Qualified Plan Partial Term/Partial Continuation

[Guest Alex Hamilton]

Does anyone see any problem with undertaking the following transaction: A small public instrumentality wants to discontinue its qualified db plan and begin to participate in large state retirement system. However, there are some older employees who may be better off staying in and accruing benefits under the existing small plan. The small entity wants to "partially terminate", cease benefit accruals and distribute benefits for most employees so that they can begin participating in the state plan. Some older workers will be offered an option to stay in the small plan and continue to accrue benefits. Since the small plan does not need to worry about the coverage or nondiscrimination rules, this seems to be "doable" even if the employees who stay in the plan are HCEs. Does anyone see why this won't work?

[Guest CVCalhoun]

Welcome to the board, Alex!

Not only is keeping the old plan alive for those employees who want it doable--it may well be legally required. Approximately two-thirds of the states have interpreted state constitutional provisions concerning nonimpairment of contracts to mean that a governmental plan can never cut back on future benefit accruals for existing employees. (This is a much tougher standard than the ERISA standard, which merely provides that you cannot cut back on already accrued benefits for existing employees.) Thus, unless the state retirement system is willing to preserve not just the already accrued benefits, but the rate of future accruals, for those highly compensated employees, it may well be unconstitutional not to allow them the option of staying in the old plan.

[Note: This message was edited by CVCalhoun]