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ACOPA Actuarial SymposiumWorkshop 9 -

Plan Terminations

Drew Forgrave, EA, MAAA, MSPA, FCAJacob, Haxton & Boord, LLC

Michael B. Preston, FSPA, MAAA, EAPreston Actuarial Services, Inc.

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Types of Plan Termination

• Involuntary

– Generally will occur when PBGC anticipates the employer’s liability to PBGC for unfunded benefits is expected to increase unreasonably if the plan is not terminated

• Voluntary

– Standard termination

– Distress termination

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Standard vs. Distress Termination

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

• Distress termination is any other voluntary termination that is not a standard termination

– Must meet one of 4 requirements by PBGC

– PBGC will convert to Involuntary Termination most of the time

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Standard Termination

• ERISA 4041(b)

• A plan may terminate in a standard termination only if

– Plan assets are sufficient to satisfy all benefits, and

– Plan Administrator follows prescribed steps

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Reasons to Terminate

• Plan related

– Plan administration too costly or complicated

– Plan benefits too costly

– Restructuring of retirement program

– Retirement/illness/death of owner(s)

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Reasons to Terminate

• Business related– Adverse business conditions– Sale of company/subsidiary/division (not involving

bankruptcy or similar proceeding)– Company/subsidiary/division closed (not involving

bankruptcy or similar proceeding)– Merger of company– Contributing sponsor acquired by another business– Another business acquired by contributing sponsor– Contributing sponsor reorganized (in bankruptcy or similar

proceeding– Contributing sponsor liquidated (in bankruptcy or similar

proceeding)

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Considerations

• Is the plan sufficient or will the employer make a commitment to make sufficient

• What will replace the plan

• Will there be excess assets in the plan after termination

• Is there a collective bargaining agreement

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Fundamental Rule

• Follow the plan document

– If document is ambiguous or silent, follow the law

– If document explicitly tells to take a certain action (such as prorating hours of service for benefit accruals), do it

• If plan document is less than clear, consider adding language BEFORE TERMINATION DATE IF YOU CAN to describe the approach

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Early Planning Activities

• Data cleanup

• Review plan documentation

• Update address information for participants

• Consider plan amendments

• Develop overall timeline

• Communication is key

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Plan Liabilities

• Benefits are determined under the plan’s provisions in effect on the plan’s termination date– Post-termination plan amendments will be taken into

account if it does not decrease the value of plan benefits as of the termination date

• Plan liabilities are sum of – Lump sums to be paid,– Cost of annuities purchased (if any), and– Amount transferred to PBGC for missing participants

• For cash balance plans with variable rates– 5-year average of interest crediting rates– 5-year average of annuity conversion interest rates

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Plan Sufficiency

• Non- PBGC covered plans

– Plan sponsor makes additional contributions

– Reduce benefits on a pro-rata basis

– Follow allocation of asset provisions in plan

• PBGC covered plans

– Plan sponsor makes additional contributions

– Majority owner(s) elect to forgo benefits

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Plan Sufficiency

• Plan sponsor makes additional contributions– Commitment to fund the plan must be made in

writing by the contributing sponsor and/or controlled group members

– Deduction rules• Non-PBGC: subject to IRS 404• PBGC: can contribute and deduct the difference between

benefit liabilities and assets IN THE YEAR OF PLAN TERMINATION

– If the 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

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Plan Sufficiency

• Reduce benefits on a pro-rata basis

– Revenue Ruling 80-229 provides guidance

• Do not rely solely on 4044 allocations

– Not available for plans integrated with Social Security or that use permitted disparity

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Majority Owner

• PBGC Reg 4041.2

• Owns, directly or indirectly, 50% or more of:– An unincorporated trade or business;

– The capital or profits in a partnership;

– The voting stock or value of all stock of a corporation

• Attribution rules of IRC 414(b) and 414(c) apply

• Options qualify as ownership

• No lookback as in substantial owner definition

• Family attribution rules of IRC 1563(e)

