The IRS recently revised the rules relating to group trusts that serve as collective investment vehicles for certain retirement plans. The revised rules (1) expand the types of plans and accounts eligible to participate in group trusts, (2) expand the documentary and operational requirements for group trusts, (3) provide model language that may be used to amend group trusts to comply with the new provisions and (4) address the participation of certain Puerto Rican plans in a group trust. The new requirements are incorporated inRevenue Ruling 2011-1, which was effective January 10, 2011.

     A group trust is an arrangement under which qualified retirement plan trusts, individual retirement accounts and certain other tax exempt retirement plans or accounts pool their assets for investment, usually for the purpose of achieving diversification of investments. The group trust will be exempt from taxation like its investing plans or accounts if certain requirements are satisfied.

(1) Eligibility for Participation in a Group Trust.

     Previously, eligibility for participation in a group trust was generally limited to tax-exempt qualified retirement plan trusts and individual retirement accounts and Code Section 457(b) governmental deferred compensation plans. Revenue Ruling 2011-1 expands the types of plans and accounts that may participate in a group trust to include the following plans and accounts:

  • Custodial accounts under Code Section 403(b)(7);
  • Retirement income accounts under Code Section 403(b)(9); and
  • Governmental plans under Code exempt under Code Section 401(a)(24), including a governmental plan providing retiree welfare benefits.

A retirement plan or account that is eligible to participate in a group trust is referred to in this article as an “eligible retirement plan.”

(2) Requirements to Maintain Tax-Exempt Status.

Revenue Ruling 2011-1 also adds the following new documentary requirements:

  • Each adopting eligible retirement plan document must provide that it is impossible for any part of its corpus or income to be used for, or diverted to, purposes other than for the exclusive benefit of the plan participants and their beneficiaries;
  • The group trust document must expressly limit the assets that may be held by the trust to assets that are contributed by, or transferred from, an eligible retirement plan (and the earnings thereon);
  • The group trust document must expressly provide for separate accounts (and appropriate records) to be maintained to reflect the interest which each adopting eligible retirement plan has in the trust, including separate accounting for contributions, disbursements and investment experience.

In addition, Revenue Ruling 2011-1 reiterates the following requirements from Revenue Ruling 81-100, as clarified and modified by Rev. Rul. 2004-67:

  • The group trust document must limit participation to eligible retirement plans, prohibit an assignment by an adopting eligible retirement plan of any part of its equity or interest in the trust, and prohibit any part of the group trust corpus or income that equitably belongs to an adopting eligible retirement plan from being used for, or diverted to, any purpose other than for the exclusive benefit of the participants and the beneficiaries of that plan;
  • The group trust must itself be adopted as a part of each adopting eligible retirement plan; and
  • The group trust must be created or organized and maintained as a domestic trust in the United States.

(3) Model Language

     Revenue Ruling 2011-1 includes two model amendments group trusts may adopt, one addressing the separate account requirement and one adding the three new categories of eligible retirement plans. The separate account amendment should be adopted by January 10, 2012.

(4) Treatment of Puerto Rican Plans.

     Under Section 1022(i)(1) of ERISA, a pension, profit-sharing, or stock bonus plan, all the participants of which are residents of Puerto Rico, is treated as an organization described in Code Section 401(a), and therefore generally exempt from income taxation, if the trust both forms part of such a plan and is exempt from income tax under the laws of Puerto Rico (a “Puerto Rican Plan”). Questions have been raised as to whether a Puerto Rican Plan may participate in a group trust as a result of an earlier ruling, Revenue Ruling 2008-40, which addressed transfers from a plan qualified under Code Section 401(a) to a Puerto Rican Plan. The question was whether a Puerto Rican Plan could continue to participate in a group trust after a transfer of assets to the Puerto Rican Plan which had previously been part of a qualified plan.

     Pending further IRS guidance, Puerto Rican Plans may continue to participate in a group trust without causing the group trust to fail to satisfy the requirements of Revenue Ruling 2011-1 as long as the Puerto Rican Plan (1) was participating in the group trust as of January 10, 2011 or (2) holds assets that had been held by a qualified plan immediately prior to the transfer of those assets to the Puerto Rican Plan pursuant to the transition relief provided in Revenue Ruling 2008-40. In addition, Revenue Ruling 2011-1 extends until January 1, 2012 the transition relief granted in 2008 to allow assets to be transferred from a qualified plan to a Puerto Rican Plan without being treated as a distribution from the qualified plan.

     The IRS also has requested comments on whether annuity contracts and other tax-favored accounts held by qualified plans and Code Section 403(b) plans should be permitted to invest in group trusts.

     Commentators have urged further clarification and expansion of the group trust rules, expressing concern that these new rules may adversely affect existing investment arrangements.