The plan is funded exclusively by the purchase of individual insurance contracts in accordance with IRC section 412(i).

Such contracts provide for level annual premium payments to be paid at retirement age for each individual participating the plan, and commencing with the date the individual became a participant in the plan.

Benefits provided by the plan are equal to the benefits provided under each contract at normal retirement age under the plan.

Benefits are guaranteed.

Premiums payable for the plan year, and all prior plan years, under such contracts have been paid before lapse or there is reinstatement of the policy.

No rights under such contract have been subject to a security interest at any time during the plan year.

No policy loans are outstanding at any time during the plan year.

All benefits must be funded through contracts of the same series.

The contracts must have a cash value based on the same terms (including interest and mortality assumptions) and the same conversion rights. See Reg. 1.401(a)(4)(3)(b)(5)(iv).

IRC section 414(k) accounts provide benefits from a combination of funding features, i.e., the defined benefit feature and the defined contribution feature. Contributions going into the IRC section 414(k) separate account are subject to the IRC section 415(c)(1) allocation limitations and there is no limitation in the amount being distributed. The distributions coming from the defined benefit plan are subject to the IRC section 415(b)(1) distribution limitations and there is no limit on the contribution amount going into the plan (except under IRC sections 404 and 412). TB Memo 98-11.

According to Reg. 1.411(d)-4 the establishment of a separate account at normal retirement age is treated as if it were an amendment that eliminates the defined benefit feature of a participant's benefit under a defined benefit plan is an IRC section 411(d)(6) violation unless the express requirements of the regulation under IRC section 411(d)(6) are satisfied.

Except in the case of a plan subject to IRC section 412, Minimum Funding Standards, Reg. 1.411(d)–2(d) provides for full vesting in the event of a complete discontinuance of contributions. There can be a complete discontinuance even though funds are contributed if the amounts are not substantial enough to reflect the intent to continue or maintain the plan.

The date of termination is determined under Reg. 1.411(d)–2. Check the trust records to determine whether benefits become nonforfeitable on the day the plan actually terminated and not a later date.

Ensure that the date of termination has been established, that the benefits of participants as well as other plan liabilities are established as of the date of termination, and all plan assets are distributed to satisfy plan liabilities as soon as administratively feasible after the termination date. See Rev. Rul. 89–87, 1989–2 C.B. 2.

A plan terminated within a few years after establishment will be qualified on termination only if the abandonment is due to business necessity which was not reasonably foreseeable when the plan was adopted. See Rev. Rul. 69–25, 1969–1 C.B. 113. Whether the employer had a valid reason for terminating the plan and whether that reason was unforeseeable may be determined by:

If the facts reveal that the employer’s plan was not intended as a permanent and continuing program, consider whether the qualified status of the plan should be revoked retroactively. See IRM 4.72.12, Revocations of IRC 401(a) Plans, on revocation procedures.

Discrimination in favor of highly compensated employees may result when a plan is terminated. Analyze all of the information necessary to test for such discrimination. See Reg. 1.401(a)(4)–5.

For plan with cash or deferred arrangements, to demonstrate the plan is not discriminatory, the plan must meet the actual deferral percentage test (ADP Test). See IRC section 401(k)(3)(A)(ii). If there are excess contributions, there are several permissible correction methods as follows:

For plan with matching contributions and employee contributions, to demonstrate the plan is not discriminatory, the plan must meet the average contribution percentage test (ACP Test). See IRC section 401(m)(2)(A). If there are excess aggregate contributions, there are several permissible correction methods as follows:

Ensure compliance with pre-termination restrictions on pension benefits contained in Reg. 1.401(a)(4)–5(b).

If the employer has received a favorable determination letter regarding the termination, determine whether allocations were made in accordance with the terms of the approved termination and that all conditional caveats in the determination letter have been satisfied.

If the plan was terminated and a determination letter was not secured, analyze the final distributions to participants. If the distributions reflect discrimination:

A defined contribution plan may satisfy the requirements of IRC section 401(a)(4) if the annual allocation of contributions are nondiscriminatory even though the benefits are discriminatory.

Verify whether a prohibited transaction may have occurred after plan termination. If yes, see IRM 4.72.11, Prohibited Transactions, for more information on prohibited transactions.

The minimum funding standard in the year of termination is applied differently for defined benefit plans and for defined contribution plans which are subject to minimum funding standards. See Rev. Rul. 79–237, 1979–2 C.B. 190. Review the plan records to ensure that the minimum funding standards have been met. See text 1.2.4.

Distributions from terminated plans are often a single-sum payment. However, if employment has not terminated, such distributions do not qualify as lump sum distributions under IRC section 402(e)(4), except for participants over age 59 1/2.

Participants may roll over distributions into an eligible retirement plan. A partial distribution may be rolled over only if the distribution is not one of a series of substantially equal periodic payments.

