7.12.1  Plan Terminations

Manual Transmittal

July 16, 2013

Purpose

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

Material Changes

(1) This IRM has been completely re-written.

(2) This IRM has been updated to reflect current procedures and revisions of annual revenue procedures.

(3) IRM sections were updated and moved in order to improve readability. The following chart shows the IRM renumbering:

2003 version Modification 2013 version
IRM 7.12.1.2.2, Retroactive Amendment updated, retitled and moved to IRM 7.12.1.4, Interim Amendments and IRM 7.12.1.5, Discretionary Amendments
IRM 7.12.1.2.3, Proposed Termination Date updated and moved to IRM 7.12.1.11, Proposed Date of Plan Termination
IRM 7.12.1.2.4, Minimum Funding Standards updated and moved to IRM 7.12.1.21, Minimum Funding Standards
IRM 7.12.1.2.5, Reason for Termination updated and moved to IRM 7.12.1.6, Permanency Requirements/Reason for Termination
IRM 7.12.1.2.6, Discontinuance of Contributions updated and moved to IRM 7.12.1.7, Discontinuance of Contributions
IRM 7.12.1.2.7, Partial Terminations updated and moved to IRM 7.12.1.8, Partial Terminations
IRM 7.12.1.2.8, Employer Reversion updated and moved to IRM 7.12.1.20, Overfunded/Underfunded Plan at Termination
IRM 7.12.1.2.9, Tax on Reversion updated and moved to IRM 7.12.1.20.1.3, Tax on Reversion
IRM 7.12.1.2.10, Implementation Guidelines updated, retitled and moved to IRM 7.12.1.20, Overfunded/Underfunded Plan at Termination
IRM 7.12.1.2.11, Forfeitures updated and moved to IRM 7.12.1.12, Forfeitures
IRM 7.12.1.2.12, Mode of Distribution updated and moved to IRM 7.12.1.14, Mode of Distribution
IRM 7.12.1.2.13, Defined Benefit Plans was removed because other IRM sections already discuss the topics in this section.
IRM 7.12.1.2.14, Allocation Guidelines updated and moved to IRM 7.12.1.20, Overfunded/Underfunded Plan at Termination
IRM 7.12.1.2.15, Miscellaneous Issues was removed because other IRM sections already discuss the topics in this section.
IRM 7.12.1.2.16, Amendments Since Last Determination Letter updated, retitled and moved to IRM 7.12.1.5, Discretionary Amendments
IRM 7.12.1.2.17, Plans Sponsored by Certain Employers was removed because information was more directed to EP Examinations and not relevant to EP Determinations specialists.
IRM 7.12.1.2.18, Notification of Interested Parties updated, retitled and moved to IRM 7.12.1.23, Interested Party Notices Upon Plan Termination
IRM 7.12.1.2.19, Frozen Plans and Wasting Trusts updated, retitled and moved to IRM 7.12.1.10, Frozen Plans and IRM 7.12.1.11, Wasting Trust Procedures
IRM 7.12.1.2.20, Prohibited Transaction and Exclusive Benefit Violation updated, retitled and moved to IRM 7.12.1.16, Prohibited Transactions
IRM 7.12.1.2.21, Springing Cash Value Life Insurance Contracts updated and moved to IRM 7.12.1.18.1, Springing Cash Value Life Insurance Contracts
IRM 7.12.1.2.22, Fully Insured Contract Plans updated and moved to IRM 7.12.1.18.2, Fully Insured Contract Plans
IRM 7.12.1.2.23, Segregated Account IRC section 414(k) updated and moved to IRM 7.12.1.19, Segregated Account IRC 414(k)
IRM examinations sections 7.12.1.3 through IRM 7.12.1.4.13.1 were removed to focus the IRM solely on EP Determinations procedures.

Effect on Other Documents

IRM 7.12.1 dated January 1, 2003 is superseded.
Quality Assurance Alert, Terminations - Waiver of Benefits (revised), dated July 28, 2005 is superseded.
Quality Assurance Alert, Terminations - Pension Equity Funding Act, dated December 6, 2004 is superseded.
Quality Assurance Alert, Terminations - Underfunded Defined Benefit Plans, dated April 2, 2004 is superseded.

Audience

Tax Exempt and Government Entities (TE/GE)
Employee Plans Personnel

Effective Date

(07-16-2013)

Robert Choi
Director, Employee Plans
Tax Exempt and Government Entities

7.12.1.1  (07-16-2013)
Overview

  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 EP Determinations specialists who are responsible for reviewing the following:

    • Form 5310, Application for Determination for Terminating Plan.

    • Form 5300, Application for Determination for Employee Benefit Plan when the employer is 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, a specialist must complete the following:

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

    • Form 6677, Plan Termination Standards Worksheet

    • Any other appropriate forms

  4. This IRM should be used in conjunction with IRM 7.11.1, Employee Plans Determination Letter Program which provides general procedures on processing DL applications.

7.12.1.2  (07-16-2013)
Documents Included with Application

  1. Rev. Proc. 2013-6, 2013-1 I.R.B. 198 (revised annually) sections 6 and 12 describe the documents an employer must submit with an application for a determination letter for a terminating plan.

  2. The following is a general list of documents that a specialist should see in an application:

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

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

    • 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 within the meaning of Treas. Regs. 1.410(b)-(6)(d), a Form 6088 is also required. A separate Form 6088 is required for each employer employing such 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.

      Note:

      A plan restatement may not be required for terminating plans per section 12.07 of Rev. Proc. 2013-6.

    • Last favorable determination letter (LFDL) or if the plan does not have a LFDL, a copy of the prior plan document. See IRM 7.12.1.3, 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 resolution of the board of directors).

