Revenue Ruling 2014-24 modifies the rules regarding 81-100 group trusts by stating that certain retirement plans qualified under the Puerto Rico Code may invest in 81-100 group trusts even if the plan is not also qualified under the Internal Revenue Code. It also clarifies that assets held by insurance company separate accounts may be invested in 81-100 group trusts under some circumstances.
Louis Mazawey, an attorney with Groom Law Group in Washington, D.C., explains that “81-100 group trusts” is the IRS’ name for CITs. Mazawey tells PLANADVISER that under IRS rulings, access to collective investment trusts has been limited to certain types of retirement plans. Over the years, the IRS has gradually expanded types of plans that can invest in them. According to Mazawey, the main update was Revenue Ruling 2011–1, which added governmental plans of all types and 403(b)(7) custodial accounts to the list of plans that can invest in CITs.
While separate accounts are not considered to be plans, insurance companies can invest a variety of tax-favored retirement accounts in a separate account. “The new ruling takes a bit of a leap by saying the separate account of an insurance company can participate in a CIT as long as it only includes asset of entities included in Revenue Ruling 2011-1,” Mazawey explains.
He says the typical example is when insurance companies have separate accounts limited to assets of 401(a) plans, so that account can participate in a CIT. Governmental plans are also permitted investors, including governmental 403(b)s. However, Mazawey says it is not clear that any 403(b) with assets in an insurance company separate account could invest in CITs; nonprofit 403(b)s are not eligible investors under Revenue Ruling 2011-1. He notes that the ruling is also important for retirement plans that use a stable value fund, as these are supported by insurance companies.
A Benefits Brief from Groom Law Group says the IRS states that separate accounts are now permitted “group trust retiree benefit plan” investors as long as:
- the separate account itself includes only qualified group trust retiree benefit plans under Rev. Rul. 2011;
- the insurer enters into a “written arrangement” with the trustee of the group trust that is consistent with the requirements for group trusts, including separate accounting for each plan’s interest; and
- the separate account’s assets are insulated from the insurer’s general creditors.
Separate accounts have until January 1, 2016, to enter into the “written arrangement” with the trustee of current group trust investors. Effective December 8, 2014, new separate account investors must have the arrangement in place no later than when the investment is made. There is no IRS guidance about what the “written arrangement” must provide.
So, why is the latest IRS ruling important to plan sponsors? Mazawey says the main reason it’s a good thing is because sometimes insurance companies do not have access to certain asset classes. By investing in a group trust, they can now access investments such as emerging markets investments. “It’s a way for insurance companies to offer investments they cannot otherwise offer internally.”
It also offers more diversification and potentially lower costs for sponsors since insurance companies will now have broader access to institutional investments, which can improve returns, he adds.
Regarding the ruling’s provisions about Puerto Rico plans, Mazawey says one good thing is plan sponsors that offer a separate retirement plan for employees in Puerto Rico can now invest that plan the same way as they do their main plan.
IRS Revenue Ruling 2014-24 can be viewed from here.