IRS EXTENDS CLOSING AGREEMENT PROGRAM FOR EMPLOYERS WHO MAKE 'RESTORATIVE PAYMENTS' TO DEFINED CONTRIBUTION PLANS.

Rev. Proc. 95-52

SECTION 1. PURPOSE

The purpose of this revenue procedure is to extend indefinitely a closing agreement program to settle certain tax liabilities that arise out of transactions between an employer and an otherwise qualified defined contribution plan. The authority to enter closing agreements pursuant to this revenue procedure applies only in the instance of transactions in which the employer makes conditional payments to an otherwise qualified defined contribution plan on account of plan assets that are invested in a guaranteed contract issued by a life insurance company that has been placed in state insurer delinquency proceedings.

This revenue procedure also restates the clarification that for purposes of Rev. Proc. 92-10, 1992-1 C.B. 661, such conditional payments constitute assets that are available for purposes of making required minimum distributions.

SECTION 2. BACKGROUND

.01 In the recent past, several life insurance companies, within the meaning of section 816(a) of the Internal Revenue Code of 1986, have experienced financial difficulties and have been placed in state insurer delinquency proceedings (e.g., rehabilitation and conservatorship).

These life insurance companies have issued a number of guaranteed investment contracts and group annuity contracts ("guaranteed contracts") under which distributions or payments have been reduced or suspended by reason of the state insurer delinquency proceedings. Assets of certain defined contribution plans, within the meaning of section 401(a), have been invested in these guaranteed contracts, and these plans are therefore "affected plans." Typically, the guaranteed contract is one of several investment options offered under an affected plan that permits participants to direct the investment of their accounts. Thus, to the extent that a participant's account balance is invested in a guaranteed contract, distributions, loans, or investment transfers from that portion of the participant's account balance may be affected during the period that payments from the guaranteed contract are reduced or suspended. Pursuant to the state insurer delinquency proceedings, the affected plan may receive additional proceeds in the future on account of the guaranteed contract. It is possible, however, that the proceeds ultimately received by the affected plan on account of the guaranteed contract may be less than the amount that otherwise would have been received had the insurance company met the terms and conditions of the guaranteed contract.

.02 An employer maintaining an affected plan may request an exemption from the Department of Labor ("DOL") under section 408(a) of the Employee Retirement Income Security Act of 1974 and section 4975(c)(2) of the Code in order to make certain payments to the affected plan. These payments would be conditioned upon their return to the employer to the extent that the affected plan receives future payments on account of a guaranteed contract. Typically, an employer wishes to make such conditional payments in order to facilitate distributions, loans, or investment transfers from the portions of participants' account balances that are allocable to a guaranteed contract. An employer need not request an individual exemption, however, if the conditional payments are made in a manner that satisfies a DOL class exemption, e.g., PTE 80-26, 1980-2 C.B. 323.

.03 If an employer chooses to make conditional payments to an affected plan, as described in section 2.02, the application of the following sections of the Code may adversely affect the plan's qualified status and result in certain income and excise taxes:

(1) Section 401(a)(2) provides generally that a qualified plan and its related trust must be operated for the exclusive benefit of employees and their beneficiaries. A trust shall not constitute a qualified trust unless under the trust instrument it is impossible to divert trust assets prior to the satisfaction of all of the trust's liabilities.

(2) Section 401(a)(4) provides generally that a qualified plan may not discriminate in favor of highly compensated employees (within the meaning of section 414(q)).

(3) Section 404(a) provides for the deduction from income of contributions to a plan of deferred compensation.

(4) Section 415 limits the contributions and other additions under a qualified defined contribution plan with respect to a participant for any year.

(5) Section 514 provides generally that unrelated business taxable income includes income from property with respect to which there is acquisition indebtedness.

(6) Section 4972 imposes an excise tax on an employer that makes nondeductible contributions to a qualified plan and sets forth an ordering rule for determining the amount of nondeductible contributions.