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Majority Owner “Election to Forgo”

• PBGC Reg 4041.21(b)(2)

• One or more ‘majority owners’ may agree to forgo all or a portion of their benefit to extent necessary to satisfy all other benefit liabilities

• IRS does not recognize ‘Election to Forgo’ for purposes of minimum funding requirements

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Majority Owner “Election to Forgo”

• Agreement must be in writing

• Agreement must not be inconsistent with qualified domestic relations order

• If value of benefit is greater than $5,000 then requires spousal consent

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Majority Owner “Election to Forgo”

• Timing of election to forgo– Election to forgo must be made, with spousal

consent, during period• Beginning with date of issuance of notice of intent to

terminate (NOIT), and

• Ending with date of final distribution

– Alternative interpretation of above is• Beginning with date the plan’s termination resolution is

signed (or else not enforceable)

• Ending with date Form 500 is filed (or else actuary can’t sign EA-S)

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Majority Owner “Election to Forgo”

• Timing of election to forgo– Timing can be vital on stock sale of company

– Must make sure NOIT is issued, and Election to forgo is made, prior to date of closing of sale (must be a majority owner when sale is made)

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Administration During Plan Term

• Plan administrator may not distribute plan assets in connection with termination until PBGC’s review period ends

• Plan Administrator must continue to carry out normal plan operations during the termination process, including:– Putting participants into pay status

– Collecting contributions

– Investing plan assets

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Administration During Plan Term

• During the period beginning with the issuance of the NOIT until PBGC’s review period ends, the Plan Administrator may not:

– Purchase irrevocable commitments to provide any plan benefits

– Pay any plan benefits attributable to employer contributions (other than death benefits) in any form other than as an annuity

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Administration During Plan Term

• Exception: Plan Administrator my provide benefits attributable to employer contributions in a form other than an annuity if:– The participant terminated employment or is

otherwise permitted to receive the distributions;

– The distribution is consistent with prior practice; and

– The distribution is not likely to jeopardize the plan’s sufficiency for plan benefits

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Plan Termination StepsStep Timing

Resolution / Plan Amendment(s) Generally by date of plan termination (DOPT)

ERISA 204(h) Notice At least 15 days (45 days if large plan) prior to freeze

Notice of Intent to Terminate At least 60 days but no more than 90 days prior to proposed DOPT

Notice to Interested Parties At least 7 days but no more than 21 days prior to filing Form 5310 (3 day grace)

IRS Form 5310, etc. Prior to filing PBGC Form 500 (if distributions intended to wait for IRS LOD)

Notice of Plan Benefits Prior to filing PBGC Form 500

PBGC Form 500, etc. No later than 180 days after DOPT (no earliest date but DOPT is logical earliest date)

Notice of Annuity Information At least 45 days prior to distribution of plan assets

Distribution of Plan Assets Generally no more than 1 year after termination date (exceptions apply)Alternative: 240 days after Form 500 filed extended to 120 days after LOD if 5310 filed by the time Form 500 is filed

Notice of Annuity Contract No later than 30 days after distributions are completed

PBGC Form 501, etc. No later than 30 days after final distribution is made (no penalty if 90 days after distribution deadline)

Final PBGC premium filing Earlier of the regular filing date for the plan year in which final distribution occurs, or the date the post-distribution certification is filed

Final Form 5500 / 5500-SF / 5500-EZ No later than last day of 7th month after final distribution

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Plan Termination Steps

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Plan Termination Timeline

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PBGC Termination with IRS Submission - Critical Dates - PROPOSED TIMELINE Date: 07/13/2016

Plan Name:

Client Name:

Comment for Chart: Chart Base Date: 10/1/16

Yes/No Months to Chart: 16

Limit Distributions until receipt of IRS Letter of Determination? No Date Prepared: 8/28/16

Are Plan Benefits being frozen in the plan termination resolution? Yes Enter freeze date: 12/10/16

Does the plan have more than 100 participants for 204(h) purposes? No

Must supplemental annuity notices be sent to participants? Yes

Has the PBGC extended the date distributions are due? Yes 01/01/2018

Earliest Latest Enter dates in the "Date Completed" column until no error

Allowed Allowed Earliest Latest messages appear below. "Note" messages are OK.

