Transfers from money purchase plan to profit-sharing plan.

• Author: Cvach, Gary Q.

Rev. Rul. 94-76 addressed the tax consequences of (1) a transfer of assets in a spinoff from a qualified money purchase pension plan to an otherwise qualified profit-sharing plan and (2) a direct rollover from a qualified money purchase pension plan to an otherwise qualified profit-sharing plan.

Spinoff

Employer X maintains a qualified money purchase pension plan (Plan A) that covers all of X's employees and that provides for distributions only on retirement, death, disability, severance plan termination. X's employees are organized into Division 1 and Division 2. In 1994, X established a discretionary profit-sharing plan (Plan B) for the Division 2 employees. Plan B includes all the optional forms of benefit available under Plan A (including the joint and survivor annuity option) but (unlike A) also permits in-service distributions of vested benefits that have been in the participant's account for at least two years. X amends Plans A and B to transfer the assets and liabilities of the Division 2 employees from Plan A to Plan B in a spinoff/merger, with no amendment of B's distribution provisions.

According to the IRS, a merger of assets and liabilities of a qualified money purchase pension plan with the assets and liabilities of a qualified profit-sharing plan does not divest the assets and liabilities of the money purchase plan of their attributes as pension assets and liabilities. Thus, to satisfy Sec. 401(a), the assets and liabilities transferred from Plan A to B must remain subject to the restrictions on distributions from a qualified money purchase pension plan. Because a money purchase pension plan cannot provide for in-service distributions, and because Plan B permits such distributions, the application of B's in-service distribution provision to the accrued benefits transferred from Plan A results in the merged plan failing to satisfy Sec. 401(a).

To remain qualified, Plan B must be amended to provide that, on and after the transfer, the accrued benefits attributable to the assets and liabilities transferred from Plan A the account balances and post-transfer earnings) will be distributable only on or after events permissible under qualified pension plans. implementing this amendment would require an acceptable separate accounting between (1) the accrued benefits attributable to the assets and liabilities transferred from Plan A and (2) all other benefits under Plan B. What's more, the amendment must be adopted on or before the...