Ineffective Termination; Vesting of New Participants

[Guest Steve McKneely]

Sponsor of DB plan attempted to terminate the plan in 1995. Form 500 was filed with PBGC and participants were notified of termination, but no other steps were taken. Plan assets were never distributed, and no Forms 5500 were filed after the attempted termination.

Employees were hired (and some have left employment) after the attempted termination who have accrued service entitling them to participant status under the plan. Is the vesting status of those participants also 100%, or does their length of service and the plan's vesting schedule determine their vesting?

All replies appreciated.

[david rigby]

Most important question is whether the plan was also amended to freeze, both accruals and new entrants.

[RCK]

pax is of course correct. If there is an amendment terminating the plan, freezing accruals and barring new entrants, then it seems to me that you do all those things, and vest everyone who was participating. If that was not done, then the plan is not terminated and new entrants should be coming in, benefits accruing and vesting continuing.

Sure hope that actuarial valuations have been done on a basis consistent with whatever you figure out.

[Guest]

Even if the plan benefits were frozen you may need to grant minimum accruals if the plan was/is top heavy. Maybe even worse, if the plan gives the minimum to all participants rather than only non-keys you may have HCEs benefiting,which means that you no longer automatically pass 410b. If there have been no new entrants because participation was frozen you may have failed coverage,and it may be too late to do the appropriate corrective amendment. This could get ugly.

[Guest Steve McKneely]

Thanks pax and RCK. No amendment was made freezing the plan, and no actuarial valuations have been made in the interim. The former third-party plan administrator began the termination process but didn't complete it, and is now, you guessed it, out of business. Unfortunately, the sponsor was overly dependent on the administrator, and was unaware that its plan continued. It must now carefully go about the process of bringing the plan into compliance.

I haven't been able to find direct authority, but my take on the new participant vesting issue is the same as RCK's: termination was ineffective, so the plan continues in accordance with its terms, except that participants on the atempted termination date became 100% vested.

Thanks again for your thoughts, and for any you or others may care to add.

[david rigby]

My suggestion would be to find a competent and experienced ERISA attorney.