New plan - potential permanency issue?

[Belgarath]

I'm inclined to think this is ok, but thought I'd solicit opinions.

Client establishes a DB plan at age 62, with NRA of 65/5. One-person plan. Anticipating huge income for three years, then income dropping off.

At age 65, decides she is tired of it all, and closes up her business to retire, and wants to terminate the plan.

I know this is a "facts and circumstances" issue, but my inclination is that this should be an acceptable reason to terminate. Any thoughts?

[Lou S.]

Done it pleanty of times, never been an issue in my experience.

[KJohnson]

For what it's worth, this is from the IRM on plan terminations..

http://www.irs.gov/irm/part7/irm_07-012-001.html

7.12.1.2.5 (01-01-2003)
Reason for Termination

1. If a plan has been in existence for more than ten years, termination without a valid business reason has been held not to affect its qualification. See Reg. 1.401–1(b)(2) and Rev. Rul. 72–239, 1972–1 C.B. 107.
2. If a plan is terminated within a few years after its adoption, there is a presumption that it was not intended as a permanent program from its inception.
   1. Unless business necessity required the termination, it may be concluded that the plan did not qualify from its inception. The business necessity for termination must have been unforeseen when the plan was adopted and not within the control of the employer. See Reg. 1.401–1(b)(2) and Rev. Rul. 69–25, 1969–1 C.B. 113.
   2. Whatever the reason given for the termination of the plan, the facts and circumstances leading to its termination must indicate the taxpayer intended that the plan be permanent.
3. Bankruptcy, insolvency or discontinuance of the business of the employer would ordinarily be considered as prima facie evidence of such business necessity. Business necessity also includes other valid business reasons which significantly impair the attractiveness of a plan as a means of providing employee compensation. Other acceptable reasons for termination of a plan may, depending on the circumstances, include:
   1. Substantial change in stock ownership
   2. Merger
   3. Substitution of another type plan
   4. Financial inability to continue the plan
   5. Employee dissatisfaction with the plan
   6. Substantial change in the law affecting retirement plans

[KJohnson]

Just realized the IRM was updated this past summer on this.... 7.12.1.6 (07-16-2013)

Permanency Requirements/Reasons for Termination

1. Treas. Reg. 1.401-1(b)(2) indicates that a plan must be established with the intent to be a "permanent" , not "temporary" , program.

2. A specialist should review lines 4(d) and 7(a) on the Form 5310 to determine how long the plan has been in existence.

3. If a plan terminated within a few years after its adoption, the employer must provide a valid business reason for the termination. Otherwise, there is a presumption that it was not intended as a permanent program from its inception. It has been held that termination of a long established plan without a valid business reason did not affect a plan's qualification. See Rev. Rul. 72-239, 1972-1 C.B. 107.

4. Line 10 on the Form 5310 provides the following reasons for plan termination:

   • Change in ownership by merger

   • Liquidation or dissolution of employer

   • Change in ownership by sale or transfer

   • Adverse business conditions

   • Adoption of new plan

5. Line 10 on the Form 5310 also provides for a section for "Other" reasons for the plan termination. Other acceptable business reasons for plan termination could be:

   • Substantial change in stock ownership

   • Employee dissatisfaction with the plan

   • Bankruptcy of employer

   In these instances, the specialist should review all of the surrounding facts and circumstances and make a determination as to whether the plan was intended to be permanent. Consider the extent of any tax advantages the employer derived during the period of the plan’s existence.

6. The specialist should also review line 18(a) on the Form 5310 to determine permanency. Repetitive failure to make contributions in a discretionary profit-sharing plan during profitable years may indicate a lack of intent for the plan to be permanent.

7. If a specialist believes that a taxpayer lacked intent to keep their plan permanently, they should consult with the manager and discuss disqualifying the plan.

8. If bankruptcy is the reason for termination and the plan is a pension plan, further inquiry is required. The specialist must ensure that the plan is fully funded (See paragraph (5) of IRM 7.12.1.9, Proposed Date of Plan Termination for a definition of fully funded) and that no excise taxes are due as described in IRM 7.12.1.21, Minimum Funding Standards. If it is determined that excise taxes may be due, the specialist should research the taxpayer on the Integrated Data Retrieval System (IDRS). If IDRS confirms that excise taxes are due, the specialist should go to the following website: http://mysbse.web.irs.gov/exam/tip/bankruptcy/contacts/12268.aspx and contact the bankruptcy coordinator for the state that the taxpayer does business in. The bankruptcy coordinator will prov ide the name of the Insolvency Bankruptcy specialist assigned to the taxpayer's bankruptcy case. The specialist must then refer the case to EP Examinations on a Form 5666, TE/GE Referral Information Report so they can determine how much excise tax is due and report that amount to the Bankruptcy specialist BEFORE the bar date. See IRM 5.9, Bankruptcy and Other Insolvencies.

   Note:

   If the bar date has passed, we can no longer collect any excise taxes and we will only be able to document the Form 5621.

9. Forward the Form 5666 to EP Classifications Unit in El Monte. Referrals can be sent by mail to the address listed in Exhibit 7.12.1-1, EP Examinations Referral Mailing Address or they can be secure e-mailed to the EP Classification mailbox at *TE/GE-EP-Classification. The taxpayer should be informed of any EP Examinations referral.

[Bird]

Not a problem for me; it sounds like the plan did what it was supposed to. And I think "permanent" generally means while the business exists.

[Belgarath]

Thank you all. Very helpful.

[KJohnson]

Agree, To me under the language of the IRM before with the recent change the phrase: " business necessity for termination must have been unforeseen when the plan was adopted and not within the control of the employer" was a bit troubling in your situation because it appears he would controlling the liquidation of the business and the liquidation was largely anticipated. But they have now dropped that from the IRM. And, both versions acknowledge liquidation or discontinuation of the business as a business necessity.

[mbozek]

Decline in business or discontinuation of the business is always a legitimate reason to terminate the plan w/out violating the permanency requirement. IRS cannot force an employer to maintain a plan if the employer cannot make sufficient contributions to fund it.