Plan Termination

[Guest Sunny]

Employer terminated 401(k) Plan, distributed deferrals in November 2000, now employer is distributing profit sharing contributions 2 years later.....is there any legal time frame pertaining to when distributions should be completed??

[mbozek]

Under IRS rules a plan which has recieved a favorable determination letter upon termination must distribute all assets within 12 months after receiving the letter. If the assets are not distributed then the plan must be amended for any changes in the tax law occurring after the date of determinaton letter and must apply for a new determinaton letter.

[Guest Sunny]

thanks for your insight. The participants are upset because the market is so low now that the employer is paying the remaining distributions...do they have to accept the lowered market valued distribuitons or can they force employer to pay them out at share prices when distribution was originated?

[david rigby]

The assets are what the assets are.

[mbozek]

The participants would have to sue the fid for delaying the distribution but participants rarely win these cases unless the plan fid failed to follow plan provisions requiring the distributions to be made by a fixed date. Even if there is a fixed date the plan admin usualy has discretion to make distributions.

[Guest Sunny]

Thanks again!! Very helpful, I will pass along to the participants who are questioning their position.

[Guest FAQ]

Under IRS rules a plan which has recieved a favorable determination letter upon termination must distribute all assets within 12 months after receiving the letter.

mbozek-

Do you have a cite for the authority that allows a sponsor up to 12 months from the receipt of a favorable determination letter to distribute assets on termination of the plan?

I have seen elsewhere on this board that the time frame is 6 months after receipt of a favorable letter (if later than one year after termination), but I have not found an authority for either time frame.

The only one I have found is in Rev Proc 89-87, stating that a plan has not actually terminated if its assets are not distributed as soon as administratively feasible after the termination (with a rebuttable presumption of one year from the termination date as the limit).

Thanks in advance!

[mbozek]

Internal Revenue Manual, Plan termination guidelines, 7.7.2.2.19 (4/20/99), Frozen Plans and Wasting trusts (6) states that if the distribution was not completed within 1 year following the date of termination, the trust may not have been liquidated as soon as administratively feasible. Thus the plan would be treated as an onging plan required to to be amended for subsequent changes in IRC 401(a) as well as continuing to credit vesting service, accruals and TH minimums unless there are valid reasons for distributions not being made within one year.

[KJohnson]

As to the year "requirement" see the following. If you haven't distributed within a year, I always have treated this as a "rebuttable presumption" that you have not distributed as soon as adminstratively possible.

Rev. Rul. 89-87

1989-2 C.B. 81, 1989-27 I.R.B. 5.

Internal Revenue Service (I.R.S.)

Revenue Ruling

WASTING TRUSTS: TERMINATING PLAN

Published: July 3, 1989

Section 401. - Qualified Pension, Profit-Sharing and Stock Bonus Plans, 26 CFR 1.401-1: Qualified pension, profit-sharing and stock bonus plans.

(Also Sections 411.7805; 1.411(d)-2, 301.7805-1.)

Wasting trusts: terminating plan. A qualified plan under which benefit accruals have cased is not terminated if assets of the plan remain in the plan's related trust rather than being distributed as soon as administratively feasible. Rev. Rul. 69-157 clarified and Rev. Rul. 79-237 modified.

ISSUE

Is a pension, profit-sharing, or stock bonus plan terminated if, after an amendment is adopted to terminate the plan, the assets are not distributed as soon as administratively feasible, but are held in the plan's trust which remains in effect in order to make distributions when employees become entitled to payments under the terms of the plan as they exist when the amendment is adopted?

FACTS

For several years before 1988, Plan A was maintained as a qualified plan. In 1987, actions were taken to terminate the plan as of December 31, 1987. All benefit accruals ceased and participants were fully vested in their accrued benefits. However, the plan's trust remained in existence in order to pay benefits when due under the terms of Plan A, on and after plan participants attained the ages necessary for early or normal retirement benefits. The assets of Plan A were not distributed as soon as administratively feasible following the date of plan termination as specified for the plan.

LAW

Section 401(a) of the Internal Revenue Code provides that a trust created or organized in the United States and forming a part of a qualified stock bonus, pension, profit-sharing plan of an employer shall constitute a qualified trust only if the various requirements set out in section 401(a) are met.

Section 501(a) of the Code provides that an organization described in section 401(a) (that is, a trust which is part of a qualified pension, profit-sharing or stock bonus plan) is exempt from taxation.

Section 1.411(d)-2© of the Income Tax Regulations provides that, for purposes of section 411, a plan to which Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) applies is considered terminated as of a particular date if as of that date it was terminated under section 4041 or 4042 of ERISA. Section 1.411(d)-2© also provides that a plan that is not subject to Title IV is considered terminated on a particular date if, as of that date, it is voluntarily terminated by the employer or employers maintaining the plan.

Rev. Rul. 69-157, 1969-1 C.B. 115, provides that a trust that is part of a qualified plan will not retain its qualified status after the plan has been terminated. Rev. Rul. 69-157 also provides that a plan is not considered terminated in fact where the plan continues in effect until all the assets have been distributed to participants in accordance with the terms of the plan.

