Regulators Lay out Rules on Pension Transfers

August 6, 2008 ( - While declaring that employers cannot transfer their pension plans to an unrelated entity without moving "significant business assets, operations or employees," federal regulators also offered guidance on how such transfers could legally be carried out.

The move by the U.S. Treasury Department was being seen Wednesday as an effort to block the sale of frozen defined benefit plans to unrelated companies whose sole business purpose is to operate the plans at a profit, as has been the case in the U.K. recently (See  Citi Buys DB Plan of UK Newspaper Publisher ).   The Treasury said   in Revenue Ruling 2008-45   federal law requires tax-qualified pension plans be established by employers for the “exclusive benefit of its employees or their beneficiaries,” while a sale to unrelated entities not part of a larger business transaction would only benefit the buyers.

However, officials used Wednesday’s regulatory document to offer a “legislative framework” to guide federal lawmakers in crafting legislation allowing the transfer of a frozen plan if the parties meet certain conditions and if the deal benefits participants,   beneficiaries, the employer, and the private-sector pension insurance system run by the Pension Benefit Guaranty Corporation (PBGC).

Developing the new regulatory framework in addition to the PBGC, were the Department of Labor (DoL), the Treasury Department and the Commerce Department.

According to the Revenue Ruling, required conditions for frozen pension plan transfers include:

  • Plan participants, their representatives, and Employee Retirement Income Security Act (ERISA) regulators would be required to receive advance notice of a plan transfer and the parties to the transaction would be required to provide regulators with information necessary to review and approve the proposed transaction.
  • Only financially strong entities in well-regulated sectors would be permitted to acquire a pension plan in a plan transfer transaction.
  • The parties to the transaction would be required to demonstrate that participants' benefits and the pension insurance system would be exposed to less risk as a result of the transfer and that the transfer would be in the best interests of the participants and beneficiaries.
  • Limitations on transfers would be imposed to limit undue concentration of risk.
  • Transferees and members of their controlled groups would assume full responsibility for the liabilities of transferred plans and would comply with post-transaction reporting and fiduciary requirements.
  • Subsequent transfer transactions would be subject to the rules applicable to original transfer transactions.

Officials warned that deals not meeting the conditions would not qualify for tax benefits because an unrelated pension operator would not be considered an employer and because the benefits would not be exclusive to employees and beneficiaries.

The new regulations are available here .