    • Required interim amendments for the plan's current cycle, even if the amendments are dated earlier than a previous determination letter. See IRM 7.12.1.4, Applicable Interim Amendments.

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

    • Discretionary amendments adopted or effective in the plan's current cycle. See IRM 7.12.1.5, Discretionary Amendments.

  3. Rev. Proc. 2013-6 section 6.04 provides that a specialist may request additional items as needed in order to provide a favorable ruling on the plan.

  4. If the application is determined to be incomplete, the specialist may return the application on a Letter 1015 (DO/CG), Letter for Returning Incomplete EP Applications with User Fee Refund, if no contact has been made, or a Letter 1012 (DO/CG), Letter for Returning Incomplete EP Applications, if contact has been made.

7.12.1.3  (07-16-2013)
Determining the Scope/Verifying Prior Law

  1. Always verify that the plan was properly amended for prior legislation. The scope of review should include verification of compliance with the applicable Cumulative List (CL) for the remedial amendment cycle (RAC) immediately preceding the current cycle in which the application was submitted.

    Example:

    A taxpayer with an Employer Identification Number (EIN) ending in 4 submits a Form 5310 application on March 15, 2013. Since the EIN ends in 4, the taxpayer would normally fall under cycle D. Therefore, the scope of the review must begin with the preceding cycle D RAC. The applicable CL for cycle D is the 2009 Cumulative List.

  2. Compliance with the applicable Cumulative List for the preceding RAC must be verified on every application.

  3. In order to prove prior law compliance, the taxpayer may provide either:

    1. A copy of the FDL 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 taxpayer cannot prove that the plan was timely amended for the provisions of the applicable Cumulative List for the prior RAC, the specialist should request managerial approval to expand the scope of review to include laws prior to the plan’s initial cumulative list.

  5. Additionally, if it is determined that a plan has not been timely amended for prior law, the plan is considered to have a Plan Document Failure as described under Rev. Proc. 2013-12 and a closing agreement may be needed to correct the failure. The specialist should consult with the manager and see IRM 7.11.8, Employee Plans Determination Letter Program, EP Determinations Closing Agreement Program.

7.12.1.4  (07-16-2013)
Interim Amendments

  1. Once a specialist has verified prior law, as necessary, they may review the application for subsequent law.

  2. Rev. Proc. 2007-44, 2007-2 C.B. 54 section 8 provides that the termination of a plan ends the plan’s remedial amendment period (RAP) and generally shortens the RAC for the plan.

  3. Accordingly, Rev. Proc. 2013-6 section 12.05 provides that a plan that terminates after the effective date of a change in law, but prior to the date that amendments are otherwise required, must be amended, in connection with the termination, to comply with the applicable provisions of the law from the date on which such provisions became effective with respect to the plan.

  4. Specialists should use the Issue Focus Reports on Terminations for help determining whether new laws are relevant to a particular terminating plan. To find these reports, go to the TEGE intranet site http://tege.web.irs.gov/home.asp and follow these steps:

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

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

    • Scroll to the "Determinations and Determinations Quality Assurance" section.

    and go to the Determinations and Determination Quality Assurance section.

7.12.1.4.1  (07-16-2013)
IRC 401(b) Period for Interim Amendments

  1. When reviewing interim amendments, the specialist should ensure the amendment was timely adopted within the time frame described in IRC 401(b) and section 5 of Rev. Proc. 2007-44.

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

  3. In the case of an existing plan, a disqualifying provision is any plan provision or the absence of a provision which causes the plan to fail to meet the qualification requirements of IRC 401(a) as a result of any plan amendment or changes in the qualification requirements due to the enactment of certain statutory provisions.

  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 due date (plus extensions) for filing the income tax return of the employers taxable year in which the amendment becomes effective.

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

  7. As noted in IRM 7.12.1.4, Interim Amendments, termination of a plan may curtail any remedial amendment period open at the time of termination.

  8. Any interim amendment that is not adopted timely could potentially disqualify the plan. In lieu of disqualification, the plan may enter the Closing Agreement Program (CAP). The case should be discussed with the manager prior to consulting the closing agreement coordinator. See IRM 7.11.8, Employee Plans Determination Letter Program, EP Determinations Closing Agreement Program.

7.12.1.5  (07-16-2013)
Discretionary Amendments

  1. A specialist must also review any discretionary amendments that are 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 such required amendments. They are optional amendments adopted to reflect changes in plan design.

  3. When reviewing a discretionary amendment, the specialist must ensure that it does not violate IRC 401(b) or IRC 411(d)(6).

7.12.1.5.1  (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 a discretionary plan amendment is treated as timely if it is adopted by the end of the plan year in which it is effective.

    Exception:

    Corrective amendments under the Employee Plans Compliance Resolution System (EPCRS) may be adopted with a retroactive effective date. See IRM 7.2.2, Employee Plans Compliance Resolution System (EPCRS) and Rev. Proc. 2013-12, 2013-1 IRB 313.

  2. Any discretionary amendment that is not adopted timely could potentially disqualify the plan. In lieu of disqualification, the plan may also enter the Closing Agreement Program (CAP). The case should be discussed with the manager prior to consulting the closing agreement coordinator. See IRM 7.11.8, Employee Plans Determination Letter Program, EP Determinations Closing Agreement Program.

7.12.1.5.2  (07-16-2013)
IRC 411(d)(6) Issues with Amendments

  1. Protected benefits, to the extent they have accrued, are subject to the protections of IRC 411(d)(6) and cannot be reduced, eliminated, or made 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. For purposes of determining whether or not any participant’s accrued benefit is decreased, all plan provisions affecting accrued benefits must be considered including changes in service counting rules, break-in-service rules, accrual rules, and actuarial factors for determining optional or early retirement benefits. See Treas. Reg. 1.411(d)-3(b).

