5.
Section 401(k) provides the rules relating to cash or deferred arrangements.
Section 401(k)(1) provides that a profit-sharing or stock bonus plan, a pre - ERISA money purchase plan, or a rural cooperative plan shall not be considered as not satisfying the requirements of section 401(a) merely beca u se the plan includes a qualified cash or deferred arrangement as defined in section 401(k)(2).
Section 401(k)(2)(A) defines a cash or deferred arrangement as any arrangement which is part of a profit-sharin g or stock bonus plan, a pre - ERISA money purcha s e plan, or a rural cooperative plan which meets the requirements of section 401(a) under which a covered employee may elect to have the employer make payments as contributions to a trust under the plan on beh alf o f the employee, or to the employee directl y in cash.
Section 401(k)(4)(B)(ii) provides that a cash or deferred arrangement shall not be
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4 treated as a qualified cash or deferred arrangemen t if it is part of a plan maintained by a State or local governm ent o r political subdivision thereof, or any ag e ncy or instrumentality thereof. However, section 1116(f)(2)(B)(i) of the Tax Reform Act of 1986, P.L. 99-514 , provides a transition rule purs uan t to which the prohibition of section 401(k)(4)(B)(ii) does not apply to an y cash or deferred arrangement adopt ed by a State or local government (or political subdivision thereof) before May 6, 1986. Thus, even if a governmental employer maintains a def ine d contribution plan (as com pared to a defined benefit plan), the defined co ntribution plan cannot generally inc lude a qualified cash or deferred arrangement within the meaning of section 401(k), unless the cash or deferred arrangement was adopted before Ma y 6, 1986.
Section 1.401(k ) - 1(a)(1) of the Income Tax Regulations provides that a plan, other than a profit-sh aring, stock bonus, pre - ERISA money purchase pension, or rural cooperative plan, does not satisfy the requirements of section 401(a) if the p lan includes a cash or deferred arrangement. For this purpose, a cash or deferred arrangement is part of a plan if any contributions to the plan, or accruals or other benefits under the plan, are made or provided pursuant to the cash or deferred arrangemen t. B ecause a defined benefit plan is not a profi t-sharing, stock bonus, pre - ERISA money purchase pension, or rural cooperative plan, if a defined benefit plan includes a cash or deferred arran gement, it does not satisfy the requirements of section 401(a) .
Sec tion 1.401(k) - 1(a)(2) provides that, subject to certain exceptions, which are inapplicable in this case, a cash or deferred arrangement is an arrangement under which an eligible employee may make a cash or deferred electi on with respect to contributions to , or accruals or other benefits under, a plan that is intended to satisfy the requirements of section 401(a).
Section 1.4 01(k) - 1(a)(3)(i) generally defines a cash or deferred election as any direct or indirect election (or modification of an earlier elec tion) by an e mployee to have the employer either: (A) provide an amount to the employee in the form of cash (or some other taxable benefit) that is not currently available, or (B) contribute an amount to a trust, or provi de an accrual or other benefit, und er a plan def erring the receipt of compensation.
Section 1.401(k) - 1(a)(3)(iv) provides that an amount is curre ntly availab le if it has been paid to the employee or if the employee is able currently to receive the cash or other taxable amount at the employ ee’s discreti on. An amount is not currently available if there is a significant limitation or restriction on th e employee’s right to receive the amount currently. Similarly, an amount is not currently available as of a da te if the employee may under no cir cumstances re ceive the amount before a particular time in the future.
Section 1.401(k) - 1(a)(3)(vi) provides th at an amount generally is includible in an employee’s gross income for the taxable year in which the employee actually or constructively receives the amount . But for section 402(e)(3), an employee is treated as
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5 having received an amount that is contributed to an exempt trust or plan described in section 401(a) pursuant to th e employee’s cash or deferred election .
Section 1.401(k) - 1(a)(5)(i) provi des that a no nqualified cash or deferred arrangement is a cash or deferred arrangement that fails to satisfy on e or m ore of the requirements in § 1.401(k) - 1(b), (c), (d) or (e) . Section 1.401(k) - 1(a)(5) (iii) provides that e lective contributions under a non qualified cas h or deferred arrangement are includible in an employee's gross income at the time the cash or oth er tax able amount that the employee would have received (but for the cash or deferred election) would have bee n includible in the employee's gros s income .
Se ction 1.401(k) - 1(e)(4) provides that a governmental plan is generally prohibited from creating a c ash or deferred arrangement.
