Grace period ends Aug. 21, 1995 for waiving penalties on property contributions to qualified retirement plans.

• Author: Josephs, Stuart R.

In 1993, the Supreme Court held that an employer's contribution of unencumbered property to a qualified defined benefit pension plan, in satisfaction of the employer's funding obligation, was a "sale or exchange" and, therefore, a prohibited transaction (Keystone Consolidated Industries, Inc., 113 Sup. Ct. 2006 (1993)).

However, the Court did not expressly address in-kind contributions to such plans in excess of amounts necessary to reduce the sponsor's funding obligation for the year in which the contribution is made or contributions to other types of plans. (See also Tax Trends, "Sup. Ct.: Contribution of Unencumbered Property to Defined Benefit Plan Was a Sale or Exchange," TTA, Aug. 1993, at 536, and Tax Clinic, "Property Contributions to Pension Plans Are Prohibited, But What About Profit-Sharing Plans?" TTA, Oct. 1993, at 653.)

DOL's interpretation of

Supreme Court's decision

Defined benefit plans: Since in-kind contributions are credited to the plan's funding standard account, they reduce the employer's or sponsor's funding obligation to the plan. Therefore, unless a statutory or administrative exemption applies, these contributions would be prohibited transactions - even if the contribution's value exceeds the funding obligation for the plan year in which the contribution is made (since those contributions would result in credits against funding obligations that might arise in the future).

Defined contribution and welfare plans: In-kind contributions to a plan that reduce the employer's or sponsor's obligation to make a contribution measured in terms of cash amounts would be prohibited transactions (unless an exemption applies).

Example 1: A profit-sharing plan requires the employer to make annual contributions "in cash or in kind" equal to a given percentage of the employer's net profits for the year. An in-kind contribution used to reduce this obligation would constitute a prohibited transaction in the absence of an exemption; the amount of the contribution obligation is measured in terms of cash amounts (a percentage of profits), even though the plan's terms permit in-kind contributions.

Conversely, a transfer of unencumbered property to a welfare benefit plan that does not relieve the employer or sponsor of any present or future obligation to make a contribution measured in terms of cash amounts would not constitute a prohibited transaction. The same principles apply to defined contribution plans not subject to minimum funding...