(7) Section 4975 imposes an excise tax on a disqualified person where there is a prohibited transaction involving a plan and the disqualified person.

(8) Section 4980 imposes an excise tax on the employer maintaining a qualified plan where there is a direct or indirect reversion of plan assets.

(9) Section 7872 provides rules for the treatment of certain below-market loans.

.04 Section 7121 of the Code permits the Service to enter into a written agreement ("closing agreement") with a person relating to the tax liabilities of such person.

SECTION 3. CLOSING AGREEMENT PROGRAM FOR RESTORATIVE PAYMENTS

.01 Under this revenue procedure, the Service will enter into a closing agreement with an employer that maintains an affected plan and the trustee of the plan's trust that provides that restorative payments (including amounts subsequently returned to the employer) do not cause the affected plan to violate sections 401(a)(2), 401(a)(4), or 415. In general, restorative payments are conditional payments to an affected plan on account of plan assets that are invested in a guaranteed contract under which payments have been reduced or suspended by reason of state insurer delinquency proceedings.

.02 Under this revenue procedure, the closing agreement will provide for the timing of deductions under section 404 for any restorative payments ultimately retained by the trust of an affected plan. The closing agreement will also provide that the restorative payments will not trigger the application of any excise taxes described in sections 4972 and 4980. In addition, the closing agreement will provide that the restorative payments will not be treated as giving rise to acquisition indebtedness under section 514 or as a below-market loan under section 7872.

.03 The Service will not enter into the closing agreement described in this revenue procedure unless an employer that maintains an affected plan either has received a prohibited transaction exemption from DOL to make restorative payments or supplies an opinion of counsel that the restorative payments are exempt under a DOL class exemption. Where section 4975 does not apply to an affected plan (i.e., no exemption is required from DOL) the Service will consider entering into a closing agreement with an employer under the terms and conditions set forth in the sample closing agreement, excluding those conditions that relate to section 4975 and any other income tax or excise taxes that would otherwise not apply to the employer.

.04 The specific terms and conditions applicable to the closing agreement (including certain variable factors) are set forth in the sample closing agreement attached as an exhibit to this revenue procedure. This is the case even if an employer has already selected a method of payment in lieu of the original schedule of payments of principal and interest from the guaranteed contract or if the employer wishes to limit restorative payments solely to loans or transfers or distributions.

.05 A request for a closing agreement under this revenue procedure is subject to the provisions of Rev. Proc. 95-4, 1995-1 C.B. 397, without regard to any user fee described in Rev. Proc. 95-8, 1995-1 C.B. 485. Any such request must contain the relevant items listed in section 9 of Rev. Proc. 95-4, and must also include (1) a copy of the guaranteed contract, (2) a copy of the agreement under which the employer will make (or is making) restorative payments to the affected plan, (3) a completed closing agreement (to the extent that the information is available at the time of the request), (4) a copy of the most recent series Form 5500 filed for the affected plan to which the closing agreement would apply, (5) if applicable, a copy of either the application submitted to DOL for the prohibited transaction exemption or an opinion of counsel that a class exemption applies, and (6) if a rate of interest is to be used after the maturity date of the guaranteed contract, a statement of the reasons that such interest rate is reasonable under the facts and circumstances. Any such request must be clearly labeled as a request for a closing agreement under this revenue procedure. Five copies of the applicable closing agreement must be enclosed and sent to the following address:

               Internal Revenue Service

.01 Rev. Proc. 92-10 provides guidance regarding the required minimum distribution under section 401(a)(9) for a plan or arrangement that has invested assets in an annuity contract or guaranteed investment contract under which payments have been reduced or suspended by reason of state insurer delinquency proceedings.

.02 Where an employer makes restorative payments to an affected plan, as described in this revenue procedure, the affected plan's assets attributable to restorative payments are assets that must be used to make required minimum distributions to participants. Thus, with regard to a participant to whom an affected plan must make a required minimum distribution, the unavailable portion of an affected investment (as those terms are used in section 5.01 of Rev. Proc. 92-10) is reduced by the amount of assets attributable to restorative payments that is held in the trust on account of the portion of the participant's account balance that is allocable to the guaranteed contract.

