7.12.1  Plan Terminations

Manual Transmittal

September 01, 2015


(1) This transmits revised IRM 7.12.1, Employee Plans Guidelines, Plan Terminations.

Material Changes

(1) This IRM is updated to reflect current versions of annual revenue procedures.

(2) This IRM is updated to meet the requirements of P.L. 111-274 (H.R. 946), the Plain Writing Act of 2010. The Act states writing must be clear, concise, well-organized, and follow other best practices appropriate to the subject or field and intended audience.

(3) This IRM is updated to reflect the newest version of Form 5310 published December 2013.

(4) Exhibit 7.12.1-1, EP Examinations Referral Mailing Address, is removed. All references to EP Examinations referrals are updated to reference IRM 7.11.10, EP Examination and Fraud Referral Procedures.

Effect on Other Documents

This supersedes IRM 7.12.1 dated July 16, 2013.


Tax Exempt and Government Entities
Employee Plans

Effective Date


Robert S. Choi
Director, Employee Plans
Tax Exempt and Government Entities  (07-16-2013)

  1. The purpose of IRM 7.12.1 is to provide procedures and technical guidance on issues that may arise when reviewing Determination Letter (DL) applications for terminating and terminated retirement plans.

  2. This IRM is designed for Employee Plans (EP) Determinations specialists who review:

    • Form 5310, Application for Determination for Terminating Plan.

    • Form 5300, Application for Determination for Employee Benefit Plan requesting a ruling on a partial plan termination.

    • Form 5300, Application for Determination for Employee Benefit Plan for termination of collectively bargained multi-employer or multiple-employer plan covered by PBGC insurance.

  3. When reviewing an application for a full or partial termination, complete the following:

    • Form 5621, Technical Analysis Control Sheet (revised 3-2005)

    • Form 6677, Plan Termination Standards Worksheet

    • Any other appropriate forms

  4. Use this IRM with IRM 7.11.1, Employee Plans Determination Letter Program which gives general DL application processing procedures.  (09-11-2015)
Documents Included with Application

  1. A plan sponsor must submit certain documents with a DL application for a terminating plan Rev. Proc. 2015-6, 2015-1 I.R.B. 194 (revised annually) sections 6 and 12.

  2. These documents include:

    • Form 8717, User Fee for Employee Plan Determination Letter Request, and a check covering the user fee, if applicable.

    • Form 5310, Application for Determination for Terminating Plan, signed and dated under the penalties of perjury.

    • Procedural Requirements Checklist set forth in the Form 5310.

    • Form 6088, Distributable Benefits from Employee Pension Benefit Plans for all Defined Benefit (DB) or underfunded Defined Contribution (DC) plans. If a collectively bargained plan is terminating and the plan benefits employees who are not collectively bargained employees (Treas. Regs. 1.410(b)-(6)(d)), a Form 6088 is also required. A separate Form 6088 is required for each employer employing non-collectively bargained employees.

    • Form 8905, Certification of Intent to Adopt a Pre-Approved Plan, if applicable.

    • Complete copy of the most current plan document and/or adoption agreement.


      A plan restatement may not be required for terminating plans per Rev. Proc. 2015-6, section 12.07.

    • Last Favorable Determination Letter (LFDL) or if the plan does not have a LFDL, a copy of the prior plan document. See IRM, Determining the Scope/Verifying Prior Law.

    • Supplemental information or schedules required by the forms or form instructions. For example, the application must include copies of all records of actions taken to terminate the plan (such as a board of directors resolution).

    • Required interim amendments for the plan's current cycle, even if the amendments are dated earlier than a previous DL. See IRM, Applicable Interim Amendments.

    • Additional schedules, such as a schedule listing information on employees who separated from vesting service with less than 100% vesting.

    • Discretionary amendments adopted or effective in the plan's current cycle. See IRM, Discretionary Amendments.

  3. A specialist may request additional items as needed to issue a favorable DL. Rev. Proc. 2015-6, section 6.04.

  4. If the application is incomplete, return it using the procedures in Rev. Proc. 2015-6, section 6.13.  (09-11-2015)
Determining the Scope/Verifying Prior Law

  1. Always verify that the plan was properly amended for prior legislation. Verify compliance with the applicable Cumulative List (CL) for the plan sponsors on-cycle Remedial Amendment Cycle (RAC) immediately preceding the cycle that the application was submitted.


    A plan sponsor with an EIN ending in 1 submits a Form 5310 application on March 15, 2015. Since the EIN ends in 1, the plan sponsor would normally fall under cycle A. Therefore, the scope of the review must begin with the preceding cycle A RAC. The applicable CL for cycle A2 is the 2010 Cumulative List.

  2. Verify that the plan complies with the applicable CL for the preceding RAC for every application.

  3. To prove they complied with prior law, the plan sponsor may provide either:

    1. A copy of the LFDL for the plan's prior RAC.

    2. A timely adopted plan document/adoption agreement for the plan's applicable CL for the prior RAC.

  4. If the plan sponsor can't prove that the plan was timely amended for the applicable CL for the prior RAC, request managerial approval to expand the scope of review to prior laws.

  5. If a plan sponsor is not able to prove that the plan was timely amended for prior law, the plan is considered to have a Plan Document Failure as described under Rev. Proc. 2013-12, 2013-1 IRB 313 and they may need to enter into a closing agreement to correct the failure. Consult with your manager and see IRM 7.11.8, Employee Plans Determination Letter Program, EP Determinations Closing Agreement Program.  (09-11-2015)
Interim Amendments

  1. Once you've verified prior law, review the application for subsequent law changes.

  2. The termination of a plan ends the plan’s Remedial Amendment Period (RAP) and generally shortens the RAC for the plan (Rev. Proc. 2007-44, 2007-2 C.B. 54 section 8).

  3. When a plan terminates after the effective date of a change in law, but prior to the date that the plan sponsor is normally required to adopt an amendment for that law, the plan must be amended, in connection with the termination, to comply with the law (Rev. Proc. 2015-6, section 12.05).

  4. Use the Issue Focus Reports on Terminations to determine whether new laws are relevant to a particular terminating plan. These reports are posted on the TEGE intranet site http://tege.web.irs.gov/home.asp:

    • Select "Job" on the top of the page.

    • Select "Case Closing" under the Revenue Agent section.

    • Go to the "Determinations and Determinations Quality Assurance" section.  (07-16-2013)
IRC 401(b) Period for Interim Amendments

  1. When reviewing interim amendments, ensure the amendment was timely adopted according to the time in IRC 401(b) and Rev. Proc. 2007-44, section 5.

  2. The IRC 401(b) period or RAP is the period when plan sponsors may retroactively amend their plan to eliminate "disqualifying provisions."

  3. For existing plans, a disqualifying provision is any plan provision or absence of one which causes the plan to fail IRC 401(a). This can be the result of an amendment to the plan or the failure to make an amendment to the plan when one is required due to the enactment of statutory changes.

  4. Generally, the 401(b) period for interim amendments begins on the date the provision becomes effective.

  5. Generally, the 401(b) period for interim amendments ends on the later of: the last day of the plan year or the employer's income tax return due date (plus extensions) for the tax year in which the amendment becomes effective.

  6. However, the Commissioner of Internal Revenue may extend the 401(b) period under Treas. Reg. 1.401(b)-1(f).

  7. As noted in IRM, Interim Amendments, termination of a plan may shorten any remedial amendment period open at the time of termination.

  8. If a plan sponsor doesn't timely adopt an interim amendment, the plan is considered to have a Plan Document Failure as described under Rev. Proc. 2013-12 and may need to enter into a closing agreement to correct the failure. Consult with your manager and see IRM 7.11.8, Employee Plans Determination Letter Program, EP Determinations Closing Agreement Program.  (07-16-2013)
Discretionary Amendments

  1. Review any discretionary amendments submitted with the application.

  2. A discretionary amendment is any amendment that is not an interim amendment. Discretionary amendments are not amendments that are required to comply with statutory law changes or amendments that are integrally related to those required amendments. They are optional amendments a plan sponsor adopts to reflect changes in its plan design.

