In Revenue Ruling 2011-1 (the "Ruling"), the Internal Revenue Service (the "IRS") modifies the rules which a group trust must meet in order to be treated as a tax-exempt entity. Prior to the Ruling, these rules were set forth in Revenue Ruling 81-100, as clarified and modified by Revenue Ruling 2004-67.
In general, the Ruling sets out the conditions under which the assets of one or more of the following plans or accounts may pooled in the group trust, without adversely affecting the tax-exempt status of the group trust or the tax status of the investing plan or account : a qualified retirement plan under section 401(a) of the Internal Revenue Code (the "Code"), an individual retirement account (an "IRA") under section 408 of the Code (including a Roth IRA under section 408A), an eligible governmental plan under section 457(b) of the Code, a custodial account under section 403(b)(7) of the Code, a retirement income account under section 403(b)(9) of the Code, and a governmental plan under section 401(a)(24) of the Code. For convenience, each such plan or account is referred to below as a "Plan", unless otherwise indicated.
Under the Ruling, on or after January 10, 2011, the conditions for pooling are generally as follows:
(1) The group trust is adopted as a part of each investing Plan.
(2) The group trust instrument expressly limits participation to Plans.
(3) The group trust instrument expressly prohibits any part of its corpus or
income that equitably belongs to any adopting 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.
(4) Each Plan, which adopts the group trust, is itself a trust, a custodial account, or a similar entity that is tax-exempt under Code section 408(e) or 501(a) (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.
(5) 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.
(6) 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.
(7) The group trust instrument expressly prohibits an assignment by an adopting
Plan of any part of its equity or interest in the group trust.
(8) The group trust is created or organized in the United States and is maintained
at all times as a domestic trust in the United States.
In addition, the assets of a custodial account under Code section 403(b)(7) can be invested only in a group trust that contains solely the assets of other section 403(b)(7) custodial accounts. The Ruling contains model language that may be used by a group trust to comply with the requirements of the Ruling. The Ruling also contains guidance/transitional rules: for meeting requirements (3), (5) and (6) above, for certain commingled trust funds maintained by the Pension Benefit Guaranty Corporation, for reliance on prior determination letters and for plans described in section 1022(i)(1) of ERISA (i.e., Puerto Rico situs trusts) that are participating in a group trust.
IMPORTANT NOTE: Requirements (4), (5) and (6) above are new, and they become effective on January 10, 2011. Therefore, an existing group trust or an investing Plan may have to be amended (and maybe very soon) to reflect one or more of these requirements. The Ruling provides some guidance on these amendments, for example, it says that an amendment to comply with the separate accounts rule in requirement (6) need not be adopted until January 10, 2012 (but is curiously silent on the timing of any amendment to reflect the contribution/transfer rule in (6)). It appears that requirement (4) is met in operation, rather than by plan provision, but that is not a certainty. Any one maintaining a group trust or an investing Plan should read the Ruling carefully, and review the document for the group trust or investing Plan, to determine whether and when an amendment is needed.