Plan Terminations DB and DC Kurt F. Piper, MSPA, COPA, MAAA, ASA

Today’s Purposes are:

• To provide some insight into the plan termination process • To discuss important issues • To provide possible responses and solutions • To get ASPPA and Joint Board Credit

TO TERMINATE OR NOT TO TERMINATE

• When will T5 hit the theaters?

• Will the Governator be in T6?

• Sometimes it is a bad idea to terminate a plan (or a movie annuity) • Think of the need for actuaries and actors to work • But seriously folks…

Creditor Protection

• An “ERISA Qualified Plan” provides better protection against creditors than an IRA because benefits are protected not just in Bankruptcy • Need to balance the need for creditor protection against further fees, filing and notice requirements, contributions, etc.

To Freeze a Plan

• To continue the Plan and minimize further contributions, the Plan should be frozen • For a defined contribution plan, this means it is necessary to stop further contributions • For a defined benefit pension plan, the only mechanism available is to stop future benefit accruals (“freezing”) • “Freezing” a defined benefit pension plan may not eliminate the need for contributions if they are required by minimum funding standards

Change Plans

• Sometimes the best solution is to terminate the defined benefit pension plan and … • Directly roll benefits over into a new or existing defined contribution plan.

• Make sure that an “employee” has an account in the defined contribution plan in addition to the owner’s own account to keep Title I coverage and protection.

Contributions are needed

• Sometimes the company must make a contribution to the new DC plan in order to make sure an employee has an account balance.

• Please note that employee contributions (such as 401(k) salary deferrals) work just as well as employer contributions.

Contributions not possible

• If there can never be either employer or employee contributions to the new DC plan, then … • It should be a zero percent money purchase pension plan.

• The IRS may still require “substantial and ongoing” contributions to a profit sharing or 401(k) plan.

Merger

• Merge the Plan into another Plan without the need to terminate the first Plan.

• Usually this only works when both Plans are defined contribution plans.

Merger

• Sometimes it works when the first Plan is a defined contribution plan and the second is a defined benefit pension plan.

• It never works when the first Plan is a defined benefit pension plan and the second Plan is a defined contribution plan.

• Never.

• Ever.

“Wasting Trust”

• There used to be something called a wasting trust.

• The IRS considered a wasting trust to be a trust where the Plan had been terminated and the benefits were sitting around in accounts earning investment return until the participants chose to take the money.

• The Trustee was able to assume plan sponsorship.

Rev Rul 89-87

• Revenue Ruling 89-87 said, “A plan that is amended to terminate and to cease benefit accruals has not, in fact, been terminated under the Code if the assets are not distributed

as soon as administratively feasible

after the stated date of plan termination, regardless of whether the plan is treated as terminated under other federal law, including Title IV of ERISA.”

Rev Rul 89-87

• Thus, Revenue Ruling 89-87 did away with almost all wasting trusts.

• It is possible that some still exist, continuing to rely on the determination letter granted by the IRS at the time the Plan was originally terminated.

• One would hope that an ERISA attorney is involved and has provided continuing advice regarding the qualified status of the Plan and Trust.

“Administratively Feasible”

• A matter of facts and circumstances • Generally, a period of one year from the plan termination date is deemed to comply • Or, waiting for the Form 5310 final determination letter • Also there could also be circumstances in which it takes a long time to be able to sell a plan asset (e.g. real estate)

Title IV Plans

• “In the case of a single-employer plan that is terminated for purposes of Title IV, if plan assets are not distributed as soon as administratively feasible after the date of plan termination under Title IV, the plan will not be treated as terminated for purposes of the Code,

Title IV Plans

• except that the plan will be considered as terminated for purposes of section 1.411(d)-2(c) of the regulations. Thus, for example, a plan which is terminated for purposes of Title IV, but under which plan assets are not distributed as soon as administratively feasible, will not be terminated for purposes of Rev. Rul. 79 237 for determining the applicability of the minimum funding standard to such plans.”

Title IV Plans

• Since the Revenue Ruling predates the detailed PBGC regulations governing the length of each step of the plan termination process and • The PBGC maintains review of when final distributions occur and oversight of delays past the regulatory deadlines

Title IV Plans

• It would be unlikely for the IRS to disagree when the PBGC has deemed the distribution as soon as administratively feasible.

• More likely is the situation in which the PBGC raises the issue and requires additional Top Heavy minimum benefits as a condition to not objecting to the termination of the plan.

IRC 436 Restrictions

• Per Final 436 Regulations – AFTAP restrictions remain in effect post termination – However, the restrictions do not apply if the accelerated payment or purchase of an annuity is to carry out the termination of the plan

Should a FDL be Sought on Plan Termination?

• More protection from problems if the Plan were later to be chosen for examination • More protection both for the client and for the service provider • Unfortunately, the reviewing agent used to help the client clean up any problems without sanctions, but not now.

Chance of Audit

• It is

not

true that a Plan is less likely to be chosen for audit if a final FDL is obtained.

• A plan is more likely to be chosen for audit if there has been a Form 5310 filing, “To see if the distributions were made as proposed by the taxpayer”.

Double Jeopardy

• Using the argument that the final FDL only covered document issues an audit sometimes delves into operational issues already reviewed by the earlier agent.

Double Jeopardy

• If operational issues aren’t covered, then why are they examined in the 5310 process?

• One would hope the examiners are not spending the time paid for by large user fees to fish for excise taxes instead of reviewing for tax qualification.

CAP

• Issues discovered by the agent during the plan termination review are no longer just allowed to be cleaned up without penalty.

• The Plan must go through audit CAP.

• The only way to avoid audit CAP is to point out any issues in the cover letter as being possible issues for Walk-in CAP.

5310 = AUDIT

• A Form 5310 filing is exactly like an audit.

• The service provider must conduct a pre audit.

• Any issues should either be resolved through APRSC before the Form 5310 is filed or, else, a choice between the risks of Walk-in CAP (with disclosure) or Audit CAP (without disclosure) must be made by the client.

Administration Vegas Style!

• “Taking a chance” that the agent won’t find a problem is tantamount to deciding to risk the sanctions of Audit CAP.

• It is very important to determine ahead of the filing of Form 5310 just exactly

WHO

would pay the sanctions, • The client, the service provider, or a prior service provider.

Know when to Fold ‘em

• Since a Form 5310 filing is exactly like an audit • The plan cannot make unrestricted use of self-correction if the plan is under audit…BUT……

Know when to Fold ‘em

• If the taxpayer withdraws the Form 5310 filing • Then until and unless the plan is chosen for audit • The plan is

not

under audit.

• So it is then possible to make full use of the self-correction program • Submit Form 5310 again

after correction.

Remedial Amendments

• If a Plan is in a remedial amendment period, such as the one for EGTRRA or PPA ‘06 • It must be amended for that law before the final distributions can occur or, in some circumstances, by the plan termination date.

Remedial Amendments

• Unless the IRS has provided a model amendment then it may be advisable to submit for a final FDL even for plans using Standardized prototype documents.

• Otherwise an agent upon audit could say that a “t” wasn’t crossed or an “i” wasn’t dotted and stick the Plan into Audit CAP.