  3. When reviewing a discretionary amendment, ensure that it does not violate IRC 401(b) or IRC 411(d)(6).  (07-16-2013)
IRC 401(b) Period for Discretionary Amendments

  1. The general rule for discretionary amendments under Rev. Proc. 2007-44, section 5.05, is that they are considered adopted timely if the plan sponsor adopts it by the end of the plan year in which it is effective.


    Plan sponsors may adopt corrective amendments under the Employee Plans Compliance Resolution System (EPCRS) with retroactive effective dates. See IRM 7.2.2, Employee Plans Compliance Resolution System (EPCRS) and Rev. Proc. 2013-12.

  2. If a plan sponsor doesn't timely adopt a discretionary amendment, the plan is considered to have a Plan Document Failure as described under Rev. Proc. 2013-12 and may need to enter into a closing agreement to correct the failure. Consult with your manager and see IRM 7.11.8, Employee Plans Determination Letter Program, EP Determinations Closing Agreement Program.  (07-16-2013)
IRC 411(d)(6) Issues with Amendments

  1. Protected benefits, to the extent they have accrued, are protected under IRC 411(d)(6) and can't be reduced, eliminated, or be subject to employer discretion except to the extent permitted in the regulations. See Treas. Reg. 1.411(d)-4 Q&A-1.

  2. Protected benefits include:

    1. Accrued benefits under the plan.

    2. Early retirement benefits.

    3. Retirement-type subsidies.

    4. Optional forms of benefits.

  3. To determine whether or not any participant’s accrued benefit is decreased, consider all plan provisions affecting accrued benefits including: changes in service counting rules, break-in-service rules, accrual rules, and actuarial factors used to determine optional or early retirement benefits. See Treas. Reg. 1.411(d)-3(b).

  4. Also, IRC 411(a)(10) protects plan participants from amendments that reduce the vesting schedule. A change in vesting schedules is any direct or indirect change that alters the way in which a participant's nonforfeitable percentage is determined. See Treas. Reg. 1.411(a)-8(c). An example of an indirect change is a change in the way a plan counts vesting service or when a plan changes to or from a top heavy vesting schedule. For these changes:

    1. IRC 411(a)(10)(A) requires that a participant's vested percentage of his or her accrued benefit may not be decreased as of the later of: the date the amendment is adopted or the date the amendment becomes effective.

    2. IRC 411(a)(10)(B) requires that each participant with 3 or more years of service must be given the opportunity, within a reasonable period of time after the plan sponsor amends the vesting schedule, to elect the former schedule for all (past or future) accrued benefits.

  5. A plan's transfer of assets or any other transaction which may amend or have the effect of amending a plan must still comply with IRC 411(d)(6). Under most circumstances, participant's protected benefits may not be eliminated, however, the transfer between DC plans that eliminates a 411(d)(6) benefit is allowed if it satisfies the conditions in Treas. Reg. 1.411(d)-4 Q&A-3(b).  (07-16-2013)
Permanency Requirements/Reasons for Termination

  1. A plan must be established with the intent to be a "permanent" not "temporary" program (Treas. Reg. 1.401-1(b)(2)).

  2. Review Form 5310 lines 4(d), 5(a)(2) and 5(a)(3) to determine how long the plan has been in existence.

  3. If a plan terminated within a few years after its adoption, the employer must give a valid business reason for the termination. Otherwise, there is a presumption that the plan was not intended to be a permanent program from its inception. Courts have held that when a long established plan terminates without a valid business reason, it does not affect its qualification under IRC 401(a). See Rev. Rul. 72-239, 1972-1 C.B. 107.

  4. Form 5310 line 14 lists the following reasons for plan termination:

    • Change in ownership by merger

    • Liquidation or dissolution of employer

    • Change in ownership by sale or transfer

    • Adverse business conditions

    • Adoption of new plan

  5. Form 5310 line 14 also has a section for "Other" reasons for the plan termination. Other acceptable business reasons for plan termination could be:

    • Substantial change in stock ownership

    • Employee dissatisfaction with the plan

    • Bankruptcy of employer

    When a plan sponsor lists any reason in "Other," review all the surrounding facts and circumstances and determine whether the plan was intended to be permanent. Consider the extent of any tax advantages the employer derived when the plan existed.

  6. Form 5310 line 19 is also used to determine permanency. Failing repetitively to make contributions in a discretionary profit-sharing plan during profitable years may indicate the employer lacked intent for the plan to be permanent.

  7. If you believe that an employer lacked intent to keep their plan permanently, consult with your manager and discuss disqualifying the plan.

  8. If bankruptcy is the reason for termination for a pension plan, review the Form 5310 line 17(h) to determine if there is a funding deficiency or if the employer owes excise taxes. If you determine that the employer may owe excise taxes, use EMFOLT on the Integrated Data Retrieval System (IDRS) to research the Form 5500, Schedule B for the year of the deficiency to confirm. If IDRS confirms that excise taxes are due, go to the following website: http://mysbse.web.irs.gov/exam/tip/bankruptcy/contacts/12268.aspx and contact the bankruptcy coordinator for the state that the employer does business in. The bankruptcy coordinator will provide the Insolvency Bankruptcy specialist assigned to the employer's bankruptcy case. Refer the case to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures to have them calculate the excise tax and have them report that amount to the Bankruptcy specialist BEFORE the bar date. See IRM 5.9, Bankruptcy and Other Insolvencies. EP Examination must calculate the excise tax because it is an operational issue.


    If the bar date has passed, we can no longer collect any excise taxes. Document the Form 5621 with an explanation.  (07-16-2013)
Discontinuance of Contributions

  1. This section only applies to plans that are not subject to IRC 412, such as profit sharing and stock bonus plans. For plans subject to IRC 412, see IRM, Minimum Funding Standards.

  2. Pursue a possible discontinuance of contributions only if there are participants who have forfeitures during the years under consideration. See Form 5310, line 19(b).

  3. If the plan sponsor stops making contributions or makes contributions that aren't substantial, the plan may have incurred a complete discontinuance. A profit sharing plan must make recurring and substantial contributions for employees (Treas. Reg. 1.401-1(b)(2)).

  4. A plan may have had a complete discontinuance of contributions even if the plan sponsor made contributions but the amounts are not substantial enough to reflect the plan sponsor’s intent to continue to maintain the plan (Treas. Reg. 1.411(d)-2(d)(1)).

  5. Review Form 5310, line 19a, which lists the plan sponsor contributions for the current plan year and the five prior plan years, to determine if the plan has had a complete discontinuance.

  6. Consider all of the relevant facts and circumstances of a case; but generally, in a profit-sharing or stock bonus plan, if the plan sponsor has failed to make substantial contributions in three out of five years, and there is a pattern of profits earned, consider the issue of discontinuance of contributions.

  7. For a single employer plan, a complete discontinuance becomes effective the last day of the employer’s tax year after the tax year for which the employer made a substantial contribution to the profit-sharing plan. For a plan maintained by more than one employer, the discontinuance is effective the last day of the plan year after the plan year within which the employer last made a substantial contribution. See Treas. Reg. 1.411(d)-2(d)(2).

  8. If the plan has incurred a complete discontinuance, all affected employees rights to benefits accrued to the date of discontinuance, to the extent funded as of that date, or the amounts credited to the employees’ accounts at that time, must be nonforfeitable (100 percent vested). See IRC 411(d)(3) and Treas. Reg. 1.411(d)-2(a)(1)(ii).  (07-16-2013)
Partial Terminations

  1. Upon partial termination, all "affected employees" rights’ to all amounts credited to their account will become nonforfeitable. See IRC 411(d)(3).

  2. Only pursue a possible partial termination if there were participants who had forfeitures during the years under consideration.

  3. The term "affected employees" is not defined by the Code or Regulations. However, according to GCM 39310 and FSA 1992-1023-1 (Field Service Memo issued in 1992), the term "affected employees" is any employee or former employee who has not forfeited his non-vested interest as of the proposed termination date.

  4. To determine if a plan has had a partial termination, first calculate the turnover rate (See IRM, Calculating the Turnover Rate) but also consider all of the relevant facts and circumstances of a particular case.

  5. Based on facts and circumstance, there is a presumption that a qualified plan has partially terminated, per IRC 411(d)(3) when the turnover rate for participating employees is at least 20 percent. The revenue ruling also states it depends on all of the facts and circumstance in the particular case when deciding whether or not a partial termination has occurred when the participant turnover is less than 20 percent (Rev. Rul. 2007-43, 2007-2 C.B. 45).

