Plan to Plan transfer on plan termination

[dmb]

An employer with a frozen DB plan is considering terminating the plan with a plan to plan transfer (rolling DB assets as a whole) to a start up DC plan. Does the plan to plan transfer require IRS approval or any other special requirements? I assume the DB plan must be sufficiently funded before the transfer can take place. Thanks.

[WDIK]

A good place to start might be the instructions to Form 5310-A.

[Guest mjb]

If this is a termination, the plan sponsor has to purchase annuities for those plan participants whose accrued benefits are in excess of the cashout amounts. I dont think you can avoid this requirement by transferring a LS to a DC plan ( Providing a LS for participants will be more expensive than purchasing a group annuity for accrued benefits.) You need counsel to review this option.

[david rigby]

I agree with mjb. Don't put "transfer" and "termination" in the same sentence. The sponsor should first determine what it wants to accomplish, before deciding on the mechanism. (BTW, if the plan is terminated, purchasing a group annuity may not be available under the terms of the plan document.)

[dmb]

Thanks for the help. This is actually a prospective client. A competitor is suggesting this method of going from a DB to a DC plan. We think they are only doing this to keep all the assets intact. We would suggest terminating the DB plan and going forward from there. Thanks again.

[david rigby]

There might be reasons to suggest a plan termination, but I can think of several reasons to argue against it. Just because another vendor is suggesting one thing is no reason to suggest the opposite. Perhaps you can offer advice to the prospect that will meet their needs.

[Guest mjb]

If benefit accrual has been suspended I dont know why the plan should be continued because of the continuing costs to maintain a DB plan, e.g., actuarial fees, plan amendments, PBGC premiums, 5500s,etc as well as the risk of having to to put in additional funds because of a change in the funding standards or investment losses. A DB plan is a mortgage on the equity in the plan sponsor's business for an indefinite period and an unknown amount. Why would the owner of the business bet his equity in the company on such a risk?

[dmb]

At this point we're not sure what to recommend yet, but the goal is to recommend what is best for the client, whether it be plan termination or the plan to plan transfer. We would not recoemmend doing something different than a competitor just for the sake of competing. I just wanted to find out a little more about the plan to plan transfer. thanks again.