• (I have

not

seen any abuse by the IRS.)

Go Down Gambling?

• A service provider might want to make an exception and not submit the amendment for a FDL if • The lump sum benefit is very small • Or if the entire lump sum benefit is being taken as current taxable income • Due to the decreased risk.

• That would be a

business decision

both of the client and of the service provider.

CAP Should be on Client’s Head

• Assuming that all potential issues can be found, if the client does not want to fix all of them under APRSC, or cannot fix all of them • Then it would be best to submit for an FDL so as to limit liability to that under Walk-in CAP.

• This would fix the liability on the client.

• A service provider who fails to bring up an issue might bear some liability.

Lack of Remedial Amendment Period

• If a Plan is not in a remedial amendment period for a new law, • has been amended with appropriate approval for all current laws, • then there isn’t necessarily a document reason to submit a Form 5310.

• Whether to submit will depend on other issues such as IRC Section 415.

What Does an FDL Do?

• The only rules and restrictions on the IRS are the rules and restrictions the IRS puts on itself.

• When the IRS imposes rules and restrictions on itself, IRS employees cannot ignore those rules.

• See IRS Chief Counsel Notice CC-2002 043 on following published guidance positions in litigation.

IRS Rules on FDL

• Per Revenue Procedure 2000-16, Section 21 (“What Effect will an Employee Plan Determination Letter Have”) • A determination letter is “the opinion of the Service as to the qualification of the particular plan involving the provisions of Sections 401….”

IRS Rules on FDL

• There is no requirement that the determination letter make reference to any particular section of the plan; • the determination letter is a ruling under section 401 on the entire plan document.

• This prevents an auditor from claiming that the FDL you obtained did not apply to a particular section of the plan because you did not note that section for special review in your determination letter request.

Change in FDL

• The prior qualification of a plan will not be adversely affected by the publication of a revenue ruling, a revenue procedure or an administrative pronouncement under section 6661 (e.g. a Revenue Notice), if: • The plan was the subject of a favorable determination letter and • the request for the letter contained no misstatement or omission of material facts;

Change in FDL

• The facts subsequently developed are not materially different from the facts on which the determination letter was based; • There has been no change in the applicable law; and… • The employer has established that the plan acted in good faith in reliance on the determination letter.

The Non-effect of Oral Statements

• If the qualification of the a plan is not adversely affected under the above circumstances by the publication of a • revenue ruling, • revenue procedure or • Notices, • publications, and • Other printed guidance, THEN…

The Non-effect of Oral Statements

• It certainly is not adversely affected by the informal change of views among National Office personnel.

Appeal to a Higher Authority

• Plans may be required to be amended for

subsequent

years but … • Not retroactively.

• While I have had individual IRS employees try to ignore the rules, they have been corrected by appeal to either their supervisor or to district counsel.

• The system works, sometimes slowly.

The More Things Change

• The IRS is always publishing new Revenue Procedures which set forth the above rules.

• For any dispute, always check the most recent version.

• Objects in Revenue Procedures may be smaller than they appear.

FDL Conclusion

• Unless the IRS can come up with a better way to protect taxpayers than the determination letter • It is necessary to obtain an FDL on the document language (reliance on prototype or volume advisory letters seem to be OK).

• And a good idea to seek one on the termination of the plan.

FDL Conclusion (2)

• Remember that exceptions arise.

• You are Gambling with both the client’s money and Your money if something goes wrong and the client sues.

The Plan Termination Resolution

• The termination resolution (or, for sole proprietors and partnerships, the Written Record of Action) and amendment should specify:

The Plan Termination Resolution

• The date accruals will be suspended; • The Plan Termination Date; • That participants become fully vested; • That no new entrants shall become eligible after the Plan Termination Date (PTD);

The Plan Termination Resolution

• That no new entrants shall become eligible after benefit accruals are suspended; • Any changes to the 417(e) rules; • The method of allocating excess assets or a deficiency of assets, or • the percentage of excess assets which are to be transferred to a Qualified Replacement Plan;

The Plan Termination Resolution

• Any removal of benefits which are not protected by Code section 411(d)(6) but are considered to be benefits under Code section 401(a)(2) which must be paid before a reversion of assets to the employer; • Any changes to the plan document to bring the plan into compliance with law or regulation changes.

The Plan may anticipate

• The existing plan may cover some of the above already and not need to be amended for such.

• E.g., usually the plan says that participants are vested at plan termination.

The Plan may not anticipate well

• However, it may be either necessary or recommended to vest as of an earlier date, especially where there might be issues with respect to a • partial plan termination or a • cessation of employer contributions under a profit sharing plan.

Date of Amendments

• While amendments to bring the plan into compliance with laws or regulations can be signed after the Plan Termination Date if necessary to obtain a FDL •

Some

must be adopted prior to PTD, • e.g. the removal of benefits not protected by 411(d)(6) or a change in 417(e) rates for PPA ’06.

Date of Amendments

• • In addition, if a determination letter isn’t being sought, then

all amendments should be adopted prior to the PTD.

• (It may be OK if amendments are adopted after the PTD but prior to the payment of benefits, but that is a gray area and the plan sponsor is taking a chance.)

Benefits not protected by 411(d)(6)

• Eliminating the insured death benefit as soon as possible in a defined benefit plan can save some serious money for the employer or for the participants by • eliminating the premiums and • preventing additional mortality charges against the cash values.

Benefits not protected by 411(d)(6)

• In most cases I would recommend offering the insurance for sale to the participants in case any have become unable to purchase insurance on their own.

• I also get spousal consent, to both protect potential widows and prevent lawsuits by widows.

• Cynicism is in the eyes of the defendant.

Benefits not protected by 411(d)(6)

• Other examples of unprotected benefits are accident or health insurance benefits, • Social security supplements described in section 411(a)(9), except qualified social security supplements described in section 1.401(a)(4) 12; • the availability of loans; • the right to direct investments; • the right to a particular form of investment; • administrative procedures for distributing benefits; etc.

Allocation of Assets

• Another provision which must usually be amended before the PTD is the plan section allocating assets on plan termination.

• While all plans have language regarding this, sometimes it is necessary to change the language.

Allocation of Assets

• Where a Majority Owner is consenting to be last in line for the allocation of assets in order for the plan to satisfy the criteria for a Standard Plan Termination under PBGC rules, • I believe that the “waiver” the Majority Owner and spouse must sign might be insufficient to a court, but better than a poke in the eye with a sharp stick.

Allocation of Assets

• It is best to amend the asset allocation section of the plan before the PTD to specify that the Majority Owner will be last in line.

• I also strongly recommend this for non Title IV DB plans as well, except for one man plans.

204(h) Notice

• Generally, ERISA 204(h), as amended by EGTRRA, requires that a notice must be provided to all participants, beneficiaries, etc. a reasonable period before the effective date of a suspension (or reduction) in benefit accruals. • The IRS has issued final regulations.

204(h) Notice

• Plans with fewer than 100 participants have a 15-day notice period.

• Larger plans have a 45-day notice period except that the special 15-day rule also would apply to a plan amendment adopted in connection with a corporate acquisition or disposition.