  6. Some facts and circumstances to consider when deciding if a plan has had a partial termination:

    • A plan may have a high turnover rate as part of its normal routine. Consider these facts to determine if the turnover is routine for a particular plan sponsor: the turnover rate in other periods, the extent to which terminated employees were actually replaced, and whether the new employees performed the same functions, had the same job classification or title, and received comparable compensation.

    • If there is a significant increase in the turnover rate for a period, the plan may have incurred a partial termination.

    • Consider if the plan has increased its possibility for prohibited discrimination.

  7. If a DB plan’s cessation or reduction of future benefit accruals creates or increases a potential for reversion, the plan is deemed to have a partial termination.  (07-16-2013)
Calculating the Turnover Rate

  1. Review Form 5310 line 16(a) to review the turnover rate.

  2. The turnover rate is the number of participating employees who had an employer-initiated severance from employment during the applicable period divided by the sum of all of the participating employees at the start of the applicable period plus the employees who became participants during the applicable period. The applicable period depends on the circumstances: it is a plan year (or, for a plan year less than 12 months, the plan year plus the immediately preceding plan year) or a longer period if employer has had a series of related severances from employment. See Tipton and Kalmback, Inc. v. Commissioner, 83 TC 154, 5 EBC 1976 (1984); and Weil v. Terson Co. Retirement Plan Committee, 750 F.2d 10, 5 ECB 2537 (2nd Cir. 1984).

  3. Turnover rate factors:

    • Consider all participating employees to calculate the turnover rate, including vested and nonvested.

    • Employer-initiated severance from employment generally includes any severance from employment other than those because of death, disability, or retirement on or after normal retirement age.

    • A severance from employment is employer initiated even if caused by an event outside the employer’s control such as terminations due to depressed economic conditions.

    • The employer may be able to prove that an employees' severance was voluntary (not employer-initiated) by providing information from personnel files, employee statements, or other corporate records.  (07-16-2013)
Examples of Partial Termination

  1. Discharge by the employer of 95 of 165 participants under the plan in connection with the dissolution of one division of the employer’s business. See Rev. Rul. 81-27, 1981-1 C.B. 228.

  2. Discharge of 12 of 15 participating employees who refused to transfer to the employer’s new business location when the old location was closed. See Rev. Rul. 73-284, 1973-2 C.B. 139.

  3. Reduction in participation of 34 percent and 51 percent in consecutive years where adverse business conditions beyond the employer’s control resulted in participation reductions. See Tipton and Kalmbach, Inc. v. Commissioner, 83 TC 154, 5 EBC 1976 (1984).

  4. Relocation of two of an employer’s 16 divisions resulting in the termination of over 75 percent of the employees in the affected divisions, and termination of 27 percent of the total plan participants. See Weil v. Terson Co. Retirement Plan Committee, 750 F.2d 10, 5 EBC 2537 (2nd Cir. 1984).  (07-16-2013)
Percentage of Affected Employees

  1. In the partial termination examples, a significant percentage of employees were excluded from participating in the plan.

  2. Matz v. Household International Tax Reduction Investment Plan, 388 F.3d 570 (7th Cir. 2004) held that there is a rebuttable presumption that a 20 percent or greater reduction in plan participants is a partial termination for purposes of IRC 411(d)(3). Each case's facts and circumstances must be considered and may include the extent to which terminated employees are replaced and the normal turnover rate in a base period.

  3. The base period ordinarily should be a set of consecutive plan years (at least two) from which you can determine the normal turnover rate, and should reflect a period of normal business operations rather than one of unusual growth or reduction. Generally, the plan years selected should be those immediately preceding the period in question.  (07-16-2013)
Proposed Date of Plan Termination

  1. Plans not subject to Title IV of The Employee Retirement Income Security Act of 1974 (ERISA) (DC plans) proposed termination date is the date the plan sponsor(s) who maintain the plan voluntarily terminate it (Treas. Reg. 1.411(d)-2(c)(3)). Generally, the plan sponsor will establish the proposed termination date by board resolution or an amendment to the plan.

  2. The proposed termination date of a plan subject to Title IV of ERISA (DB plans) is the date determined under ERISA (Treas. Reg. 1.411(d)-2(c)(2)). There are three types of terminations under ERISA:

    • A standard termination - ERISA 4041(b) - is a DB plan termination when the plan has sufficient assets to meet all of its liabilities at the date of termination.

    • A distress termination - ERISA 4041(c) - is a DB termination when the plan assets are not sufficient to pay plan liabilities but the plan sponsor meets certain hardship criteria (such as bankruptcy or proves to the PBGC that the plan termination is necessary to pay debts or to avoid burdensome pension costs).

    • An involuntary termination - ERISA 4042 – is a DB termination in which PBGC terminates the plan involuntarily if it determines that the plan is unable to meet the minimum funding requirements or is unable to pay benefits when due. In an involuntary termination the PBGC generally decides the date of termination.


    See IRM, Underfunded DB Plan at Termination for distress and involuntary terminations.

  3. The type of termination can impact the date of proposed termination.

  4. A copy of the resolution or amendment terminating the plan is required in the DL application. If not submitted with the application, request it. Be alert to the possible effect that document backdating has on vesting, funding and benefit accrual.

  5. Compare the proposed termination date on the resolution or amendment to the date on Form 5310, line 5(a)(2). If the two dates don’t match, research and reconcile the difference only if the discrepancy raises issues for benefit accruals, vesting service, etc.

  6. The proposed termination date is important because:

    • All participants must be 100 percent vested as of the proposed termination date.

    • The plan should be amended for all law EFFECTIVE on or before the proposed termination date.

    • The plan should be fully funded up to the proposed termination date (fully funded means that the plan satisfies IRC 412).

  7. When reviewing the action to terminate, ensure that the plan has not incurred any IRC 411(d)(6) violations. In most cases, plans will not violate IRC 411(d)(6) because the effective date of termination will be AFTER the date the plan sponsor signs an action to terminate the plan. For example, a Board of Directors Resolution to terminate the plan is adopted June 25, effective July 1 of same year

  8. The proposed termination date may not be retroactive except when it will not reduce any participant's accrued benefit.

  9. For a money purchase, DB, or target benefit plan, if the proposed termination date is before the date the plan sponsor adopts the amendment to terminate the plan, the plan sponsor must still make any required contributions to the plan on any allocation date after the effective date of termination but prior to the amendment adoption date.

  10. If a plan sponsor takes actions to terminate a plan but doesn’t distribute the assets as soon as administratively feasible, the plan is not considered terminated for purposes of IRC 401(a). The plan must remain qualified until the plan is terminated. See Rev. Rul. 89-87, 1989-2 C.B. 2, and IRM, Wasting Trusts.

  11. A plan is not terminated simply because it is amended to cease future accruals or is "frozen." However, this type of amendment may trigger a complete discontinuance of contributions and require increased vesting under Treas. Reg. 1.411(d)-2(d)(i). However, 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 Rev. Rul. 89-87 and See IRM, Wasting Trust Procedures.

  12. If the plan is not actually terminated after the proposed date of termination, (e.g., because assets were not distributed as soon as administratively feasible or because the plan sponsor hasn’t properly and timely notified employees and PBGC (for plans subject to Title IV of ERISA), determine if the plan was qualified as of the actual date of termination.  (07-16-2013)
Frozen Plans

  1. A frozen plan is one where all future contributions or benefit accruals not yet accrued have ceased, but the plan has not been formally terminated. The plan may also freeze participation so that no new employees will be eligible to enter the plan. A plan will stay frozen until it is amended to either continue further contributions or terminate.

  2. A frozen plan must continue to meet the requirements of IRC 401(a) (including changes in the law) except for two situations:

    1. Top-Heavy allocations are not required for frozen DC plans. This is because key employees receive no benefit so the plan isn’t required to make a contribution for non-key employees.

    2. Coverage testing is not required for frozen plans under Treas. Reg. 1.410(b)-3. Under this regulation, coverage is automatically satisfied when no participants are benefiting.

