PLR Rules IRA Rollover Assets From DB Plan Subject to Forfeiture

February 14, 2006 – The general qualification requirement that IRA assets may not be assigned or subject to forfeiture (IRC Sec. 408(a)(4)) does not mean that no such restriction may ever be placed upon them, according to IRS private letter ruling (PLR) 200606051. This PLR points out the fact that there may be uncommon circumstances in which a stance that “IRA assets may not be forfeited” may require further examination.

PLR 200606051 considers a lump sum distribution from an employer-sponsored defined benefit (DB) pension plan. Certain nondiscrimination provisions of IRC Sec. 401(a)(4) require that restrictions be placed upon lump sum distributions made to a DB plan’s 25 highest paid HCEs, in the event of the plan’s early termination. The plan must be able during a restriction period to reclaim certain paid-out amounts in the event of early plan termination, in order to not unduly discriminate in benefit payments in favor of the top paid HCEs.

This PLR allows such a top paid HCE to receive a lump sum distribution for rollover to an IRA. However, the IRA must be split into two accounts. One such account will be subject to an agreement to repay an amount to the employer plan if the plan terminates early and repayment is necessary to meet benefit obligations. The IRA subaccount subject to the repayment agreement will be held by the financial organization “for the benefit of Plan X during the period of restriction.”  After that restriction period, it will, as normal, be held by the financial organization for the benefit of the IRA holder.

PLR 200606051 may be accessed at http://www.irs.gov/pub/irs-wd/0606051.pdf.