204(h) Notice

• Extra time to give notice if the plan amendment is in connection with a merger, transfer, or consolidation of assets or liabilities and significantly reduces an early retirement benefit or retirement-type subsidy but does not significantly reduce the rate of future benefit accrual. • In such case, the deadline for providing notice would be 30 days after the effective date of the amendment.

204(h) Notice

• The Internal Revenue Service final regulations(TD 9052) provide that 45 days notice is sufficient notice for most plan changes.

204(h) Notice

• As in the proposed regulations (REG 136193-01), notice can be provided 30 days prior to a change made in connection with a business merger or acquisition that affects only an early retirement program or retirement-type subsidy, and 15 days prior to other changes made in connection with a business merger or acquisition or a change to a small pension plan.

204(h) Notice

• The final regulations allow multiemployer plans to give notice only 15 days before a benefit-reducing amendment.

204(h) Notice

• The final regulations, like those proposed, provide that participants must be given sufficient information to be able to choose between an old and new benefit formula, as would be the case in a cash balance conversion.

204(h) Notice

• The regulations apply to applicable pension plans which are subject to the funding requirements of tax code Section 412, and the notice is expected to be provided to participants and alternate payees for whom a plan amendment is reasonably expected to significantly reduce the rate of benefit accrual.

204(h) Notice

• The final regulations clarify that the notice provision is still applicable to a plan amendment to convert a money-purchase pension plan into a profit-sharing or any other individual account plan not subject to Section 412.

• The regulations interpret Section 4980F.

204(h) Notice Content

• The final regulations retain most of the content requirements that were proposed, but make a number of clarifications, such as one clarifying that the content must permit the applicable individual to determine the approximate magnitude of the reduction available to the individual, which can be satisfied through illustrative examples.

204(h) Notice Content

• They also clarify that individualized benefit statements may be used in lieu of illustrative examples if they include the same information, such as showing approximate ranges of reductions that vary over time and identification of assumptions used in the projections.

November 2009 Regulations on 204(h)

• The November 2009 regulations reflect the changes made by PPA ‘06. • This outline does not reflect those regulations.

Organize, Organize

• The plan termination process is the worst part of the job.

• All problem plans end up in termination.

• Administrators do not like to work on plan terminations; it is a hard job and many times the client is not a continuing one.

And Organize

• First, a schedule of activities and due dates must be created for

each

plan termination.

• I

guarantee

that failure to keep to the schedule will cause deadlines to slip and cause problems for the service provider.

Charity does not begin at the Office

• The first item is to be engaged for the plan termination. • I would suggest also that payment be made in full before work commences. • I have had clients try to renegotiate mid stream in some of the few cases where I didn’t get paid up front.

And If NOT Paid

• If payment is not immediately forthcoming • It is important to tell the plan sponsor in writing the kinds of things which must be done and by when • That way if deadlines pass resulting in penalties or additional accrual of benefits the plan sponsor cannot claim that it was your fault under the rules of

estoppel

.

401(k) Terminations

• Unlike other qualified retirement plans, if a "successor plan" exists, 401(k) plans may not distribute assets even if the plan is terminated.

• In general, distributions are not allowed earlier than death, disability, the attainment of age 59½, hardship, separation from service, plan termination, the sale by a corporation of substantially all of the assets used in its trade or business, or the sale by a corporation of its interest in a subsidiary.

401(k) Issues

• Whether a board resolution terminating the plan is sufficient for determining the date of plan termination?

• Whether a "separation of service" has occurred under the "same desk rule?“ (This has changed) • Whether employees of acquired company need to be covered under Purchaser's plan?

• Whether the minimum coverage transitional rule may be applied?

Same Desk Rule

• Congress eliminated the same desk rule by amending §401(k)(2)(B)(i)(I) to provide that a distribution can be made upon an employee's "severance from employment," rather than "separation from service.“ • This change was effective for distributions after December 31, 2001, regardless of when the severance from employment occurred.

Stock or Asset Sale

• The rules work differently depending on whether the sale is a stock sale or an asset sale. First, for

stock sales

there are the following issues: • Plan Termination - 401(k) accounts may be distributed as a result of plan termination provided that a "successor plan" is not established or maintained by the employer. • "Employer" is defined to include controlled group and affiliated service group members as of the date of termination.

Stock Sale

• "Successor Plan" is any other defined contribution plan (other than an employee stock ownership plan) maintained by the same employer at the time of the 401(k) termination, or within 12 months after distribution of plan assets • 2% exception - if fewer than two percent of the employees who were eligible under the old plan as of the plan termination date are eligible under the new plan, the new plan is not considered a successor plan

Stock Sale

• Is a board resolution terminating the plan sufficient?

• The provision implies that if the seller adopts resolutions terminating the 401(k) plan prior to the date of the deal documents, the buyer will not be treated as the same employer as the seller under controlled group rules, and the buyer's plans will not be "successor plans." Thus, the 401(k) assets may be distributed even if the buyer maintains another 401(k) plan.

Stock Sale

• The National Office of the IRS has confirmed that a board resolution prior to sale is sufficient to treat as date of plan termination so long as assets are in fact distributed as soon as administratively feasible thereafter.

Stock Sale

• • • Even if board resolutions are adopted prior to the sale of the employer, it is recommended that a favorable IRS determination letter be obtained prior to the distribution of the seller's 401(k) plan.

At whose cost?

Who will sign IRS Form 5310?

Stock Sale

• • • Disposition of Subsidiary -- Lump sum distributions are permitted to employees of a subsidiary upon its disposition, provided that: the "transferor corporation continues to maintain the plan after the disposition;" distributions are made only to those employees who continue employment with the purchaser of the subsidiary;

Stock Sale

• Distributions are made in connection with the disposition of the subsidiary (usually no later than end of 2nd calendar year following calendar year of disposition); • the purchaser does not maintain the plan after the disposition (the buyer cannot adopt the plan or merge the plan into one of its own but rollovers are permitted); and • the purchaser must be an unrelated entity or individual.

Asset Sale

• • Plan Termination If a 401(k) plan is terminated prior to the sale of assets, the buyer will not be treated as the same employer under the successor plan rule.

Asset Sale

• Separation from Service ("Same Desk Rule") • Congress eliminated the same desk rule by amending §401(k)(2)(B)(i)(I) to provide that a distribution can be made upon an employee's "severance from employment," rather than "separation from service."

Plan Sufficiency

• Plan sufficiency is different for PBGC Terminations as opposed to terminations of plans not covered by Title IV of ERISA.

• Plan terminations can be

voluntary

or

involuntary

.

Voluntary or Involuntary

• An

involuntary termination

is generally accomplished by court action initiated by the PBGC. • Generally, it will occur when PBGC anticipates that the employer's liability to PBGC for unfunded benefits is expected to increase unreasonably if the plan is not terminated.

Voluntary or Involuntary

• A

voluntary termination

can be either a standard termination or a distress termination.

Standard Termination

• A

standard termination

may occur when the terminating plan has assets sufficient to cover all benefit liabilities

Distress Termination

• A

distress termination

is any other voluntary termination that is not a standard termination.

Criteria for Distress Termination

• The plan sponsor and all members of the controlled group (if applicable) responsible for the terminating plan must satisfy any one of the following distress criteria.

