Terminated Plan - Allocation of Surplus

[Guest Boston Attorney]

In a terminated defined benefit plan, has anyone ever had a problem doing a post-termination amendment specifying the allocation of surplus assets? Specifically, is there any requirement that sponsor must specify, in a plan provision or pre-termination amendment, how to allocate surplus? can't the sponsor just wait till after calculations rae made and allocate any known surplus during the post-termination period? (The Plan otherwise, by its terms, allows an employer reversion.) In the same vein, is a pro-rata benefit increase or transfer to a replacement plan under Code sec. 4980 the only way to reduce or eliminate a reversion. Any chance the IRS would somehow claim that the plan, after having frozen benefit accruals as of the termination date, "unfroze" them by allocating the surplus in the form of additional benefits and must now go thru the termination process again; re-freeze the thawed benefit accruals; give another 204(h) notice; satisfy min. funding standard for the post-termination year; etc., etc.?? Note, I think the answer is No, there's no problem here, but I m seeking input from others who've actually been through this in real life. For example, PBGC Reg 4041.8 clearly contemplates post-termination amendments to allocate surpluses; and rev. proc. 80-229 contemplates post-termination benefit increases to allocate a surplus, whether by amendment or just plain sponsor action.

[david rigby]

I sympathize with the confusion here. I anaylzed this (I'm an actuary not an attorney) a few years ago and always came back to the point that, *during* the process of plan termination, the plan sponsor seems to clearly have the right to stop the termination and reinstitute the plan, whether frozen or not. Therefore, the plan sponsor has the right to amend the plan.

However, I'm unsure at what point this "right" would cease. It seems to me that the plan could not be "unterminated" once the distribution of benefits has commenced. Could it be unterminated after receiving an IRS approval letter but before payments have begun? I think the answer is Yes but that is more on instinct than anything else.

As far as how you allocate any excess assets, I think the IRC 4980 statute is relevant. If the plan is being amended late to change the handling of the excess from reversion to allocation, then the effect is exactly that of the statute; that is, changing the amount subject to reversion, and hence reversion tax. I think the definition of "qualified participant" in Sec. 4980(d)(5) is a good guide, probably easily defended, but may not be the only answer. For example, could the plan be more generous and allocate proportionally to all remaining participants including some vested terms who have been gone for more than 3 years? I think this is equally valid because it includes additional participants, but it is not exactly the statute definition. Others may have different opinions.

The sponsor could allocate the 20% of the excess as defined in 4980(d)(3) and then allocate all or a portion of the balance of the excess in some other non-discriminatory manner.

With respect to your last comment about "just plain sponsor action", that probably should be avoided, since it sounds like an allocation after the reversion, meaning there is no "credit" for this under sec. 4980. Also this sounds like it is not a payment from a qualified plan, which would mean it is subject to FICA taxes and is not eligible for rollover treatment. A formal plan amendment would likely be the best course of action.

[This message has been edited by pax (edited 12-17-1999).]