Section 402(a) generally provides that any amount actually distributed to any re cipient by any employees’ trust des cribed in sec tion 401(a), which is exempt from tax under section 501(a), shall be taxable to the recipient in t he tax able year of the distribution under section 72 (relating to annuities).
Under section 411(c)(2)(B), in the case of a defined benefit plan , the accrued benefit derived from contributions made by an employee as of any applicable date is the amount eq ual to the employee’s accumulated contributions expressed as an annual benefit commencing at normal retirement age, using an interest rate which would be used under the plan under section 417(e)(3) (as of the determination date).
Section 411(c)(2)(C) d ef ines the term “accumulated contributions” as the mandatory contributions made by the employee, increased by in terest. With respect to periods dur ing plan year s beginning on or after January 1, 1988, section 411(c)(2)(C)(iii) specifies that the interest i s determined using the rate of 120 percent of the Federal mid-term rate (as in effect under section 1274 for the first month of each plan year) for the period b eginning with the first plan year to which section 411(a)(2) applies (by reason of the applicabl e effective date) and ending on the date the determination is being made, and using the interest rate under sect ion 417(e)(3) for the period betwee n the determi nation date and the date on which the employee attains normal retirement age.
Section 411(c)(3 ) requires that, if the accrued benefit derived from employee contributions is to be determined with respect to a benefit other than an annual bene fit in the fo rm of a single life annuity (without ancillary benefits) commencing at normal retirement age, th e accrued benefit derived from contributions made by the employee shall be the actuarial equivalent of the amoun t determined under section 411(c)(2 ).
Section 411(e) provides that a governmental plan (within the meaning of section 414(d)) is treated as me et ing the requirements of section 411, provided the governmental plan
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6 meets the vesting requirements resulting f rom the application of sections 401 (a)(4) and 40 1(a)(7) as in effect on September 1, 1974.
Section 415(a)(1)(A) provides that a defined benefi t plan is not a qualified plan if the plan provides for the payment of benefits with respect to a participant wh ich exceed the limitation of sectio n 415(b). Sec tion 415(b)(1) prescribes limitations that are based on the annual benefit determined under sect io n 415(b)(2). Section 415(b)(2)(B) provides for adjustments, in accordance with regulations, to the benefit det ermined under the plan if employees contribute o r make rollover contributions to the plan.
Section 1.415(b) - 1(b)(1) prescribes rules for the d et ermination of the annual benefit for purposes of section 415(b). Under § 1.415(b) - 1(b)(1)(ii), the annual bene fit, for purposes of determining th e section 415 (b) limitation, does not include the annual benefit attributable to either employee contribution s or rollover contributions (as described in section 401(a)(31) and section 402(c)(1)). Furthermore, pursuant to § 1.415(b) - 1(b)(1)(ii), the treatm ent of transf erred benefits is determined under the rules of § 1.415(b) - 1(b)(3).
Under § 1.415(b) - 1(b)(2)(v ), the annual benefit attributable to rollover contributions is determined by using the factors applicable to ma ndatory employee contributions as d escribed in s ections 411(c)(2)(B) and (C) and regulations promulgated under section 411, regardless of whethe r the requirements of sections 411 and 417 apply to the plan. Thus, in the case of rollover contributions from a defined contribution plan to a def ined benefit plan to provide an annuity distribution, the annual benefit attributable to those rollover contr ib utions, for purposes of section 415(b), is determined by applying the rules of section 411(c) as described in § 1.415(b) - 1(b)(2)(iii), regardless of the assum ptions used to compute the annuity distribution under the plan and regardless of whether the pla n is subject to the requirements of sections 411 and 417 . Accordingly, in such a case, if the plan uses more fav orable factors than those specified in section 4 11(c) to determine the amount of annuity payments arising from rollover contributions, the annua l benefit under the plan would reflect the excess of those annuity payments over the amounts that would be payab le using the factors specified in s ection 411(c) .
Section 1.415(b) - 1(b)(3)(ii) provides that where, as described in § 1.411(d) - 4, Q&A - 3(c) (pe rm itting certain elective transfers of distributable benefits), a distributable benefit is transferred to a defi ned benefit plan from either a defi ned contribut ion plan or a defined benefit plan, the amount transferred is treated as a benefit paid from the t ransferor plan and the annual benefit provided by the transferee defined benefit plan does not include the ann ual benefit attributable to the amo unt transferr ed (determined as if the transferred amount were a rollover contribution subject to the rules of § 1.415 (b) - 1(b)(2)(v)) . Section 1.415 (b) - 1 (b)(3)(ii) further states that the rule in the preceding sentence app lies regardless of whether the requ irements of s ection 411 apply to the plan and, in the case of a transfer from a defined contribution plan that is not subject to the requirements of section 411 (such as a governmental plan) to a defined benefit plan,
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7 the rule applies even if the participa nt’s benefits are not distributable from the defined contribution plan at the time of th e transfer.
