"Converting" DB plan to 401(k)

[Guest blaum8]

I'm probably missing something here, but I thought the effect of "converting" a DB plan into a 401(k) plan results in a plan termination of the DB plan. Is this not right?

I have a new takeover situation, and plan sponsor maintains a DB plan, but wants to swtich to a safe-harbor 401(k) plan. They've been told that all that is necessary to do is to amend and restate the DB plan into the 401(k) plan using the same plan number, and then just obtain a determination letter on the "new" plan.

I think it's necessary to first cease benefit accruals and then terminate the DB plan, with vested accrued benefits being subject to normal distribution options.

What's the correct way to handle this?

[AndyH]

You are of course right. Scary stuff out there.

[Belgarath]

I find that clients and their "advisors" often refuse to believe me when I tell them this. Refer them to ERISA 4041(e) if they do - that usually quiets them down!

[MGB]

You are correct. The person that created the "They've been told" doesn't have a clue as to what they are talking about.

[Guest blaum8]

Just obtained some additional facts. The plan is sponsored by professional service corporation with fewer than 25 employees. Thus, the plan is arguably not subject to ERISA 4041(e)(1) since the coverage exception of 4021(b)(13) would seem to apply.

Is this correct?

My thinking now is the only concern is whether a partial termination has occurred - depending on whether or not the plan assets exceed the value of the accrued benefits on the date benefit accruals are frozen.

If the plan is not subject to PBGC coverage, I'm not aware of a corresponding provision in the IRC to 4041(e)(1), so I'm thinking the possibility of a partial termination under the IRC is the only potential pitfall.

This doesn't seem like the correct result merely because the plan isn't subject to PBGC coverage requirements.

If I want to convince the plan sponsor to do a formal plan termination, is there anything else I can hang my hat on?

[Mike Preston]

Just resign if he won't do it. Who is the looney tunes suggesting that it isn't a plan termination?

Going to any attorney familiar with these matters will generate a citation for the client.

[RTK]

The IRS's postion is that a db feature is itself a protected benefit that cannot be eliminated. Thus, even if Title IV does not apply, how can a conversion eliminate the db feature without running afoul of the protected benefit rules?

[Mike Preston]

It can't. The only way to eliminate the DB feature is to allow for participant choice in the conversion of their benefits. You can only do that at retirement age or plan termination. I suppose if 100% of the participants in the plan are beyond NRA, one could make the argument that a participant could be given a choice as to benefit distribution, and if they elected to move the monies into the contemplated DC plan, that would work, ala 414(k). Of course, that is whole other can of worms. And I suppose if one wanted to be super agressive about it the plan's definition of NRA could be lowered to be lower than the youngest participant in the plan. Have to be very careful about benefit formulas, though. Wouldn't want to make somebody's 10% of pay benefit payable 20 years earlier, would we?

Geez, just terminate the DB plan already.