In Rev. Rul. 2014-24, scheduled for publication on September 8, 2014, the Internal Revenue Service (the Service) substantially completed its pending guidance on Rev. Rul. 81-100 group trusts by permanently authorizing the participation in group trusts of retirement plans qualified only under Puerto Rico tax law, extending the transition relief for certain transfers from Puerto Rico plans that are dually qualified under Puerto Rico and U.S. tax law, and confirming that eligible plans may participate in group trusts through insurance company separate accounts.
Rev. Rul. 81-100 Group Trusts
By way of background, the Internal Revenue Code treats as tax-exempt the trusts funding a number of retirement or employee benefit plans subject to, among other things, an exclusive benefit requirement – generally, that the trust assets be used only for the exclusive benefit of plan participants and their beneficiaries.
- In Rev. Rul. 81-100, the Service continued a ruling position dating to 1956 that, subject to specified conditions, certain types of retirement plans may pool their trust assets for investment in a group trust, without violating the exclusive benefit rule, and the group trust would enjoy the same tax exemption as the trusts for the participating plans.
- In Rev. Rul. 2004-67, the Service permitted additional types of retirement arrangements to participate in these 81-100 group trusts.
- In Rev. Rul. 2011-1, as modified by Notice 2012-6, the Service again expanded the types of plans that may invest in 81-100 trusts, clarified or added certain requirements for these trusts, and noted several issues for future guidance.
Rev. Rul. 2014-24 further refines the rules for 81-100 group trusts by:
- Providing definitive guidance allowing the participation in group trusts of Puerto Rico-only qualified retirement plans described in section 1022(i)(1) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), i.e., plans that are qualified under Puerto Rico tax law but not the Internal Revenue Code and cover only residents of Puerto Rico, and thus are treated by ERISA §1022(i)(1) as maintaining a trust exempt under IRC §501(a);
- Confirming that eligible plans may invest in a group trust through a “separate account” maintained by an insurance company -- most often pursuant to a variable annuity contract or a funding agreement – that is insulated from the claims of the insurer’s general creditors and subject to certain other conditions; and
- Clarifying that the separate accounting requirement elaborated in Rev. Rul. 2011-11 does not require separate accounts.
The cumulative tax requirements for 81-100 group trusts are summarized in the following chart, with revisions made by Rev. Rul. 2014-24 indicated in italics. Except as otherwise indicated, the ruling does not specify any effective date.
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Finally, Rev. Rul. 2014-24 extends to December 31, 2016, the transition relief provided by Rev. Rul. 2008-40 (as subsequently modified) for transfers to a §1022(i)(1) plan from a plan that is dually qualified under Puerto Rico and U.S. tax law and that participated in an 81-100 group trust on January 10, 2011. This extension allows plan sponsors that wish to convert their dual-qualified Puerto Rico plans into plans qualified only under Puerto Rico tax law the ability to do so without adverse U.S. tax consequences to the trust or participants arising from the U.S. source portion of the assets converted.