BusinessWeek Report Rebuttal - How to Disqualify a Pension Plan

No sooner than I had posted on the BusinessWeek article from last week (see my previous post), I spotted this posted on CFO.com, effectively a rebuttal of the BusinessWeek article explaining why spinning off a pension plan to a Wall Street firm for the specific purpose of off-loading the plan's liabilities is a bad idea from the tax qualification perspective.

Robert Willens who writes a weekly tax column on CFO.com opines in the immediately attention grabbing headline: "How to Disqualify a Pension Plan":

Unfortunately for companies to hang on to their tax benefit, the Internal Revenue Service in Revenue Ruling 2008-45, has indicated that such a transaction would result in the disqualification of the pension plan, a result which renders these transactions completely untenable.

First though, a word from Mr. Willens on how such transactions would potentially be structured:

The transaction being contemplated is a sort of rescue operation that involves a transfer of the stock of a "shell" subsidiary to the financial institution, after the plan sponsor does two things: transfers sponsorship of the plan to the shell subsidiary, and injects sufficient assets into the plan to cure the underfunding.

The shell subsidiary's stock would then be sold to a financial institution which would more astutely manage the plan's assets and profit from the surplus the plan would generate over and above the amount needed to pay the accrued benefits to the plan participants and their beneficiaries.

The major benefit of the transaction, however, hinges on the pension plan remaining "qualified" in the eyes of the Internal Revenue Services. Indeed, qualified plans are tax-deductible and the plan's earnings can accumulate free of any tax consequences.

A-ha, but Mr. Willens is applying logic based on current tax law. The BusinessWeek report by Mr. Goldstein specifically suggests that the Congress is being actively lobbied to change tax law presumably in favor of the Wall Street firms (whatever it may be) and I would venture a guess that specific provisions may need to be amended/enacted to preserve the tax qualification of such plans in order to create a market for such services to be rendered. I would encourage the reader to go through Mr. Willens article in its entirety in order to gain a better understanding of the points raised (which I will not go through with in detail here).

The gist of it if I understood correctly is that the tax qualification is premised on the basis of there being an employer and the plan being established by the employer for the exclusive benefit of the employees - where/how is this relationship being preserved (and thereby the tax qualification of the plan) if a plan is spun off to a Wall Street firm in a structured transaction?

Could the tax code be amended to make this palatable to all sides of the transaction? You betcha...