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Unterminated Governmental Defined Benefit Plan Risks. Plan Termination


Guest Ralph Amadio
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Guest Ralph Amadio

Public School District qualified defined benefit plan, with an existing determination letter was used as a one time offer "window" plan retirement incentive several years ago for a specific group of retirees. All benefits have now been funded and annuities have been purchased for all participants. The plan still has assets left over. What danger to the plan sponsor and its fiduciaries are involved in keeping this plan open? Also what are the steps necessary to terminate the plan?

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The major issue is that so long as the plan stays open, it will have to comply with new statutory and regulatory changes in order not to lose its qualified status. There may also be issues under applicable state and local law.

Note that assets cannot revert to the employer unless the plan document so provides. However, unlike in the case of private employers, the provision does not have to have been in the plan for a certain period before plan termination. If you want to revert assets to the employer, and if this is permitted by applicable state and local law, you will need to make sure that the plan document is timely amended.

Otherwise, termination is a relatively straightforward process. You may want to get an IRS determination letter on the termination, although that is not required. And whatever entity has authority to amend the plan must adopt a resolution terminating it.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Guest Ralph Amadio

It appears that no steps have been taken to amend the plan to maintain qualification, therefore the previous Letter of Determination is no longer valid. Since there are assets remaining in the trust, and the plan sponsor (school district) has plenary authority and fiduciary responsibility for them, would the safest track be to amend to reestablish qualification and then file for a Letter of Determination for approval of Termination, or would another route be advisable? I am concerned about risk to the plan sponsor.

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If the plan truly has no participant, the plan is not and cannot be made a qualified plan. Revenue Ruling 70-316. If there is a trust, its qualification for exemption must be determined under the rules in the Internal Revenue Code other than 401(a). My reaction without knowing the facts is that if the plan has no participant it should be terminated and the assets paid to the employer. If the plan does have a participant, the remedial amendment period is still open for TRA '86 and later laws and so it probably is not too late to amend and submit for a determination letter.

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