Terminating a defined benefit plan

[Guest JPotosky]

I have a client who is interested in possibly terminating their defined benefit plan. The plan is overfunded. It is a very small group (5 employees) and the concern is that as top staff leaves the group, a defined benefit plan will be a difficult sell to new management. They would also like to decrease their administrative expense. What are the options available and what is the time line associated with making these changes?

[Guest sdolce]

Questions:

1.Is the plan covered by PBGC? If so, there is a very strict timeline that must be observed,and the termination must be submitted to PBGC to demonstrate sufficiency of assets.

2.Are they going to submit to the IRS?This is optional,but usually is recommended.

Let's start here for now.

[Guest JPotosky]

They are participatiing in PBGC insurance. If you have a reference where I can get information on the PBGC procedures, I would appreciate it.

They probably would file with the IRS as well. Any references you have on that would be appreciated as well.

Sincerely,

Joe P

[Blinky the 3-eyed Fish]

Unless one is desperate for the dough, I can't see why any a small DB plan would terminate at this time. The 415 limits increase dramatically soon, and that may relieve the overfunding problem. I'd rather wait than pay most of the reversion to excise taxes.

[david rigby]

Blinky is right. It the plan is overfunded, then one of 2 things will happen to the excess:

1. The IRS gets most of it, or

2. The excess can be allocated to plan participants. If the 415 limits have prevented the "top staff" from getting more benefit, then the change in the law should help that.

[Guest JPotosky]

Thanks for your input. These are good considerations which I will explore in more detail. The concern of the management staff is the lack of appeal a DB plan will have for new management which will be hired in about 5-6 years. Certainly if that is a readily correctible future problem, it makes sense to maximize the benefits of the current overfunding rather than give the dollars back to Uncle Sam in the form of an excise tax.

Joe P.

[RCK]

We do acquisitions on a regular basis, in a wide variety of circumstances. If there is an underfunded DB plan, that is obviously a liability.

But if there is an overfunded DB, we can merge that with one of our DB plans that is just fully funded or underfunded. It gives us interesting opportunities. Merging in an overfunded plan is almost as good as making a contribution.

However if the successor does not have a plan or any interest in adding one, then the earlier comments are correct--you can give it to the participants through increased benefits or to the IRS upon termination.

[Guest sdolce]

There is a third alternative. If you already have or wish to install a defined contribution plan this can serve as a "Qualifed Replacement Plan". Instead of reverting the entire excess amount and losing 90% of it to excise and income taxes,you transfer 25% of the excess to the QRP.It is held inthe QRP in a suspense account and allocated out to the participants over no more than 7 years. With the repeal of 415(e) this can be a good deal for people who previously would have been prevented from getting an allocation due to the combined plan limits.The allocation from the suspense account can be made in the same manner as the regular plan allocation,or on any other non-discriminatory basis. It depends on how the plan and/QRP amendments are written.

The remaining 75% of the excess reverts to the plan sponsor where it is subject to a reduced excise tax of 20%. This effectively reduces the total excise tax rate from 50% to 15%.

But all this is at the end of the line. From your original posting it seems like your client hasn't even started the termination process yet. The PBGC requires that plan participants must be given 60 days' notice of the terminationThe PBGC has a prescribed format for the notice.You then have 180 days form the proposed termination date to get the information to the PBGC informing them that the plan is terminating with sufficent assets. This is done by filing PBGC Forms 500 and EA-S. The EA-S is the certification by an enrolled actuary of the sufficiency of assets. The PBGC then has a mandatory 60-day period to look at the termination. If they don' t find anything wrong with the filing you must then commence distributions,unless you're waiting for IRS approval. If you've submitted to the IRS at the same time as you've submitted to thePBGC you have an additional 120 days from the date of the IRS approval letter to make the distribution.

IRS submission is done using Forms 5310 and 6088,and Schedule Q. An agent will review the filing ask for any additional information

he or she deems necessary, and presumbly you get an approval letter. This process takes about 4-6 months.

Plans which terminate without getting IRS approval are supposedly subject to an increased risk of audit.This may or may not be a big thing for your client. Fees may also be a issue. The IRS submission = time+work= money.also,whethr the plan term is submitted to IRS or not the plan will have to be restated for GUST just like it would be if it were ongoing.

One last thing,should have been first. There must be resolution of the Board of Directors (or Partners or Sole Proprietor,etc) terminating the plan,just like the resolution that adopted the plan initially.

[david rigby]

Good comments from sdolce.

Another planning idea to consider is a cash balance plan, the purpose of which is to "use up" the excess in future years. (This may not be an attractive alternative if the current employees will not be around to participate.)

[Guest nikomendy]

one thing which was not highlighted in the requirements for funded DB plan termination--

is getting approval (from DOL) of a private insurance carrier- and then purchasing annuities

for retired plan participants- who are already

in pay status.. receiving periodoc payments

from the (to be terminated) pension plan trust.

Furthermore the identity of this insurance

carrier must be made known to the participants-

as a part of the noticwe of termination.