Section 1.416-1, T-4, of the regulations defines a terminated plan as one which has been formally terminated, under which crediting service has ceased for vesting and benefit accruals and under which plan assets have been, or are being, distributed as soon as is administratively feasible. Section 1.416-1, T-5, provides that under a plan for which the assets are not distributed as soon as administratively feasible, minimum contributions or benefit accruals are required under section 416 of the Code.

Section 1.401(a)-20, Q&A-6, of the regulations provides that a terminated or frozen plan is subject to the survivor annuity requirements of sections 401(a)(11) and 417 of the Code, unless such plan was terminated prior to September 17, 1985 and all assets were distributed as soon as administratively feasible after the termination date.

Rev. Rul. 79-237, 1979-2 C.B. 190, holds that, once applicable, the minimum funding standards described in section 412 of the Code apply to a pension plan through the date of its termination. Rev. Rul. 79-237 defines the date of termination for plans subject to Title IV as the date described in section 4048 of ERISA.

ANALYSIS

In order to terminate a qualified plan, the date of termination must be established, the benefits of plan participants and other liabilities under the plan must be determined with respect to the date of plan termination, and all plan assets must be distributed to satisfy those liabilities in accordance with the terms of the plan as soon as administratively feasible after the date of termination. Generally, the date of plan termination for a single-employer plan under Title IV of ERISA, will be the date of plan termination for purposes of the Code. In addition, a single-employer plan to which Title IV applies that has not been terminated under Title IV, even though its assets have been distributed, will not have terminated for purposes of the Code. A plan that is amended to terminate and to cease benefit accruals has not, in fact, been terminated under the Code if the assets are not distributed as soon as administratively feasible after the stated date of plan termination, regardless of whether the plan is treated as terminated under other federal law, including Title IV of ERISA. Termination of a multiemployer plan under Title IV of ERISA generally goes not result in plan assets being distributed as soon as administratively feasible after the date of plan termination under Title IV. Accordingly, such a plan will not be treated as terminated under section 401(a) of the Code and will have to continue to meet the requirements of section 401(a) to retain its qualified status. In the case of a single-employer plan that is terminated for purposes of Title IV, if plan assets are not distributed as soon as administratively feasible after the date of plan termination under Title IV, the plan will not be treated as terminated for purposes of the Code, except that the plan will be considered as terminated for purposes of section 1.411(d)-2© of the regulations. Thus, for example, a plan which is terminated for purposes of Title IV, but under which plan assets are not distributed as soon as administratively feasible, will not be terminated for purposes of Rev. Rul. 79-237 for determining the applicability of the minimum funding standard to such plans.

Whether a distribution is made as soon as administratively feasible is to be determined under all the facts and circumstances of the given case but, generally, a distribution which is not completed within one year following the date of plan termination specified by the employer will be presumed not to have been made as soon as administratively feasible. A plan under which all assets are not distributed as soon as administratively feasible is an ongoing plan and must meet the requirements of section 401(a) of the Code, in order to continue its qualified status. Such a plan remains subject to the minimum funding requirements of section 412, where applicable. Also, in any year in which the trust assets have not been distributed, the plan is subject to the information reporting requirements of sections 6057 and 6058 and, in the case of a defined benefit plan, the actuarial reporting requirements of section 6059.

In this case, Plan A was not in fact terminated when benefit accruals ceased because distributions were not made as soon as administratively feasible thereafter but were delayed until the participants became entitled to receive distributions under the terms of the plan as they existed when the benefit accruals ceased.

HOLDING

A pension, profit-sharing or stock bonus plan, under which benefit accruals have ceased, is not terminated if, after an amendment is adopted to terminate the plan, the plan assets are not distributed as soon as administratively feasible but are held in the trust which remains in existence in order to make distributions when employees become entitled to receive payments as provided under the terms of the plan as they exist when the amendment is adopted. This revenue ruling does not consider whether the cessation of benefit accruals results in a partial termination within the meaning of section 1.411(d)-2 of the regulations.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 69-157 is clarified.

Rev. Rul. 79-237 is modified to provide that for purposes of that revenue ruling, a termination will not occur if plan assets are not distributed as soon as administratively feasible, even if the plan is terminated under Title IV of ERISA.

PROSPECTIVE APPLICATION

Under the authority of section 7805(b) of the Code, the holding in this revenue ruling will not be retroactively effective for eligible plans (as described below). Under the section 7805(b) relief described in the previous sentence, an eligible plan will be treated as having terminated on the date of plan termination specified by the employer if distribution of all remaining plan assets is completed prior to the later of January 1, 1990, or as soon as administrative feasible after July 3, 1989. An eligible plan for which plan assets are not distributed, but which is amended prior to January 1, 1990 to comply retroactively with all qualification requirements for the period following the specified termination date and to retroactively restore employee benefit rights to that which they would have been had the plan been in compliance with the qualification requirements during such period, will be considered to have been an ongoing plan which was qualified for all years following the termination date specified by the employer. Thus, for example, an eligible plan would have to be amended by January 1, 1990 to comply retroactively with all qualification requirements for which the period to amend without loss of qualification has expired, including any section 401(b) remedial amendment period, and to restore employee benefit rights to that which they would have been had the plan been in compliance with such qualification requirements. In addition, the plan would have to operationally comply with any qualification requirements for which the effective date has passed but for which the section 401(b) period has not expired, and employee benefit rights have to be restored to that which they have been had the plan operated in conformance with such qualification requirements.

