IRS has extended to certain custodial accounts, retirement income accounts, and governmental plans the right to pool assets in a group trust. IRS also has provided model amendments for group trusts that intend to permit such custodial accounts, retirement income accounts, or governmental retirement plans to participate in the group trust.
Background. Various Code provisions require that retirement plan and IRA assets be held in trust for the exclusive benefit of plan participants and beneficiaries, and there are Code prohibitions against commingling of trust fund assets.
Notwithstanding these rules, IRS provided in Rev Rul 81-100, 1981-1 CB 326, that if certain requirements are met, a group trust is exempt from tax under: (a) Code Sec. 501(a) with respect to funds that equitably belong to participating Code Sec. 401(a) trusts; and (b) Code Sec. 408(e), with respect to funds that equitably belong to IRAs that meet the requirements of Code Sec. 408. The status of the individual trusts as qualified under Code Sec. 401(a), or as meeting Code Sec. 408, and as being tax-exempt, is not affected by the pooling of their funds in a group trust. In Rev Rul 2004-67, 2004-2 CB 28, IRS extended these rules for group trusts to governmental Code Sec. 457 plans, Roth IRAs, and deemed IRAs.
Group trust rules extended further. Effective Jan. 10, 2011, Rev Rul 2011-1 provides that the assets of qualified plans, IRAs, and Code Sec. 457(g) governmental plans may be pooled in a group trust with the assets of Code Sec. 403(b)(7) custodial accounts, Code Sec. 403(b)(9) retirement income accounts, and Code Sec. 401(a)(24) governmental plans (collectively referred to as “group trust retiree benefit plans”) without affecting the tax status of the group trust or the tax status of each of the separate group trust retiree benefit plans participating in the group trust, if the eight requirements listed below are met:
1. The group trust must be adopted as a part of each adopting group trust retiree benefit plan.
2. The group trust instrument must expressly limit participation to: (a) qualified pension, profit-sharing, and stock bonus trusts or custodial accounts; (b) IRAs that are exempt under Code Sec. 408(e); (c) eligible governmental plans that are exempt under Code Sec. 457(g); (d) custodial accounts under Code Sec. 403(b)(7); (e) retirement income accounts under Code Sec. 403(b)(9); and (f) Code Sec. 401(a)(24) governmental plans (group trust retiree benefit plans).
3. The group trust instrument must prohibit any part of its corpus or income that equitably belongs to any group trust retiree benefit plan from being used for, or diverted to, any purpose other than for the exclusive benefit of the participants and beneficiaries of the group trust retiree benefit plan.
4. Each group trust retiree benefit plan must itself be a trust, a custodial account, or a similar entity that is tax-exempt under either Code Sec. 408(e) or Code Sec. 501(a). An adopting Code Sec. 401(a)(24) governmental plan is treated as meeting this requirement if it is not subject to federal income taxation.
5. Each group trust retiree benefit plan must expressly and irrevocably provide in its governing document that it is impossible for any part of the corpus or income of the group trust retiree benefit plan to be used for, or diverted to, purposes other than for the exclusive benefit of the plan participants and their beneficiaries. Certain plans satisfy this requirement if they satisfy one of the following regs: Reg. § 1.401(a)-2 (for qualified plans); Reg. § 1.403(b)-8(d)(2)(iii) (for Code Sec. 403(b)(7) custodial accounts); Reg. § 1.403(b)-9(a)(2)(i)(C) (for Code Sec. 403(b)(9) retirement income accounts); Reg. § 1.408-2(b) (for IRAs); and Reg. § 1.457-8(a)(2)(i) (for eligible governmental plans described in Code Sec. 457(g)).
6. The group trust instrument must expressly limit the assets that may be held by the group trust to assets that are contributed by, or transferred from, an adopting entity to the group trust. Also, the group trust instrument must expressly provide for separate accounts (and appropriate records) to be maintained to reflect the interest which each group trust retiree benefit plan has in the group trust, including separate accounting for contributions to the group trust from the adopting plan, disbursements made from the adopting plan's account in the group trust, and investment experience of the group trust allocable to that account.
7. The group trust instrument must prohibit assignment by an adopting entity of any part of its equity or interest in the group trust.
8. The group trust must be created or organized in the U.S. and maintained at all times as a domestic trust in the U.S.
A group trust will not be treated as failing to satisfy these requirements merely because PBGC, rather than a qualified plan, holds the interest in the group trust, or merely because the group trust holds assets attributable to PBGC's commingled trust funds.
Other provisions. Rev Rul 2011-1 includes two model amendments that reflect the extension of the group trust rules, and carries special rules for certain Puerto Rican trusts.
References: For the pooling of pension plans, section 457 plans, and IRA funds in group trusts, see FTC 2d/FIN ¶H-8062.
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