Pension Benefit Guaranty Corporation 

81-10 

May 5, 1981 

REFERENCE: 

4021(a) Plans Covered. Requirements of Coverage

4022 Benefits Guaranteed

4041(a) Termination by Plan Administrator. Filing of Notice of Intent to Terminate

4044 Allocation of Assets

4048 Date of Termination

4062 Liability of Employer in Single Employer Plans 

OPINION: 

 This is in reference to your recent letters and telephone conversations with * * * of my staff regarding the abovereferenced pension plan (the "Plan"). You ask whether the Plan is covered by Title IV of the Employee Retirement

Income Security Act of 1974 ("ERISA"). You also have orally asked: 1) what date the PBGC will use for purposes of

determining the employer's net worth, 2) whether the Plan allows contributions made to the Plan for the first plan year

to be returned to the employer, and 3) whether the Plan authorizes payment of certain adminstrative expenses from Plan

assets. 

As we understand the pertinent facts, * * * Corporation adopted the Plan effective March 1, 1975, with Plan years

commencing March 1 of every calendar year. On February 29, 1980, submitted a Notice of Intent to Terminate the Plan

to the PBGC. You state that * * * submitted Form 5310 [*2] to the Internal Revenue Service in March 1980, and

requested a favorable determination on termination with respect to the Plan. You state that the IRS had not previously

issued, nor had * * * previously requested, a favorable determination letter with respect to the Plan. 

You have stated that the IRS has not, at present, issued a determination letter and that the sole issue regarding

qualification is whether the Plan discriminates in favor of officers, shareholders or highly compensated employees

because of the absence of a benefit reduction formula provided for byRevenue Ruling 71-446. Section 401(a)(4) of the

Internal Revenue Code provides that the contributions or the benefits of a qualified pension plan shall not discriminate

in favor of employees who are officers, shareholders, or highly compensated (the "prohibited group" employees).The

Plan does not incorporate the benefit reduction formula provided by section 5.02 ofRevenue Ruling 71-446. That section

requires that if an employee at normal retirement date (or actual retirement date, if later) has completed fewer than 15

years of service, the maximum benefit percentage must be reduced by 1/15, or 2.5%, for each year of [*3] service less

than 15 at such retirement date. n1 The effect of not includingRev. Rul. 71-446's benefit reduction formula is that the

Plan's two prohibited group employees receive a greater benefit than they would under a properly integrated plan. 

n1 Your letter stated that the employer intended to amend the Plan retroactively to include the reduction formula

required for proper integration. You later indicated, in telephone conversations with Deborah West, that the amendment

would not be adopted. Accordingly, this letter does not address the questions raised by your letter regarding the proposed

amendment. 

You have indicated that, in all other respects, the Plan met section 401's qualification requirements. n2 

n2 We have discussed this matter with the IRS District Office and note that their position is consistent with that

stated by you. 

ERISA section 4021(a) provides that Title IV covers any plan, which, for a plan year -- 

(1) is an employee pension benefit plan (as defined in paragraph (2) of section 3 of this Act) established or

maintained-- 

(A) by an employer engaged in commerce or in any industry or activity affecting commerce, or 

(B) by any employee organization, [*4] or organization representing employees, engaged in commerce or in any

industry or activity affecting commerce, or 
(C) by both, * * * which has, in practice, met the requirements of part I of subchapter D of chapter 1 of the Internal

Revenue Code of 1954 (as in effect for the preceding 5 plan years of the plan) applicable to plans described in paragraph

(2) for the preceding 5 plan years; or 

(2) is, or has been determined by the Secretary of the Treasury to be, a plan described in section 401(a) of the

Internal Revenue Code of 1954, or which meets, or has been determined by the Secretary of the Treasury to meet, the

requirements of section 404(a)(2) of such Code. 

See also ERISA section 4022. 

Based on the above-mentioned facts (and assuming a date of Plan termination under ERISA section 4048 in March

1980), the PBGC has determined that the Plan is covered under section 4021(a)(1) as of its termination date because the

Plan in practice met the IRS plan qualification requirements during the five full Plan years prior to March 1980. During

the Plan's existence, it was operated as a qualified plan. No officers, shareholders or highly compensated employees

received benefits in excess [*5] of the amount to which they would be entitled under a properly integrated plan.

Accordingly, the PBGC has determined that the Plan is covered by Title IV of ERISA. 

This determination is subject to reconsideration under Subpart C of the PBGC's administrative review regulation.

A copy of the regulation is enclosed. Your request for reconsideration must be submitted to the General Counsel within

30 days of the date of this letter. You are not required to file a reconsideration request in order to seek judicial review

of this determination. 