  3. The Form 5310 application does not specifically ask a question about frozen plans, however line 17(b) does ask if there has been an amendment to the plan which decreases plan benefits for any participant. If the file contains an amendment freezing or reducing employer contributions, verify that the amendment does not violate IRC 401(b) or 411(d)(6) as described in IRM, Discretionary Amendments. Also, verify that the plan continued to operate properly from the date the amendment was made until the actual date of termination.

  4. The plan sponsor must continue to file the Form 5500 series, including Schedule SB, if applicable, to meet its reporting requirements for any year in which the plan has trust assets.


    Even though the applicant is required to complete the Form 5500, they are not required to submit it to the IRS with their DL application.  (07-16-2013)
Wasting Trust Procedures

  1. A wasting trust is when a plan formally terminates and ceases benefit accruals, but the plan doesn't distribute assets as soon as administratively feasible (generally one year or less) (Rev. Rul. 89-87, 1989-2 C.B. 2).

  2. Rev. Proc. 2007-44 section 8 explains that an application is deemed to be filed for a plan termination if it is filed by the later of one year from the:

    1. Effective date of the termination.

    2. Adoption date of the document which terminates the plan.

    If the Form 5310 application is submitted to the IRS within one year of the termination, the plan administrator may generally delay distributing the assets until the IRS issues the DL and the trust will not become wasting.

  3. There are two ways to determine if a trust is wasting:

    • Compare the proposed plan termination date to the DL application's control date.

    • Review Form 5310, line 5(b).

  4. If the control date is within one year of the proposed termination date, the trust is not wasting. If the time between the control date and the proposed termination date exceeds one year, and the plan sponsor hasn’t distributed the assets, then the trust is wasting. The plan sponsor must select a new proposed termination date, and the plan must continue to meet the requirements of IRC 401(a) until the new proposed date of termination.

  5. Form 5310, line 5(b) asks "Will funds be distributed as soon as administratively feasible" ? If the answer is "NO," the trust may be a wasting trust. Follow these steps:

    1. Don't accept the Form 5310 if the plan sponsor does not intend to distribute assets as soon as administratively feasible. The plan sponsor must continue to amend the plan to comply with all current law provisions to remain qualified and must submit a Form 5300 or Form 5307 if they wish to receive a DL.

    2. If the plan sponsor agrees to distribute assets, they must send either an amended Form 5310 or a written statement indicating that assets will be distributed as soon as administratively feasible.

    3. You may request technical advice to determine whether the plan has terminated. See IRM 7.11.12, Preparing Technical Advice Requests.

    4. If the plan sponsor withdraws the Form 5310, return the case using the procedures in IRM, Withdrawal of Applications. If there are potential disqualifying features, refer the case to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures.

  6. A plan administrator does not meet the burden of showing that all plan assets were distributed as soon as administratively feasible merely because they delayed distribution because IRS was auditing the employer.

  7. However, if an employer delays distribution because it seeks to obtain a higher value than current market value, this is generally deemed to have been made as soon as administratively feasible. See Rev. Rul. 89-87.  (07-16-2013)

  1. When reviewing a terminating plan, review when forfeitures happen and how forfeitures are allocated.

  2. The date a plan forfeits a participant’s non-vested accrued benefit depends on:

    • The plan terms

    • When the plan distributes a participant’s vested accrued benefit

    • Whether the employee returns to employment

  3. Review and compare Form 5310, lines 16(a)(6) and 19(b). If line 16(a)(6) lists participants who left without full vesting, the plan sponsor must also send in an attachment which contains all of the information listed under line 19(b).

  4. The attachment required under line 16(a) shows six years of history of all participants who left without full vesting. Compare this information to the plan terms for forfeitures and vesting and then to the answers on lines 16(a)(6) and 19(b).

  5. If you have any questions or possible erroneous information, you may need to secure more information from the employer or their representative, if applicable. If line 16(a)(6) is incorrect and needs to be revised, secure a corrected Form 5310.

  6. If you determine that participants forfeited part of their accrued benefit but shouldn’t have, obtain a written statement from the employer that they will restore the forfeitures.

  7. Forfeitures can't revert to the employer when these plans terminate: profit- sharing, stock bonus, or for years after December 31, 1985, money purchase plans. See Rev. Rul. 71-149, 1971-1 C.B. 118 and Rev. Rul. 2002-42, 2002-2 C.B. 76. Forfeitures must be allocated to the remaining participants or used to reduce the employer contributions that are otherwise required under the plan. See Rev. Rul. 81-10, 1981-1 C.B. 172 and Rev. Rul. 71-313, 1971-2 C.B. 203.

  8. A DB pension plan may not use forfeitures to increase benefits prior to plan termination. See IRC 401(a)(8) and Treas. Reg. 1.401-7.  (07-16-2013)

  1. Plans qualified under IRCs 401(a),403(b), and 457(b) may receive rollovers from other qualified plans under the rules provided in IRC 401(a)(31) and IRC 402(c).


    For a plan to allow for rollovers, the plan language must state so.

  2. Form 5310 line 19(c) lists rollovers the plan received in the last six years.

  3. Review line 19(c) to see if the plan received any rollovers. If the amount(s) are excessive based upon the facts and circumstances of the case, develop the issue.

  4. Verify where the rollovers came from and how many different participants rolled assets over. Also, request a copy of the DL for the originating plan.

  5. If you discover that the rollover came from an ERSOP/ROBS (Entrepreneur Rollover Stock Ownership Plan/Rollover Business Start-ups) arrangement, see your manager as additional procedures may apply.  (07-16-2013)
Mode of Distribution

  1. Qualified plans must state the forms of payment they will pay participants and beneficiaries. Payment forms are either mandatory per the plan document language or may be decided by the participant or beneficiary. Per Treas. Reg.1.411(d)-4, Q&A-4, the employer, or any other fiduciary or third party, may not have the discretion to choose a participant's or beneficiary’s form of distribution.

  2. Upon plan termination, all plan assets must be distributed as soon as administratively feasible (generally within one year following the date of plan termination). Generally, a pending DL application will extend this date; however, an IRS audit does not extend this date. Form 5310 line 20 lists checkboxes for the benefit forms in which the plan will pay when the plan terminates. Verify the payment forms listed on the Form 5310 are consistent with the terms of the plan.

  3. If Form 5310 line 20 is inconsistent with the terms of the plan, request either a corrected Form 5310 or an amendment to the plan. For example, if the plan only allows lump sum distributions, it may not distribute assets in the form of an annuity upon plan termination unless the plan is amended to permit annuities.

  4. If a plan offers a Qualified Joint & Survivor Annuity (QJSA), the plan must distribute the assets in that form unless the participant (and spouse, if applicable) consents to a different form of benefit (such as a single-sum distribution) as required by IRC 417(a)(2).

  5. If a plan offers a QJSA, also review line 17(c) to verify that all of the benefit rights were correctly protected as required under IRC 401(a)(11) and IRC 417.

  6. A terminating DC non-pension plan that doesn’t offer an annuity distribution option may distribute a participant’s account balance without the participant’s consent, even if the account balance exceeds the involuntary cash-out limit in the plan (Treas. Reg. 1.411(a)-11(e)). However, this rule doesn’t apply if the plan sponsor, or a member of its controlled group, maintains another DC plan. In this case, if the participant does not consent to an immediate distribution, the plan sponsor may transfer his account balance, without the participant’s consent, to the other plan.

  7. Review Form 5310 line 17(j) when verifying that distributions were made correctly. This question lists the largest amount within the last six plan years distributed or applied to purchase an annuity contract. If this line is completed, secure additional information: number of participant(s), make-up of the distribution (e.g., rollover, employer contribution, elective deferral etc.), status of participant (i.e. HCE, officer, trustee, owner etc.) and date of distribution. Verify the distribution did not consist of any elective deferrals that were restricted from being distributed under IRC 401(k)(10).  (07-16-2013)
401(k) Plan Distributions

  1. A terminated 401(k) plan cannot distribute the elective deferrals part of the participant’s account if the employer maintains or establishes a successor plan within a certain period of time from the proposed termination date (IRC 401(k)(10)(A)). If the terminating plan is a 401(k) plan and the employer:

    • Has a successor (alternative) plan (see Form 5310 line 17(m)), the plan must transfer the elective deferrals to the successor plan, keep them in the plan until a distributable event occurs (such as severance from employment), or purchase a deferred annuity contract which will delay the distribution.