SECTION 5. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 92-10 is clarified.

Rev. Proc. 92-16, 1992-1 C.B. 673, is modified and superseded.

Rev. Proc. 94-19 is superseded.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective February 2, 1995, and will continue in effect until a contrary publication in the Internal Revenue Bulletin. This revenue procedure pertains to requests for closing agreements on or after that date and (as stated in Rev. Proc. 92-16) required minimum distributions that relate to the 1991 and later calendar years.

DRAFTING INFORMATION

The principal author of this revenue procedure is Michael Rubin of the Employee Plans Division. For further information regarding this revenue procedure, please contact the Employee Plans Division's taxpayer assistance telephone service or Mr. Rubin between 1:30 and 4:00 p.m., Eastern time, Monday through Thursday on (202) 622- 6074/6075 or (202) 622-6214, respectively. Neither telephone number is toll-free.

EXHIBIT

CLOSING AGREEMENT ON FINAL DETERMINATION COVERING SPECIFIC MATTERS

Under section 7121 of the Internal Revenue Code (the "Code"), the X Corporation (the "Employer"), ______________________________ _____________________________ [address and EIN], the X Corporation Retirement Plan Trust (the "Trust"), ________________________________________________________________ [address and EIN], and the Commissioner of Internal Revenue make the following closing agreement:

WHEREAS, the X Corporation Retirement Plan (the "Plan") was established on ______________________; and

WHEREAS, the Employer represents that the Plan and Trust are qualified under section 401(a) of the Code; and

WHEREAS, the Plan is a defined contribution plan; and

[The closing agreement must contain either Alternative A or Alternative B.]

Alternative A

WHEREAS, the Trust holds a guaranteed investment contract [insert group annuity contract, if applicable] (the "GC") issued by _____________________ (the "Insurer"), a life insurance company (within the meaning of section 816(a) of the Code) that is in state insurer delinquency proceedings; and

Alternative B

WHEREAS, the Trust holds an interest in a guaranteed investment contract [insert group annuity contract, if applicable] (the "GC") issued by ________________________ (the "Insurer"), a life insurance company within the meaning of section 816(a) of the Code that is in state insurer delinquency proceedings; and

WHEREAS, the Insurer is prohibited under the state insurer delinquency proceedings from making full payment in accordance with the terms of the GC; and

WHEREAS, the Employer represents that it has made or will make payments to the Trust ("Restorative Payments") meeting the following criteria:

1. The total of the Restorative Payments made on any date plus the amount of Restorative Payments made before that date (less the amount of Restorative Payments that have previously been returned pursuant to paragraph 2 below) do not exceed the "current value" of the GC as of that date. The "current value" of the GC is defined as [if Alternative A above is used insert "the issue price of the GC" and if Alternative B above is used insert "the sum of the Trust's investments in the GC"], adjusted as follows: (A) interest is credited to the current date calculated at the guaranteed interest rate under the terms of the GC during any period for which the terms of the GC provide for interest at a guaranteed rate; [(B) no interest is credited for periods for which no rate of interest is guaranteed under the terms of the GC or (B) interest is credited for periods for which no interest is guaranteed under the terms of the GC at ___ ]; and (C) any actual proceeds received by the Trust on or before the current date with respect to the GC are subtracted when received. For purposes of this agreement, all references to various terms and conditions of the GC refer to the terms and conditions of the GC in force immediately prior to the beginning of the state insurer delinquency proceedings.