  4. Additionally, IRC 411(a)(10) protects plan participants from plan amendments reducing the vesting schedules. A change in vesting schedules is any change, direct or indirect, that alters the manner in which the nonforfeitable percentage is determined. See Treas. Reg. 1.411(a)-8(c). An example of an indirect change is a change in the service counting rules or a change to or from a top heavy vesting schedule. In the case of such a change:

    1. IRC 411(a)(10)(A) requires that the nonforfeitable percentage of the accrued benefit, as of the later of the date the amendment is adopted or the date such amendment becomes effective, may not be decreased.

    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 adoption of a vesting changing amendment, to elect the former schedule for all (past or future) accrued benefits.

  5. A 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, 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 described in Treas. Reg. 1.411(d)-4 Q&A-3(b).

7.12.1.6  (07-16-2013)
Permanency Requirements/Reasons for Termination

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

  2. A specialist should review lines 4(d) and 7(a) on the Form 5310 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 provide a valid business reason for the termination. Otherwise, there is a presumption that it was not intended as a permanent program from its inception. It has been held that termination of a long established plan without a valid business reason did not affect a plan's qualification. See Rev. Rul. 72-239, 1972-1 C.B. 107.

  4. Line 10 on the Form 5310 provides 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. Line 10 on the Form 5310 also provides for 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

    In these instances, the specialist should review all of the surrounding facts and circumstances and make a determination as to whether the plan was intended to be permanent. Consider the extent of any tax advantages the employer derived during the period of the plan’s existence.

  6. The specialist should also review line 18(a) on the Form 5310 to determine permanency. Repetitive failure to make contributions in a discretionary profit-sharing plan during profitable years may indicate a lack of intent for the plan to be permanent.

  7. If a specialist believes that a taxpayer lacked intent to keep their plan permanently, they should consult with the manager and discuss disqualifying the plan.

  8. If bankruptcy is the reason for termination and the plan is a pension plan, further inquiry is required. The specialist must ensure that the plan is fully funded (See paragraph (5) of IRM 7.12.1.9, Proposed Date of Plan Termination for a definition of fully funded) and that no excise taxes are due as described in IRM 7.12.1.21, Minimum Funding Standards. If it is determined that excise taxes may be due, the specialist should research the taxpayer on the Integrated Data Retrieval System (IDRS). If IDRS confirms that excise taxes are due, the specialist should 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 taxpayer does business in. The bankruptcy coordinator will prov ide the name of the Insolvency Bankruptcy specialist assigned to the taxpayer's bankruptcy case. The specialist must then refer the case to EP Examinations on a Form 5666, TE/GE Referral Information Report so they can determine how much excise tax is due and report that amount to the Bankruptcy specialist BEFORE the bar date. See IRM 5.9, Bankruptcy and Other Insolvencies.

    Note:

    If the bar date has passed, we can no longer collect any excise taxes and we will only be able to document the Form 5621.

  9. Forward the Form 5666 to EP Classifications Unit in El Monte. Referrals can be sent by mail to the address listed in Exhibit 7.12.1-1, EP Examinations Referral Mailing Address or they can be secure e-mailed to the EP Classification mailbox at *TE/GE-EP-Classification. The taxpayer should be informed of any EP Examinations referral.

7.12.1.7  (07-16-2013)
Discontinuance of Contributions

  1. This section is only applicable 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 7.12.1.21, Minimum Funding Standards.

  2. Unless there are participants with forfeitures during the years under consideration, a specialist should not pursue a possible discontinuance of contributions. See line 18 of the Form 5310.

  3. Treas. Reg. 1.401-1(b)(2) provides that a profit sharing plan must make recurring and substantial contributions for employees. If contributions are stopped or are not substantial, a complete discontinuance may have occurred.

  4. Also, Treas. Reg. 1.411(d)-2(d)(1) provides that a complete discontinuance of contributions may occur even if contributions are made but the amounts are not substantial enough to reflect the intent on the part of the employer to continue to maintain the plan.

  5. To determine if complete discontinuance has occurred, the specialist should review line 18 on the Form 5310. This line displays the amount of employer contributions for the current plan year and the five prior plan years.

  6. A specialist should also consider all of the relevant facts and circumstances of a case; but generally, in a profit-sharing or stock bonus plan, if the employer 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 not later than the last day of the taxable year of the employer following the last taxable year of such employer for which a substantial contribution was made under the profit-sharing plan. For a plan maintained by more than one employer, the discontinuance is effective not later than the last day of the plan year following the plan year within which the last substantial contribution was made by any employer. See Treas. Reg. 1.411(d)-2(d)(2).

  8. If a complete discontinuance has occurred, IRC 411(d)(3) requires that 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 at such time, must be nonforfeitable. See Treas. Reg. 1.411(d)-2(a)(1)(ii).

7.12.1.8  (07-16-2013)
Partial Terminations

  1. IRC 411(d)(3) provides that upon partial termination, the rights to all amounts credited to an "affected employees" account will become non-forfeitable (100 percent vested).

  2. Unless there are participants with forfeitures during the years under consideration, a specialist should not pursue a possible partial termination.

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

  4. To determine if a partial termination has occurred, a specialist should first calculate the turnover rate (See IRM 7.12.1.8.1, Calculating the Turnover Rate) but they must also consider all of the relevant facts and circumstances of a particular case.

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

  6. Some facts and circumstances that affect the determination as to whether a partial termination has occurred include:

    • A plan may have a high turnover rate as part of its normal routine. For this purpose, information as to the turnover rate in other periods and the extent to which terminated employees were actually replaced, whether the new employees performed the same functions, had the same job classification or title, and received comparable compensation are relevant to determining whether the turnover is routine for the employer.

