"Permanency" of DB Plan

[Thornton]

I haven't worked much in the DB area and have a question. I've read that the IRS requires a new DB plan to exist for 3 or 5 years before termination, depending on who I talk to. What are the IRS guidelines? Thanks.

[jpod]

Following on top of that question, if you have a db plan around for say 7 years, terminate it, and then adopt a virtually identical plan for the same group of participants without skipping a plan year, do you have a "permanency" problem? (The motivation being to allow participants to get their money out of the first plan and roll it over to an IRA or do whatever the heck they wish with it, but while not missing a year's worth of contributions.)

[RatherBeGolfing]

Following on top of that question, if you have a db plan around for say 7 years, terminate it, and then adopt a virtually identical plan for the same group of participants without skipping a plan year, do you have a "permanency" problem? (The motivation being to allow participants to get their money out of the first plan and roll it over to an IRA or do whatever the heck they wish with it, but while not missing a year's worth of contributions.)

I'm not an actuary, nor have I ever played one on TV. However, I have been told by several actuaries that I consult with that this is not a permanency problem.

[Thornton]

In the case of the 2nd question, I don't see a permanency problem, but what about the successor plan issues? Also, any comment on the original question?

[Effen]

It is a facts & circumstances test. The sponsor needs to intend the plan to be permanent when they adopt it.

If the consultant puts in a plan, then looses his most significant client the next year and terminates the plan after one year - this probably isn't a problem.

If a consultant sells his company and creates a plan to shelter as much of that income from the sale as he can, then immediately terminates the plan - this might be a problem.

I have heard it said that anything beyond 3 years is relatively safe. I have had plans terminate for legitimate reasons after 2 years and didn't have a problem. (Then again, they didn't submit to the IRS for approval either.)

[jpod]

Thornton, what are these "successor plan issues" to which you refer?