Cash balance plan termination and adoption of new one

A law firm client of mine, which has maintained a cash balance plan for over 10 years, raised the possibility of terminating the plan and then establishing a new one.  They were told by another law firm that "if the plan has been in effect for 10 years this strategy is allowed by the IRS".  There are reasons my client would consider this...including getting out from under a complicated interest crediting methodology that the investment advisor can't seem to track.  There are no surplus assets that would revert to the employer.

I told them that while you can terminate a plan, and establish another, they would need to design the new plan with enough distinctions (e.g., different benefit structure, different eligibility, etc.) that the IRS would not consider this a subterfuge for making premature distributions. 

I tend to be "old school" but am I being overly cautious?  They would file a 5310 for the termination. 

Thanks to all.

There was a recent article that stated that "the IRS outright will not question a plan termination if the plan being terminated has been around 10 or more years. If the plan hasn’t existed so long, strategic termination is still absolutely possible, so long as the process plays out correctly."  I would be curious about others' experiences and opinions.

https://www.plansponsor.com/administration-basics-strategic-db-plan-termination/

Suppose the firm/employer terminates its db plan after 8 plan years, files 5310, and indicates on the 5310 that it does intend to establish a new db plan covering the same participants.  Clean determination is issued, with no questions asked about the intended new plan.  Firm/employer then sets up a new plan effective for the next plan year.  New plan is in all material respects identical to old plan.  Any risk here?   

jpod, are you being facetious? The original question stated that the employer intends to start a new plan, so the statement in 5310 would be a false statement to IRS. I hope that is risky!

15 minutes ago, Luke Bailey said:

jpod, are you being facetious? The original question stated that the employer intends to start a new plan, so the statement in 5310 would be a false statement to IRS. I hope that is risky!

I think you are hallucinating a "not".

Correct, there was no "not" in my post.  But I was changing the facts just a little bit (by reducing the life of the first plan from 10 years to 8 years) just to see what everyone thinks about my hypothetical.  

OK. So I'm not sure I'm following the missing "not," but to clarify, I actually thought jpod was saying that tongue in cheek, and wanted to nail that down for everyone.

Luke, I am only pushing to see what everyone thinks about how protective a clean determination letter on the termination of the first plan can be where you end up setting up what is basically a clone new plan without skipping a year. 

jpod, my guess is that, putting aside the representation to IRS in 5310 submission issue, the issue would be based on what the participants did with some or all of the money. If the purpose of the termination and distribution is really just to start over with simpler plan provisions (which except for the problem of maintaining the old rules for pre-amendment amounts could probably be done by amendment anyway), it is hard to see where there is much harm, e.g. if all the funds are rolled to traditional rollover IRAs on termination, then rolled back in to the new plan. The new plan would be a successor for 415 anyway. But if the controlling participants needed access to funds, popped the plan and used distributions for personal purposes, and then restarted pretty soon after once they needed tax shelter again, it would seem to me that an EP exam agent that wanted to pursue it, or the DL submission reviewer when the new plan is submitted, could get into the facts and circumstances.

4 hours ago, Luke Bailey said:

jpod, are you being facetious? The original question stated that the employer intends to start a new plan, so the statement in 5310 would be a false statement to IRS. I hope that is risky!

Luke, you added the "not" in this sentence:  "Suppose the firm/employer terminates its db plan after 8 plan years, files 5310, and indicates on the 5310 that it does intend to establish a new db plan covering the same participants. The action anticipated is being fully disclosed.  

Wow, you're right Larry. Thanks. In that case, the employer shouldn't get the letter. Sorry, jpod. Reading too fast.

6 hours ago, Larry Starr said:

Luke, you added the "not" in this sentence:  "Suppose the firm/employer terminates its db plan after 8 plan years, files 5310, and indicates on the 5310 that it does intend to establish a new db plan covering the same participants. The action anticipated is being fully disclosed.  

I used less words. 

Thanks to all for your comments, especially the link to the article.

So it seems that my client may be a good candidate for the termination/reestablishment as long as the new plan is designed with enough differences as mentioned (interest crediting rate, eligibility and benefit structure).  By the way, as far as I know none of the partners are interested in taking taxable distributions...they would either roll over to their 401(k) plan or an IRA.

On 11/22/2018 at 1:05 AM, Mike Preston said:

I used less words. 

You must be an actuary; what you said was absolutely correct and absolutely useless! (Substitute attorney for actuary to get joke as I originally heard it).

46 minutes ago, Larry Starr said:

You must be an actuary; what you said was absolutely correct and absolutely useless! (Substitute attorney for actuary to get joke as I originally heard it).

You heard it from somebody who stole it from the actuaries:

https://actuarialjokes.com/

See joke #5