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

    • If the possibility for prohibited discrimination has increased.

  7. If the potential for reversion has been created or increased as a result of cessation or reduction of future benefit accruals under a DB plan, a partial termination is deemed to have occurred.

7.12.1.8.1  (07-16-2013)
Calculating the Turnover Rate

  1. The specialist should review line 15(a) on the Form 5310 to assist in the review of the turnover rate.

  2. The turnover rate is determined by dividing the number of participating employees who had an employer-initiated severance from employment during the applicable period by the sum of all of the participating employees at the start of the applicable period and the employees who became participants during the applicable period. The applicable period depends on the circumstances: the applicable period is a plan year (or, in the case of a plan year that is less than 12 months, the plan year plus the immediately preceding plan year) or a longer period if there are 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:

    • All participating employees are taken into account in calculating the turnover rate, including vested as well as nonvested.

    • Employer-initiated severance from employment generally includes any severance from employment other than severance that is on account 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.

    • In certain situations, the employer may be able to prove that other terminations were also not employer-initiated.

    • A claim that a severance from employment was purely voluntary can be supported through items such as information from personnel files, employee statements, and other corporate records.

7.12.1.8.2  (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 twelve of fifteen 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).

7.12.1.8.2.1  (07-16-2013)
Percentage of Affected Employees

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

  2. Matz v. Household International Tax Reduction Investment Plan, 388 F.3d 570 (7th Cir. 2004) holds 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). The facts and circumstances must be considered in each case 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 the normal turnover rate can be determined, 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.

7.12.1.9  (07-16-2013)
Proposed Date of Plan Termination

  1. Treas. Reg. 1.411(d)-2(c)(3) provides that the proposed termination date of a plan not subject to Title IV of The Employee Retirement Income Security Act of 1974 (ERISA) (DC plans) is the date the plan is voluntarily terminated by the employer, or employers, maintaining the plan. Generally, the employer will establish the proposed termination date by board resolution or an amendment to the plan.

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

    • A standard termination as defined in section 4041(b) of ERISA is the termination of a DB plan that has sufficient assets to meet all of its liabilities at the date of termination.

    • A distress termination as defined in section 4041(c) of ERISA is the termination of a DB where the plan assets are not sufficient to pay plan liabilities but the employer 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 as defined under section 4042 of ERISA permits the PBGC to terminate a 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.

    Note:

    See IRM 7.12.1.20.2, Underfunded DB Plan at Termination for distress and involuntary terminations.

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

  4. A copy of the resolution or amendment terminating the plan is required as part of the determination letter request. If this document does not accompany the application, the specialist should contact the applicant and secure the document. The specialist should be alert to the possible effect that document backdating has on vesting, funding and benefit accrual.

  5. The specialist should compare the proposed termination date on the resolution or amendment to the date on line 7(a) of the Form 5310. If the two dates do not match, the specialist should research and reconcile the difference only if the discrepancy raises issues relating to 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 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, the specialist should ensure that no IRC 411(d)(6) violations have occurred. In most cases, this will be satisfied because the effective date of termination will be AFTER the date the action to terminate is signed. 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 where it will not reduce any particpant's accrued benefit.

  9. For a money purchase, DB, or target benefit plan, if the proposed termination date precedes the date of adoption of the termination amendment, contributions that were required to be made as of allocation dates after the effective date of termination but prior to the date of adoption may not be eliminated by such an amendment.

  10. If actions are taken to terminate a plan but the assets are not distributed as soon as administratively feasible, the plan is not considered terminated for purposes of IRC 401(a). The plan's qualified status must be maintained until the plan is terminated in fact. See Rev. Rul. 89-87, 1989-2 C.B. 2, and IRM 7.12.1.13, Wasting Trusts.

  11. A plan is not terminated simply because it is amended to cease future accruals or "frozen." However, such 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 7.12.1.11, 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 proper and timely notice has not been given in the case of a plan subject to Title IV of ERISA) a determination must be made as to whether the plan was qualified as of the actual date of termination.

7.12.1.10  (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 may be eligible to enter the plan. A plan will stay frozen until it is amended to 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 would be getting no benefit so no contribution is required for non-key employees.

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

  3. The Form 5310 application does not specifically ask a question pertaining to a frozen plan, however line 9(b) on the Form 5310 does ask if there has been an amendment to the plan which decreases plan benefits for any participant. If the case file contains an amendment freezing or reducing employer contributions, the specialist should verify that the amendment does not violate IRC 401(b) or 411(d)(6) as described in IRM 7.12.1.5, Discretionary Amendments. The specialist should also verify that the plan continued to operate properly from the date the amendment was made until the actual date of termination.

  4. In any year in which the trust assets have not been distributed, the plan is subject to information requirements. The appropriate 5500 series form, including the Schedule SB, if applicable, must be filed for the plan.

    Note:

    Even though the applicant is required to complete the Form 5500, they are not required to submit it to the Service as part of the determination letter request.

7.12.1.11  (07-16-2013)
Wasting Trust Procedures

  1. Rev. Rul. 89-87, 1989-2 C.B. 2 provides that a wasting trust occurs when a plan formally terminates and benefit accruals are ceased, but the assets in the trust are not distributed as soon as administratively feasible (generally one year or less).

  2. Rev. Proc. 2007-44 section 8 explains that an application will be deemed to be filed in connection with plan termination if it is filed no later than the later of one year from the:

    1. Effective date of the termination.

    2. Date on which the action terminating the plan is adopted.

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

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

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

    • Review line 7(b) on the Form 5310.