• The plan sponsor or controlled group member has filed a petition seeking liquidation in bankruptcy.

• The controlled group member has filed a petition seeking reorganization.

Distress Termination

• A termination is required to enable payment of debts while staying in business or to avoid unreasonably burdensome pension costs caused by a declining workforce.

• All liabilities in a distress or involuntary plan termination with insufficient assets must be paid by the contributing sponsor and all members of its controlled group (even those who did not adopt the plan).

Distress Termination

• Negotiation with the PBGC is possible.

If not Covered by PBGC

• Sponsors of such plans may reduce benefits on a pro rata basis if assets are not sufficient to provide for all accrued benefits. • Revenue Ruling 80-229 provides guidance.

• The exception to being able to reduce benefits on a pro rata basis would be if the plan’s benefits were integrated with Social Security (old law term used by the revenue ruling) or uses permitted disparity.

If not Covered by PBGC

• While an argument can be made that the NHCE can have their benefits reduced on a greater basis than HCE as long as IRC 401(a)(4) nondiscrimination rules are satisfied, I think that is a

bad

idea.

• And discriminatory, in my humble opinion.

• And a bad idea.

Back to PBGC

• A

standard termination

requires that a plan be sufficient for benefit liabilities.

• A plan is sufficient for benefit liabilities when there is no amount of unfunded benefit liabilities under the plan.

Unfunded Benefit Liabilities

• This amount is the excess of the actuarial present value of benefit liabilities under the plan (determined on the basis of assumptions prescribed by the PBGC for purposes of ERISA Section 4044) over the current value of plan assets.

Options to Deal with UBL

• PBGC regulations allow an insufficiently funded plan to proceed with a standard termination if the plan sponsor makes a commitment to contribute the additional sums necessary to make the plan sufficient for all benefit liabilities or • If one or more Majority Owners consent to be at the end of the line in the doling out of assets (“eating dirt”).

Commitment by Employer

• This commitment must be in writing and signed by the contributing sponsor and/or controlled group members. • If the contributing sponsor or any controlled group member is in bankruptcy, the commitment must either be approved by the bankruptcy court or unconditionally guaranteed by a person not in bankruptcy.

Extra Contribution

• A contribution made pursuant to the above commitment is subject to IRS Section 404 deduction rules.

Oh 404(o)(5)

• Title IV Plans may still contribute and deduct the difference between Benefit Liabilities and assets in the year of plan termination – 404(o)(5)

More 404(o)(5)

This means, for example, that if a Plan covered by Title IV or ERISA terminates in 2009, and the difference between Benefit Liabilities and assets exceeds the otherwise deductible maximum deduction under 404(o), the amount under 404(o)(5) is the maximum deductible contribution.

404(o)(5) … oh oh

• What happens if the plan sponsor does not know by the due date of the 2009 tax return what the full 404(o)(5) contribution is?

• Remember that the Plan will not satisfy the criteria for a Standard Plan Termination unless the full 404(o)(5) amount is contributed or, else, one or more Majority Owners eat dirt.

404(o)(5) maybe

• One theory is that the amount not contributed by the Plan sponsor’s 2009 tax return is not deductible.

• Another theory is that the amount not contributed by the Plan sponsor’s 2009 tax return is deductible over some amortization period.

• Horse feathers.

PBGC May I?

• There are only two real-World possibilities – Ask the PBGC to change the Plan Termination Date without incurring additional benefits.

Make Participants Happy

– Contribute and claim the full contribution required to satisfy the criteria for a Standard Plan Termination.

Horns of 404(o)(5)

Choosing not to claim a tax deduction only makes sense if the plan sponsor pays no taxes.

Choosing to amortize the amount could possibly lose some of the deduction if the IRS takes a liberal interpretation later. This is because if the tax year of the contribution is beyond the statute of limitations, the IRS will not let the plan sponsor go back and amend the return to increase the tax deduction.

Cover your 404(o)(5)

• So, either deducting all of the contribution ASAP or, else, getting the PBGC to let the Plan Termination Date slide into another tax year, are the best alternatives.

• However, the choice can only be made by the plan sponsor with advice from the tax advisor.

Majority Owners

• A

majority owner

can agree to forgo receipt of all or a portion of his or her benefit (“eat dirt”).

Majority Owners

• Owns at least 50% of the stock or profits of a business. • Options qualify as ownership.

• No look back!!!

• Attribution rules of IRC 1563(e) – Spouse, minor children and if more than 50% attribution from grandparents, parents, children and grandchildren

To Be Valid

• The agreement must be in writing; • The agreement must not be inconsistent with a qualified domestic relations order (QDRO); • • If the benefit is greater than $5,000, the spouse, if any, must consent in writing; and

In my opinion

, the plan should be amended prior to the plan termination date to change the asset allocation method to correspond with the language of the waiver.

“Waiver” is Misnamed

• The IRS does not recognize

waivers

purposes of minimum funding for requirements. • Thus a “waiver” made for the purpose of reducing benefit liabilities will not reduce minimum required contributions under Code sections 412 and 430.

Changes for PPA ‘06

• Plans that have not been amended for PPA ‘06 can be so amended. • This changes the interest rate and mortality table used to determine plan sufficiency. • In most cases, a PPA ‘06 amendment will decrease benefit liabilities. • This amendment should be done before the end of the remedial amendment period and before the plan termination date.

Overfunded Plans

• Assets remaining after the satisfaction of all benefit obligations may revert to the company if the plan so provides.

• The plan provision to allow reversion must have been in effect for at least five years (or since the inception of the plan, if less than five years).

50% Excise Tax

• IRC 4980 imposes a 50% excise tax on reversions of excess plan assets. • The 50% tax is reduced to 20% if one of the following applies:

Qualified Replacement Plan

• Establishes or maintains a qualified replacement plan to which it transfers assets equal to the excess (if any) of 25% of the maximum reversion it could receive over the value of certain benefit increases that take effect upon plan termination. • More than 25% may be transferred and the IRS has stated in a Revenue Ruling that this will reduce the excise tax.

Qualified Replacement Plan

• If the qualified replacement plan is a defined contribution plan, the amounts transferred must be allocated to participants in the year of transfer or credited to a suspense account and allocated ratably over seven years.

Pro-Rata Benefit Increase

• • The plan provides pro rata increases in benefits of qualified participants in connection with the plan termination equal to at least 20% of the maximum reversion that could be received.

If a participant cannot receive his share due to 415 it is OK to give the rest to others.

Qualified Replacement Plan

• • At least 95% of the active participants in the terminated plan who remain as employees are active participants; A direct transfer of 25% (or more) of the surplus of the original plan is made to the qualified replacement plan;

Qualified Replacement Plan

• The funds are allocated under the plan to the accounts of the participants in the plan year in which the transfer occurs or • credited to a suspense account and allocated to the accounts of the participants no less rapidly than ratably over 7 years beginning with the year of the transfer.

Qualified Participant

• An active participant, • A participant or beneficiary in pay status, • A terminated vested participant who terminated within three years of the date on which the final distribution of assets occurs, or • A beneficiary of such a terminated vested participant.

