Early Plan Termination

[Guest mjr]

Less than 3 years service, 20% vested. Accrued balance did not become nonforfeitable when plan terminated early. Why did ERISA Sec. 411 not apply? What would have happened to the 80% balance not paid out?

[Mike Preston]

What kind of plan? Was this person actively employed or terminated? If terminated, how many years before plan termination did termination of employment take place?

[Guest mjr]

Defined benefit pension plan. Employment terminated in 1992. Plan terminated less than one month later. Employer transferred benefits to a Profit Sharing Plan. That plan was terminated in 2000 and 20% was disbursed.

[Mike Preston]

The individual had terminated employment prior to the date that the plan terminated. Hence, there are some that argue this individual's vesting would appropriately be 20%. There are some in the IRS that disagree. I think there is a GCM out there that addresses this issue. I also think that it is dated after 1992, but I might be wrong on that. In any event, the IRS has not been terribly consistent on who is required to be vested upon plan termination over the years. Hence, if the plan was submitted to the IRS for approval, and disclosed this individual's status, it is not clear whether the iRS would have mandated 100% vesting.

However, you bring up an interesting point. The only way that benefits can be transferred from a DB plan to a PS plan is to provide the participant with an option for a lump sum and an election as to how to take the distribution. If the plan didn't do that then this individual still has their defined benefit options, technically. Not that this is necessarily valuable, because most benefits rolled or transferred in 1992 would be worth far more today as DC monies from 1992 than as the originally promised DB benefit.

Good luck.

[Mike Preston]

One other thing, in answer to your original question, the plan sponsor probably would have had to have made a larger contribution in the year that the plan terminated had this individual been treated as 100% vested. Hence, it could be argued that the 80% went to the plan sponsor. That is not necessarily the case, but there is a good likelihood that it is.

[Guest mjr]

Thanks. I want to be sure I haven't overlooked any rule or reg. that negates what I've found so far.

It appears benefits become nonforfeitable upon early plan termination unless benefits had become forfeitable prior. The basis for forfeiture prior to plan termination would have been 5 consecutive breaks in service (5 yrs). In the case of the DB plan, there was less than a month break in service prior to plan termination. The plan administrator transferred the funds to a PS plan and claims the transfer was a merger and therefore did not require consent. By the time the PS plan terminated 8 years later, she had lost her nonforfeitable right due to the 5 yr rule and it appears the administrator reclaimed 80% of her money. Also, due to bad investing or whatever, her PS benefits did not accrue more than 5% total over the last 5 years of the plan.

[Kirk Maldonado]

It was G.C.M. 39310, 4/4/84. However, it dealt with a defined contribution plan; not a defined benefit plan.

[Guest RSNOW]

I don't have quick access to that GCM but I know I've used it before to sucessfully argue against full vesting where less than 5 years of break-in-service. If I'm remembering the right publication I thought it used a 1-year break-in-service criteria. We've sucessfully argued the issue in two different IRS District offices, and were challenged each time, but prevailed each time with at least one of those plans being a DB plan. However, it doesn't sound like there was even a 1-year break in your situation and shortcuts taken in other areas which wouldn't seem to pass muster.

[david rigby]

Here are some other threads that discuss some of these issues

http://www.benefitslink.com/boards/index.p...ST&f=17&t=19437

http://www.benefitslink.com/boards/index.p...ST&f=22&t=15583

http://www.benefitslink.com/boards/index.p...ST&f=19&t=11053

[david rigby]

GCM 39310

GCM39310.rtf

[Guest mjr]

Thanks again for your imput. I am researching this particular situation for a fellow ex-employee. I have other issues with this plan that I could use some help with which I will start on a new thread.