A frozen plan generally refers to a plan in which future accruals have ceased and the trust continues in operation. For a profit-sharing plan no future contributions will be made, but for a pension plan contributions must continue if required by IRC section 412.

Under Rev. Rul. 89–87, 1989–2 C.B. 2, a plan is not terminated simply because it is amended to cease future accruals. Such amendment may require increased vesting under Reg. 1.411(d)–2 but, because assets have not been distributed and are not in the process of prompt liquidation, the plan is not considered terminated for qualification purposes. See section 1.2.19.

The provisions relating to mergers or consolidations of plans or transfers of assets or liabilities from one plan to another are contained in IRC sections 401(a)(12) and 414(l) and ERISA 208A. These transactions frequently occur as a result of the purchase or sale of an ongoing business. When a corporation, with a qualified plan, purchases another corporation, which also has a qualified plan, the buying corporation is faced with several alternatives. The buyer can terminate the seller’s plan, operate the seller’s plan unchanged, freeze the seller’s plan, or operate the seller’s plan separately but amend it to conform to the buyer’s plan. The buyer corporation may also merge or consolidate the seller’s plan with the buyer’s plan.

Of course, a merger, consolidation, or transfer may occur whether or not there is any form of business reorganization.

When examining a plan involving a merger, consolidation, or transfer of assets or liabilities, determine whether there was a plan termination or partial termination resulting from plan amendments or plan changes as a result of the IRC section 414(l) transaction (such as decreased coverage or accruals or a change in a plan from defined benefit to defined contribution).

Form 5310A, Notice of Plan Merger or Consolidation, Spinoff, or Transfer of Plan Assets or Liabilities; Notice of Qualified Separate Lines of Business (Info Copy Only), must be filed as a notice in such cases. See IRC section 6058(b).

During the examination of a plan that has terminated, verify the date of termination and the date of any earlier partial termination. Be aware that—

Inspect the trust records for the year(s) examined to see if a substantial decrease of participants’ benefit accruals has occurred. When this has occurred, determine if a partial termination has resulted and, if appropriate, verify whether nonforfeitability has been extended to the accounts of the affected participants involved (current and terminated). Such a determination must be based on the facts and circumstances in each case. See Reg. 1.411(d)–2(b) for explanations of, and procedural instructions concerning, partial terminations.

If there has been a termination, ensure that the plan has been operating in conformance with the applicable qualification requirements and that the affected assets are being distributed in a nondiscriminatory manner.

During the examination of a terminated plan, complete the Plan Termination Standards Worksheet (Form 6677) or review the previously completed Form 6677 if an application for determination has been processed.

Check the date of the most recent IRS determination letter on the Form 5500, filed for the plan. Verify this date by checking the Employee Plans Master File (EPMF) to see if and when the most recent determination letter was issued. If necessary, request a copy of the latest determination letter to determine whether the plan received a determination letter covering all the qualification requirements in effect as of the date of plan termination.
EXAMPLE 1: The latest determination letter for Company C’s defined benefit plan, which terminated in 1999, was issued in 1981. The plan therefore did not receive a letter covering the qualification requirements as in effect through the date of plan termination and may not have been timely amended to comply with those laws.

Check to see whether plan amendments were timely adopted to comply with any qualification requirements that became applicable with respect to the plan between the date of the last determination letter and the date of plan termination. In addition, check if the plan operated in accordance with all plan amendments from the effective date of the amendments.

Ongoing qualified plans generally have until the end of the remedial amendment period to amend for changes in the qualification requirements. See text 1.2.2.

To satisfy IRC section 401(a)(26), on one day in each plan year (beginning in 1989 and ending when the plan terminated), each of the employer’s defined benefit plans must benefit at least the lesser of 50 employees or 40% of the employer’s employees.

For purposes of the minimum participation test, all employees of controlled groups of corporations under IRC section 414(b) , all employees of entities under common control under IRC section 414(c), and all employees of affiliated service groups under IRC section 414(m) are treated as employed by a single employer.

To satisfy IRC section 401(a)(17) for plan years beginning after 12/31/1993, compensation must be capped at $150,000 ($200,000 for plan years beginning after 12/31/2001), as adjusted for cost-of-living. This requirement applies even if plan benefits were based on average compensation.

A plan will not be considered discriminatory merely because contributions and benefits of employees under the plan favor HCEs if the plan provides for the disparity in allocations or accruals permitted under IRC sections 401(a)(5) and 401(l). There is no requirement that plans provide for permitted disparity. However, a plan can provide for a disparity in contributions or benefits in conformance with the permitted disparity rules under IRC section 401(l) as amended by TRA ‘86.