    • Doesn’t have a successor (alternative) plan, the 401(k) plan must distribute elective deferrals in a lump sum distribution according to IRC 401(k)(10)(B) and IRC 402(e)(4)(D).  (07-16-2013)
In-Kind Distributions

  1. An "in-kind" distribution is a distribution a plan makes in a form other than cash.

  2. Examples of in-kind distributions include but are not limited to:

    • Real-estate

    • Art

    • Stock

    • Valuable metals

  3. If Form 5310, line 17(f) indicates that the plan will distribute property other than cash and/or readily tradable marketable securities, verify

    1. The plan allows in-kind distributions.

    2. All participants have been given the option of having a distribution in kind.

    3. How assets will be distributed.

    4. How the assets are valued.

  4. If a plan allows in-kind distributions, has invested all or some the assets of the trust in property and/or stock, and has not liquidated these assets into cash prior to terminating the plan, the employer is required to give all participants the option of taking an in-kind distribution of their respective portion of the asset.  (07-16-2013)
Trust Assets/Balance Sheet

  1. Form 5310, line 21 requires plan sponsors to provide a statement of trust assets available as of the proposed termination date or the last valuation date.

  2. Begin verifying assets by adding all assets and reconcile them to line 21(f).

  3. If the plan sponsor submits a Form 6088, Distributable Benefits From Employee Pension Benefit Plans, verify that the net assets available on the Form 5310 are equal to the benefit amounts listed on the Form 6088. If the amounts are not equal, reconcile any differences, keeping in mind that assets may be computed using different dates and the Form 6088 may include amounts already distributed.


    The Form 6088 is only required for DB plans and underfunded DC plans. If a plan is over or underfunded, see IRM or IRM


  4. When reviewing line 21, consider the type of assets, how they are valued, when they were contributed, and how they are distributed.

  5. If there are assets listed on line 21(a), review the required explanation to determine why assets are being held in "noninterest-bearing cash." In most circumstances, trust assets would be held in investments that earn interest. Verify that the plan doesn't have a Prohibited Transaction (PT) with these assets by securing a description of the asset and an explanation of the allocation.

  6. If there are "Receivables" listed on line 21(b), verify that these assets were paid to the trust in a timely manner.

    • To be deductible under IRC 404(a)(6), profit sharing plan and money purchase plan contributions must be paid to the trust by the employer's federal tax return due date (plus extensions).

    • For minimum funding, a plan sponsor having a pension plan may contribute to the plan as late as eight and one-half months after the close of the plan year. See IRM, Minimum Funding Standards.

    • Plan sponsors must pay employee 401(k) elective deferral receivables and after-tax contributions to the trust as soon as practicable, but in no event later than the 15th day of the month following the month in which the employer withheld the contributions. DOL permits a safe-harbor for plans with fewer than 100 participants to deposit employee contributions within 7 business days. (DOL Regulations 2510.3-102(b)(1)).


    If Form 5310 line 21(b) lists Employer Receivables, review line 15, which shows the amount and date of the last employer contribution. If the amount on line 15 equals the amounts listed on line 21(b) and the contribution was made timely, you don't have to investigate further.

  7. Form 5310, lines 21(c)(7)(A) and (B) list investments in real estate. These assets could possibly generate rental income on real property and/or personal property, may or may not be debt financed, and have Unrelated Business Income (UBI). See IRM, Unrelated Business Income Tax. Also, purchasing real estate in a trust could be a PT if the transaction was between the trust and a disqualified person. See IRM, Prohibited Transactions. Request:

    1. An explanation of the purpose of the real estate.

    2. The purchase or lease documentations.

    3. The appraisal of the real estate within the last three years.

    4. An explanation to determine if it is debt financed.

  8. The amount invested in partnerships/joint ventures is recorded on the line 21(c)(6). A partnership/joint venture is a partnering between two or more entities to share the risk of investment and expertise. Any income derived by the partnership/joint venture is disclosed on a Form 1065, Schedule K-1. If the partnership is identified as a general partner, there could possibly be UBI. Also, if the investment is related to a disqualified person, it is a PT. If the asset section has an amount on this line, secure an explanation stating the type of business and who the parties are that are involved to determine if the plan has UBI or PTs. Secure the most recent Form 1065, Schedule K-1.

  9. Any assets listed on line 21(c)(8) - (13), 21(d), and 21(e) will generally require you to secure an explanation or description of the asset because there could be an issue with UBI or a PT. Be alert for investments in property of the employer or any related entity because this could possibly involve improper deductions, PTs, debt financed income, or valuation problems which could violate the exclusive benefit rule or result in discriminatory allocations. See IRMs and

  10. Loans to participants are listed on line 21(c)(9) of the Form 5310. If an amount is reported on this line:

    • Verify that the terms of the plan allow participant loans.

    • Verify if the terms of the plan allow more than one outstanding loan at one time.

    • Secure a copy of the loan document for each participant loan and review the amount, date, and repayment schedule of each loan.

    • Identify and verify if any participant is a disqualified person and has met the requirements to be exempt under the PT rules.

    • Verify that the dollar amount of each loan did not exceed 50% of the participant’s vested account balance (there is an exception to this rule for Hurricane Relief).

    • Verify that the loan repayment period doesn't exceed 5 years and if it does, verify it meets the home loan exception.

    • Reconcile the loan document to each loan's amortization and/or repayment schedule to verify the loans were timely paid.

    • Verify that any missed loan payments were made within the correct time-frame if any of the loans are in default and the plan administrator has established a cure period.

    • Verify whether the participant will repay the outstanding balance prior to any distribution, or the plan will offset the participant’s distribution by the outstanding loan amount if there are any outstanding loans at the plans proposed date of termination.

    • If the plan has violated IRC 72(p), report the amount as income to the participant by referring the case to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures. Prepare a Form 5346, Examination Information Report, in addition to the Form 5666, Referral and Information Report, that is normally prepared.

  11. The amount of insurance contracts are reported on line 21(c)(12). See IRM, Life Insurance Contracts.

  12. Plan liabilities are listed on lines 21(g), (h), (i), or (j). If there are amounts listed on these lines, request the following:

    1. A detailed explanation for the liability which includes name of person being paid and their relationship to the plan.

    2. An estimated date of payment.

    3. The most recent appraisal or valuation, if applicable.

  13. If the Form 5310 or any documentation submitted with the application indicates that there are any issues relating to the plan or trust currently pending before the IRS or another government agency, determine whether these issues impact plan qualification and discuss the case with your group manager before taking further action. Document the file to reflect the actions you considered and your conclusion.  (07-16-2013)
Terminating Plans with Zero Assets

  1. In some instances, a plan sponsor will submit a Form 5310 application after all assets have already been distributed to plan participants and line 21 will show zero plan assets.

  2. If this is the case, secure written documentation showing the:

    1. Date of distribution of all assets.

    2. Investment allocation of all assets prior to distribution.

    3. Allocation of assets to participants.

  3. Rev. Proc. 2007-44 section 8 states that "In no event can the application be filed later than twelve months from the date of distribution of substantially all plan assets in connection with the termination of the plan."

  4. Therefore, if the plan distributed assets more than one year prior to the Form 5310 control date, return the case using a Letter 1924. Use caveat "2" with a variable of "Rev. Proc. 2007-44."

  5. If the plan sponsor filed the application within 12 months from the date the assets were distributed, follow the normal case processing procedures.  (07-16-2013)
Prohibited Transactions

  1. If you determine there is a PT, refer the case to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures to ensure that the disqualified person pays the proper taxes. See IRM 4.72.11, Employee Plans Technical Guidance, Prohibited Transactions.  (07-16-2013)
Unrelated Business Income

  1. The purpose of the tax on UBI is to ensure that exempt organizations are taxed on income earned from activities that are unrelated to the purpose for which they were granted exempt status.

  2. A qualified trust under IRC 501(a) generally is exempt from tax on any income derived from the "intended activity" which is investing and saving for retirement.

  3. However, if the plan or trust is involved in generating any income outside it's "intended activity," that amount is considered UBI and is subject to tax.

