Defined Benefit Plan: Plan Disqualification

[ERISA25]

What are the tax consequences to the ER for disqualification to a DB plan?

I understand that the regs provide that if funded and has more than one participant, ER may take a contribution deduction only if a separate account is maintained for each employee. This doesn’t really make much sense to me. If the money is distributed to the participants, then the ER should get a deduction for the compensation paid to the participants. Thoughts?

[david rigby]

Disqualification means a plan no longer qualifies for favorable tax treatment (generally, deferred taxation of any ER contributions and earnings thereon). Therefore, the tax consequence of disqualification is immediate taxation to the participants of the current value of benefits. Ongoing earnings in the trust would also be taxable. Disqualification does not automatically create a distributable event or plan termination, although the plan may be written to incorporate the latter.