Revenue R uling 67-213, 1967-2 CB 149, provides that if a participant’s interest in a qualified plan is transferred from the trust forming part of that pla n to the trus t forming part of another qualified plan, there is no distribution of the p articipant’s interest i n the plan and no taxable income will be recognized by reason of such transfer.
With respect to the first rul ing request, an election by an empl oyee between Plan C and Plan D will not result in a nonqualified or impermissible cash o r deferred arrangemen t . The mandatory employee contributions are the same whether contributed to Plan C or Plan D and the definition of compensation is the same under P lan C and Pla n D . Since e mployees are not given a choice between receiving an amount in the form of cash (or so me other taxable benefit) that is not currently available or deferring the receipt of compensation , there is n o cash or deferred election . Thus, the election will not result in a cash or deferred arrangement within the meaning of sec tion 401(k).
With resp ect to the second ruling request , pursuant to Revenue Ruling 67-213, the trustee-to-trustee transfer of assets from Plan C to Plan D is not deeme d to be an ac tual distribution to a participant of the amount transferred . Therefore, the transfer of assets fr om Plan C to Plan D will not result in taxation to an employee under sections 72 (t) , 401(k), or 402 .
With respect to the third ruling request , pursuant to § 1.415(b) - 1 (b) (3)(ii), the annual benefit provided by Plan D generally does not include the annu al benefit attributable to the amount transferred from Plan C (determined as if the transferred amount were a rollover contribution subject to th e rules of § 1.415(b) - 1(b)(2)(v) ) . In accordance with § 1.415(b) - 1(b)(2)(v) , the annual benefit attributable to the plan-to-plan transfers from Plan C to Plan D, for purposes of section 415(b) , is determined by applying t he rules of section 411(c) as descr ibed in § 1.4 15(b) - 1(b)(2)(iii) . Therefore, if Plan D uses the factors spec ified in section 411(c) to calculate the annual benefit under the plan, then, for purposes of the limitation of section 415(b) , as provided in § 1 .415(b) - 1 (b) (3)(ii), the annual ben efit provided under Plan D will not include the annual benefit attributable to the amounts transferred from Pla n C . However, pursuant to § 1.415(b) - 1(b)(2)(v) , if Plan D uses more favorable factors than those specified in section 411(c) to determine the am ount of annui ty payments arising from the transferred amounts, the annual benefit under Plan D, for purposes of the limitation of section 415(b) , would reflect the excess of those annuity payments over the amounts that wo uld be payable using the factors sp ecified in se ction 411(c) .
This ruling is based on the assumption that Plan C and Plan D satisfy the qualific ation requirements set forth in section 401(a), and constitute governmental plans within the meaning of sectio n 414(d), at all relevant times.
T he rulings co ntained in this letter are based upon inform ation and representations
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8 submitted by the taxpayer an d accompanied by a penalt ies of perjury statement executed by an appropriate party, as specified in Rev. Proc. 20 2 3-1, 20 2 3-1 I.R.B. 1, section 7 .01(16)(b). T his office has not verified any of the mater ial submitted in support of the request for ruling, an d such material is subject to verification on examination. The Associate office will revoke or modify a letter ruling and apply the revocation re troactively i f there has been a misstatement or omission of controlling facts; the facts at the time of the tra nsaction are materially different from the controlling facts on which the ruling was based; or, in the case of a transaction involving a continui ng action or series of actions, the controlling facts cha nge during the course of the transaction. See Rev. Pro c. 20 2 3-1, section 11.05.
Except as specifically set forth above, no opinion is expressed or implied concerni ng the federal tax consequences of any aspect of any transaction or item discussed or refere nced in this letter ruling.
This letter ruling is di rected only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as pre cedent.
A copy of this letter has been sent to your authorized representatives in accordance with a power of attorney on file in this office .
Sincerely,
Brandon Ford Acting Branch Chief, Qualified Plans Branch 4 ( Employee Benefits, Exempt Organizati ons, and Employment Taxes )
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