Terminated Plan and Plan Amendments

[J. Bringhurst]

Client acquired frozen defined benefit plan and subsequently amended the plan for current law, terminated the plan (board action as well as appropriate IRS and PBGC filings) and distributed benefits to participants. It has now been several years, and the Plan's trust still contains residual assets. The Plan has not been timely amended for EGTRRA, but client has, however, been timely filing IRS Form 5500. Client is contemplating either (1) taking the reversion or (2) merging the Plan with one of their current plans. If they decide to merge the Plan, must they amend the Plan for EGRRRA as well as file under VCP as a late EGTRRA amender (which requires a contemporaneous determination letter filing) to avoid risk of tainting current plan?

[david rigby]

Apples and oranges. If the plan has been terminated, then it cannot be merged into something else.

Why does it still have residual assets? Check plan provisions to see what should happen to the excess assets, and do that. But, I'm assuming all the participants have been distributed. If not, then address that first.

[mbozek]

Won't there be 50% excise tax if client takes the reversion? If plan was terminated several years ago why weren't all of the assets paid out after all benes were distributed? Amend plan for EGTRRA and distribute surplus after paying tax on reversion.

[J. Bringhurst]

The Plan is the result of multiple acquisitions and client doesn't know the cause of the excess (e.g., overfunding, demutualization proceeds, etc.). All participants have been paid out and the Plan received a 1995 determination letter on its termination. Form 5500 has been timely filed and no participants/no benefit liabilities indicated in each year since termination. This raises another issue of whether the IRS could consider this some kind of tax haven (i.e., assets in Plan's trust for 10 years without benefiting participants). The question really is whether the plan has truly been terminated (See Rev. Rul. 89-87)...although all assets have not been timely distributed, all benefits have been paid out.

[mbozek]

Under the facts the plan was disqualified one year after termination for the failure to benefit any participants which could make the plan assets taxable in the year the plan was disqualified. Trust would be treated as taxable entity subject to income taxation.