Pro-Rata Increase in Benefits

• A benefit increase in proportion to present value of accrued benefits.

• A benefit increase that does not meet these requirements will not result in a decrease in the excise tax rate from 50% to 20% but will reduce the amount of the reversion to which the excise tax rate is applied.

Pro-Rata Increase in Benefits

• Any benefit increase that eliminates a reversion entirely, will eliminate the excise tax. • Any benefit increase must meet the nondiscrimination requirements of IRC 410(b) and 401(a)(4) • If you want a tax qualified plan.

Exceptions to the Reversion Tax

• The reversion is transferred to an ESOP that meets certain conditions; • Reversions to employers which have at all times been exempt from federal income tax; • Governmental plans within the meaning of IRC 414(d).

Techniques to Reduce Reversion

• Consider hiring family members of the owner and so they become participants in the plan.

• The Plan almost certainly must be amended for – Year of service definitions (eligibility, accrual) – Normal Retirement Age or Early Retirement Age.

• Watch out for 401(a)(4) issues.

• Make sure they are real employees.

Techniques to Reduce Reversion

• If needed, life insurance can be purchased on the lives of the active participants.

• Make certain that assets are not overvalued. This is particularly important for assets that are not publicly traded and for which a market value is not readily determinable.

Techniques to Reduce Reversion

• Some advocate merging the plan with an underfunded defined benefit plan.

• Be careful with this so as to avoid an abusive tax avoidance scheme.

Reversions Have Limits

• In increasing accrued benefits, be careful about increasing benefits to be worth more than the assets and throwing the plan into an underfunded situation which might require minimum funding requirements or worse.

Fees and Reimbursements

• "Settlor" functions are said to relate to the business activities of the employer and are therefore not properly payable by the plan.

• Settlor functions of a termination would be those involved in the employer's decision about whether or not to terminate the plan, evaluation of a possible reversion, working out problems of valuation, or designing the arrangement for disposition of plan assets, for example.

Fees and Reimbursements

• Settlor functions would not include those involved after the employer has decided to terminate the plan, has worked out the basic policy decisions and has taken action to implement the decision. • Thus, the cost of communicating with the employees, determining participants' benefits, arranging for transfers, distributions and rollovers, and filing with the PBGC and IRS could be charged to the plan.

Fees and Reimbursements

• If an employer incurs an expense directly which properly belongs to the plan, there seems to be no basis for objecting to a reimbursement from the plan to the employer.

• There would be a time limit on retroactive reimbursements – ask the attorney.

Notice of Intent to Terminate

• NOITs are issued at least 60 days and no more than 90 days before proposed termination date.

Notice of Intent to Terminate

• The following must receive the NOIT: • Participants, • beneficiaries of deceased participants, • alternate payees under QDROs, • employee organizations that currently represent group of participants • and for those participants not currently represented by employee organization, the employee organization that last represented such group within 5-year period preceding date of NOIT.

Notice of Intent to Terminate

• A NOIT is issued to each affected party individually either by • hand delivery or • by first-class mail or • courier service directed to the affected party's last known address (deemed issued on date of delivery or evidence of postmark).

• • • • •

Notice of Intent to Terminate

The NOIT shall include all of the following information: The name of the plan and of the contributing sponsor; The employer identification number ("EIN") of the contributing sponsor and the plan number ("PN"); The name, address, and telephone number of the person who may be contacted by an affected party with questions concerning the plan's termination; A statement that the plan administrator expects to terminate the plan in a standard termination on a proposed termination date that is either:

Notice of Intent to Terminate

• A specific date set forth in the notice, or • A date to be determined that is dependent on the occurrence of some future event; • If the proposed termination date is dependent on the occurrence of a future event, the nature of the event (such as the merger of the contributing sponsor with another entity), generally when the event is expected to occur, and when the termination will occur in relation to the other event;

Notice of Intent to Terminate

• A statement that benefit accruals were frozen as of a certain date in accordance with section 204(h) of the ERISA; • A statement that, in order to terminate in a standard termination, plan assets must be sufficient to provide all benefit liabilities under the plan with respect to each participant and each beneficiary of a deceased participant;

Notice of Intent to Terminate

• A statement that, after plan assets have been distributed to provide all benefit liabilities with respect to a participant or a beneficiary of a deceased participant, either by the purchase of an irrevocable commitment or commitments from an insurer to provide benefits or by an alternative form of distribution provided for under the plan, the PBGC's guarantee with respect to that participant's or beneficiary's benefit ends;

Notice of Intent to Terminate

• If distribution of benefits under the plan may be wholly or partially made by the purchase of irrevocable commitments from an insurer: • The name and address of the insurer or insurers from whom, or (if not then known) the insurers from among whom, the plan administrator intends to purchase the irrevocable commitments; or

Notice of Intent to Terminate

• If the plan administrator has not identified an insurer or insurers at the time the NOIT is issued, a statement that: • Irrevocable commitments may be purchased from an insurer to provide some or all of the benefits under the plan, • The insurer or insurers have not yet been identified, and • Affected parties will be notified at a later date (but no later than 45 days before the date of distribution, of the name and address of the insurer or insurers from whom, or (if not then known) the insurers from among whom, the plan administrator intends to purchase the irrevocable commitments; • Please see Section VII: "Selecting an Annuity."

Notice of Intent to Terminate

• A statement that if the termination does not occur, the plan administrator will notify the affected parties in writing of that fact; • A statement that each affected party, other than any employee organization, will be receiving a written notification of the benefits that the person will receive; and • For retirees only, a statement that their monthly (or other periodic) benefit amounts will not be affected by the plan's termination.

• Information on state guaranty association coverage.

• Statement as to how a participant or beneficiary can get the summary plan description.

Supplemental NOIT

• Are Supplemental Notices Required? • A supplemental NOIT or NOITs must be issued to each affected party if: • The plan administrator has not yet identified an insurer or insurers at the time the NOIT is issued; or • The plan administrator notifies affected parties of the insurer or insurers from whom (or from among whom) he or she intends to purchase the irrevocable commitments, either in the NOIT or in a later notice, but subsequently decides to select a different insurer.

Supplemental NOIT

• When Issued? The plan administrator shall issue each supplemental notice in the same manner provided above no later than 45 days before the date of distribution and shall include the name and address of the insurer or insurers from whom, or (if not then known) the insurers from among whom, the plan administrator intends to purchase the irrevocable commitments.

• Any supplemental notice or notices meeting the above requirements shall be deemed a part of the NOIT.

Notice of Plan Benefits

• • • When Issued? A NOPB must be issued no later than the date on which the STN is mailed to the PBGC.

To Whom? Participants, beneficiaries of deceased participants, and alternate payees under QDROs.

How? The NOPBs are issued in the same manner as the NOIT.

Notice of Plan Benefits

• Contents of NOPB? The NOPB shall include all of the following information: • The name of the plan, the employer identification number ("ElN") of the contributing sponsor, and the plan number ("PN"); • The name, address, and telephone number of the person who may be contacted to answer questions concerning a participant's or beneficiary's benefit;

Notice of Plan Benefits

• The proposed termination date and, if applicable, a statement that this date is later than the proposed termination date given in the NOIT; and • If the amount of the plan benefits set forth in a notice is an estimate, a statement that the amount is an estimate and that benefits paid may be greater than or less than the estimate.