In general, IRC section 401(l), as amended by TRA ‘86, requires that the rate of allocations or accruals with respect to compensation up to a specified integration level be at least one-half of the rate of allocations or accruals with respect to compensation above the integration level. In addition, the disparity between the rate of allocations or accruals with respect to compensation up to the integration level and that rate above the integration level shall in no case exceed 5.7% of compensation in a defined contribution plan, and 3/4 of a percentage point of average annual compensation per year in the case of a defined benefit plan (with no more than 35 total years taken into account). Under certain circumstances, (i.e., certain integration levels other than taxable wage base under a defined contribution plan, or benefits commencing at an age other than social security retirement age under a defined benefit plan) the 5.7% limit and the 3/4 of a percentage point limit must be reduced. See Regs. 1.401(l)–1 through 1.401(l)–6.

IRC section 415 imposes limits on the amount that can be contributed to, or benefits that can be paid from, qualified plans for a participant, including any additional allocations or accruals on plan termination. The limitations of IRC section 415, except to the extent choices may be made, may be incorporated by reference in the employer’s plan. See IRM 4.72.6, Exam Guidelines for IRC 415(b) and IRM 4.72.7 Exam Guidelines for IRC 415(c).

In accordance with Reg. 1.401(a)–20, Q&A–2, annuity contracts that are purchased and distributed to a participant or spouse by a plan subject to the survivor annuity requirements must provide both a QJSA and a QPSA to remain qualified.

Plans are required to provide each participant within a reasonable period of time before the annuity starting date a written explanation of the terms and conditions of the QJSA or QPSA, as applicable. See Reg. 1.401(a)–20, Q&As 34–36.

In addition, spousal consent must be obtained for any form of distribution other than a QPSA or QJSA. See IRM 4.72.9, Qualified Joint and Survivor Annuity Requirements.

The Unemployment Compensation Amendments of 1992, Pub. L. 102–318, (UCA) added IRC section 401(a)(31), and amended IRC sections 402(f) and 3405. See also Notice 93–3, 1993–1 C.B. 293, Notice 92–48, 1992–2 C.B. 377, and Notice 93–26, 1993–1 C.B. 308.

These distribution, withholding, and notice requirements apply to distributions made after 12/31/1992. Plans are required to be amended to comply with UCA on or before the last day of the first plan year beginning on or after 1/1/1994 (or, if later, the last day by which amendments must be made to comply with TRA ‘86 remedial amendment period).

Plans that terminate before the required amendment date in the preceding sentence must be amended by the time of termination to comply with these requirements. This plan amendment must be made effective for distributions made to participants after 12/31/1992, and the plan must have been operated in accordance with the amendment from its effective date.

A plan must satisfy all the qualification requirements in effect on the date of plan termination. See text 1.2.19 and 1.3.8. Failure to do so will disqualify the plan.

The question of when a plan termination has occurred with respect to frozen plans and wasting trusts (a plan or trust for which all allocations or accruals have ceased), is discussed in Rev. Rul. 89–87, 1989–2 C.B. 2. Many plan sponsors thought that a plan terminated when it ceased benefit accruals. As a result, these ongoing plans may not have been amended to comply with qualification requirements, and may therefore have lost their qualified status.

IRC section 411(d)(3) provides that upon a partial termination, benefits of all affected participants accrued as of the date of the partial termination to the extent funded, or the amounts credited to the participant’s account must be nonforfeitable. Reg. 1.411(d)–2(b) provides for a facts and circumstances test in determining whether or not a partial termination has occurred. See also, text 1.2.7 and 1.3.

IRC section 411(d)(3) requires that, in the case of a plan to which IRC section 412 does not apply, upon complete discontinuance of contributions under the plan, the rights of all affected employees to benefits accrued to the date of such discontinuance, to the extent funded as of such date, or the amounts credited to the employees accounts, must be nonforfeitable.

IRC section 401(a)(2) provides that under a qualified plan it must be impossible for any part of the trust to be used for purposes other than the exclusive benefit of the employees or their beneficiaries until all plan liabilities have been satisfied. Under Reg. 1.401–2(b), the employer may reserve the right to recover, at plan termination, any balance left in the trust after satisfaction of these liabilities, to the extent that the balance is due to an erroneous actuarial computation. See text 1.2.8 for a complete discussion of excess asset reversions.

Implementation Guidelines for Termination of Defined Benefit Pension Plans provide that any attempt to recover surplus assets in termination/reestablishment, or spinoff/termination will be treated as a diversion of assets for a purpose other than the exclusive benefit of employees unless certain conditions are met. See Treasury News dated 5/24/1984, as supplemented by a teletype dated 6/1/1984, and entitled "Processing Employee Plans Cases that Terminate with Reversion of Surplus Assets to the employer." See text 1.2.10 for a complete discussion on the Implementation Guidelines.

The minimum funding standards of IRC section 412 continue to apply to terminating plans during the year of termination. Rev. Rul. 79–237, 1979–2 C.B. 190 provides guidance concerning the application of the minimum funding standard, and the taxes due on failure to meet the standard, to plans that are terminating. See text 1.2.4 for a complete discussion of the Minimum Funding Requirements.