  4. A common source of UBI is when a trust invests in either a partnership or joint venture. IRC 512(c) notes that the trust's share of the partnership income should be treated as if it were carrying on the trade or business of the partnership. Thus, unless the income is one of the exclusions under IRC 512(b), it is considered UBI for the trust.

  5. If you determine that the trust has possible UBI, refer the case to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures.  (07-16-2013)
Life Insurance Contracts

  1. Life insurance can be used to fund retirement plans as either an "incidental" benefit or the sole benefit. See IRM, Fully Insured Contract Plans if 100 percent of trust's assets are invested in insurance or annuity contracts.

  2. If a plan is not a fully insured contract plan, then the life insurance must meet the requirements to be considered an "incidental" benefit to the main purpose of retirement benefits in the plan. For life insurance coverage to be incidental:

    • For a DC plan, the amount of total premiums for ordinary whole life insurance must be less than 50 percent of the annual contribution. The figure is 25 percent for term or universal life insurance.

    • For a DB plan, the insurance face amount generally cannot exceed 100 times the participant's projected monthly retirement benefit.

  3. If Form 5310 line 21(c)(12) shows that plan assets are invested in life insurance contracts, verify if the plan is a fully insured contract plan. If the plan is not a fully insured contract plan, reconcile the assets and ensure that the benefits are incidental to the plan's main purpose of providing a retirement benefit (and not solely a death benefit).

  4. Ask if the life insurance contracts are springing cash value contracts. See IRM, Springing Cash Value.  (07-16-2013)
Springing Cash Value

  1. Some firms have promoted an arrangement where an employer sets up a section 412(i) plan, makes and deducts contributions to the plan, and then uses the contributions to purchase specially designed "springing cash value" life insurance contracts. Generally, these special policies are available only to highly compensated employees.


    IRC 412(i) plans received their name by the code section that described them. However, under PPA, IRC 412(i) plans are now described in IRC 412(e)(3).

  2. A "springing cash value" insurance contract may be designed so that the stated cash surrender value of the policy for a specified number of years (e.g., the first 5 years) is very low compared to the plan assets used to purchase the contract. When the cash surrender value is low, the plan distributes the policy to the employee; however, the contract is structured so that the cash surrender value increases significantly after it is transferred to the employee.

  3. Using this springing cash value life insurance gives employers tax deductions for amounts far in excess of what the employee recognizes in income and are not permitted.

  4. In Announcement 88-51, 1988-13 I.R.B. 34, the IRS cautioned that taxpayers must use a more accurate valuation method to determine the taxable amounts under IRC 72 rather than the cash surrender value. Therefore, if a plan is distributing a "springing cash value" contract, the plan must value the contract using the total policy reserve value instead of the stated cash surrender value.

  5. Notice 89-25, 1989-1 C.B. 662, Question 10, states that an employee cannot use the cash surrender value to determine the amount to include in gross income under IRC 402(a) when the total policy reserves including life insurance reserves (if any) computed under IRC 807(d), added to any reserves for advance premiums, dividend accumulations, etc., represent a more accurate approximation of the fair market value of the policy. If a plan inappropriately uses the cash surrender value to value the amount distributed, thereby allowing a greater distribution than would otherwise be allowed, the distribution could be treated, in part, as an employer reversion. Also, in certain circumstances, these types of distributions could disqualify the plan (e.g., distributions in excess of the IRC 415 limits).

  6. If a plan is incorrectly valuing the contracts, obtain a corrected value using total policy reserve value instead. Refer any resulting adjustment to the participant's taxable income to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures.  (07-16-2013)
Fully Insured Contract Plans

  1. If Form 5310, line 7(e) is marked "Yes" or line 21(c)(12) shows 100 percent of assets invested in life insurance contacts, the plan is a fully insured contract plan (called IRC 412(i) plan) and is funded exclusively by purchasing individual insurance contracts.

  2. Under these contracts, each participant receives level annual premium payments until normal retirement age. The plan benefits equal the benefits under each contract at plan's normal retirement age.

  3. For all IRC 412(i) plans:

    • Review lines 17(c) and 17(f) to determine if the plan is distributing insurance contracts.

    • Ensure that all premium payments have been made timely.

    • Verify no rights under the contract have a security interest at any time during the plan year.

    • Verify no policy loans are outstanding at any time during the plan year.

  4. Review the benefit formula to ensure that it is non-discriminatory. All of the contracts must have a cash value based on the same terms (including interest and mortality assumptions) and the same conversion rights. Treas. Regs. 1.401(a)(4)-(3)(b)(5) describes rules for safe-harbor insurance contract plans.

  5. Fully insured contract plans are currently part an EP Examinations Abusive Transaction project. See http://www.irs.gov/Retirement-Plans/EP-Abusive-Tax-Transactions. Also see IRM, Abusive Transactions / Listed Transactions.  (07-16-2013)
Segregated Account IRC 414(k)

  1. IRC 414(k) accounts provide benefits by combining funding features, i.e., a DB feature and a DC feature.

  2. Contributions going into the IRC 414(k) separate account are subject to the IRC 415(c)(1) allocation limits. Unlike a DB plan, there is no limit on the amount the plan distributes.

  3. The distributions coming from the DB plan are subject to the IRC 415(b)(1) distribution limit. Except for IRC 404 and IRC 412, there is no limit on the amount an employer may contribute to the plan. TB Memo 98-11.

  4. Establishing a separate account at normal retirement age is considered an amendment that eliminates the DB feature of a participant's benefit under a DB plan and violates section 411(d)(6) unless the plan meets the exception in the Treas. Regs. 1.411(d)-4 Q&A 3. Therefore, review the separate account feature under the plan and determine if the transfer meets the following rules:

    1. The transfer must be voluntary.

    2. If the transferor plan is subject to the requirements of IRC 401(a)(11) and IRC 417, the plan must notify the participant and obtain spousal consent.

    3. The participant whose benefits are transferred must be eligible, under the terms of the transferor plan, to receive an immediate distribution from that plan. If the employer is terminating the transferor plan, then they meet this requirement.

    4. The amount of the benefit transferred must equal the participant’s entire nonforfeitable accrued benefit under the transferor plan subject to IRC 415 limits.

    5. The participant must be fully vested in the transferred benefit in the transferee plan.

    6. The participant must have the option of preserving his/her entire nonforfeitable accrued benefit, e.g., as an immediate annuity contract which provides for all the benefits under the transferor plan if the plan is terminating, or by leaving the accrued benefit in the plan if it is ongoing.

  5. The option to transfer benefits under the above rules will constitute an optional form of benefit under the plan per IRC 401(a). Accordingly, the transfer is subject to the nondiscrimination provisions of IRC 401(a)(4), the cash-out rules of IRC 411(a)(7), the early termination provisions of IRC 411(d)(2), and the QJSA requirements of IRCs 401(a)(11) and 417. It is not, however, a distribution for purposes of the minimum distribution requirements of IRC 401(a)(9).

  6. The IRS will not rule on a plan with a 414(k) separate account provision that does not meet the exception rules. Request that the plan sponsor submit a written request to withdraw the application and return the case on Letter 1924 using procedures in IRM, Procedures When Not Authorized to Issue a DL.

  7. If you determine that the 414(k) account violates IRC 411(d)(6), refer the case to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures.  (07-16-2013)
Overfunded/Underfunded Plan at Termination

  1. Review the Form 6088, Distributable Benefits From Employee Pension Benefit Plans, and Form 5310, line 21 to determine if the plan is overfunded or underfunded.

  2. A Form 6088 is required for all DB plans and underfunded DC plans. Also, a multiple employer plan must submit a Form 6088 for each employer who has adopted the plan. For collectively bargained plans, a Form 6088 is only required if the plan benefits employees within the meaning of Treas. Regs. 1.410(b)-6(d) and a separate Form 6088 is required for each employer employing such employees.  (07-16-2013)
Overfunded Plan at Termination

  1. If the Present Value of Accrued Benefits (PVAB) of all participants (located on Form 6088, column h) is less than the total assets (located on Form 5310, line 21), the plan is overfunded.

  2. The overfunding can be corrected using one of the following methods:

    • Reallocate to the participants. See IRM, Excess Assets Reallocated to Participants.

