In Notice 2008-81, the Internal Revenue Service (IRS) explained that the voluntary temporary program will be limited to assets in money market funds as of the close of business on September 19, 2008, and to investors of record as of that date. New money flowing into these funds after close of business on September 19 will not be covered by the program.
Funds electing to take part in the Treasury Department/IRS program are required to pay premiums that will be tied to the per share net asset value of the money market fund.
“This Notice provides administrative relief in furtherance of public policy to promote stability in the market for money market funds,” the IRS wrote. “Except with respect to the administrative relief expressly provided in this Notice, no inference should be drawn from this Notice regarding any other federal tax issues affecting tax-exempt bonds, money market funds, or any other security.”
According to a notice distributed Monday by Brian H. Graff, executive director/chief executive officer of the American Society of Pension Professionals and Actuaries (ASPPA), most, if not all, investment companies with money market funds are planning to participate.
Graff said the amount insured will not be capped like FDIC insurance and that once a participating fund board determines the fund has “broken a buck” and decides to liquidate, any shortfall would be covered by Treasury. The Securities and Exchange Commission (SEC) has been given the responsibility of developing this program.
According to the IRS notice, government officials said they will not assert that the program violates the restrictions against federal guarantees of tax-exempt bonds with respect to any tax-exempt bond assets held by tax-exempt money market funds participating in the program. The program will not impair the ability of a money market fund to designate exempt interest dividends or of the shareholders of such a fund to claim the benefits of tax exemption with respect to such exempt interest dividends.
Graff said the SEC told the American Society of Pension Professionals and Actuaries (ASPPA) that covered fund values include the effect of buy and sell instructions made by plan participants and beneficiaries before the trading close on September 19, 2008, but processed after hours. "We are still waiting on clarification as to whether interest accruals not yet posted for the month of September as of the 19th will need to be taken into account," Graff wrote in the ASPPA member alert.
Graff also said the $1 per share net asset value guarantee will apply to the account value as of close of business on September 19, 2008, even if there was a subsequent exchange and repurchase prior to fund liquidation.
The IRS notice is available here .