Plan terminates but doesn't distribute all assets

[mariemonroe]

Has anyone ever terminated a plan and not immediately distributed all of the plan's assets?

It has always been my understanding that a plan must complete distributions within an administratively feasible period of time following its termination or else it was considered to be an ongoing plan subject to qualification, funding and reporting requirements. Generally this means the plan must complete distributions within a year of its termination, but the plan may wait until it receives a favorable determination letter until making final distributions

However, the instructions to Form 5500 seem to contemplate a situation in which a plan terminates but does not distribute all its assets within a year.

Specifically, page 7 states:

"If the plan was terminated but all plan assets were not distributed, a return/report must be filed for each year the plan has assets. The return/report must be filed by the plan administrator, if designated, or by the person or persons who actually control the plan's assets/property."

Has anyone ever terminated a plan, but not distributed all of the assets? If so, how long have you kept assets in a plan after "terminating" the plan? Why did you keep some asset in the plan (were some assets illiquid)? Did the plan sponsor continue to keep the document up to date and file 5500s?

[Leopurrd]

I believe that the instructions are simply stating that a Form 5500 is required until the assets equal zero. usually this results in a short plan year, because you'd file as soon as the last dollar in the plan is paid out.

every now and then a plan sponsor doesn't meet the one year rule and must update their doc as needed for current legislation.Usually due to missing participants, etc.

[Bird]

I think the instructions are pointing out that the plan exists as long as it has assets, regardless of whether some documentation has terminated it. If you don't distribute assets in a timely manner, the consequence is that the plan is not really terminated and among other things, you have to keep the document up to date and file 5500s. It's possible that benefits or contributions could re-accrue as well, depending on how well or poorly the termination documentation was done.

No, I've never been involved with this and hope not to.

[Guest mjb]

There is an old (1973?) IRS rev ruling that states that a plan is not terminated until all assets are distributed. Assets of missing participants should be forfeited after termination of employement and redistibuted among other participants long before termination of the plan. However, terminated plans have received assets after termination through demutualization of an insurance company long after the plan files last 5500.

If the terminated plan does not distribute all assets it must continue to meet all of the requirements of the IRC for Q plans.

[Locust]

I agree with all of the comments, but here is how I would explain it.

You've got two concepts here. First, the IRS concept that says that certain rules apply on plan termination. The one-year rule relates to that. If you say you've terminated a plan, but don't intend to pay out assets for a long time, have you really terminated it? No, in that case you don't have a terminated plan, but a frozen plan.

Second, the Department of Labor/ERISA concept that says that retirement assets have to be held in trust (or some equivalent) and that there are reporting and fiduciary obligations as long as the plan has assets. Just because you've said you've terminated the plan doesn't mean your reporting and fiduciary obligations to participants have ended - those end only when all participants have been paid what they are due, and so long as the trust has assets. Thus the 5500 requirement that it be filed as long as there are assets.

[mariemonroe]

First of all, thank you all for your comments. They have been helpful.

Let me give you a few more facts.

The employer has signed a consent to terminate and the plan has been submitted to the IRS. The IRS has approved the termination.

The plan assets consist of 95% cash and 5% real estate. The plan has been trying to sell the real estate for ages with no takers. The plan intends to distribute the majority of the cash ASAP. The plan will retain some of the cash to pay for various real estate related expenses such as property tax, etc.

After distributing a majority of the cash, can the plan (or trust?) continue to exist for purpose of holding and attempting to sell the real estate? The plan would continue to file 5500s until the real estate is sold and the proceeds distributed.

Is there a problem with this?

I should add that I am trying to avoid having the plan create a liquidating trust to hold the real estate and issuing certificates in such trust to the participants.

Thanks again for your comments.