  4. If the control date is within one year of the proposed termination date, the trust is not wasting. If the proposed termination date is over a year prior to the control date, and the assets have not been distributed, then the trust is wasting and a new proposed termination date should be selected and the plan must continue to meet the requirements of IRC 401(a) until the new proposed date of termination.

  5. Line 7(b) on the Form 5310 asks "Will funds be distributed as soon as administratively feasible" ? If the answer is "NO", there is a potential for a wasting trust. The following steps should be followed:

    1. Form 5310 should not be accepted if the employer does not intend to distribute assets as soon as administratively feasible. The plan must continue to be amended to comply with all current law provisions to remain qualified and a Form 5300 or Form 5307 must be submitted.

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

    3. Technical advice may be requested to determine whether the plan has terminated. See IRM 7.11.1.40.8, Technical Advice Requests.

    4. If the taxpayer withdraws the Form 5310, the determination case should be considered for an examination. If there are indications of potential future operational problems that would affect qualification of the plan, prepare Form 5666 and follow local procedures for subsequent examination follow-up action. See IRM 7.11.1.20, Withdrawal of Applications.

  6. A plan administrator does not meet the burden of showing that all plan assets were distributed as soon as administratively feasible merely because such distribution was delayed on account of an audit of the employer by the Service.

  7. In addition, a distribution that was delayed merely for the purpose of obtaining a higher value than current market value is generally not deemed to have been made as soon as administratively feasible. See Rev. Rul. 89-87.

7.12.1.12  (07-16-2013)
Forfeitures

  1. When reviewing a terminating plan, the specialist must review the timing of forfeitures and how forfeitures are allocated.

  2. The timing of any forfeitures will depend on:

    • The terms of the plan.

    • When the vested accrued benefit is distributed.

    • Whether the employee returns to employment.

  3. The specialist should thoroughly review and compare lines 15(a)(6) and 18(b) on the Form 5310. If line 15(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 15(b).

  4. The attachment required under line 15(b) provides six years of history which shows all participants who left without full vesting. The information provided here should be compared to the terms of the plan (forfeitures, vesting) and to the answers provided in lines 15(a)(6) and 18(b).

  5. If there are any questions or possible erroneous information, further information may need to be secured from the employer or their representative, if applicable. If any information on line 15(a)(6) needs to be revised, a corrected Form 5310 application should be secured.

  6. If the specialist determines that participants had wrongful forfeitures, the specialist must obtain written documentation from the employer that the forfeitures will be restored.

  7. There can be no reversion of forfeitures to the employer upon termination of a profit-sharing, stock bonus, or for years after December 31, 1985, money purchase plan. See Rev. Rul. 71-149, 1971-1 C.B. 118 and Rev. Rul. 2002-42, 2002-2 C.B. 76. The 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 is precluded from using forfeitures to increase benefits prior to plan termination. See IRC 401(a)(8) and Treas. Reg. 1.401-7.

7.12.1.13  (07-16-2013)
Rollovers

  1. IRC 401(a)(31) and IRC 402(c) provide that plans qualified under IRC 401(a), IRC 403(b), and IRC 457(b) may receive rollovers from other qualified plans.

    Note:

    In order for a plan to allow for such rollovers, the language must be contained within the plan document.

  2. Line 18(c) on Form 5310 will show the amount of rollovers received into the plan in the last six years.

  3. The specialist should review line 18(c) to see if any rollovers were received. If the amount(s) are excessive based upon the facts and circumstances of the case, the specialist should develop the issue.

  4. The specialist should verify where the rollovers came from and how many different participants rolled assets over. Additionally, the specialist should obtain a copy of the determination letter for the originating plan.

  5. If it is determined that the rollover came from an ERSOP/ROBS (Entrepreneur Rollover Stock Ownership Plan/Rollover Business Start-ups) arrangement, see manager as additional procedures may apply.

7.12.1.14  (07-16-2013)
Mode of Distribution

  1. Qualified plans must state the forms of payment available to participants and beneficiaries. Payment forms are either mandatory per the plan document language or are subject to the participant’s or beneficiary’s election. In accordance with 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 the 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, an outstanding determination letter will extend this date; however, an IRS EP Examination does not extend this date. Line 19 on the Form 5310 addresses the payment forms that the plan will make upon the termination of the plan. The specialist must verify the payment forms provided on the Form 5310 are consistent with the terms of the plan.

  3. If line 19 on the Form 5310 is inconsistent with the terms of the plan, the specialist should either request a corrected Form 5310 or an amendment to the plan. For example, if the plan only allows for lump sum distributions, it may not distribute assets in the form of an annuity upon plan termination unless an amendment is made to the plan.

  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, to the extent required) consents to a different form of benefit (such as a single-sum distribution) as provided by IRC 417(a)(2).

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

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

  7. The specialist should review line 17(j) on the Form 5310 when verifying that distributions were made correctly. This question provides information concerning the largest amount within the last six plan years which was distributed or applied to purchase an annuity contract. If this line is completed, additional information is needed as follows: number of participant(s), composition of the distribution (e.g., rollover, employer contribution, elective deferral etc.), status of participant (i.e. HCE (Highly Compensated Employee), officer, trustee, owner etc.) and date of distribution. The specialist should verify the distribution did not consist of any elective deferrals that were subject to the distribution restrictions under IRC 401(k)(10) .

7.12.1.14.1  (07-16-2013)
401(k) Plan Distributions

  1. IRC 401(k)(10)(A) provides that a 401(k) plan which terminates cannot distribute the elective deferrals portion 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. If the terminating plan is a 401(k) plan and:

    • A successor (alternative) plan exists (verified by reviewing line 17(m) on the Form 5310), the elective deferrals must either be transferred to the successor plan, kept in the plan until a distributable event occurs (such as severance from employment), or the plan may purchase a deferred annuity contract which will delay the distribution.

