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Can a plan be "un-terminated"?


Richard Anderson

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A profit sharing plan terminated in 1997. A determination letter was received on the termination. No distributions have been made since the termination. All 5500s since 1997 have indicated that the plan is terminated. The plan sponsor now wants to "reinstate" the plan. Can the plan be un-terminated? If so, what is the procedure?

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Well............

If there have been no distributions, then the sponsor has failed to complete the termination process, which may automatically void it. That probably leaves a frozen plan, but careful review of the documentation is called for.

It is my understanding that a plan termination can be cancelled before distributions have commenced, but that doing so after some, but not all, distributions have been paid would be "suspect." I suggest avoiding the term "un-terminated."

No doubt I have left something out.

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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I've seen this a few , on both DC and DB plans. As pax correctly points out, a key is the timing of the distributions, or failure to do so.

On a DB, the IRS and PBGC were notified of the revocation of termination. The plan sponsor was unable to meet the final contribution requirement.

On a DC, I'd be inclined to send a letter to the IRS if an FDL application was made on termination, to the person named in the FDL. If no FDL application was made, I think the termination is void if the distributions are not made within a reasonable time following the initial term date. The 5500 forms ask some relevant questions.

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  • 4 weeks later...

This plan was "terminated" in 1997, but no distributions were made. All participants accounts were 100% vested at that time. Now that the plan sponsor does not want to terminate the plan, are those accounts still 100% vested? I don't see how that would be right because the plan will be treated as if the termination has not occurred. But the participants have been getting statements showing that they are 100% vested. The Board Resolution terminating the plan that all participants are 100% vested in their accrued benefits effective December 31, 1997.

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Although the facts are a bit sketchy, I would guess that Yes the participants are 100% vested. This points out the importance of doing two things in any plan termination:

1. Freeze the plan, specifically freezing the accrual of benefits and freezing the participation of the plan. Note that vesting is NOT an issue here.

2. Terminate the plan. This can have the same effective date as (1) but, if something happens to void the termination, it will not change the fact that the plan is frozen.

If the plan amendment that froze the plan specifically mentioned 100% vesting, you are probably stuck, but of course you will want the advice of a competent ERISA attorney.

Also, remember that ERISA requires ambiguities to be resolved in a non-discriminatory manner, and that generally this will be in favor of the participant.

Most plan terminations that I have seen had only a small percentage of the total benefit affected by the 100% vesting, so "giving in" on a question such as this was not a major point.

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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