A ?? 12/10/16 12/10/16

B ?? 11/25/16 11/15/16

C ?? 9/29/16 10/29/16 10/27/16

D ?? 12/26/16 1/25/17 12/28/16

E ?? 10/27/16 1/15/17 10/27/16

F ?? 11/20/16 12/4/16 12/1/16

G ?? 1/15/17 12/14/16

H ?? 12/10/16 1/15/17 12/10/16

I ?? 12/10/16

J ?? 12/12/16 6/26/17 1/15/17

K ?? 1/17/17

L ?? 3/20/17

M ?? 5/15/17

N ?? 3/21/17 1/1/18 7/30/17

O ?? 7/31/17 11/27/17 12/1/17 <== TOO LATE!

P ?? 7/30/17 2/28/18 9/15/17

Date 204(h) Notice Sent to Participants:

Date NOIT Sent to Participants:

Proposed Termination Date:

Date Notice of Plan Benefits Sent:

Form 501 *FILED* with PBGC:

Final Form 5500 due to EBSA (w/o extension):

Distributions of Benefits:

Majority Owner Waiver Executed

Form 500 *DATESTAMPED* by PBGC:

Determination Letter Application Sent to IRS:

Benefit Commitment Executed

The Testing of the Best Widgets in the World, Inc. Defined Benefit Pension Plan

The Testing of the Best Widgets in the World, Inc.

PGBC NonCompliance Review Period ends:

IRS Determination Letter Received:

Notice to Interested Parties Sent:

Form 500 *FILED* with PBGC:

Dates Done

Enter PBGC

extension date:

Date Termination Resolution Signed:

Timeline with proposed termination date of 12/28/2003

Click below for a description of the

Click "??" below for help on any

Plan Termination Timeline

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PBGC Termination with IRS Submission - Critical Dates - PROPOSED TIMELINE Date: 07/13/2016

Plan Name:

Client Name:

Comment for Chart: Chart Base Date: 10/1/16

Yes/No Months to Chart: 16

Limit Distributions until receipt of IRS Letter of Determination? No Date Prepared: 8/28/16

Are Plan Benefits being frozen in the plan termination resolution? Yes Enter freeze date: 12/10/16

Does the plan have more than 100 participants for 204(h) purposes? No

Must supplemental annuity notices be sent to participants? Yes

Has the PBGC extended the date distributions are due? Yes 01/01/2018

Earliest Latest Enter dates in the "Date Completed" column until no error

Allowed Allowed Earliest Latest messages appear below. "Note" messages are OK.

A ?? 12/10/16 12/10/16

B ?? 11/25/16 11/15/16

C ?? 9/29/16 10/29/16 10/27/16

D ?? 12/26/16 1/25/17 12/28/16

E ?? 10/27/16 1/15/17 10/27/16

F ?? 11/20/16 12/4/16 12/1/16

G ?? 1/15/17 12/14/16

H ?? 12/10/16 1/15/17 12/10/16

I ?? 12/10/16

J ?? 12/12/16 6/26/17 1/15/17

K ?? 1/17/17

L ?? 3/20/17

M ?? 5/15/17

N ?? 3/21/17 1/1/18 7/30/17

O ?? 7/31/17 11/27/17 9/15/17

P ?? 7/30/17 2/28/18 9/15/17

Date 204(h) Notice Sent to Participants:

Date NOIT Sent to Participants:

Proposed Termination Date:

Date Notice of Plan Benefits Sent:

The Testing of the Best Widgets in the World, Inc. Defined Benefit Pension Plan

Form 501 *FILED* with PBGC:

Final Form 5500 due to EBSA (w/o extension):

Distributions of Benefits:

Majority Owner Waiver Executed

Form 500 *DATESTAMPED* by PBGC:

Determination Letter Application Sent to IRS:

Benefit Commitment Executed

The Testing of the Best Widgets in the World, Inc.

