terminating DB plan with mortgage

[doombuggy]

Rats, I just lost everything I typed and need to do this over...

i hope I picked the right forum to post this crazy question. Db plan (which i don't work on, I just do DC stuff) had a plan term date of 12/1/11. The trustees had intended to move the assets over to a MPP set up with a 0% formula to take the assets but the assets were not transferred prior to 12/31/11 9they went sometime earlier this year). So MPP had $0 at Fidelity and DB plan had lots on 12/31/11. DB plan also has a mortgage that reads:

[blah, blah, blah] and {insert name}LLC Defined Benefit Plan with trustees {insert name} and-or {insert name}, herein called "Mortgagee," which term includes Mortgagee's heirs, executors, administrators, trustees, successors, legal representatives and assigns, and shall denote the singular and/or plural and the masculine and/or feminine and natural and/or artificial persons whenever and wherever the context so requires or admits, and whose address is.....

I think the trustees are looking at this are the DB plan is the Mortgagee and that this automatically transfers the mortgage to the successor plan, the MPP. Your thoughts?

If you agree, when would this take effect? This is critical as if the MPP has no assets on 12/31/11, it doesn't need a 5500 for that year (it's first year).

if you disagree, what do you think is needed to transfer the mortgage over to the MPP?

Thanks for your thoughts!

[Effen]

I think more details are needed.

I know this isn't your question, but you can't just transfer the DB assets into a MP plan. The DB plans must go through a formal termination and participants must be given whatever options are available (lump sum, annuity, rollover, etc...). The Trustees can't just move the money to a MP plan.

Is the DB covered by the PBGC? If so, you need to file with them before terminating. If not, you may want to file with the IRS, or not, but you can't just move the money.

What are they trying to accomplish?

[AndyH]

What's the frequency, Kenneth?

[doombuggy]

I think more details are needed.

I know this isn't your question, but you can't just transfer the DB assets into a MP plan. The DB plans must go through a formal termination and participants must be given whatever options are available (lump sum, annuity, rollover, etc...). The Trustees can't just move the money to a MP plan.

Is the DB covered by the PBGC? If so, you need to file with them before terminating. If not, you may want to file with the IRS, or not, but you can't just move the money.

What are they trying to accomplish?

The DB plan covered the owner and his spouse. She retired earlier in the year, so only the owner was left in the plan as of the terminaiton date of 12/1/11.

While the DB plan is not mine, I certainly know that it needs to go thru a terminaion process. My co-worker has done this. No it is not covered by the PBGC.

The MPP was created to take the assets of the DB plan for the sole remaining partiicpant/owner of the plan sponsor. I know my co-worker issued the proper distribuiton paperwork, with the intent that the distribuiotn was to take place before the end of last year. It was discovered in January when he was working on 1099-Rs that the assets were not liquidated in 2011.

My concern remains with the mortgage that I quoted in my initial post. The plan sponsor seems to think the wording of the legal document/mortgage would automatically transfer the mortgage to the MPP from the DB. I don't feel that this is the correct answer. I personally think they need some kind of document that states the mortgage should be transferred to the new plan.

While I think it is more uncommon, at least to me, that plans hold assets that are not readily liquid (real estate, mortgage, art, etc), I felt that there might be others on this forum who have more experience with non-liquid assets. In this case, the "from" plan happens be a DB plan, so I thought I would post the question here. I'll try another fourm. Thanks.

[JAY21]

I believe they are effectively doing the equivalent of a quit-claim deed approach but it's a Trustee-to-Trustee assignment of assets and I believe this approach has "some" validity under general Trust Law. That said, it's probably a short-cut approach that still will need the actual mortgage re-titled (Title Company work) at some point (you don't want the mortgage to always show the DB plan name years after it's in the MP plan).

Whether you can claim that the signature date on the Trust-to-Trust transfer can be the "distribution" date will probably be up to the plan sponsor. In my opinion this is a grey area, I've seen it done, don't recommend it, but there seems to be some general trust law that support such an approach though whether that works with a Qualified Plan Trust is hard to say.

[mbozek]

I believe they are effectively doing the equivalent of a quit-claim deed approach but it's a Trustee-to-Trustee assignment of assets and I believe this approach has "some" validity under general Trust Law. That said, it's probably a short-cut approach that still will need the actual mortgage re-titled (Title Company work) at some point (you don't want the mortgage to always show the DB plan name years after it's in the MP plan).

Whether you can claim that the signature date on the Trust-to-Trust transfer can be the "distribution" date will probably be up to the plan sponsor. In my opinion this is a grey area, I've seen it done, don't recommend it, but there seems to be some general trust law that support such an approach though whether that works with a Qualified Plan Trust is hard to say.

I dont believe accrued benefits/plan assets can be transferred on a trustee to trustee basis from a DB plan to a DC plan. Upon termination the DB plan can only distribute the present value of the participant's accrued benefit either as a lump sum or annuity and the participant can rollover the distribution to another plan, IRA or commence the annuity. Excess assets remaining upon termination of the plan after the distribution of all accrued benefts revert to plan sponor and are subject to income and excise taxes except to the extent assets are transferred to a qualified replacment plan under IRC 4980(d).

Further what is the plan's right to sell, distribute or assign the RE that its holding as collateral for the loan?

Need to have a RE lawyer who knows ERISA review the plan and the terms of the loan before taking any action. Needless to say this will cost $$.

[JAY21]

Maybe, but what is the purpose of a Form 5310-A then ? Also when you transfer excess assets to a Qualified Replacement Plan via IRC 4980(d) this is not just the present value of the participants accrued benefit but includes excess assets as well. I'm not advocating the trust-to-trust approach, I consider it aggressive, but I don't agree that there as NO trust-to-trust transfers as aforementioned.

[mbozek]

Maybe, but what is the purpose of a Form 5310-A then ? Also when you transfer excess assets to a Qualified Replacement Plan via IRC 4980(d) this is not just the present value of the participants accrued benefit but includes excess assets as well. I'm not advocating the trust-to-trust approach, I consider it aggressive, but I don't agree that there as NO trust-to-trust transfers as aforementioned.

5310-A applies to mergers or spinoff of assets of plans. Reg. 1.414(l)-1(l) provides that in the case of a merger of a DB with a DC plan one of the plans before the merger should be converted into the other type of plan. It is my understanding that converting a DB plan to a DC plan triggers a termination of the DB plan which would permit the merger of plan assets but some else can confirm this.

IRC 4980d permits the transfer of excess assets of a terminated DB plan to a replacement plan, not accrued benefits, to the extent that it comples with the contribution limits under IRC 415. I have revised my prior reponse to include this option.

[david rigby]

It is my understanding that converting a DB plan to a DC plan triggers a termination of the DB plan which would permit the merger of plan assets but some else can confirm this.

IRC 4980d permits the transfer of excess assets of a terminated DB plan to a replacement plan, not accrued benefits, to the extent that it complies with the contribution limits under IRC 415.

Correct.