flosfur Posted June 11, 2004 Posted June 11, 2004 A (non-PBGC covered) plan was terminated in 2003. The 2003 Valuation & Sch B were prepared on plan termination basis. No assets have yet been distributed from the plan. The client now wants to keep the plan alive and make contributions to the plan! How does one Void a termination and what are the implications for the 2003 Val & Sch B?
Blinky the 3-eyed Fish Posted June 11, 2004 Posted June 11, 2004 Rescind the termination, rerun the valuation and prepare an amended return. It's as easy as 1-2-3! "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs."
AndyH Posted June 11, 2004 Posted June 11, 2004 And notify participants. Some may not be happy that they cannot get a distribution. I wonder what would happen if someone really made an issue out of that.
david rigby Posted June 11, 2004 Posted June 11, 2004 Some similar discussions here: http://benefitslink.com/boards/index.php?showtopic=8785 I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.
flosfur Posted July 11, 2004 Author Posted July 11, 2004 Rescind the termination, rerun the valuation and prepare an amended return. It's as easy as 1-2-3! But amending the prior Yr Sch B will be a problem (in most cases). In this case the required contribution based on the terminated plan was very small because of pro-rated Charges & Credits. The required contribution on an un-terminated plan would have been a lot more, a whole lot more, and there would be a deficiency! Consider the case: Initial termination was in early 2002 and the 2002 Sch B was filed in October 2003. The un-termination was decided after the the Sch B was filed!
Kirk Maldonado Posted July 12, 2004 Posted July 12, 2004 Isn't there a question as to whether the termination of the plan effected a full vesting of all participants that cannot be rescinded (depending on the wording of the plan dociument, SPD, and the adopting resolutions)? Kirk Maldonado
SoCalActuary Posted July 12, 2004 Posted July 12, 2004 My normal practice on a plan termination is to have the resolutions address the issues of vesting, future entrants, and future accrual (full vest, no new, no accrual) and espress the intent of the plan sponsor to terminate the plan. This amendment is still valid, even if the termination is rescinded. The notice to employees in a non-pbgc case is primarily the 204(h) notice of change in accruals. If an IRS submission is involved, then a Notice to Interested Parties is given. Finally, some terminations are rescinded after we find out how much payout is required. Some employees have already received benefit distribution options and election forms. If the employees have not separated from service, then generally you should not pay them after the termination is rescinded. Where are you in your termination process? Separately, for funding purposes you have already filed a Sch B with your chosen assumptions and methods. If the Sch B matches the plan termination documentation, then you should have changed to unit credit funding under current IRS funding rules. Assuming this is a valid change in funding method, you are probably also stuck with this method for five years.
Blinky the 3-eyed Fish Posted July 12, 2004 Posted July 12, 2004 Flosfur, you have confused me now. The plan was terminated early 2002 and you still haven't paid out the assets to date? The plan is well past the one-year rule. And if the plan was terminated in 2002, there is no valuation for 2003, so why are you concerned with that? SoCal, in the year of termination automatic approval for a change to unit credit is only available for a fully funded plan. In the small plan world, especially due to the stock market through mid-2003, I find that most plans do not meet this criteria and must continue with the same funding method they have been using. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs."
SoCalActuary Posted July 12, 2004 Posted July 12, 2004 In the year of termination, which may be a partial year, you can keep the funding method in place. But the IRS actuaries are claiming that a projected funding method on a frozen plan is not a proper funding method. Informally, I understand that the desired method is traditional unit credit on a frozen plan, with 10 year amortization of the initial unfunded due to change in method, and 5 yr amortization of gains & losses until the plan is liquidated completely.
flosfur Posted July 12, 2004 Author Posted July 12, 2004 Flosfur, you have confused me now. The plan was terminated early 2002 and you still haven't paid out the assets to date? The plan is well past the one-year rule. And if the plan was terminated in 2002, there is no valuation for 2003, so why are you concerned with that? Sorry about the confusion - The plan was resurrected during November 2003 so that the sponsor can continue contributing to the plan for the years 2003 on. So a valuation will be required for 2003. As to the other comments, this is a one person plan - so let's not worry about vesting, SPD, funding method change and all other peripheral stuff because then the basic question will get lost in the commotion, which is: If one nullifies a termination whether by default (assets not distributed within one year ....) or otherwise, how does one proceed with the 2003 Val & Sch B? One answer was - redo the valuation & amend the 2002 Sch B to reflect the fact that the plan was not terminated. But that's a problem because then there will a deficiency for 2002. What now?
david rigby Posted July 12, 2004 Posted July 12, 2004 Deficiency? Maybe not. If the plan was frozen for the 2002 Schedule B, why does "unfreezing" it now change the charges for the 2002 plan year? Yes, unfreezing is not the same as "unterminating" but the net result may be the same in this case. I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.