PGBC NonCompliance Review Period ends:

IRS Determination Letter Received:

Notice to Interested Parties Sent:

Form 500 *FILED* with PBGC:

Dates Done

Enter PBGC

extension date:

Date Termination Resolution Signed:

Timeline with proposed termination date of 12/28/2016

Click below for a description of the

Click "??" below for help on any

Plan Termination Timeline (alt)

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Steps Earliest Latest Comments

Proposed termination date 01/01/2017

Proposed distribution date 04/01/2017

Proposed PBGC Form 500 filing date 01/01/2017

Issue a Notice of Intent to Terminate (NOIT) to all plan participants at least 60

days, and no more than 90 days, before the proposed termination date. 10/03/2016 to 11/02/2016

File Form 5310 with all attachments with the IRS. Must file prior to PBGC Form

500 to qualify for extended distribution period. (Not required. It is

recommended to seek legal advice on the decision to file this form.) 10/03/2016 to 06/29/2017

Issue a notice of plan benefits to all plan participants on or before filing the plan

termination with the PBGC 10/03/2016 to 06/29/2017

File Form 500 with attachments with the PBGC on or before the 180th day after

the proposed termination date. The PBGC has a 60 day review period or the

termination is deemed approved by the PBGC 10/04/2016 to 06/30/2017

PBGC 60-day blackout period 01/01/2017 to 03/02/2017 based on proposed date; assumes PBGC receipt date

Issue plan benefit election forms to all plan participants at least 60 days prior to

the proposed distribution date. 01/31/2017 to 04/30/2018

Issue to all plan participants a notice of annuity information with this benefit

election form, but no later than 45 days before the distribution date. 01/31/2017 to 05/15/2018

Distribute plan assets according to the participant’s election before the later of

(a) 180 days after expiration of the PBGC 60-day review period, or (b) 120 days

after receipt of a favorable determination letter from the IRS. 03/03/2017 to 06/29/2018 assumes IRS filing date of 12/31/2016, and FDL in 14 months

Issue a notice of annuity contract to participants receiving benefits in the form

of an annuity no later than 30 days after all plan benefits are distributed. 06/29/2018 to 07/29/2018 assumes IRS filing date of 12/31/2016, and FDL in 14 months

File PBGC Form 501, Post-Distribution Certification, no later than 30 days after

all plan benefits are distributed. 04/01/2017 to 05/01/2017 no penalties until 06/30/2017

File final 5500 form with the IRS no later than 7 months after all benefits

distributed (unless request an extension). 11/01/2017 to 01/16/2018

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Resolution and Amendments

• Resolution for corporations

• Written Record of Action for sole proprietors and partnerships

• Only need to update if current plan does not already include

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Resolution/Amendment Content

• Date accruals will be suspended

• Date of Plan Termination (DOPT)

• Participants become fully vested

• No new entrants shall become eligible after DOPT

• No new entrants shall become eligible after benefit accruals are suspended

• Any changes to 417(e) rules

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Resolution/Amendment Content

• 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

• Any removal of benefits which are not protected by IRC 411(d)(6) but are considered to be benefits under IRC 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

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Timing of Amendments

• As noted earlier, benefits are determined under plan provisions in effect DOPT, unless amendment does not decrease the value of benefits

• Must be adopted prior to DOPT– Removal of benefits not protected by 411(d)(6)– Change in 417(e)– Change in method of allocating excess assets

• Should be adopted prior to DOPT– Asset allocation if plan is insufficient– Providing lump sum distributions, if not already there– All amendments, if not seeking FDL

• May be adopted after DOPT if necessary to obtain FDL– Amendments to comply with laws and regulations

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Notice of Intent to Terminate