Upon the expiration of the reconsideration period or the disposition of a reconsideration request, we will refer this

matter back to the Office of Program Operations to take appropriate action to determine whether the Plan has sufficient

assets, when allocated in accordance with section 4044, to discharge when due all obligations of the Plan with respect

to guaranteed benefits. n3 

n3 Your letter discusses whether certain participants have benefits in priority category 6 of the section 4044

allocation. We need not address this issue at this time because it is unclear whether the plan has sufficient assets to pay

all benefits guaranteed by the PBGC. [*6] 

You have asked orally what date the PBGC will use to determine the employer's net worth for purposes of

determining the amount of the employer's liability to the PBGC under ERISA section 4062. Normally the net worth

record date is the date of plan termination, but the PBGC may chose a date that is up to 120 days prior to that date.See

ERISA section 4062(b)(2). The ERISA section 4041(a) date of plan termination in the instant case is March 10, 1980.

You have indicated orally that, assuming that the Internal Revenue Service determines that the Plan is not qualified,

the employer may, pursuant to Plan Article 11, seek to recover contributions made to the Plan for the first plan year.

Article 11 provides, inter alia, that if the Internal Revenue Service determines "initially" that the Plan and Trust does not

qualify under applicable sections of the Internal Revenue Code and the Employer decides not to amend the Plan or Trust

to obtain qualified status, the Trustee shall return to the Employer all contributions made by it for the first plan year. 

The Plan provision you cite does not authorize the return of the first year's contributions upon an IRS determination

upon termination [*7] that the Plan is not qualified. Subpart (b) of Article 11 provides that "[u]pon return of the

contribution for the first plan year by the Trustee [because of an IRS determination that the Plan does not initially qualify]

the Plan and Trust shall terminate and the Trustee shall be discharged from all obligations" under the Plan. The

provision, then, allows return of contributions when qualified status is denied to the ongoing plan (if the employer

chooses not to amend the plan to obtain qualification). The provision provides for the subsequent immediate termination

of the Plan. The provision is inapplicable here because the employer did not seek, nor did the IRS rule on, an initial

determination of the ongoing Plan's qualification during the relevant period - i.e., during the Plan's life. n4 The

provision's plain language indicates that it was intended to apply to the initial IRS determination with regard to the

ongoing Plan; it does not apply to an IRS determination upon termination that the Plan does not meet the qualification

rules in the Internal Revenue Code. Further, it is doubtful whether such a return is consistent with either Title I or Title

IV of ERISA. We do not [*8] reach this issue, however, because the Plan language itself does not authorize the return.

n4 We note further, that the provision appears to contemplate that the employer will seek a determination of

qualification from the IRS within an "initial" start up period. Thus, even were qualification sought with respect to the

ongoing plan five years after the Plan was adopted, it is doubtful whether this provision would authorize the return of

the first year's contributions. 
You have stated in an April 20, 1981, letter to of this office that the Plan's Trustee, the Corporation, has directed

that $15,000 in legal expenses and approximately $4,000 in actuarial expenses incurred in connection with the

termination of the Plan be paid for with Plan assets. 

As we have indicated orally, the PBGC cannot at this time approve use of Plan assets to pay these expenses. Plan

Article 12.02(m) provides that "[t]he reasonable compensation for services due the Trustee, plus any reimbursement due

for expenses, shall be paid by the Employer but if not paid by the Employer, shall be paid from the Trust Fund and the

Trustee." This language indicates that the employer, not the Plan, is primarily responsible [*9] for the payment of

expenses. The use of Plan assets to pay validly incurred reasonable Plan expenses must be consistent with the Trustee's

fiduciary responsibilities under Title I of ERISA. For example, the use of Plan assets to pay expenses may not be

reasonable if the employer has sufficient funds to pay those expenses and if no effort was made by the Trustee to obtain

reimbursement of those expenses from the employer. 

In the course of oral discussions with * * * you proposed that Plan assets representing the first year's contributions

and the amount due for legal and actuarial fees be placed in escrow pending resolution of the issues regarding the first

year's contributions and the payment of expenses. At the time of your proposal, an independent Trustee, the * * * Trust

Company of * * * controlled Plan assets. The PBGC spoke with * * * of the * * * Trust Company on March 26, 1981,

and indicated our view that as Trustee * * * Trust had a statutory duty to keep Plan assets intact. However, you have

since informed us that, by resolution dated March 27, 1981 of the * * * Corporation Board of Directors, the * * *

Company has been appointed to replace the Trust Company as Trustee. [*10] You have stated that, as the Leasing

Corporation is now Trustee, you have no further interest in arranging for an escrow account. You have also indicated

that you believe that the new Trustee may disburse Plan assets to pay for legal and actuarial fees, but will not return the

first year's contributions to the employer. 

n5 We note for your information that ERISA section 412 requires that each fiduciary of an employee benefit plan

be bonded in accordance with that section. 

The PBGC believes that the employer has not yet demonstrated that the Plan documents authorize actuarial and legal

expenses incurred in connection with the Plan to be paid from Plan assets in this situation. The PBGC will, of course,

consider any additional information you may wish to submit on this point. 

We are prepared to discuss resolution of these matters. * * * is the attorney handling this matter. She may be

reached by phone at (202) 254-3010. 

Henry Rose 

General Counsel