    • Revert assets to the plan sponsor. See IRM, Reversion of Excess Assets.

  3. Plan sponsors may also attempt to recover surplus assets in a termination/reestablishment or spinoff/termination. They must follow the conditions in the "Implementation Guidelines for Termination of Defined Benefit Plans" issued 5-24-84. The Implementation Guidelines were supplemented by the 6-1-84 teletype "Processing Employee Plan Cases that Terminate with Reversion of Surplus Assets." Find a copy of the guidelines at: http://tege.web.irs.gov/content/EmpPlansMainWindow/linkedHtmlDocuments/determs/052484A.pdf. Find a copy of the teletype at: http://tege.web.irs.gov/content/EmpPlansMainWindow/linkedHtmlDocuments/determs/060184A.pdf

  4. If the plan is overfunded, determine which methods the plan sponsor used to correct the overfunding and ensure they applied it in a nondiscriminatory manner.  (07-16-2013)
Excess Assets Reallocated to Participants

  1. A plan that has assets in excess of the PVAB (whether or not vested) can allocate the excess assets to participants.

  2. The plan may apply the excess to increase the participants’ accrued benefit in a nondiscriminatory manner. Generally, in a plan that does not use permitted disparity in its benefit formula, allocation of excess plan assets based upon the ratio of each participant’s PVAB to the PVAB of all plan participants will not be discriminatory. Rev. Rul. 80-229 contains rules and examples on nondiscriminatory reallocation of excess assets.

  3. The plan sponsor may only reallocate excess assets to participants if the plan already contains a provision allowing for it or if they adopt a plan amendment for it. Review Form 5310, line 17(k)(2), and the applicable plan provision or amendment to ensure that the plan reallocated excess assets in a nondiscriminatory manner. Ensure that no participant exceeded the IRC 415 limits when the plan reallocated excess assets.

  4. Plan assets allocated according to these priorities generally will be deemed to be nondiscriminatory:

    1. Except as provided in d. below, the plan assets are allocated according to ERISA 4044(a)(1), (2), (3), and (4)(A). PBGC has authority to approve this allocation.

    2. Subject to the requirements of a. above, the assets are allocated, to the extent possible, so that nonhighly compensated employees receive at least the same proportion of the PVAB (whether or not forfeitable) as employees who are highly compensated.

    3. Notwithstanding any other paragraphs, any assets restricted by Treas. Reg. 1.401(a)(4)-5 may be reallocated to the extent necessary to help satisfy b. above within each category.

    4. For a plan establishing subclasses per ERISA 4044(b)(6), the plan may reallocate the assets described in any paragraph of ERISA 4044(a) within such paragraph to satisfy b. above.

    5. Subject to a. through d., the assets must be allocated according to ERISA 4044(a)(4)(B), (5), and (6); however, they must to be reallocated to minimize discrimination.  (07-16-2013)
Reversion of Excess Assets

  1. If Form 5310 lines 5(c) and 17(i) indicate that the plan will have or has ever had a reversion, ensure that the reversion was permissible.

  2. In general, no part of a qualified plan's trust may revert to the employer, but they may occur under certain circumstances. See IRC 401(a)(2), Treas. Reg. 1.401-2, and ERISA 403.

    1. For a multiemployer plan, reversions may occur by reason of mistakes in law or fact or return of any withdrawal liability payment.

    2. For a plan other than a multiemployer plan, reversions may occur by reason of mistake of fact.

    3. For overfunded DB plans, reversions are only permitted if the plan has met all liabilities for the participants and their beneficiaries.

  3. Don't close the case until you secured proof that the reversion was due to erroneous actuarial computation and reviewed the plan to ensure that the terms of the plan allowed reversions for at least five calendar years preceding the plan proposed termination date.

  4. If the plan has a reversion, use caveats 6, 9, and 8503 on the 1132 letter.

  5. Prepare a Form 5666, Referral and Information Report and Form 5346, Examination Information Report and refer the case to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures. Discuss in your report whether the plan sponsor has included the reversion as income on its tax return for the year of the reversion and whether excise tax was paid on the reversion. See IRM

  6. If the reversion exceeds $5,000,000, the application becomes a mandatory review case and you should send it to Quality Assurance with a Form 3198-A, Special Handling Notice when your review is complete.

  7. In general, a plan sponsor may not attempt to receive a reversion in a termination/reestablishment or spinoff/ termination earlier than 15 years following any previous similar transaction. If you've determined that a spinoff/ termination or termination/ reestablishment is not part of an integrated transaction in the Implementation Guidelines, request technical advice to resolve the case.  (07-16-2013)
Tax on Reversion

  1. Reversions are taxable income to the plan sponsor in the year they receive it and taxed under the applicable federal tax rates.

  2. In addition to income taxes, IRC 4980(d) imposes an excise tax of 50 percent of the reversion amount. However, if the reversion meets one of three exceptions, the excise tax rate is reduced to 20 percent.

  3. To use the 20 percent excise tax rate rather than the higher 50 percent excise tax rate, the plan sponsor must show in writing one of these:

    1. The plan sponsor was in Chapter 7 bankruptcy liquidation (or similar proceeding under state law) on the date of plan termination.

    2. The plan was amended prior to termination to provide immediate pro rata benefit increases (with a present value equal to at least 20 percent of the amount that would have otherwise reverted) to all qualifying participants.

    3. The plan sponsor directly transferred at least 25 percent of the excess assets to a qualified replacement plan (as defined in IRC 4980(d)(2)) before any amount reverted to the plan sponsor. Also, at least 95 percent of active participants in the terminated plan must participate in the replacement plan.


      Any amount transferred to the replacement plan is not included in the plan sponsor’s income, deducted by the plan sponsor, or treated as a reversion. Therefore, if the entire amount of a reversion is transferred to the replacement plan, no income or excise tax would be due. See Rev. Rul. 2003-85, 2003-2 CB 291.

  4. If Form 5310 lines 5(c) and 17(i) show a reversion has taken place, verify that the tax on the reversion was properly paid.  (07-16-2013)
Underfunded Plan at Termination

  1. If the PVAB of all participants (located on Form 6088, column h) is more than the total assets (located on Form 5310, line 21), the plan is underfunded. Review the prior three years of the Form 5500, Schedule SB or MB, to determine if there is a funding deficiency.

  2. If the plan is underfunded, then the plan sponsor may generally terminate the plan under a standard termination using one or a combination of three options (otherwise the plan will have to terminate under a distress or involuntary termination):

    1. Make a supplemental employer contribution to make the plan whole.

    2. Allocate trust funds according to ERISA 4044.

    3. The majority owner may forgo his or her distribution. (Make every effort to support this method if chosen by the plan sponsor.)

  3. If the plan sponsor decides to allocate trust funds according to ERISA 4044, refer to Rev. Rul. 80-229, 1980-2 C.B. 133 and the instructions to Form 6088 to ensure that allocations do not violate IRC 401(a)(4).

  4. If a plan participant is a majority owner (i.e., a participant with an interest in the employer greater than 50%), he/she may, with spousal consent, agree to "forgo" receipt of all or part of his/her benefit until the plan satisfies the benefit liabilities of all other plan participants. This is not a "waiver" or forfeiture under IRC 411 and does not affect the plan's otherwise applicable minimum funding requirements in the year of termination. See PBGC Reg. 4041.2 and 4041.21(b)(2) relating to this topic at: https://www.pbgc.gov/docs/97-29500.htm

  5. If the plan sponsor hasn't corrected a funding deficiency or filed Form 5330, refer the case to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures.  (07-16-2013)
Minimum Funding Standards

  1. IRC 412 imposes minimum funding standards on certain types of plans in order to protect a participant's promised benefits. Plan sponsors are subject to a tax under IRC 4971 if they don't meet the funding standards.

  2. IRC 412(a)(2) requires plan sponsors of a:

    1. DB plan which is not a multiemployer to make contributions to (fund) the trust for the plan year of the minimum amount required under IRC 430.

    2. Money purchase plan to fund the trust for the plan year in the amount required under the plan terms unless they have a funding waiver.

    3. Multiemployer plan to fund the trust for the plan year in an amount so that the plan does not have an accumulated funding deficiency. IRC 431.