Blinky the 3-eyed Fish Posted July 12, 2004 Posted July 12, 2004 Okay, now it's clearer. 2002 is done. Just because you rescind the termination does it mean that you have to redo it. I liken the situation to if you had froze the plan and then unfroze it. That too would be a situation where prior years are unaffected. Now on to 2003. You mentioned in your first post that the 2003 valuation and Sch B were reflecting the plan termination, but I assume that is a mistake and you meant 2002. The plan was either terminated in 2002 and there was no 2003 valuation required or the termination was rescinded and the plan termination not recognized. So, for 2003, again, the valuation is run with the plan termination forgotten. Pax beat me, but at least we are saying the same thing. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs."
SoCalActuary Posted July 13, 2004 Posted July 13, 2004 Under your scenario, you would have an amendment in 2002 that froze plan benefits with the intent to terminate the plan and distribute assets. However, in November 2003, you amended to start new benefit accruals again. For a one-participant plan, just be sure you kept proper track of the frozen benefit. Did you start a new formula, or adopt back into the old formula? Did you deal with any wearaway issues, past service grants, indexing of old benefits for pay or 415 limit increases? I suspect not, and that may be ok. If you did not employ any NHCE's, just comply with 415 and go on.
flosfur Posted July 13, 2004 Author Posted July 13, 2004 Deficiency? ............. why does "unfreezing" it now change the charges for the 2002 plan year? Yes, unfreezing is not the same as "unterminating" but the net result may be the same in this case. Freezing & termination have one major difference, as it affects sch B. As you know, for the year of termination, charges and credits are pro-rated which is not the case for freezing benefit accruals. Consider a plan which is frozen and terminated effective March 31, 2002. For simplicity, assume no prior credit bal & Ind Agg funding method with a Normal Cost of $50,000 for 2002. Because of the termination, the required minimum for 2002 was $12,500 which the employer contributed. But if the plan was simply frozen, the required minimum would have been $50,000. Sure, I want the anwers to be: "amending the 2002 Sch B is not required...." but the concern is, does the IRS have a leg to stand on if they take the position that the termination was never intended and therefore $50,000 should have been contributed for 2002! Termination of a plan has a finality to it that freezing a plan does not have.
david rigby Posted July 13, 2004 Posted July 13, 2004 Another example of why no plan should be terminated without also freezing accruals. I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.
Blinky the 3-eyed Fish Posted July 13, 2004 Posted July 13, 2004 Flosfur, I hear your concerns but I don't think they are valid in this situation. When the 2002 valuation was done, the plan termination was reflected. At that time it was legitimately intended for the plan to terminate, no? Ask yourself if the IRS were to audit this plan, would the facts and circumstances point to the validity of the termination. If so, then allay thy fears man! Pax, whether the benefits were frozen or not has no effect on Flosfur's concern here, as he/she is concerned with the proration of the NC that occurred. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs."
david rigby Posted July 13, 2004 Posted July 13, 2004 Well, it has to do with what is the proper NC. If the plan is frozen, then the NC can reflect that, can it not? (OK, yes it may depend on when the plan freeze is adopted.) I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.
flosfur Posted August 10, 2004 Author Posted August 10, 2004 Another example of why no plan should be terminated without also freezing accruals. Say what? Plan was frozen & then terminated. It's the termination that is creating the problem (if there is one) because of the pro-rating of charges & credits.
flosfur Posted August 10, 2004 Author Posted August 10, 2004 This question was asked at the ASPA 2004 summer conference's workshop "How to Complete Sch B...". Per the presenter, one must go back and amend the Sch B as if the plan had not been terminated (citing it to be the IRS's position!?). On the other hand, the moderator of the workshop opined that a valuation & Sch B for a given year are based on the plan provisions in effect for that plan year, so there is no need to go back & redo the valuation & amend the Sch B. So there you have it - no conclusive answer! One way around this confusion would be to start a new DB plan effective for the year after the year of termination!?
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