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Partial termination distributions and timing


Guest pjz1234

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Guest pjz1234

I am trying to get a better handle on the contours of partial plan termination and required actions by the plan sponsor/administrator. I have read all the forum topics I could on this issue, but some of my issues seem to be unresolved. I greatly appreciate any answers any of you can provide.

1. What, if any, requirements are there for distributions upon partial plan termination? I have seen two people in these forums say that partial plan terminations are not distributable events. From my own research, however, I am little skeptical of this. Looking at Revenue Ruling 89-87, I think that a plan administrator must distribute assets as soon as is administratively feasible. Although this ruling is not directly on point as it deals with voluntary terminations, I don't see any reason why it shouldn't be applied to partial plan terminations. In its analysis, the ruling establishes: (a) a plan will only terminate at the selected date when all benefits under the plan are determined with respect to the termination date an all plan assets are distributed to satisfy said benefits as soon as is administratively feasible; (b) A plan is not considered terminated if the above requirements are not met “regardless of whether the plan is treated as terminated under other federal law ….”; © A plan which has not distributed its assets as soon as administratively feasible is considered an ongoing plan and must meet the requirements of § 401(a) in order to continue its qualified status. I can't identify language in the revenue ruling, or a policy reason, that would prevent these rules from applying to partial terminations. I also cannot find any contrary authority stating partial terminations do not require distributions (I understand that the only mentions of partial terminations in the IRC relates to vesting). Has anyone been able to test this issue or have any additional authority to answer the question?

2. How can a plan sponsor/administrator go about establishing the date of partial plan termination for purposes of vesting? Are there many dates based on the termination of each individual affected employee? Is it a single date at the beginning/end of the termination event? Is it dependent on the facts and circumstances?

3. Related to #2, can anyone clarify the determination letter process for me? By my reading, it seems that a plan administrator could filed a Form 5300 to get a determination letter regarding whether partial termination has occurred. The plan could rely upon the letter process and treat the plan as qualified until they receive a determination. The plan could then retroactively vest the affected employees with benefits as of the time of partial plan termination. My problem is I can't seem to find any express authority providing this safe harbor period. The closest I got was Internal Revenu Manual 7.12.1.14, which states: "Upon plan termination, all plan assets must be distributed as soon as administratively feasible (generally within one year following the date of plan termination). Generally, an outstanding determination letter will extend this date; however, an IRS EP Examination does not extend this date." Does this encompass 5300 letters or just 5301? If it does, is this the safest way to handle a plan termination? If a plan sponsor was fairly certain that a partial termination is occurring or had occurred, is amending the plan an even safer route?

Thank you in advance to any and all help.

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If you have a plan and you think you have a Partial Plan termination I STRONGLY recommend you get some professional assistance. A good ERISA attorney or TPA can help you. These rules are hard and they aren't very clear. That is the reason they are subject to a fair amount of litigation.

Also, don't look to plan termination rules to guide you on Partial Plan Terminations.

So in order

1) Since a partial plan termination is caused by a large number of people being terminated that is the distributable event for those people. For the people who did not get terminated they don't have a distributiable event.

2) The time period that a partial plan termination can cover can be rather long. It really is a facts and circimstances rule. This is where good advice will help you. There are cases where everyone one laid off over a two year period were ruled as being effected by the partial plan termination. You have to look at things like was the termination voluntary or involuntary. You have to look at things like was there a series of related reductions in force. Each case has to be looked at on a case by case setting.

3) I don't think I have ever seen anyone file for a determination letter for a partial plan termination. I am not even sure it can be done.

Sorry if this wasn't as detailed as you were hoping. I really do think you need to find an ERISA attorney or good TPA to look at all the facts. I understand one not wanting to spend money if you have been laying off people as that means the company is not doing well. In this case the money spent will very likely save you time, money and grief down the road. Think of it as cheap insurance.

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Guest pjz1234

I don't think I have ever seen anyone file for a determination letter for a partial plan termination. I am not even sure it can be done.