    • If no successor (alternative) plan exists, the 401(k) plan must distribute elective deferrals in a lump sum distribution in accordance with IRC 401(k)(10)(B) and IRC 402(e)(4)(D).

7.12.1.14.2  (07-16-2013)
In-Kind Distributions

  1. An "in-kind" distribution is a distribution made 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 line 17(e) on the Form 5310 indicates that distributions will include property other than cash and/or readily tradable marketable securities, the specialist should:

    1. Verify the plan allows for in-kind distributions.

    2. Verify if all participants have been given the option of having a distribution in kind.

    3. Determine how assets will be distributed.

    4. Determine how the assets are valued.

  4. If a plan allows for 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 the termination of 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.

7.12.1.15  (07-16-2013)
Trust Assets/Balance Sheet

  1. When a plan submits a Form 5310 application, they are required to provide a statement of trust assets available as of the proposed termination date or the last valuation date. A specialist is required to review this statement which is provided on line 20 on the Form 5310.

  2. The specialist should begin the asset verification by ensuring that the calculation for line 20(f) is correct and that all assets sum up correctly.

  3. If the plan sponsor submits a Form 6088, Distributable Benefits From Employee Pension Benefit Plans, the specialist must 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.

    Note:

    The Form 6088 is only required for DB plans and underfunded DC plans. If a plan is over or underfunded, see IRM 7.12.1.24 or IRM 7.12.1.25

    .

  4. When reviewing line 20, the specialist should be concerned with 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 20(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. The specialist should verify that a Prohibited Transaction (PT) has not occurred with these assets by securing a description of the asset and an explanation of the allocation.

  6. If there are "Receivables" listed on line 20(b), the specialist must 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 due date of the federal tax return (plus extensions).

    • For minimum funding purposes a pension plan has a maximum of up to eight and one-half months after the close of the plan to make contributions. See IRM 7.12.1.21, Minimum Funding Standards.

    • Employee 401(k) elective deferral receivables and after-tax contributions should be paid 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 Regulations.

    Note:

    If there are assets listed under line 20(b), the specialist should review line 11 which shows the amount and date of the last employer contribution. If the amount on line 11 is equal to the amounts listed on line 20(b) and the contribution date is timely, no further information is needed for this issue.

  7. Lines 20(c)(7)(A) and (B) of Form 5310 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 7.12.1.17, Unrelated Business Income Tax. Additionally, the purchase of real estate could be a PT if the transaction was between the trust and a disqualified person. See IRM 7.12.1.16, Prohibited Transactions. The specialist should:

    1. Secure an explanation of the purpose of the real estate.

    2. Secure the purchase or lease documentation.

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

    4. Inquire if it is debt financed.

  8. The amount invested in partnerships/joint ventures is recorded on Line 20(c)(6) of the Form 5310. 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 unrelated business income. Additionally, if the investment is related to a disqualified person, it is a PT. If the asset section includes an amount on this line, then the specialist should secure an explanation stating the type of business and who the parties are that are involved. The specialist should also secure the most recent Form 1065, Schedule K-1.

  9. Any assets listed on line 20(c)(8) - (13), 20(d), and 20(e) will generally require the specialist 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. The existence of such investments indicates the possibility of improper deductions, PTs, debt financed income, or valuation problems which could violate the exclusive benefit rule or result in discriminatory allocations. See IRMs 7.12.1.18 and 7.12.1.19.

  10. Loans to participants are listed on line 20(c)(9) of the Form 5310. If an amount is reported on this line, the specialist should:

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

    • Verify if the terms of the plan allow for 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 for the exception 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 time period to repay the loan does not exceed 5 years and if it does, verify it meets the home loan exception.

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

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

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

    • If it is determined the plan has violated IRC 72(p), prepare Form 5346, Examination Information Report, to report the amount as income to the participant.

  11. The amount of insurance contracts are reported on line 20(c)(12) of the Form 5310. See IRM 7.12.1.18, Life Insurance Contracts.

  12. Plan liabilities are listed on lines 20(g), (h), (i), or (j) of the Form 5310. If there are amounts listed on these lines, the specialist should 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 such issues impact plan qualification and discuss the case with the group manager before taking further action. The file should be documented to reflect actions considered and the conclusion.

7.12.1.15.1  (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 20 will indicate zero plan assets.

  2. If this is the case, the specialist should 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 assets were distributed more than one year prior to the control date of the Form 5310, the case should be returned using a Letter 1924. Use caveat "2" with a variable of "Rev. Proc. 2007-44." A "5998" caveat may also be required if a Form 2848, Power of Attorney and Declaration of Representation or Form 8821, Tax Information Authorization was submitted with the application.

  5. If the application was filed within 12 months from the date the assets were distributed then the specialist should proceed with the normal case processing procedures.

7.12.1.16  (07-16-2013)
Prohibited Transactions

  1. In any instance where a prohibited transaction is found, the specialist should prepare a Form 5666 and forward it to EP Examinations ensure that the proper taxes are paid. See IRM 4.72.11, Employee Plans Technical Guidance, Prohibited Transactions.

7.12.1.17  (07-16-2013)
Unrelated Business Income

  1. The purpose of the tax on unrelated business income 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 taxation on any income that is 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 of it's "intended activity" , that amount is considered UBI and is subject to taxation.

