On December 16, 2010, the Internal Revenue Service (the “IRS”) issued Revenue Ruling 2011-1 (the “Ruling”), modifying the rules for group trusts as described in Revenue Ruling 81-100 (as clarified and modified by Revenue Ruling 2004-67, “Rev. Rul. 81-100”). The Ruling (i) revises the generally applicable rules for group trusts set forth in Rev. Rul. 81‑100 and (ii) permits the participation in group trusts by custodial accounts under Section 403(b)(7) of the Internal Revenue Code of 1986, as amended (the “Code”), retirement income accounts under Section 403(b)(9) of the Code, and governmental retiree benefit plans under Section 401(a)(24) of the Code, if certain requirements are met. The Ruling also extends the transition relief provided in Revenue Ruling 2008-40 relating to plans qualifying under section 1165 of the Puerto Rico Internal Revenue Code through January 1, 2012.
The assets of qualified plans under Section 401(a) of the Code, individual retirement accounts (“IRAs”), and eligible governmental plans under Section 457(b) of the Code may be pooled in a group trust with the assets of custodial accounts under Section 403(b)(7), retirement income accounts under Section 403(b)(9) and Section 401(a)(24) governmental plans (each such entity, a “Plan”) without affecting the tax status of the Plan or the group trust, if the requirements set forth in the Ruling are met. The requirements under the Ruling generally mirror the requirements set forth in Rev. Rul. 81-100, with the addition of the following new requirements:
Each Plan which adopts the group trust is itself a trust, a custodial account, or a similar entity that is tax-exempt under Sections 408(e) or 501(a) of the Code (or is treated as tax-exempt under Section 501(a)). A Section 401(a)(24) governmental plan is treated as meeting this requirement if it is not subject to Federal income taxation.
Each Plan which adopts the group trust expressly and irrevocably provides in its governing document that it is impossible for any part of the corpus or income of that Plan to be used for, or diverted to, purposes other than for the exclusive benefit of the plan participants and their beneficiaries.
The group trust instrument expressly limits the assets that may be held by the group trust to assets that are contributed by, or transferred from, a Plan to the group trust (and the earnings thereon), and the group trust instrument expressly provides for separate accounts (and appropriate records) to be maintained to reflect the interest which each adopting Plan has in the group trust.
It should be noted that the Ruling is limited to the tax-exempt status of group trusts and does not extend to the treatment of group trusts under other laws, including the securities laws which generally do not provide an exemption for IRAs or Section 403(b) plans. For example, Section 403(b) plans are not eligible for purposes of the securities law exemptions for bank-maintained collective funds.
The Ruling is scheduled to take effect on January 10, 2011, and a sponsor of a group trust that satisfies Rev. Rul. 81-100, but that does not currently provide for separate accounts, must generally amend its group trust instrument by January 10, 2012. The Ruling provides a model amendment for this purpose, as well as a model amendment to reflect the Ruling in general, that may be adopted by group trusts that received favorable determination letters from the IRS prior to January 10, 2011.