Notice of Plan Benefits

• The NOPB for a participant or beneficiary in pay status as of the proposed termination date must include: • The amount and form of the participant's plan benefits payable as of the proposed termination date; • The amount and form of benefit, if any, payable to a beneficiary upon the participant's death and the name of the beneficiary;

Notice of Plan Benefits

• The amount and date of any increase or decrease in the benefit scheduled to occur after the proposed termination date (or that has already occurred) and an explanation of the increase or decrease, including, where applicable, a reference to the pertinent plan provision; and

Notice of Plan Benefits

• For benefits of participants or beneficiaries in pay status for one year or less as of the proposed termination date, the specific personal data used to calculate the plan benefits, e.g., • participant's age at retirement, • spouse's age, • participant's length of service, • and including, for Social Security offset benefits, the participant's actual or, if unknown, estimated Social Security benefit and, for an estimated benefit, the assumptions used for the participant's earnings history.

Notice of Plan Benefits

• NOPB for a participant who is not in pay status as of the proposed termination date, but who has, as of that date, elected to retire and has elected a form and starting date, or with respect to whom the plan administrator has determined a lump sum distribution will be made, must include the following information: • The amount and form of the participant's plan benefit starting date, and what that date is;

Notice of Plan Benefits

• The amount and form of benefit, if any, payable to a beneficiary upon the participant's death and the name of the beneficiary; • The amount and date of any increase or decrease in the benefit scheduled to occur after the proposed termination date (or that has already occurred) and an explanation of the increase or decrease, including, where applicable, a reference to the pertinent plan provision; and

Notice of Plan Benefits

• If the age at which, or form in which, the plan benefits will be paid differs from the age or form in which the participant's accrued benefit at normal retirement age is stated in the plan, the age or form stated in the plan and the age or form adjustment factors, including, in the case of a lump sum benefit, the interest rate used to convert to the lump sum benefit described above and a reference to the pertinent plan provision;

Notice of Plan Benefits

• The specific personal data used to calculate the plan benefits (other than a lump sum benefit) and, with respect to a benefit payable as a lump sum, the personal data used to calculate the underlying annuity; and

Notice of Plan Benefits

• If the plan benefits will be paid in a lump sum, • an explanation of how the interest rate is used to calculate the lump sum; • a statement that the higher the interest rate used, the smaller the lump sum amount; • and, if applicable, a statement that the lump sum amount given is an estimate because the applicable interest rate may change before the distribution date.

Notice of Plan Benefits

• The NOPB for any participant not described above must include the following information: • The amount and form of the participant's plan benefits payable at normal retirement age in any form permitted under the plan;

Notice of Plan Benefits

• The availability of any alternative benefit forms, including those payable to a beneficiary upon the participant's death either before or after retirement, and, for any benefits to which the participant is or may become entitled that would be payable before normal retirement age, the earliest benefit commencement date, the amount payable on and after such date, and whether the benefit would be subject to fixture reduction;

Notice of Plan Benefits

• The specific personal data used to calculate the plan benefits and, with respect to a benefit that may be paid in a lump sum, the personal data used to calculate the underlying annuity; and • If the plan benefits may be paid in a lump sum, an explanation of when a lump sum may be paid without a participant's consent; an explanation of how the interest rate is used to calculate the lump sum; and a statement that the higher the interest rate used, the smaller the lump sum amount.

Standard Termination Filing

• • • • What to file? The plan administrator shall file with the PBGC a PBGC Form 500, STN, Single Employer Plan Termination, with Schedule EA-S, Standard Termination Certification of Sufficiency.

When to file? The STN is filed on or before the 180th day after the proposed termination date.

Standard Termination Filing

• Are any supplemental notices required? • If any of the benefits of the terminating plan may be provided in annuity form through the purchase of irrevocable commitments from an insurer and either of the conditions listed below are met, the plan administrator shall file a supplemental notice (or notices) with the PBGC in accordance with the provisions that follow.

Standard Termination Filing

• The plan administrator shall file with the PBGC a supplemental notice (or notices) if: • The insurer or insurers from whom the plan administrator intends to purchase irrevocable commitments is not identified in the STN filed with the PBGC, or • The plan administrator has notified the PBGC of the insurer or insurers from whom he or she intends to purchase irrevocable commitments, either in the STN or in a later notice, and subsequently decides to select a different insurer.

Standard Termination Filing

• The supplemental notice (or notices) may be filed at any time after the filing of the STN, but no later than 45 days before the date of distribution, and shall: • Be in writing addressed to: Case Operations and Compliance Department, Pension Benefit Guaranty Company, 1200 K Street, NW., Washington, DC 20005 4026;

Standard Termination Filing

• Give information identifying the contributing sponsor and the plan by name, address, employer identification and plan numbers ("EIN/PN"), and PBGC case number (if applicable); and • Give the name and address of the insurer or insurers from whom, or (if not then known) the insurers from among whom, the plan administrator intends to purchase the irrevocable commitments.

PBGC Review Period

• • How long? After a complete STN has been filed, the PBGC has 60 days to review the notice, determine whether to issue a notice of noncompliance ("NON"), and to issue any such notice.

PBGC Review Period

• When does review period begin? • The 60-day review period begins on the day following the filing of a complete STN and includes the 60th day.

• The PBGC seems to lose the envelope with the postmark date, so you must expect them to consider the 60 days to start on receipt by the PBGC not the USPS.

PBGC Review Period

• The PBGC shall notify the plan administrator in writing of the date on which a complete STN was filed, so that the plan administrator may determine when the 60-day review period will expire.

PBGC Review Period

• The PBGC shall return an incomplete STN and advise the plan administrator in writing of the missing item(s) of information and that the complete STN must be filed no later than the 120th day after the proposed termination date or the 20th day after the date of the PBGC notice, whichever is later.

PBGC Review Period

• When can distributions be made? • If the PBGC does not issue a NON by the last day of this 60-day period, the plan administrator shall proceed to close out the plan.

PBGC Review Period

• Can 60-day review period be extended?

• The 60-day review period may be extended according to the following rules:

PBGC Review Period

• • • The PBGC and the plan administrator may agree in writing, before the expiration of the 60-day review period, to extend the period for up to an additional 60 days; More than one such extension may be made; and Any extension may be made upon whatever terms and conditions are agreed to by the PBGC and the plan administrator.

PBGC Review Period

• • Can the 60-day review period be suspended? The 60-day review period shall be suspended if the PBGC requests supplemental information.

PBGC Review Period

• Whenever the PBGC has reason to believe that any of the requirements of the NOIT, NOPB or STN were not complied with, or in any proposed termination that will result in a reversion of residual assets to the contributing sponsor, the PBGC may require the submission of supplemental information. • A request for additional information shall be in writing and shall suspend the running of the 60 day (or extended) review period.

PBGC Review Period

• When does review period begin running again? • The review period shall begin running again on the day following the filing of the required information.

PBGC Review Period

• What if plan administrator fails to provide supplemental information? • If a plan administrator or contributing sponsor fails to submit information required under this paragraph within the period specified in the PBGC's request, the PBGC may issue a NON or take other appropriate action to enforce the requirements of ERISA.

