IRS nixed plans by an employer to use excess pension assets to pay its matching contributions to a defined contribution profit-sharing plan.
In a private letter ruling issued March 10 and made public today, the IRS told the unidentified employer that the reallocation of surplus defined benefit plan assets, on which the employer already has received a tax deduction, is ``inconsistent with the premise on which the initial deduction to the defined benefit plan was allowed.'' The employer would have to pay income taxes on the money drawn from the pension fund. Moreover, siphoning surplus assets from the defined benefit plan into the defined contribution plan to pay for the employer match amounts to a reversion of assets on which the employer might have to pay up to 50% in excise taxes, the IRS said.
The PBGC will expand its premium audit pilot program nationwide. The agency reported the pilot program generated more than $4 million in addtional income, collecting $8 for every $1 spent on the effort.
The PBGC reviews premium filings, actuarial assumptions and other information to determine whether a plan calculated and paid the correct premium for the six most recent plan years. Plans that underpaid are billed for the unpaid amounts plus late payment penalty and interest charges. The PBGC recently started a voluntary compliance program under which plans can reduce their penalty charges if they identify and correct premium underpayments before they are contacted by the agency. The pilot program started in 1995 and was limited to companies based in the East.
West Palm Beach (Fla.) General Employees Retirement System may be changing its plan structure if a city ordinance is approved that will terminate the more than $100 million current plan, buy annuities for retired employees and create a ``clone'' defined benefit plan for active employees. If the ordinance passes, the system might have to drop one of its two managers, said Alfredo Lay, pension administrator. Putnam runs $15 million in equities and INVESCO runs the rest in a balanced portfolio. It is unknown how large the second plan would be, but between 200 and 275 employees would be in the plan. A decision on the ordinance could come in July.
State Universities Retirement System of Illinois, Champaign, might increase Smith Barney Capital's equity portfolio by $75 million and change its benchmark. Ennis Knupp is recommending the changes, which the board of the $7.5 billion fund will consider at its meeting later this month. Smith Barney now runs $124 million in a large-cap value orientation, benchmarked to a 60/40 blend of the Wilshire 5000 and Wilshire large company value indexes. Ennis recommends changing to the BARRA large value index.
The Supreme Court today refused to revive the claims of disgruntled bond fund investors who filed a class-action suit against Hyperion Capital Management. The ruling resolves a legal battle that started in 1993, after the value of three closed-end funds dropped by as much as 25% in little more than a year. Investors charged that Hyperion, its managers and its underwriters failed to give adequate warning that performance could plummet if interest rates fell, as they did during most of 1993.
The decision not to take the case leaves intact an October ruling by a federal appellate court that absolved Hyperion 1997 Term Trust, Hyperion 1999 Term Trust and Hyperion 2002 Term Trust of any wrongdoing.