2. Pursuant to a written agreement between the Employer and the Trustee, whenever the total amount of the Restorative Payments (less the amount of Restorative Payments that have previously been returned pursuant to this paragraph) exceeds the current value of the GC, the "excess amount" will be promptly returned to the Employer. The "excess amount" is defined as the excess of Restorative Payments (less the amount of Restorative Payments that have previously been returned pursuant to this paragraph) over the current value of the GC, plus any actual or deemed earnings on Restorative Payments permitted to be returned to the Employer under a prohibited transaction exemption issued by the Department of Labor.

3. The Employer notifies the Trustee at the time any Restorative Payment is paid to the Trust that the payment is a Restorative Payment under the written agreement described in paragraph 2 above; and

[The closing agreement should include either Alternative C or Alternative D.]

Alternative C

WHEREAS, the Department of Labor issued a prohibited transaction exemption to the Employer on __________________ [date of issuance], in accordance with section 408(a) of the Employee Retirement Income Security Act of 1974, covering the payment of Restorative Payments to the Trust and the return of Restorative Payments to the Employer as described above; and

Alternative D

WHEREAS, the Employer has supplied an opinion of counsel to the Service stating that a class exemption issued by the Department of Labor in accordance with section 408(a) of the Employee Retirement Income Security Act of 1974 covers the payment of Restorative Payments to the Trust and the return of Restorative Payments to the Employer as described above; and

WHEREAS, the Employer and the Trustee have determined that the agreement set forth herein is in the best interests of the Employer and the Trust; and

WHEREAS, the Service, through its authorized representative, has determined that said agreement is also in its best interests;

NOW IT IS HEREBY DETERMINED AND AGREED for federal income and excise tax purposes that the above representations are material to this closing agreement and that:

1. The Service will treat the Plan as not failing to satisfy the requirements of section 401(a) of the Code on account of the following:

(A) The payment of Restorative Payments to the Trust.

(B) The return of Restorative Payments (and earnings as permitted to be returned) to the Employer (including any amount deemed returned to the Employer as provided in subparagraph 6(D) below) as required under the representations made in this agreement.

(C) The use of Restorative Payments and earnings thereon to make distributions or loans to any participant or to make any transfer to another investment option from the participant's account.

(D) The allocation of earnings attributable to Restorative Payments to any participant's account, where earnings attributable to Restorative Payments are used in lieu of current employer contributions to make current allocations to a participant's account as provided in subparagraph 6(F) below.

2. The Service will not apply the section 4972 excise tax on nondeductible contributions to Restorative Payments that are treated as contributions (as provided in subparagraph 6(C) below) and that exceed the deduction limits under section 404. If otherwise applicable, the section 4972 excise tax will apply only to the amount of nondeductible contributions remaining, if any, after subtracting the "amount attributable to Restorative Payments." In each year, the "amount attributable to Restorative Payments" is the sum of (1) the amount of Restorative Payments treated as contributions for the taxable year under subparagraph 6(C) below; plus (2) the amount of nondeductible contributions for the preceding year for which the section 4972 excise tax was not applied because of this paragraph.

3. The Service will not apply the section 4980 excise tax on employer reversions to the return of Restorative Payments or earnings thereon, or to the deemed return of Restorative Payments or earnings thereon as provided under subparagraph 6(D) below.

4. The Service will not treat the Trust as having incurred acquisition indebtedness under section 514 of the Code on account of the receipt of Restorative Payments.

5. The Service will not treat the payment of Restorative Payments to the Trust as a below-market loan under section 7872 of the Code.

6. As a condition to the treatment described in paragraphs 1 through 5 above, the Employer and the Trustee agree to the following:

(A) The use of Restorative Payments and earnings thereon to make distributions or loans to any participant or to make any transfer to another investment option from the participant's account will not increase the amount of the participant's account balance over the amount that would have been the participant's account balance, in the absence of Restorative Payments, had the Insurer satisfied the terms and conditions of the GC. This subparagraph does not apply to allocations made as provided in subparagraph (F)(3) of this paragraph 6.

(B) The use of Restorative Payments and earnings thereon to make distributions or loans to any participant or to make any transfer to another investment option from the participant's account will be carried out on the same basis with respect to all similarly situated participants. This subparagraph does not apply to allocations made as provided in subparagraph (F)(3) of this paragraph 6.

