SECTION 2. BACKGROUND

.01 In the recent past, several life insurance companies, within the meaning of § 816(a) of the Internal Revenue Code of 1986, have experienced financial difficulties and have been placed in state insurer delinquency proceedings ( e.g., rehabilitation and conservatorship).

These life insurance companies have issued a number of guaranteed investment contracts and group annuity contracts (‘‘guaranteed contracts’’) under which distributions or payments have been reduced or suspended by reason of the state insurer delinquency proceedings. Assets of certain defined contribution plans, within the meaning of § 401(a), have been invested in these guaranteed contracts, and these plans are therefore ‘‘affected plans.’’ Typically, the guaranteed contract is one of several investment options offered under an affected plan that permits participants to direct the investment of their accounts. Thus, to the extent that a participant’s account balance is invested in a guaranteed contract, distributions, loans, or investment transfers from that portion of the participant’s account balance may be affected during the period that payments from the guaranteed contract are reduced or suspended. Pursuant to the state insurer delinquency proceedings, the affected plan may receive additional proceeds in the future on account of the guaranteed contract. It is possible, however, that the proceeds ultimately received by the affected plan on account of the guaranteed contract may be less than the amount that otherwise would have been received had the insurance company met the terms and conditions of the guaranteed contract.

.02 An employer maintaining an affected plan may request an exemption from the Department of Labor (‘‘DOL’’) under § 408(a) of the Employee Retirement Income Security Act of 1974 and § 4975(c)(2) of the

1995–2 C.B. 439

Code in order to make certain payments to the affected plan. These payments would be conditioned upon their return to the employer to the extent that the affected plan receives future payments on account of a guaranteed contract. Typically, an employer wishes to make such conditional payments in order to facilitate distributions, loans, or investment transfers from the portions of participants’ account balances that are allocable to a guaranteed contract. An employer need not request an individual exemption, however, if the conditional payments are made in a manner that satisfies a DOL class exemption, e.g., PTE 80–26, 1980–2 C.B. 323.

.03 If an employer chooses to make conditional payments to an affected plan, as described in section 2.02, the application of the following sections of the Code may adversely affect the plan’s qualified status and result in certain income and excise taxes:

(1) Section 401(a)(2) provides generally that a qualified plan and its related trust must be operated for the exclusive benefit of employees and their beneficiaries. A trust shall not constitute a qualified trust unless under the trust instrument it is impossible to divert trust assets prior to the satisfaction of all of the trust’s liabilities.

(2) Section 401(a)(4) provides generally that a qualified plan may not discriminate in favor of highly compensated employees (within the meaning of § 414(q)).

(3) Section 404(a) provides for the deduction from income of contributions to a plan of deferred compensation.

(4) Section 415 limits the contributions and other additions under a qualified defined contribution plan with respect to a participant for any year.

(5) Section 514 provides generally that unrelated business taxable income includes income from property with respect to which there is acquisition indebtedness.

(6) Section 4972 imposes an excise tax on an employer that makes nondeductible contributions to a qualified plan and sets forth an ordering rule for determining the amount of nondeductible contributions.

(7) Section 4975 imposes an excise tax on a disqualified person where there is a prohibited transaction involving a plan and the disqualified person.

(8) Section 4980 imposes an excise tax on the employer maintaining a

440 1995–2 C.B.

qualified plan where there is a direct or indirect reversion of plan assets.

(9) Section 7872 provides rules for the treatment of certain below-market loans.

.04 Section 7121 of the Code permits the Service to enter into a written agreement (‘‘closing agreement’’) with a person relating to the tax liabilities of such person.