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Scott

"Unterminating" a Plan

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A DB plan was frozen in 1993. In June 1998, the sponsor adopted resolutions to terminate the plan. At that time, the GATT interest rate would have required the sponsor to contribute approximately $90,000 to fund the plan upon termination. The sponsor gave participants the Notice of Intent to Terminate as the first step of filing the termination with the PBGC.

Neither PBGC Form 500 nor IRS Form 5310 has been filed yet (both would be due at the end of December 1998). The plan's actuary has informed the sponsor that the GATT interest rate has dropped significantly since June, which will now require the sponsor to contribute approximately $180,000 to fund the plan upon termination. Because of the unexpected increase in the cost of terminating the plan, the sponsor desires to reinstate the plan on a frozen basis and wait for the interest rates to go back up.

Can the sponsor do this? If so, what steps would be required?

One thing that comes to my mind is that, as a result of the sponsor's resolutions terminating the plan, all participants became fully vested. Even if the plan can be "unterminated," that vesting probably can't be taken away. Other than that, I can't think of any reason the plan can't be placed back into a frozen status.

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With the recent significant decrease in GATT rates, I think your issue is going to become a common one.

Under the PBGC rules, you must follow an elaborate ballet of notices, filings, etc. all keyed to specific dates. Failure to meet any of the requirements voids the termination for PBGC purposes.

It seems to me that simply failing to proceed with the next appropriate step in the termination would void it for PBGC purposes.

The IRS follows completely different rules. For their purposes, a plan is not terminated unless assets are distributed within a "reasonable" amount of time, generally defined as 1 year. Again, failing to distribute assets within a reasonable period of time would void the termination.

Practically speaking, I would have the plan sponsor adopt a resolution rescinding the termination of the plan (I don't think he could rescind the 100% vesting), notify the participants of such and continue to administer and fund it as a frozen plan.

I have seen situation which went as far as receiving an IRS favorable determination letter upon termination which later rescinded the termination and continued as frozen plans and then later received another favorable determination letter at the time of actual termination.

Two issues to consider:

1) if the plan termination stated that new participants would enter the plan and no further benefits would accrue and both of these plan provisions continue in force, you need to keep an eye on 401(a)(26) and 410(B) issues. There is an exception to 401(a)(26) for frozen plans unable to terminate in a standard termination and generally no one accrues a benefit so 410(B) is not an issue.

2)if the plan is top-heavy, top-heavy benefits must continue to be provided. In some cases in which there is a DC plan with contribution of 5% or more, the plans are amended such that the top-heavy benefit is provided in the DC plan. Otherwise, top-heavy benefits in the DB plan must continue, which might delay the date at which the plan would be sufficient to terminate.

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I agree with Lorraine.

We have seen several plan sponsors decide to rescind the termination, with a simple resolution. As stated, there does not appear to be a way to rescind the 100% vesting. I would not just ignore the process; a positive step to rescind is better than an implicit one. I don't think that the reason for rescinding is relevant.

This is the perfect example of why a termination should state 2 things: freeze and terminate, so that if you change your mind about the latter, you will not affect the former.

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