(C) Any Restorative Payments will be treated as contributions paid to the Trust in a particular taxable year to the extent that the Employer has reasonably determined that the Restorative Payments will not be returned pursuant to the state insurer delinquency proceedings. The Restorative Payments that are not returned to the Employer and that are treated as contributions under this paragraph will be subject to the limits of section 404 of the Code.

(D) Where any Restorative Payments or earnings thereon are required to be returned to the Employer, as represented in this agreement, any amount that is not promptly returned to the Employer will be treated as returned to the Employer and recontributed to the Trust in the taxable year in which the Trustee is obligated to return that amount to the Employer. Because the deemed recontribution to the Trust is not a Restorative Payment, it is subject to the rules governing plan contributions and allocations without regard to this agreement.

(E) Amounts that are returned to the Employer, as described under the representations in this agreement, are treated as follows:

(1) Except as provided in subparagraph (2) below, an amount returned to the Employer is includible in the gross income of the Employer only if the amount returned causes the total of the amounts returned to date to exceed the total Restorative Payments made to date.

(2) An amount returned to the Employer that does not cause the total of amounts returned to the Employer to exceed the total Restorative Payments is includible in gross income, subject to section 111 of the Code, if the amount returned causes the total of amounts returned to the Employer to exceed the total Restorative Payments made to date less Restorative Payments deducted by the Employer to date.

(F) The Trustee will maintain an unallocated suspense account to determine the amount of any increase in the value of Plan assets over what the value would have been, in the absence of Restorative Payments, had the Insurer satisfied the terms and conditions of the GC. This account will be maintained as described in subparagraphs (1) and (2) below. Any balance ultimately remaining in this account will be allocated to participants' accounts as described in subparagraph (3) below.

(1) The account will be established as of the date the Employer commences to make Restorative Payments to the Plan. The amount in the account, until subparagraph (2) below applies, will be equal to the amount of Restorative Payments plus the proceeds received by the Plan on account of the GC, less distributions, loans and transfers to other investment options of account balances invested in the GC, and repayments of Restorative Payments to the Employer (including amounts deemed repaid under subparagraph (D) of this paragraph 6). The account will be adjusted to reflect the investment experience (positive or negative) attributable to any balance in the account.

(2) When the Trust is not entitled to receive any further proceeds on account of the GC, the value of all participants' account balances remaining that are attributable to investment in the GC will be subtracted from the amount in the account.

(3) Any positive balance remaining in the account, after the application of subparagraph (2) above, must be allocated to participants' accounts as contributions under the Plan before any additional employer contributions are made to the Plan. The Employer will not treat this allocation as a contribution paid to the Trust under section 404 of the Code. The Employer will make this allocation in accordance with the normal plan qualification rules, including sections 401(a)(4) and 415.

7. This agreement constitutes a resolution under the Code solely of the specific matters discussed herein. No inference shall be made as to the application of the Code under any facts and circumstances outside this agreement. No inference shall be made with respect to whether this resolution satisfies other federal law, including Title I of the Employee Retirement Income Security Act of 1974.

This agreement is final and conclusive except:

(a) the matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of material fact;

(b) it is subject to the Code sections that expressly provide that effect be given to their provisions (including any stated exception for section 7122) notwithstanding any other law or rule of law; and

(c) if it relates to a tax period ending after the date of this agreement, it is subject to any law, enacted after the agreement date, that applies to that tax period.

By signing, the above parties certify that they have read and agreed to the terms of this document.

X CORPORATION

By:______________________________________________________________

Title:___________________________Date Signed_____________________

X CORPORATION RETIREMENT PLAN TRUST

By:______________________________________________________________

Title:___________________________Date Signed_____________________

COMMISSIONER OF INTERNAL REVENUE

By:______________________________________________________________

Title:___________________________Date Signed_____________________