Hey ESOP Guy, thanks for the response. First, don't worry, I am not an employer and I am not currently dealing with a partial plan termination at the moment. More of just getting a handle on hypotheticals for some other issues regardin account valuation (all a bit tricky and irrelevant to my current issues).

To clarify on #1, I am not talking about the unaffected employees. I know the partial termination only applies to the terminated employees. I am just wondering if there is requirement, outside of the plan documents, for a distribution "as soon as is administratively possible" to those affected employees.

To clarify #2, I appreciate the fact-intensive inquiry surrounding partial plan termination. But I am not so much interested in whether partial plan termination has occurred, but when it has occurred for purposes of determining when the affected employees became vested in their account balances. A hypothetical better illustrates this issue. Employer fires employees over the course of 2013. It fires 8% of its employees in February, 8% in June, and 8% in November. 24% of the employees were fired in total, and assume that this qualifies as a partial plan termination when looking at all the facts and circumstances. Would the employees fired in February be vested in February or November? Would the employees in November be vested in February or November? Thats the issue I am wrestling with.

In regards to the determination letter, there is a process, I am just a little uncertain of the effect. Form 5300 certianly addresses partial plan terminations, and has a specific table that can be filled out re: partial plan termination. I am more interested in the distinction between From 5300 letter and 5301 letters, and whether the safe harbor period for a 5301 letter (i.e. the plan can continue as qualified while the determination is pending) exists for a 5300 letter. The instructions the IRS provides are not very clear (who would've figured that!), and I am trying to figure out the best and safest way for plan administrators to evaluate whether partial terminations have occurred.

Thanks again ESOP guy. I understand there may no be real guidance on the above issues. I am just hoping someone out there has thought about this too!

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On #1 - No need to distribute "as soon as is administratively possible," other than under $5K cashout if in the document. And no need to even offer distributions if it happens to be a plan that only have deferred distribution dates, such as a DB plan with no lump sums.

On #2 - My understanding, and it could be wrong, is you vest the participants affected by the partial termination when you determine it has occurred. You would therefore vest them when you determine a partial termination occurs. In your example say you determine that the partial termination occurred in November but spanned the period February - November. You would vest all affected participants. In the event that you paid out partially vested participants (and generated forfeitures) from the February and/or June group before you determined the partial termination had occurred, you might have to restore some forfeited benefits and process a second distribution for affected individuals. I don't think it is disqualifying event to have paid them our or anything that needs to be corrected through EPCRS but rather something you "self correct" because when you originally paid them out partially vested you simply didn't know that they would part of a partial termination group due to latter turnover/closings whatever. Kind of a no-harm, no-foul as long as you restore the benefits forfeited. At least that's my theoretical understanding of how it works.

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1. I disagree with the response from ESOPGuy. If a partial termination occurs, that means some (perhaps many) participants had a severance of employment. However, the part-term creates 100% vesting for those affected participants. Whether it also creates a distributable event is determined only under the terms of the plan document.

2. Probably yes. It's possible the ER might want to ensure there is no question by simply amending the plan to provide vesting for the terminees. BTW, the cost is often not much.

3. Agree, probably not worth doing a DL, assuming you've got some good advice looking over your shoulder w/r/t actual plan administration.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest pjz1234

1. I disagree with the response from ESOPGuy. If a partial termination occurs, that means some (perhaps many) participants had a severance of employment. However, the part-term creates 100% vesting for those affected participants. Whether it also creates a distributable event is determined only under the terms of the plan document.

2. Probably yes. It's possible the ER might want to ensure there is no question by simply amending the plan to provide vesting for the terminees. BTW, the cost is often not much.

3. Agree, probably not worth doing a DL, assuming you've got some good advice looking over your shoulder w/r/t actual plan administration.

Hey David, thanks for the reply.