• Applies to PBGC-covered plans

• Issued to ‘affected parties’ as of proposed termination date

– Participants, beneficiaries, alternate payees, union

– Does not include PBGC

• Provided 60-90 days prior to proposed termination date

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Notice of Intent to Terminate

• Delivery by any method reasonably expected to ensure receipt– Hand delivery

– First class mail

– Electronic delivery by electronic media

– Commercial delivery service

– Posting is not a permissible method

• Model notice in PBGC’s Standard Termination Filing Instructions

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NOIT Content

• Identifying information• Intent to terminate plan• Sufficiency requirement• Cessation of accruals• Annuity information• Benefit information• Summary Plan Description• Continuation of monthly benefits for persons in

pay status• Extinguishment of guarantee

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Notice to Interested Parties

• Informs participants of their rights regarding the plan termination

• Only required if requesting a FDL

• Not required for one man plans

• Provided 7-21 days prior to filing Form 5310 (3 day grace)

• Sample notice in Announcement 2013-15

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Determination Letter

• Pros– Provides protection from risk of disqualification

– More protection from problems if the Plan were later to be chosen for examination

– More protection both for the client and the service provider

– No reliance on Opinion Letter or Advisory Letter for plan termination

– Extends the time for final distribution of benefits for PBGC-covered plans

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Determination Letter

• Cons

– Does not establish validity of termination

– Does not establish that benefit distributions were correct

– Issues discovered by the reviewing agent are no longer allowed to be cleaned up without penalty

– More likely to be chosen for an audit ‘to see if the distributions were made as proposed by the taxpayer’

– IRS User Fee ($2,000 for single employer, $3,000-$15,000 for multiple employer)

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Notice of Plan Benefits

• Send to each ‘affected party’

• Provided prior to filing PBGC Form 500

• Delivered in same manner as NOIT

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NOPB Content

• Identifying information– Name of plan and plan number

– Name and EIN of each contributing sponsor

– Name, address, and phone number of person to be contacted with questions

• Proposed termination date given in NOIT

• If benefit amount in notice is estimated, a statement stating so and that the benefit paid may be greater than or less than the estimate

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NOPB Content

• For persons not in pay status for more than a year as of proposed termination date– Personal data needed to calculate person’s

benefits, e.g. DOB, DOH, service, salary and hours

– Statement requesting that affected party promptly correct any information

– If any necessary data not available, the best available data, along with statement informing affected party of data not available and affording opportunity to provide

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NOPB Content

• For persons in pay status for more than a year as of proposed termination date– Amount and form of participant’s or beneficiary’s

benefit payable as of proposed termination date

– Amount and form of benefits, if any, payable upon participant’s death and name of beneficiary

– Amount and date of any increase or decrease in benefit that has occurred or is scheduled to occur after proposed termination date with explanation and reference to plan provision

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NOPB Content

• For persons without valid elections as of proposed DOPT– The amount and form of benefits payable at NRA in

any one form permitted under the plan– Alternative benefit forms, including those payable to a

beneficiary upon the person’s death– If the person is entitled to a benefit payable before

NRA, the amount and form of benefit that would be payable at the earliest commencement date (or, if more than once such form is payable at such date, any one of those forms) and whether the benefit on such date would be subject to future reduction

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NOPB Content

• For persons without valid elections as of proposed DOPT

– If benefits may be paid in a lump sum

• A description of the mortality table and interest rate(s) used and a reference to plan provisions

• An explanation of how interest rates are used to calculate lump sums and a statement that the use of a higher interest rate results in a smaller lump sum

• A statement that the applicable interest rate may change before distribution

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Standard Termination Notice

• PBGC Form 500, with Schedule EA-S and Schedule REP-S

• Filed within 180 days after proposed termination date

– May be filed before DOPT (but tough to do)

– Can file at same time as issuing NOIT and NOPBs

– If filing for FDL, do so at the same time or prior to filing Standard Termination Notice to get extension for distributions to 120 days after FDL

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PBGC Review Period

• PBGC has 60 days after receipt to review Form 500 for compliance– PBGC notifies filer of receipt date (not based on

postmark)