PBGC Review Period

• Notwithstanding the above, the PBGC may, by written notice to the plan administrator, suspend or nullify a proposed termination after expiration of the 60-day (or extended) review period in any case in which it determines that such action is necessary to carry out the purposes of ERISA.

PBGC Review Period

• • When will the PGBC issue a NON?

The PBGC shall issue to the plan administrator a written NON whenever it makes one of the following determinations:

PBGC Review Period

• The plan administrator failed to issue the NOIT in accordance with its requirements.

• The plan administrator failed to issue NOPBs in accordance with its requirements.

• The STN, or any supplemental notice, was not filed in accordance with its requirements.

• As of the proposed distribution date, plan assets will not be sufficient to satisfy all benefit liabilities under the plan.

PBGC Review Period

• The PBGC shall base any determination described above on the information contained in the STN, including any supplemental submissions and any supplemental notices, or on information provided by any affected party or otherwise obtained by the PBGC.

PBGC Review Period

• • What is the effect of NON? A NON ends the standard termination proceeding, nullifies all actions taken to terminate the plan, and renders the plan an ongoing plan.

PBGC Review Period

• The NON is effective upon the expiration of the period within which the plan administrator may request reconsideration but, once a notice is issued, the plan administrator shall take no further action to terminate the plan (except by initiation of a new termination) unless and until the notice is revoked pursuant to a decision by the PBGC on reconsideration.

PBGC Review Period

• A plan administrator may request reconsideration of a NON. • Any request for reconsideration automatically stays the effectiveness of the NON until the PBGC issues its decision on reconsideration.

PBGC Review Period

• Do affected parties have to be notified? • Upon a decision by the PBGC on reconsideration affirming the issuance of a NON (or, if earlier, upon the plan administrator's decision not to request reconsideration), the plan administrator shall notify the affected parties in writing that the plan is not going to terminate or, if applicable, that the termination was invalid but that a new NOIT is being issued.

PBGC Review Period

• The notices shall be delivered by first class mail or by hand to each person who is an employee organization or a participant or beneficiary who is then in pay status.

PBGC Review Period

• The notices to other participants and beneficiaries shall be provided in any manner reasonably calculated to reach those participants and beneficiaries. • Reasonable methods of notification include, but are not limited to, posting the notice at participants' worksites or publishing the notice in an employee organization newsletter or newspaper of general circulation in the area or areas where participants and beneficiaries reside.

Close out of Plan (no NON)

• • If the PBGC does not issue a NON or if a NON is issued and later revoked after reconsideration, the plan administrator shall complete the distribution of plan assets within 180 days after the expiration of the 60-day review period or, if applicable, the date on which the PBGC revokes the NON.

Close out of Plan (no NON)

• The plan administrator shall distribute plan assets by purchasing irrevocable commitments from an insurer in satisfaction of all benefit liabilities that must be provided in annuity form, and by otherwise providing all benefit liabilities that need not be provided in annuity form.

Close out of Plan (no NON)

• What if assets are insufficient? • Before distributing plan assets to close out the plan, the plan administrator shall determine that plan assets are, in fact, sufficient to satisfy all benefit liabilities.

Close out of Plan (no NON)

• In determining if plan assets are sufficient, the plan administrator shall subtract all liabilities (other than the future benefit liabilities that will be provided when assets are distributed), e.g., benefit payments due before the distribution date; PBGC premiums for all plan years through and including the plan year in which assets are distributed; expenses, fees, and other administrative costs.

Close out of Plan (no NON)

• If plan assets are not sufficient to satisfy all benefit liabilities, the plan administrator shall not make any distribution of assets to effect the plan's termination. • In the event of an insufficiency, the plan administrator shall promptly notify the PBGC.

Close out of Plan (no NON)

• What if assets are not distributed within 180-day period?

Close out of Plan (no NON)

• Without an extension, failure to distribute assets within the 180-day distribution period because of an insufficiency of plan assets or for any other reason, shall nullify the termination. • All actions taken to effect the plan's termination shall be null and void, and the plan shall be an ongoing plan.

Close out of Plan (no NON)

• In this event, the plan administrator shall notify affected parties in writing that the plan is not going to terminate or, if applicable, that the termination was invalid but that a new NOIT is being issued.

Close out of Plan (no NON)

• When is an automatic extension of the 180-day period available? • The plan administrator shall be entitled to an automatic extension of the 180-day period in which to complete the distribution of plan assets if the plan administrator:

Close out of Plan (no NON)

• Submits to the IRS a complete request for a determination with respect to the plan's tax-qualification status upon termination on or before the date that the plan administrator files the STN with the PBGC; and • Does not receive a determination letter at least 60 days before the expiration of the 180-day period.

Close out of Plan (no NON)

• How long is automatic extension? • If the above requirements are met, the time within which the plan administrator shall complete the distribution of plan assets is automatically extended until the 120th day after receipt of a favorable determination letter from the Internal Revenue Service.

Close out of Plan (no NON)

• Is there a discretionary extension? • If the plan administrator will be unable to complete the distribution of plan assets within the 180-day (or extended) period for any reason other than an insufficiency of assets, the plan administrator may request, and the PBGC shall grant or deny, in its discretion, an extension of time within which to complete the distribution according to the following rules:

Close out of Plan (no NON)

• The plan administrator shall file a written request for a discretionary extension with the PBGC at least 30 days before the expiration of the 180-day (or extended) distribution period, explain the reasons) for the request, and provide a date certain by which the distribution will be made if the extension is granted.

Close out of Plan (no NON)

• The PBGC will not grant a discretionary extension based on failure to meet the requirements for an automatic extension or failure to locate all participants or beneficiaries.

• The PBGC will grant a discretionary extension, in whole or in part, only if it is satisfied that the delay in making the distribution is not due to the action or inaction of the plan administrator or the contributing sponsor and that the distribution can in fact be completed by the date requested.

Close out of Plan (no NON)

• Are there Post-distribution requirements?

• The plan administrator shall file with the PBGC a post-distribution certification • and, if any of the plan's benefit liabilities payable to a participant or beneficiary have been distributed through the purchase of irrevocable commitments, the plan administrator also shall provide such participant or beneficiary with a notice, contract, or certificate.

Close out of Plan (no NON)

• In the case of the distribution of benefit liabilities through the purchase of irrevocable commitments: • Either the plan administrator or the insurer shall, as soon as practicable, provide each participant and beneficiary with a copy of the annuity contract or certificate showing the insurer's name and address and clearly reflecting the insurer's obligation to provide the participant's or beneficiary's benefit;

Close out of Plan (no NON)

• If such a contract or certificate is not available on or before the date on which the post-distribution certificate is required to be filed, the plan administrator shall, no later than such date, provide each participant and beneficiary with a written notice stating:

Close out of Plan (no NON)

• That the obligation for providing the participant's or beneficiary's plan benefits has transferred to the insurer; • The name and address of the insurer; • The name, address, and telephone number of the person designated by the insurer to answer questions concerning the annuity; and

Close out of Plan (no NON)

• That the participant or beneficiary will receive from the plan administrator or insurer a copy of the annuity contract or a certificate showing the insurer's name and address and clearly reflecting the insurer's obligation to provide the participant's or beneficiary's benefit.