As to #1 - Am I reading 89-97 incorrectly in regards to formal/full termination of plan requiring distribution as soon as is administratively feasible? If that is the correct reading, I am having a hard time figuring out why it wouldn't also apply in the event of partial termination. I would prefer it if distribution were governed solely by plan documents, but I'm worried that if partial termination occurred and 1 year later if there was no distribution there would some risk of disqualifying the remainder of the plan.

I'm glad to hear your thoughts on the plan amendment. Seemed like the more prudent course to me. I very much appreciate your comments.

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Guest pjz1234

On #1 - No need to distribute "as soon as is administratively possible," other than under $5K cashout if in the document. And no need to even offer distributions if it happens to be a plan that only have deferred distribution dates, such as a DB plan with no lump sums.

On #2 - My understanding, and it could be wrong, is you vest the participants affected by the partial termination when you determine it has occurred. You would therefore vest them when you determine a partial termination occurs. In your example say you determine that the partial termination occurred in November but spanned the period February - November. You would vest all affected participants. In the event that you paid out partially vested participants (and generated forfeitures) from the February and/or June group before you determined the partial termination had occurred, you might have to restore some forfeited benefits and process a second distribution for affected individuals. I don't think it is disqualifying event to have paid them our or anything that needs to be corrected through EPCRS but rather something you "self correct" because when you originally paid them out partially vested you simply didn't know that they would part of a partial termination group due to latter turnover/closings whatever. Kind of a no-harm, no-foul as long as you restore the benefits forfeited. At least that's my theoretical understanding of how it works.

For #1, you wouldn't happen to have a cite related to that? I am still worried about the implications of 89-97. I understand IRC and Regs related to partial termination only talk about vesting, but I think 89-97 logically extends to partial terminations. If there is any authority out there stating otherwise, I really want to see it.

For #2, thats a good thought. I will have to look into that more.

Thanks for your comments Lou.

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1. I disagree with the response from ESOPGuy. If a partial termination occurs, that means some (perhaps many) participants had a severance of employment. However, the part-term creates 100% vesting for those affected participants. Whether it also creates a distributable event is determined only under the terms of the plan document.

2. Probably yes. It's possible the ER might want to ensure there is no question by simply amending the plan to provide vesting for the terminees. BTW, the cost is often not much.

3. Agree, probably not worth doing a DL, assuming you've got some good advice looking over your shoulder w/r/t actual plan administration.

Part of the issue here is how David and I am using the term distributable event and I may be using is it in a sloppy manner. You do have to look to the document as to when you pay a person.

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On #1 - No need to distribute "as soon as is administratively possible," other than under $5K cashout if in the document. And no need to even offer distributions if it happens to be a plan that only have deferred distribution dates, such as a DB plan with no lump sums.

On #2 - My understanding, and it could be wrong, is you vest the participants affected by the partial termination when you determine it has occurred. You would therefore vest them when you determine a partial termination occurs. In your example say you determine that the partial termination occurred in November but spanned the period February - November. You would vest all affected participants. In the event that you paid out partially vested participants (and generated forfeitures) from the February and/or June group before you determined the partial termination had occurred, you might have to restore some forfeited benefits and process a second distribution for affected individuals. I don't think it is disqualifying event to have paid them our or anything that needs to be corrected through EPCRS but rather something you "self correct" because when you originally paid them out partially vested you simply didn't know that they would part of a partial termination group due to latter turnover/closings whatever. Kind of a no-harm, no-foul as long as you restore the benefits forfeited. At least that's my theoretical understanding of how it works.

For #1, you wouldn't happen to have a cite related to that? I am still worried about the implications of 89-97. I understand IRC and Regs related to partial termination only talk about vesting, but I think 89-97 logically extends to partial terminations. If there is any authority out there stating otherwise, I really want to see it.

For #2, thats a good thought. I will have to look into that more.

Thanks for your comments Lou.

No cite for #1.

But as others have comments and I agree with then a partial termination is not the same as full termination. Partial termination relates to vesting issues only at least as far as my understanding goes.

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