Section 163 Technical Advice Memorandum Dated July 28, 1999

• Library: Specialized Business Entities 2009 Forms

The following is a reprinting of the Technical Advice Memorandum that is discussed in § 10.83 of the deskbook. It is reprinted in 27 Pens. & Ben. Rep. (BNA) 1161 (May 2, 2000). It has never received a formal number in the IRS system.

INTERNAL REVENUE SERVICE

National Office Technical Advice Memorandum

· Manager, EP Determinations

· Cincinnati, Ohio

· Taxpayer's Name:

· Taxpayer's Address:

· Identification Number:

· Years Involved:

· Conference Held: July 28, 1999

· Legend:

· Plan 1 =

· Plan 2 =

· "X" Code =

· "Y" Code =

1. ISSUES

· 1. Whether Plan 1 and Plan 2 may exclude from Plan participation employees who are either (1) not reported on the payroll records of affiliated companies as common law employees (even if a court or administrative agency determines that such individuals are common law employees and not independent contractors) or (2) are identified by either a specified job code or work status code on the employer's payroll records, and still satisfy the requirements of section 410(a) of the Internal Revenue code and section 1.410(a)-3(d) of the Income Tax Regulations.

· 2. Whether plan eligibility requirements cause Plan 1 and Plan 2 to fall [sic] to satisfy the requirement that a plan must be a definite written program.

· 3. Whether section 11.04 of Plan 1 and sections 11.02, 13.06(e), and 14.02(a) of Plan 2, which provide for an involuntary cashout of a participant's benefit if the present value of the vested portion of such participant's account is $3,500 or least [sic] the time of the distribution, satisfy the requirements of section 411(a)(11) and section 417(e) of the Code and the regulations thereunder.

II. FACTS

· In September of 1997, the Internal Revenue Services [sic] received an Application for Determination for Employee Benefit Plan, Form 5300, for Plan 1 and 2. The Plans were initially effective March 1, 1996, and have calendar plan years. The taxpayer submitted proposed amendments to the plans on March 2, 1998.

· Section 2.14 of Plan 1 and section 2.21 of Plan 2, as amended March 2, 1998, state that "an individual shall only be treated as an employee if he or she is reported on the payroll records of an affiliated company as a common law employee. This term does not include any other common law employee or any leased employee. In particular, it is expressly intended that individuals not treated as common law employees by the Affiliated Companies on their payroll records are to be excluded from Plan participation even if a court or administrative agency determines that such individuals are common law employees and not independent contractors." Neither "common law employee" [sic] nor "independent contractors" are defined in the Plan document.

· Section 3.02 of Plan 2 excludes "special assignment employees" from plan participation. The special assignment classification includes two types of workers: those with job code "Y" (Sections 2.14 and 3.03(a)) and those with work status code "X" (section 3.03(b)). The "X" and "Y" work code dictate how these workers are compensated and other term [sic] of their employment. Specifically, "Y" code workers are hired to perform work on specific contracts with specific deadlines for specific operation [sic] and benefits. These benefits include participation in other employer retirement plans. "X" code workers are members of the salaried employee union who have been laid off and are on the inactive seniority list. Pursuant to an agreement between the union and the employer these former employees are hired for a predetermined period of time to complete a specific task or project. The agreement further provides that they be paid the prevailing contract salary rate and that they are not entitled to participate in the employer's retirement plans.

· Section 11.04(a) of Plan 1 as amended March 2, 1998, provides in general that upon a participant's retirement or termination of employment, if the present value of the vested portion of the participant's account is $3,500 or less at the time of the distribution, the vested portion will be distributed to him as soon as practicable following the next valuation date after retirement or termination occurs.

· Section 11.02 of Plan 2 as amended March 2, 1998, provides that in the event a participant becomes a terminated participant, if the total value of his or her vested account is $3,500 or less at the time of the annuity starting date, he or she will receive a total distribution of his or her account as soon as practicable.

· Section 13.06(e) of Plan 2 as amended March 2, 1998, provides that with respect to a participant who has an outstanding loan balance at the time he or she terminates employment with the affiliated companies or dies and whose vested account and outstanding loan balance does not exceed $3,500 on the annuity starting date, the outstanding loan balance will be treated as a distribution.

· Section 14.02(a) of Plan 2 as amended March 2, 1998, provides that if the total value of the deceased participant's account is $3,500 or less on the annuity starting date, a total distribution shall be made automatically to the designated beneficiary.

III. LAW AND RATIONALE

Issue 1. Section 410(a) Requirements

· Section 410(a) of the Code provides, in general, that a trust will not qualify under section 401(a) if the plan of which it is a part requires, as a condition of participation, that an employee complete a period of service with the employer or employers maintaining the plan extending beyond the later of the date on which the employee attains the age of 21; or the date on which he completes 1 year of service (or two years of service in the case of a plan that meets 410(a)(1)(B)(1)).

· Section 1.410(a)-3(d) of the Income Tax Regulations states that "Section 410(a) and section 1.410(a)-4 relate solely to age and service conditions and do not preclude a plan from establishing conditions, other than conditions relating to age or service, which must be satisfied by plan participants. For example, such provisions would not preclude a qualified plan from requiring, as a condition of participation, that an employee be employed within a specific job classification."

· Section 1.410(a)-3(e)(1) of the regulations, however, provides that "plan provisions may be treated as...