DC Plan Termination Procedures

[Guest Kathleen Toth]

I have primarily worked with DB plan terminations, so I am having some difficulty understanding how DC plans terminate. Once the plan says no more accruals, how do they go from there to actually being able to shut dwon the plan -- I guess I am asking how they get everything distributed. Or do they? Without PBGC involved, I am unclear how the accounts are closed out. Can participant accounts be distributed without consent, and if so, in what form?

[mbozek]

The plan is terminated by a board resolution and the employer applies for a favorable determinaton by filing a 5310 form. Forfeitures held in suspense accounts need to be allocated among the participants and all accounts are 100% vested. The distributions can be made under the terms of the plan but if a partiticipant refuses to take a distribution the plan can either distribute a lump sum or if a annuity is the normal form, by purchasing an annuity contract for the participant. If there are missing participants who cannot be locatedby contacting the SSA, the account balances can be forfeited and the accounts allocated among the remaining participants or the plan admin can contribute 100% of the account to the IRS as withholding.

[Guest Kathleen Toth]

Thanks for the quick reply! I take then you would agree that the plan sponsor can only purchase an annuity if that is the normal form of benefit as stated in the plan documents?

[mbozek]

There is no reason to purchase an annuity contract unless that is the form required for the distribution. Otherwise a lump sum is sufficient.

[QDROphile]

Beware Treas. Reg. section 1.411(a)-11(e) if there are any other DC plans in the controlled group.

[Guest susa]

Can the participants be involuntarily distributed with account balances over $5000 in a plan termination?

[mbozek]

yes since a plan cannot be terminated untill all assets have been distributed. See reg 1.411(d)-4 A-2(B)(vi)- if employer maintains no other dc plan, PS plan account can be distributed without consent in a lump sum.

[KJohnson]

Caution, if this is a money purchase pension plan or a profit sharing plan that has any sort of annuity option you cannot use the reg cited by MBOZEK.

However, if it is a profit sharing plan not subject to 412 you may be able to do this in two steps. First, eliminate the annuity option under 1.411(d)(4)-3 and then use the reg cited by MBOZEK to cash out people over $5k involuntarily.

[mbozek]

correct but the plan can purchase an annuity contract for the participant if a lump sum is not elected.

[Guest Kathleen Toth]

That's a very useful point -- thanks!

[RCK]

I just wanted to clarify (or dispute) mbozek's first response here. The plan sponsor does NOT have to apply for a determination letter on the termination.

Is it a good idea to apply for one? Absolutely, especially if there is anything in the history that you're uncomfortable with.

Do most sponsors do it automatically? Sure.

Would it be a fiduciary breach not to apply for one? I'm sure that you could find someone to say that it would be.

RCK