An eligible plan for purposes of the section 7805(b) relief described above is a plan that was formally terminated prior to July 3, 1989, and either was entitled to rely on a favorable determination letter (or favorable opinion letter if such plan is a standardized master or prototype plan as defined under sections 4.07 and 4.08 of Rev. Proc. 84-23, 1984-1 C.B. 457) immediately prior to the stated date of plan termination or satisfied section 401(a) of the Code immediately prior to such date. In addition, either the employer must have received a favorable determination letter that considered the plan termination or the actions taken in conjunction with the formal plan termination must not have adversely affected the qualified status of the plan.

In order to be eligible for the section 7805(b) relief, the employer must have treated the plan as a terminated plan (except for the distribution of all plan assets as soon as administratively feasible) at all times following the date of termination specified by the employer. An employer will not be considered to have treated the plan as terminated unless all benefit accruals or contributions ceased upon the specified date of termination (except for any top-heavy minimums required under section 416 of the Code), and section 411(d)(3) was complied with, both in form and operation, as of such date of plan termination.

The section 7805(b) relief provided in this revenue ruling, however, will not relieve an employer from the obligation to provide for any top-heavy minimum accruals required under section 416 of the Code or to meet the survivor annuity requirements of sections 401(a)(11) and 417 for the period following the date such provisions became effective. Thus, in order to be eligible for the section 7805(b) relief provided herein, an eligible plan must have complied with the requirements of sections 416, 401(a)(11) and 417.

This section 7805(b) relief shall not apply to, nor extend the 7805(b) relief otherwise applicable to, any otherwise eligible plan with respect to which the Service has notified the employer (or the employer's authorized agent) that the plan did not satisfy the requirements for a qualified plan as of some date after the date of termination specified by the employer.

Those plans which are not eligible for section 7805(b) relief, or which are eligible but do not satisfy the conditions by January 1, 1990, will be treated as ongoing plans for all years and will be subject to the qualification requirements of section 401(a) of the Code. Such plans will not be qualified for all prior years in which the qualification requirements were not met and will be qualified for current or future years only if such plans are retroactively amended to meet all qualification requirements for the period during which the plan was ongoing, and employee benefit rights are retroactively restored to that which they would have been had the plan been in compliance with the qualification requirements during such period.

DRAFTING INFORMATION

The principal author of this revenue ruling is Charles D. Lockwood of the Employee Plans Technical and Actuarial Division. For further information regarding this revenue ruling, please contact the Employee Plans Technical and Actuarial Division's taxpayer assistance telephone service or Mr. Lockwood between the hours of 1:30 p.m. and 4 p.m. Eastern Time, Monday through Thursday by calling (202) 566-6783/6784 or (202) 343-0729. (These telephone numbers are not toll-free numbers).

Rev. Rul. 89-87, 1989-2 C.B. 81, 1989-27 I.R.B. 5

[Guest FAQ]

I'm looking for an exception to the guidance in Rev Rul 89-87 that would give extra time to distribute assets from a terminated plan, based on when the determination letter is issued. Here's the full fact scenario:

July 1 fiscal year DC plan is terminated effective April 2002. EGTRRA does not apply to the plan at that time since EGTRRA applies to plan years beginning after 12/31/01. Our first plan year after this date would have started on 7/1/02, at which time the plan had been terminated.

The plan was submitted for a determination letter (Form 5310) in December 2001. The favorable determination letter was issued in December 2002, approving the termination date of April 2002.

Based on 89-87, the plan needs to distribute its assets by April 2003 (one year from the termination date); otherwise it is presumed that the assets were not distributed as soon as administratively feasible. However, if the IRS gives extra time (i.e. 6 months) after receipt of the favorable letter, this would give until June of 2003 to distribute assets without having to worry about whether the IRS would deem the plan to have not actually terminated (and require us to update it for EGTRRA).

I spoke with an IRS representative, who read from Sal Tripodi's ERISA Outline Book, which notes the additional 6 month period after receipt of a favorable determination letter. The agent said that no cite was provided and that this may have been informal guidance by an IRS speaker at a seminar.

Has anyone seen this extra 6 month period discussed in formal (or informal) IRS guidance, and if so, do you have the cite??

[KJohnson]

I am not completely sure where the six months comes from, but that has always been my understanding. MBOZEK previously referenced you the plan termination audit guidelines. I think that is the best place to look. They can be found here:

http://benefitsattorney.com/cgibin/framed/...?ID=290&id==290

They contain the following "exception" to the one year requirement:

In general, a distribution is deemed to have been made as soon as administratively feasible if commencement of the distribution was delayed because of circumstances outside the control of the plan administrator.

EXAMPLE:

If a plan administrator submits a timely application for a determination letter upon termination, the plan administrator may generally delay the distribution of assets until the determination letter is issued.