      PPA added additional funding rules for multiemployer plans that fall into endangered or critical status. IRC 432.

  3. A plan termination does not relieve the plan sponsor of its obligation to fund the plan.

    1. For a DB plan, the charges and credits are ratably adjusted to reflect the portion of the plan year before the proposed plan termination.

    2. For a money purchase plan, the minimum funding standard charges will be any contributions due for participant-accruals earned on or before the proposed date of termination, but not for contributions due after that date.


      If a money purchase plan terminates prior to the last day of the plan year and has a "last day requirement" to earn an allocation, no contribution will be required for that year.

  4. Because the funding standard continues to be in effect until a plan is properly terminated, carefully review the proposed termination date. (See IRM, Proposed Date of Plan Termination.)

  5. Plans that do not distribute assets on the proposed date of termination or within a reasonable time, and plans that have not given proper notice of termination to participants may continue to have funding obligations. If you change a proposed date of termination for any reason, the minimum funding requirement (and participants’ accrued benefits) will likely have to be adjusted to reflect the proper date of termination. After you’ve determined the amount of the required contribution, review Form 5310, line 15 to ensure that the employer paid the correct amount.

  6. IRC 4971(a) imposes a tax on plan sponsors who fail to make a required contribution to the plan by the funding due date. Verify that the contribution was paid within 8 1/1 months after the plan year end by reviewing the Form 5310, line 15. You may need to secure proof of the contribution.

    1. If a single employer plan does not make the required contribution within 8 1/1 months after the plan year end, the IRS will impose an excise tax of 10 percent of the aggregate unpaid minimum required contributions for all plan years remaining unpaid. IRC 430(j)(1).


      If the plan has a funding shortfall for the preceding year, the single employer must make contributions in four quarterly installments. IRC 430(j)(3)

    2. If a multiemployer plan does not make the required contribution within two and one-half months after the plan year end (may be extended up to a total of eight and one-half months as described in proposed Reg. 1.412(c)(10)-1(b)), the IRS will impose an excise tax of five percent of the accumulated funding deficiency determined under IRC 431 as of the end of any plan year ending with or within the taxable year. IRC 431(c)(8).


    For both single and multiemployer plans, if the plan sponsor doesn't correct the deficiency (reduce it to zero) by the end of the tax year in which the plan is terminated, the 100 percent penalty tax described in IRC 4971(b) may apply.

    Timing of Contributions for Pension Plans
    Type of Plan Purpose Due Date If contribution late...
    Single employer plan For deductibility purposes Plan sponsor's tax return due date including extensions n/a
    Minimum funding purposes within 8 1/1 months after plan year end 10 percent tax
    Multiemployer plan For deductibility purposes Plan sponsor's tax return due date including extensions n/a
    For minimum funding purposes within 2 1/1 months after plan year end (may be extended up to 8 1/1 months) 5 percent tax
  7. Review Form 5310, line 17(h)(2), to determine if a plan has an accumulated funding deficiency. If a plan has a funding deficiency and the period for making timely contributions is still open, ensure that the plan sponsor made the contributions for the final plan year. If the period for making timely minimum funding contributions has expired, the plan sponsor must file Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, for the amounts due, or you must make a referral made to the EP Classification Unit using a Form 5666, TE/GE Information Report.

  8. Some plans may attempt to correct an accumulated funding deficiency by having plan participants "waive" their accrued benefits. These types of waivers violate IRCs 401(a)(13): assignment and alienation, 411(a): minimum vesting standard and 411(d)(6): accrued benefit may not be decreased by amendment.


    A majority owner may "forgo" receipt of their benefit. See IRM, Underfunded Plan at Termination.

  9. A plan administrator may not change the plan's funding method in the year in which the plan terminates unless the plan administrator obtains approval for a change in funding method. See Rev. Proc. 2000-40, 2000-2 C.B. 357 section 4.02.

  10. If the plan amortizes a funding waiver (under IRC 412(c)(3)) in the year in which it terminates, the plan sponsor must meet all obligations for the waiver as stated in the waiver ruling letter in the year of termination. These include:

    1. The plan sponsor's obligation to make all required amortization payments necessary for the waiver and payments for plan termination, if any, on which the approval of the waiver is contingent.

    2. The plan may not prorate a waiver amortization charge in the funding standard account in the year of termination. A plan sponsor maintaining a plan with an unamortized waiver may contribute and deduct an amount equal to the outstanding balance of the waiver in any year, including the year of termination.

  11. The plan sponsor may not amend the plan in the year of termination to reduce or eliminate any contribution requirement for that year, unless all employees’ "accrued benefits" are protected as of the later of: the amendment's adoption or effective date, or the plan satisfies the requirements of IRC 412(d)(2) allowing certain retroactive benefit reductions.


    A benefit is not considered "accrued" for this purpose unless a participant satisfies all conditions to accrue the benefit under the plan. For example, if a DC plan which requires that a participant earn an hour of service on the last day of the plan year to receive a contribution, a plan sponsor's amendment to reduce its contribution requirements will not violate IRC 411(d)(6) if they adopt it before the last day of the plan year. See Rev. Rul. 76-250, 1976-2 C.B. 124.  (07-16-2013)
Adjusted Funding Target Attainment Percentage (AFTAP)

  1. IRC 436, added by PPA 06, adds protections and restrictions to the participant's benefits in single and multiple employer DB plans. IRC 436 does not apply to multiemployer or DC plans.

  2. For a single employer DB plan, request the Schedule SB from the Form 5500 and refer to Line 15 for the AFTAP calculation.

  3. If a single employer DB plan is underfunded for any plan years beginning after December 31, 2007, there could be possible restrictions on:

    • Unpredictable contingent event benefits under IRC 436(b)(3).

    • Plan amendments increasing benefits under IRC 436(c).

    • Prohibited benefit payments under IRC 436(d).

    • Continuing accruals under IRC 436(e).

  4. This chart is a quick guide to the AFTAP restrictions. See IRC 436 for further explanation on the restrictions.

    If the Funding Ratio is: Then the benefit restrictions are:
    100 percent or higher
    • None

    More than 80 percent but less than 100 percent
    • Full restrictions on prohibited payments only if the plan sponsor is in bankruptcy.

    More than 60 percent but less than 80 percent
    • No plan amendments that cause liabilities to increase.

    • Prohibited payments limited to the lesser of (1) half of the benefit or (2) the maximum PBGC guaranteed benefit.

    Less than 60 percent
    • No shutdown or other Unpredictable Contingent Event Benefits.

    • Elimination of future accruals.

    • Full restrictions of prohibited payments.  (09-11-2015)
Interested Party Notices Upon Plan Termination

  1. The plan sponsor must notify interested parties of their DL application between 10 and 24 days prior to when they send it to the IRS. See Rev. Proc. 2015-6, section 18.02.

  2. Review Form 5310, line 8 and the copy of the "Notice to Interested Parties" to ensure that notice was provided between 10 and 24 days prior to the applications control date.

  3. If the plan sponsor failed to timely give the notice, return the application incomplete using the procedures in Rev. Proc. 2015-6, section 6.13, and closing code "03" , with a request for a copy of the notice. See IRM, Incomplete or Grossly Deficient Application for instructions.  (07-16-2013)
PBGC Notice on Plan Termination

  1. Plans not exempt from the PBGC requirements under ERISA 4021(c) must file either Form 500, Standard Termination Notice or Form 601, Distress Termination Notice Single Employer Plan Termination with the PBGC upon proposed termination.

  2. Also, the plan sponsor must give advance notice to all affected participants 60-90 days before the proposed termination date. This notice is in addition to the Interested Party Notice in IRM

  3. If the plan sponsor doesn't file the required form or give the notice to affected participants, PBGC may reject the proposed termination date. When this happens, PBGC notifies the plan sponsor that a termination has not occurred and that it must begin the termination process again. PBGC also notifies the IRS to check for any open Form 5310 applications for the plan sponsor.

  4. If PBGC rejects a proposed termination date on an open application, stop all work and return the case to the plan sponsor with the full user fee refund (if applicable). The plan sponsor may submit a new DL application with a corrected proposed termination date if they wish.

  5. If a Form 5310 is not in your inventory or if you've already issued a DL, no action is necessary.

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