Close out of Plan (no NON)

• The plan administrator shall certify to the PBGC, as part of the post-distribution certification that the above requirements have been satisfied.

• Within 30 days after the completion of the distribution of plan assets, the plan administrator shall file with the PBGC a PBGC Form 501, Post-Distribution Certification for Standard Terminations.

PBGC Redux

• The PBGC audits a substantial number of plan terminations.

• They provide a notice to employers warning them to keep the records for awhile.

• They really do check the benefits.

• It really is annoying.

Selecting an Annuity

• The Department of Labor issued Interpretive Bulletin 95 1 regarding the selection of an insurer to provide annuities upon participant or plan termination.

• Since participants must be provided with the names) of the insurers) no later than 45 days before the date of distribution, it is imperative that someone with the necessary expertise begin the search. • Furthermore, if an insurer is not identified in the original Notice of Intent to Terminate (NOIT), a supplemental NOIT must be issued to participants when one has been selected.

Selecting an Annuity

• At a minimum, ERISA's fiduciary rules require "that plan fiduciaries conduct an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities." • Such search must be done by someone with the necessary expertise to evaluate the insurer's claims-paying ability and creditworthiness without relying solely on insurance ratings. • This may require the advice of a qualified independent expert to evaluate the following factors, among others:

Selecting an Annuity

• the quality and diversification of the insurer's investment portfolio; • the size of the insurer relative to the proposed annuity; • the level of the insurer's capital and surplus; • the insurer's lines of business and other indications of an insurer's exposure to liability; • the structure of the annuity contract and guarantees supporting the annuities, such as the use of separate accounts; and • the availability of additional protection through state guaranty associations and the extent of their guarantees.

Selecting an Annuity

• The Interpretive Bulletin recognizes that if the cost of an annuity is borne by a participant, the cost of the safest annuity available may not be warranted if such annuity is only marginally safer than another. • In general, the safest annuity available should be obtained, which may be determined to be available from more than one company.

Missing Participants

• A plan is not considered terminated until all plan assets have been distributed.

• If all benefits are distributed timely, the IRS will DEEM that the plan termination date was as proposed rather than the actual distribution date.

Missing Participants

• Therefore, the plan administrator must either locate all participants and beneficiaries who are entitled to benefits under the plan or distribute their benefits by • purchasing an annuity from an insurer, or • paying the present value of the participant's benefit to the PBGC.

Missing Participant Program

• The Missing Participants Program applies to distributions that are made in plan years beginning on or after January 1, 1996. • Currently it is available only to Plans subject to Title IV of ERISA.

Missing Participant Program

• Diligent search for the participant must be made before funds are sent to the PBGC.

• Search cannot begin more than 6 months before notice of plan termination (NOIT) is given to participants.

Missing Participant Program

• Plan administrator may utilize: • IRS missing participant program; or • Social Security Administration missing participant program (see Rev. Proc. 94-22) (no charge for first 50 participants); and • if participant is not found using one of the above methods, a commercial locator service (plan bears the cost).

• Plan administrator must inquire about any known beneficiaries of the missing participants whose names and addresses are known to the plan administrator.

Missing Participant Program

• Amount of designated benefit under the plan is determined as of deemed distribution date and is based on • plan provisions, • the actuarial assumptions described in PBGC regulations (Section 4044) or • actuarial assumptions permitted under PPA ‘06 ( or as described in the plan) and

Missing Participant Program

• depends on whether the benefit required under the plan is • A mandatory lump sum, • A de minimus lump sum ($1,000 or $5000), • No lump sum, or • Elective lump sum.

Missing Participant Program

• Designated benefit is • the most valuable benefit available under the plan and • is usually the benefit payable at earliest retirement age.

Missing Participant Program

• Designated benefit is valued • as of deemed distribution date which is the earlier of the last date distributions may be made under the plan (i.e., 180 days after expiration of PBGC 60-day review period or, if later, 120 days after receipt of IRS favorable determination letter if IRS submission was timely) or, • the date selected by the plan administrator as the final payout date, if earlier.

Missing Participant Program

• Plan administrator must file Schedule MP with the Post-Distribution Certification and • pay the PBGC the value of the benefits payable to any missing participant for whom an annuity contract was not purchased from an insurer.

Missing Participant Program

• The contents of Schedule MP and related attachments are: • Identification and last known address of missing participant • Benefits payable • Form of benefit payment • If applicable, amount of annuity purchased, contract and certificate number for each annuitant • Identifying information with respect to insurer

Missing Participant Program

• The amount forwarded to PBGC is value of benefits plus $300 for each benefit whose value exceeds $1,000 or $5,000 as applicable.

Missing Participants – Other Plans

• Defined contribution plans and defined benefit plans not subject to Title IV of ERISA currently do not yet have the option of using the Missing Participant Program of the PBGC.

• Some options for plans excluded from the program are:

Missing Participants – Other Plans

• Send a check for the benefits due less the tax withholding to the last known address of the participant and hope for the best; • Set up an Individual Retirement Account (IRA) for the participant at a willing financial institution; • Purchase a qualified annuity from a willing insurance company;

Missing Participants – Other Plans

• Keep the trust alive as a wasting trust, possibly non-tax qualified; • Forfeit the benefits to the plan sponsor, with the plan sponsor to provide such benefits later if the participant shows up; • Escheat benefits to the State;

Missing Participants – Other Plans

• Pay expenses from remaining assets until they are used up (defined contribution plans only).

• Reasonable expenses only.

• No rebates or kickbacks.

• No ups, no extras.

Missing Participants – Other Plans

• Needless to say, there are problems with all of the above. • The safest is to set up an IRA. • There is a fiduciary obligation involved until the participant gets the money.

Missing Participants – Other Plans

• Look to the plan document for any options available under it to the fiduciary. • For example, you might think that forfeiture to the plan sponsor is verboten. • You would be wrong. • Many plan documents have been approved by the IRS which allow this forfeiture for missing participants.

Missing Participants – Other Plans

• Someday there might be a Department of Labor sanctioned IRA program which solves the problem. • Someday there might be a PBGC DC Missing Participant Program. • Someday my ship will come in.

Missing Participants – Other Plans

• In the meantime, the IRS has not been too picky as to the method chosen. • That said, the IRS and DOL do object to the concept of 100% tax withholding. • The problem here is that if the participant doesn’t file for a tax refund within the statute of limitations, then the withheld taxes are lost. • So the conclusion is that 100% tax withholding could be a fiduciary violation.

Missing Participants – Other Plans

• Another problem is the recalcitrant participant or spouse who refuses to consent. • If the amount is less than $5,000.00 then send a check after tax withholding.

• Otherwise, use the method which creates the

least risk

to the plan sponsor and the service providers.

Conclusions

• You can never charge enough.

• The work is always more and dirtier than expected and always takes more time than expected.

• Liability can never be adequately limited.

• Life is like a box of chocolates; so buy the box of nuts and chews if you don’t like the ones with mystery fillings.

Thank you!