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In Rev. Rul. 2014-24, scheduled for publication on September 8, 2014, the Internal Revenue Service (the Service) substantially completed its pending guidance on Rev. Rul. 81-100 group trusts by permanently authorizing the participation in group trusts of retirement plans qualified only under Puerto Rico tax law, extending the transition relief for certain transfers from Puerto Rico plans that are dually qualified under Puerto Rico and U.S. tax law, and confirming that eligible plans may participate in group trusts through insurance company separate accounts.
Rev. Rul. 81-100 Group Trusts
By way of background, the Internal Revenue Code treats as tax-exempt the trusts funding a number of retirement or employee benefit plans subject to, among other things, an exclusive benefit requirement – generally, that the trust assets be used only for the exclusive benefit of plan participants and their beneficiaries.
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In Rev. Rul. 81-100, the Service continued a ruling position dating to 1956 that, subject to specified conditions, certain types of retirement plans may pool their trust assets for investment in a group trust, without violating the exclusive benefit rule, and the group trust would enjoy the same tax exemption as the trusts for the participating plans.
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In Rev. Rul. 2004-67, the Service permitted additional types of retirement arrangements to participate in these 81-100 group trusts.
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In Rev. Rul. 2011-1, as modified by Notice 2012-6, the Service again expanded the types of plans that may invest in 81-100 trusts, clarified or added certain requirements for these trusts, and noted several issues for future guidance.
Rev. Rul. 2014-24 further refines the rules for 81-100 group trusts by:
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Providing definitive guidance allowing the participation in group trusts of Puerto Rico-only qualified retirement plans described in section 1022(i)(1) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), i.e., plans that are qualified under Puerto Rico tax law but not the Internal Revenue Code and cover only residents of Puerto Rico, and thus are treated by ERISA §1022(i)(1) as maintaining a trust exempt under IRC §501(a);
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Confirming that eligible plans may invest in a group trust through a “separate account” maintained by an insurance company -- most often pursuant to a variable annuity contract or a funding agreement – that is insulated from the claims of the insurer’s general creditors and subject to certain other conditions; and
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Clarifying that the separate accounting requirement elaborated in Rev. Rul. 2011-11 does not require separate accounts.
The cumulative tax requirements for 81-100 group trusts are summarized in the following chart, with revisions made by Rev. Rul. 2014-24 indicated in italics. Except as otherwise indicated, the ruling does not specify any effective date.
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Situs and structure
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Group trust must be created or organized in the U.S. and maintained at all times as a U.S. domestic trust
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Eligible plan investors
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Section 401(a) plans
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Individual retirement accounts
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Section 457(b) governmental plans
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Section 403(b)(7) custodial accounts
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Only if group trust limits investments to mutual funds
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Section 403(b)(9) retirement income accounts
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Section 401(a)(24) governmental plans
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Including those providing retiree welfare benefits
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Commingled trust funds maintained by PBGC as statutory trustee for terminated tax-qualified plans
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Puerto Rico-only qualified plans described in ERISA section 1022(i)(1)
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Insurance company separate account limited to the above plans
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Separate account must be insulated from claims of the insurer’s general creditors
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Each investing plan/IRA must be itself tax-exempt under §408(e) or §501(a) (or treated as tax-exempt under §501(a))
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§401(a)(24) governmental plan is treated as meeting this requirement if it is not subject to federal income taxation
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Group trust instrument expressly limits trust participation to eligible plan investors.
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Group trust instrument expressly limits the assets that may be held by the group trust to assets that are contributed by, or transferred from, an investing plan/IRA to the group trust (and the earnings thereon)
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Comments:
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Note that section 403(b)(1) annuities are not yet on the list of permissible plan investors.
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Even where allowed by the tax law, investment by IRAs or §403(b) accounts (other than §403(b)(9) retirement income accounts), for example, in certain group trusts may be precluded by securities law or other considerations, depending on the structure of the trust.
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There has been substantial prior practice of plans investing in 81-100 group trusts through insurance company separate accounts, which sometimes was expressly provided for in a group trust document approved in the IRS determination letter process. By positioning this point as a clarification, Rev. Rul. 2014-24 appears to endorse that past practice. Any existing arrangements should be reviewed for compliance with the conditions of the updated ruling.
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The ruling also appears functionally to ratify the adoption of an 81-100 trust by a Puerto Rico-only qualified plan after the last applicable date authorized in earlier guidance, if any, and prior to publication of the ruling.
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Finally, it appears that group trusts admitting Puerto Rico-only qualified plans pursuant to Rev. Rul. 2014-24 will continue to be able to claim U.S. tax treaty benefits for certain types of investment income received by U.S. pension plans from sources resident in the treaty partner, through the IRS Forms 8802/6166 process. Footnote 1, declaring the group trust to be liable for tax (specifically, for unrelated business income tax), appears intended to invoke the pertinent provision in at least most treaties.
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Adoption
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Group trust is adopted as a part of each plan or IRA.
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For separate accounts, insurance company must enter into a written agreement with the trustees of the group trust consistent with the requirements of Rev. Rul. 2011-1; transition relief is provided until January 1, 2016, if plans are invested in the group trust through a separate account as of December 8, 2014.
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Nonassignability
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Group trust instrument must prohibit the assignment by a participating plan/IRA of any part of its equity or interest in the group trust.
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Exclusive benefit
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Group trust instrument prohibits violation of exclusive benefit rule
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Using the assets of one investing plan to provide benefits under another plan is a violation, even if the benefited participant or beneficiary is the same person
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Each participating plan/IRA expressly and irrevocably prohibits in its governing document violation of the exclusive benefit rule
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Plans that satisfy Treas. Reg. §1.401(a)-2 (for qualified plans), §1.403(b)-8(d)(2)(iii) (for §403(b)(7) custodial accounts), §1.403(b)- 9(a)(2)(i)(C) (for §403(b)(9) retirement income accounts), §1.408-2(b) (for IRAs), and §1.457- 8(a)(2)(i) (for §457(b) governmental plans) are deemed to comply
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With respect to Puerto Rico-only qualified plans, Rev. Rul. 2014-24 notes the applicability of comparable requirements under §1081.1(a)(2) of the Puerto Rico tax code and ERISA §404(a)(1)(A).
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Either loan or other extension of credit from assets in the group trust to employer, or use of assets of participating plan/IRA to provide benefits under another participating plan even if the benefitting participant or beneficiary is the same person, violates this rule
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__Separate accounting
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Group trust instrument expressly provides for separate accounting (and appropriate records) to be maintained to reflect the interest of each investing plan/IRA, including separate accounting for contributions to the group trust, disbursements made from the group trust, and investment experience of the group trust allocable to that account.
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Transaction or accounting method which has the effect of directly or indirectly transferring value from the account of one investing plan into the account of another investing plan violates this requirement.
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Transaction that merely exchanges investments at fair market value between the accounts of one investing plan to another account of that investing plan does not violate this requirement
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Transition Relief
Finally, Rev. Rul. 2014-24 extends to December 31, 2016, the transition relief provided by Rev. Rul. 2008-40 (as subsequently modified) for transfers to a §1022(i)(1) plan from a plan that is dually qualified under Puerto Rico and U.S. tax law and that participated in an 81-100 group trust on January 10, 2011. This extension allows plan sponsors that wish to convert their dual-qualified Puerto Rico plans into plans qualified only under Puerto Rico tax law the ability to do so without adverse U.S. tax consequences to the trust or participants arising from the U.S. source portion of the assets converted.
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