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

  5. If the specialist determines that UBI is present, refer the plan to EP Examinations with a Form 5666.

7.12.1.18  (07-16-2013)
Life Insurance Contracts

  1. Life insurance can be used as a funding vehicle for retirement plans as either an "incidental" benefit or as the sole benefit. See IRM 7.12.1.18.2, Fully Insured Contract Plans if 100 percent of 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 retirement purpose of the plan. For life insurance coverage to be incidental:

    • For a DC plan, the employer's total annual contribution on behalf of the participant that is allocated to the purchase of ordinary whole life insurance is less than 50 percent. The figure is 25 percent in the case of 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 line 20(c)(12) of the Form 5310 shows that plan assets are invested in life insurance contracts, the specialist should ensure that the assets are proper and the plan does not indicate that it is a fully insured contract plan, and calculate the assets to ensure that the benefits are incidental to the main purpose of the plan (providing a retirement benefit and not solely a death benefit).

  4. The specialist should also make contact to determine if the life insurance contracts are springing cash value contracts. See IRM 7.12.1.18.1, Springing Cash Value.

7.12.1.18.1  (07-16-2013)
Springing Cash Value

  1. Some firms have promoted an arrangement where an employer establishes a section 412(i) plan under which the contributions made to the plan, which are deducted by the employer, are used to purchase a specially designed "springing cash value" life insurance contract. Generally, these special policies are made available only to highly compensated employees.

    Note:

    IRC 412(i) plans received their name by the code section that described them. However, with the passage of 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. At a time when the cash surrender value is low, the policy is distributed to the employee; however, the contract is structured so that the cash surrender value increases significantly after it is transferred to the employee.

  3. Use of 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 Service cautioned that a more accurate valuation method must be used for determining 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 for purposes of determining the amount includible in gross income under IRC 402(a) where the total policy reserves (including life insurance reserves (if any) computed under IRC 807(d), together with 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 in valuing the amount distributed, thereby allowing a greater distribution than would otherwise be allowed, the distribution could be treated, in part, as an employer reversion. In addition, in certain circumstances, such distributions could disqualify the plan (e.g., distributions in excess of the IRC 415 limits).

  6. If a plan is incorrectly valuing the contracts, the specialist must obtain a corrected value using total policy reserve value instead. Additionally, any resulting adjustment to the distributee’s taxable income should be referred to EP Examinations.

7.12.1.18.2  (07-16-2013)
Fully Insured Contract Plans

  1. If line 8(d) on the Form 5310 is marked "Yes" or line 20(c)(12) on the Form 5310 show 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 the purchase of individual insurance contracts.

    Note:

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

  2. These contracts provide for level annual premium payments to be paid for a period not extending beyond normal retirement age for each individual participating in the plan. Benefits provided by the plan are equal to the benefits provided under each contract at normal retirement age under the plan.

  3. For all IRC 412(i) plans, the specialist must:

    • Review lines 17(b) and 17(e) 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. The specialist should also 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 the subject of an EP Examinations Abusive Transaction project. See http://www.irs.gov/Retirement-Plans/EP-Abusive-Tax-Transactions. Also see IRM 7.11.1.27, Abusive Transactions / Listed Transactions.

7.12.1.19  (07-16-2013)
Segregated Account IRC 414(k)

  1. IRC 414(k) accounts provide benefits from a combination of 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 limitations. Unlike a DB plan, there is no limitation on the amount being distributed.

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

  4. The establishment of a separate account at normal retirement age is treated as an amendment that eliminates the DB feature of a participant's benefit under a DB plan and violates section 411(d)(6) unless the requirements of the exception provided in the regulations are satisfied. Thus, when reviewing a plan with a separate IRC 414(k) account, the specialist must review the separate account feature under the plan and determine if the transfer of the participant's DB benefit under the plan to the separate account meets the exception provided in Treas. Regs. 1.411(d)-4 Q&A 3:

    1. The transfer must be voluntary.

    2. If the transferor plan is subject to the requirements of IRC 401(a)(11) and 417, notice and spousal consent requirements must be satisfied pursuant to IRC 417.

    3. The participant whose benefits are transferred must be eligible, under the terms of the transferor plan, to receive an immediate distribution from such plan. Where the employer is terminating the transferor plan, this requirement is satisfied.

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

    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 pursuant to the above rules will constitute an optional form of benefits under the plan for purposes of 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 Service will not rule on a plan with a 414(k) separate account provision that does not meet the exception rules. The specialist should have the employer submit a letter to TE/GE requesting to withdraw the Form 5310 termination application and return the case on Letter 1924 (DO/CG) using procedures in IRM 7.11.1.12.4, Technical Screening Analysis of Applications.

  7. If it is determined that the 414(k) account violates IRC 411(d)(6), the specialist should prepare a Form 5666, Referral and Information Report for an EP Examinations referral.

7.12.1.20  (07-16-2013)
Overfunded/Underfunded Plan at Termination

  1. A specialist should review the Form 6088, Distributable Benefits From Employee Pension Benefit Plans, and line 20 of the Form 5310 to determine if the plan is overfunded or underfunded.

  2. A Form 6088 is required for all DB plans and underfunded DC plans. Additionally, 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.

7.12.1.20.1  (07-16-2013)
Overfunded Plan at Termination

  1. If the specialist determines that the Present Value of Accrued Benefits (PV of AB) of all participants is less than the total assets, the plan is overfunded (as defined in the instruction to Form 6088).

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

    • Reallocation to the participants. See IRM 7.12.1.20.1.1, Excess Assets Reallocated to Participants.

    • Reversion of assets to the plan sponsor. See IRM 7.12.1.20.1.2, Reversion of Excess Assets.

