Defined Benefit Plan Termination and § 411(d)(3)

How do you interpret and apply IRS Code § 411(d)(3) in Defined Benefit Plan termination?

If the plan terminating in May 2020 and  if there were participants terminated in 2019.

Do you make those terminated participants in 2019 100% vested when the plan terminate?

How about anyone terminated in earlier years with accrued benefit in the plan (2018, 2017, 2016, 2015)?

How about anyone terminated in earlier years  whose accrued benefit entirely distributed to them (2019, 2018, 2017, 2016, 2015)?

I assume you are asking who s/b treated at 100% vested on a plan termination?  The answer is probably in the plan document, so you will need to read those sections you typically just skim.

You will likely get several answers, and therefore, you should consult with an ERISA attorney to provide a recommendation to the sponsor.

Definitely, anyone who has not had a one year break in service s/b 100% vested.  That means, anyone who worked at least 500 hours in the prior plan year, but check document at the break in service language may be different.

Many will argue that you need to vest anyone who hasn't had 5 break years - again, check your document.

Some argue that any partially vested deferred vested should be 100% vested, but you should check your document to see if it has "deemed cash out" language.  Deemed cash out language would say something like any non-vested participant is deemed to have been paid.  

If it is a bigger plan, with a lot of terminated participants, you will want to discuss it with the sponsor and the attorney.  The PBGC will look at this if they audit, so you will want to document whatever you decide.

Thank you, Effen.

Yes, my question is who should be treated 100% vested on a plan termination.

Does the IRS Code § 411(d)(3) requires all partially vested participants, who terminated employment with less than five (5) consecutive one-year breaks in service of the the date of plan termination, who did not receive the full value of their benefits, to become 100% vested in their benefits upon plan termination?

That is what some believe. You should let the sponsor's attorney make the call. 

I have done a few plan terminations that way, but in general, we typically use the 1-yr break rule, assuming the plan has deemed distribution language.  

Thanks!!!

The one year rule has never existed in a defined benefit plan. If you read the Code carefully it actually goes much further: effectively a "forever" year rule.  The IRS came out with a non-sensical TAM that lowered "forever" to the five year rule, but I won't look this particular gift horse in the mouth.  Loosely translated, they reasoned that if a five year rule applies to defined contribution plans it is reasonable for the IRS to apply the five year rule to defined benefit plans, too. But the ruling says that plan provisions can work in favor of the "forever" rule if they chose, so the advice to check with plan counsel is wise.  I'll try to attach the TAM.

I got a copy of the unpublished TAM from a lawyer at the PBGC about 10 years ago who said that until the TAM was issued the PBGC was bound by the Code (the "forever" rule).

I think you will find this in the Code structured as the forever rule is the default, but In the case of a defined contribution plan the five year rule applies.  So, DB plans are left with the forever rule.  Or at least they were until the TAM.

TAM - Partially vested P_1.pdf

For any terminated participants who have not been paid out by the termination date and have not incurred five consecutive breaks in service, we have always vested 100%.

Of course, the client doesn't like it!