Certain Puerto Rican retirement trusts are eligible to use group trusts

The IRS has issued a revenue ruling that modifies the list of group trust retiree benefit plans eligible to participate in group trusts described in IRS Rev. Rul. 81-100, as modified by IRS Rev. Rul. 2011-1 (which was modified by Notice 2012-6), to include trusts of certain Puerto Rican retirement plans. The guidance covers plans that are qualified only under the Puerto Rico Code and that are described in ERISA Sec. 1022(i)(1). The IRS has also clarified that assets held by certain separate accounts maintained by insurance companies may be invested in 81-100 group trusts, and has provided limited transition relief.

Rev. Rul. 81-100 allows qualified retirement plans and individual retirement accounts (IRAs) to pool their assets for investment purposes in an 81-100 group trust if certain specified requirements are satisfied. Rev. Rul. 2011-1 revises and restates the generally applicable rules for group trusts described in Rev. Rul. 81-100 and expands the types of plans that are eligible to participate in these group trusts (if certain conditions are met). In Rev. Rul. 2011-1, the IRS stated that it anticipated issuing guidance as to whether a plan described in ERISA Sec. 1022(i)(1) could participate in an 81-100 group trust and that, until such guidance was issued, the IRS would not treat a group trust as failing to satisfy the requirements of Rev. Rul. 2011-1 merely because the group trust included the assets of a section 1022(i)(1) plan.

The IRS has decided that, although a section 1022(i)(1) plan is not a qualified retirement plan under Code Sec. 401(a) and is not currently listed as a group trust retiree benefit plan under Rev. Rul. 2011-1, it can satisfy the other requirements of Rev. Rul. 2011-1 applicable to group trust retiree benefit plans participating in 81-100 group trusts. For example, ERISA Sec. 1022(i)(1) provides that a section 1022(i)(1) trust is tax-exempt under Code Sec. 501(a), which is a requirement under Rev. Rul. 2011-1. In addition, the IRS notes that a section 1022(i)(1) trust must, pursuant to ERISA and the Puerto Rico Code, be part of a plan that satisfies an exclusive benefit requirement that is very similar to the exclusive benefit rule of Code Sec. 401(a) and Reg. Sec. 1.401(a)-2. The IRS states that, due to this similarity, a section 1022(i)(1) plan that satisfies the exclusive benefit rules of ERISA and the Puerto Rico Code is deemed to satisfy the exclusive benefit requirement of Rev. Rul. 2011-1. Finally, the IRS explained that permitting a section 1022(i)(1) plan to participate in an 81-100 group trust is consistent with the legislative history of section 1022(i)(1) because it permits a 1022(i)(1) plan to diversify its investments without adverse tax consequences to the group trust or its investors. Thus, the IRS has modified Rev. Rul. 2011-1 to include section 1022(i)(1) plans on the list of group trust retiree benefit plans eligible to participate in an 81-100 group trust if the requirements of Rev. Rul. 2011-1, as modified by this revenue ruling, are satisfied.

Separate accounts of insurance companies

Rev. Rul. 2011-1 requested comments on whether tax-favored accounts held by plans described in Code Sec. 401(a) or Code Sec. 403(b), such as pooled separate accounts supporting annuity contracts that are treated as trusts under Code Sec. 401(f), should be permitted to invest in 81-100 group trusts. The IRS has ruled that in order to clarify the rules pertaining to the investment of separate accounts in group trusts, Rev. Rul. 2011-1 is modified to permit separate accounts to invest in group trusts subject to certain conditions. They are: (1) all of the assets in the separate account must consist solely of assets of group trust retiree benefit plans as defined in Rev. Rul. 2011-1 and as modified by this revenue ruling, (2) the insurance company maintaining the separate account must enter into a written arrangement with the trustee of the group trust consistent with the requirements of Rev. Rul. 2011-1, and (3) the assets of the separate account must be insulated from the claims of the insurance company’s general creditors.

The IRS has also provided transition relief concerning when insurance companies and trustees of a group trust must enter into the written arrangement described above.

Source: IRS Rev. Rul. 2014-24.

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