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Question Regarding Termination of Cash Balance Plan


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Question regarding the termination of a Cash Balance Plan.  Obviously, like most plans, the assets are down in '22 so now that they are looking to terminate the Plan they are roughly $20k short of the balances earned to date.  That said, the only participants are the owner and his wife.

Is it necessary for them to make a contribution in order to bring the balance up to the earned balances?  Or can they simply distribute the money that's in the plan?

Thanks everyone!

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They do have to clear their minimum funding requirement for the year determined as of the valuation date, which could be changing as a result of the termination.  If they do that, then the plan document itself may address what occurs in a termination with insufficient assets.  (Possibly the plan says to pro-rate, or perhaps if one of them is the majority owner then that person alone forgoes receipt.)

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4 minutes ago, Bri said:

They do have to clear their minimum funding requirement for the year determined as of the valuation date, which could be changing as a result of the termination.  If they do that, then the plan document itself may address what occurs in a termination with insufficient assets.  (Possibly the plan says to pro-rate, or perhaps if one of them is the majority owner then that person alone forgoes receipt.)

Thanks!  If the document is silent, pro rata is an acceptable method I assume? 

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PBGC rules allow a majority owner to elect to forgo receipt of all or a portion of their benefit to allow the plan to terminate in a standard termination. However from the description it sounds like this is a substantial owners plan which is exempt from PBGC coverage so the standard termination rules wouldn't apply. 

The only IRS rule regarding termination of underfunded defined benefit plans that I am aware of is Rev Rul 80-229, which describes how the assets can be allocated in a nondiscriminatory manner. Since there are no rank and file employees in this plan, nondiscrimination wouldn't apply.

So, they can probably do whatever they want (but like Bri said, amend the plan document to say what they're doing). If they want the IRS's blessing on it, file a Form 5310.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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