– 60 day review period is suspended if PBGC requests additional information

• PBGC will send one of three responses– Acknowledgment letter

– Notice of incomplete filing

– Notice of noncompliance

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Distribution of Plan Assets

• Distribution may begin after PBGC review period and must be distributed by the later of:– 180 days after PBGC review period; or– 120 days after receiving FDL if 5310 filed before 500

• If neither apply, then when ‘administratively feasible’– A matter of facts and circumstances– Generally, a period of one year from the plan

termination date is deemed to comply– Could be circumstances in which it takes longer– Ask PBGC for extension before deadline

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Distribution of Plan Assets

• PBGC Reg. 4041.28(c), 4041.28(d)

• Plan Administrator distributes assets by– purchasing annuity contracts from an insurer to satisfy all

benefit liabilities that must be so provided and provides each participants with a copy of the contract; and/or

– by otherwise providing benefit liabilities that need not be provided in annuity form (i.e. pay out lump sums)

• AFTAP restrictions remain in effect post-termination; however, restrictions do not apply if the accelerated payment or annuity purchase is to carry out the termination of the plan

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PBGC Form 501

• Filed within 30 days after final distribution made

• No penalty assessed if filed within 90 days after distribution deadline

• PBGC will nullity an otherwise valid standard termination if filing is late

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PBGC Form 501 - New Requirements

• For those who received a lump sum distribution:– A copy of the cancelled check or bank statement

with the individual’s name and distribution amount

– If unavailable then CALL PBGC and negotiate a suitable alternative

• Must send a copy of the most recent complete plan document and any amendments to it

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PBGC Audits

• Focus of audit is whether or not participants got proper distributions

• Audits are comprehensive and may require– Plan documents from plan inception

– Payroll records from date of hire

• Must maintain all records necessary to demonstrate compliance with section 4041 of ERISA and 29 CFR Part 4041 for 6 years after the date the Form 501 is filed

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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)

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Excise Tax on Excess Assets

• IRC 4980 imposes a 50% excise tax on reversions of excess plan assets

• The 50% excise tax is reduced to 20% if one of the following applies:

– Employer establishes or maintains a qualified replacement plan (conditions apply);

– Employer provides pro-rata increases; or

– Employer is in liquidation in bankruptcy

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Excise Tax on Excess Assets

• Example- $4 million in assets; $3 million in benefit liabilities

• Alternatives

– Take $1,000,000 reversion

– Allocate $200,000 to participants and $800,000 reversions

50% excise 20% excise

1) Reversion $1,000,000 $800,000

2) Ordinary tax (34%) $340,000 $272,000

3) Excise tax $500,000 $160,000

4) Remaining (1 - 2 - 3) $160,000 $368,000

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Qualified Replacement Plan

• At least 95% of the active participants in the terminated plan who remain as employees are active participants; and

• A direct transfer of 25% (or more) of the surplus of the original plan is made to the qualified replacement plan

• The funds are allocated under the plan to 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 ratable over 7 years beginning with the year of transfer

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Pro-Rata Benefit Increase

• 20% (or more) of the surplus assets are allocated to participants to provide pro-rata benefit increases in proportion to present value of accrued benefits

• Any benefit increase must meet the nondiscrimination requirements of IRS 410(b) and 401(a)(4)

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Pro-Rata Benefit Increase

• 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

• Any benefit increase that eliminates a reversion entirely will eliminate the excise tax

• If a participant cannot receive share due to 415 limit, it is OK to give the rest to others

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Exception to Excise 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; or

• Governmental plans within the meaning of IRC 414(d)

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Special Accounting Issues

• Curtailments

• Settlements

• Special Termination Benefit

Miscellaneous

• PBGC Premium Due Date

– Premium Payment Year pursuant to a standard termination, the final premium payment is the earlier of:

• The Normal Premium Due Date (i.e. the due date had the plan not been terminated), or

• The date with the form 501 is filed

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Questions