Defined Benefit question

[FJR]

Company is considering Freezing and or Terminating its DB plan. If the Co. Freezes the plan, can the DB be merged into a new DC Plan?

Second, if the Co. Terminates the DB Plan, can it force the assets to be rolled over to a new DC Plan? In other words mandatory rollover to the DC plan. Not being able to take the money and spend it?

Thanks

[Blinky the 3-eyed Fish]

Either scenario is effectively merging the DB plan into the DC plan. You cannot just force a rollover into the DC plan. Now while a merger of a DB into a DC is possible it leads to some nonsensical results. You see the DB benefits will still need to have their characteristics in tact. One of these characteristics is that they are DEFINED BENEFITS and cannot be subject to investment losses. So what happens if in a few years if there are losses, a person terminates and wants their money, yet there isn't really a means within the document to contribute to the plan to make up the deficiency? You end up with a big headache is what happens.

Is your client just trying to protect their pension or doesn't want them to receive the money for other reasons?

[FJR]

Just doesn't want them spending the money after they terminate it.

[david rigby]

That may not be possible. Very important not to confuse "termination" with "merger."

Regs can be reviewed here:

http://ecfr.gpoaccess.gov/cgi/t/text/text-.../26cfrv5_02.tpl

IRS Reg. 1.414(l)-1(l)

(BTW, both of these parentheses contain a lower case letter L, not a numeral one.)

"Merger of defined benefit and defined contribution plan. In the case of a merger of a defined benefit plan with a defined contribution plan, one of the plans before the merger should be converted into the other type of plan (i.e., the defined benefit converted into a defined contribution or the defined contribution converted into a defined benefit) and either paragraph (d) or paragraphs (e) through (j) of this section, whichever is appropriate, should be applied."

The conversion of the DB plan to a DC plan must precede the (proposed) merger. It is this conversion that gives participants rights, generally similar to a plan termination.

[Guest Grumpy456]

We have a client that is facing the same situation. In our case, the DB does not presently permit any lump sum distributions. As a result of the DB plan's termination, the plan sponsor (which also maintains a DC plan) wants to add a lump sum distribution as a distribution option conditioned upon direct rollover to their DC plan. Conditioning distribution in the form of a lump sum upon direct rollover to the DC plan is OK under the benefits, rights and features rules. However, it appears that such a condition may violate Treas. Reg. 1.401(a)(31)-1, Q&A-9. Does the plan sponsor have any practical options here?