DB Plan Termination

[Guest le190]

My client has opted to terminate their DB plan in favour of their DC plan. What penalties/taxes will participants under 59 and 1/2 be subject to?

[david rigby]

depends on what the sponsor does with the benefits and assets under the plan.

A DB plan termination means that the trust will be liquidated. The plan has already promised the payment of an accrued benefit, probably commencing at normal retirement age. The plan should also be frozen at the time of amending it for termination, so that no additional benfits accrue and no additional employees become participants.

Depending on what the current plan provisions are, the sponsor could purchase annuities (thru the trust) to pay the accrued benefits.

Alternatively, the plan could provide the participants the alternative to receive the value of the accrued benefit in the form of a lump sum. Note that under this scenario, the participant gets to make the decision (with spouse approval) if the amount is greater than $5000).

The participant also gets to decide on whether to receive a direct payment (minus the required 20% federal withholding), or a direct rollover to an IRA or another qualified plan.

I think the applicable tax issues are the same as when any participant receives a

lump sum distribution:

- tax is deferred on any amounts deferred into an IRA,

- amounts not (timely) placed in an IRA or other qualifed plan are subject to income taxation and possible 10% penalty if under age 59-1/2.

Others can probably enhance this response.

[Guest le190]

Thanks, Pax. That's the answer I was looking for!

[Guest EdwardF]

Does anyone know if there is a ERISA, PBGC, or IRS deadline for terminating a DB Plan? I recently heard that the window of opportunity to terminate a DB plan ended 12/31/2000. Any truth to this.

[david rigby]

NO.

If you can clarify where you heard this, or in what context, perhaps we can clear up the confusion.