  3. Some employers may attempt to recover surplus assets in a termination/reestablishment, or spinoff/termination. The conditions under the "Implementation Guidelines for Termination of Defined Benefit Plans" issued 5-24-84 must be followed. The Implementation Guidelines were supplemented by the 6-1-84 teletype entitled "Processing Employee Plan Cases that Terminate with Reversion of Surplus Assets." A copy of the guidelines is found at the following website: http://tege.web.irs.gov/content/EmpPlansMainWindow/linkedHtmlDocuments/determs/052484A.pdf. A copy of the Teletype is also available: http://tege.web.irs.gov/content/EmpPlansMainWindow/linkedHtmlDocuments/determs/060184A.pdf

  4. If the plan is overfunded, the specialist should determine which of the available methods was used to correct the discrepancy and ensure that the method was applied in a nondiscriminatory manner.

7.12.1.20.1.1  (07-16-2013)
Excess Assets Reallocated to Participants

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

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

  3. The specialist must review line 17(g) on the Form 5310 to ensure that the reallocation was done in a nondiscriminatory manner. The specialist must also ensure that IRC 415 limits were not exceeded during the reallocation.

  4. Plan assets allocated in accordance with the following priorities generally will be deemed to be nondiscriminatory:

    1. Except as provided in d. below, the plan assets are allocated in accordance with ERISA 4044(a)(1), (2), (3), and (4)(A) of ERISA. 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 the rank and file employees receive from the plan at least the same proportion of the present value of their accrued benefits (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. In the case of a plan establishing subclasses within the meaning of ERISA 4044(b)(6), the assets described in any paragraph of ERISA 4044(a) may be reallocated within such paragraph to the extent such reallocation helps to satisfy b. above.

    5. Subject to a. through d., the assets shall be allocated in accordance with ERISA 4044(a)(4)(B), (5), and (6); however, the assets in paragraphs (4)(B), (5) or (6) of section 4044(a) of ERISA must to be reallocated to minimize the discrimination.

7.12.1.20.1.2  (07-16-2013)
Reversion of Excess Assets

  1. If lines 7(c) and 17(h) on Form 5310 indicate that a reversion has occurred, the specialist must ensure that the reversion was permissible.

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

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

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

    3. In the case of certain overfunded DB plans, reversions are only permitted if all liabilities with respect to the participants and their beneficiaries have been met.

  3. Closure of the case must not occur until securing proof that the reversion was due to erroneous actuarial computation and the plan reviewed to ensure that the terms of the plan for at least five calendar years preceding the plan proposed termination date allowed reversions.

  4. If there is a reversion, the specialist must 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 to refer the case to EP Examinations. The reports should discuss whether the reversion has been included as income on the taxpayer's tax return for the year of the reversion and whether the taxpayer has paid the excise tax on the reversion. See IRM 7.12.1.20.1.3

  6. If the reversion exceeds $5,000,000, the application becomes a mandatory review case and should be sent to Quality Assurance with a Form 3198, Special Handling Notice.

  7. In general, an employer may not attempt to receive a reversion in a termination/reestablishment or spinoff/ termination earlier than 15 years following any previous similar transaction. If it is determined that a spinoff/ termination or termination/ reestablishment is not part of an integrated transaction subject to the Implementation Guidelines, technical advice must be requested to resolve the case. If a funding deficiency has not been corrected or the Form 5000 has not been filed, prepare a Form 5666 and forward it to exam.

7.12.1.20.1.3  (07-16-2013)
Tax on Reversion

  1. Reversions are taxable income to the employer in the year received under the applicable federal tax rates.

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

  3. To have the 20 percent excise tax rate applied rather than the higher 50 percent excise tax rate, the employer must provide written documentation that shows one of the following:

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

      Note:

      Any amount transferred to the replacement plan is not included in the employer’s income, deducted by the employer, 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 line 7(c) on the Form 5310 shows a reversion has taken place, the specialist should verify that the tax on the reversion was properly paid.

7.12.1.20.2  (07-16-2013)
Underfunded Plan at Termination

  1. If assets on the Form 5310 balance sheet are less than the accrued benefits listed in column (h) of the Form 6088, the plan is underfunded. The specialist should review the prior three years of the Form 5500, Schedule SB or MB, to determine if there is a funding deficiency.

  2. If it is determined that the plan is underfunded (Present Value of Accrued Benefits (PV of AB) of all participants is greater that the total assets), then there are generally three options that will allow the plan to terminate under a standard termination (otherwise the plan will have to terminate under a distress or involuntary termination). The employer may do one or a combination of the following three actions:

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

    2. Allocate trust funds in accordance with ERISA 4044.

    3. The majority owner may forgo his or her distribution as described in the note below. (Every effort should be made to support this method if it is chosen by the employer.)

  3. If the employer decides to allocate trust funds in accordance with ERISA 4044, the specialist should refer to the 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).

    Note:

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

  4. If a funding deficiency has not been corrected or the Form 5500 has not been filed, the specialist should complete a Form 5666 and refer to EP Examinations.

7.12.1.21  (07-16-2013)
Minimum Funding Standards

  1. IRC 412 imposes minimum funding standards on certain types of plans in order to protect participant's promised benefits. A tax under IRC 4971 is imposed if a plan sponsor does not meet the minimum funding standards.

  2. IRC 412(a)(2) requires that:

    1. The sponsor of a DB plan which is not a multiemployer, must make contributions to (fund) the trust for the plan year which are not less than the minimum amount required under IRC 430.

    2. The sponsor of a money purchase plan must fund the trust for the plan year in an amount which is required under the terms of the plan unless a funding waiver is in effect.

    3. The sponsors of a multiemployer plan must fund the trust for the plan year in an amount that is sufficient to ensure that the plan does not have an accumulated funding deficiency. IRC 431.

      Note:

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

  3. A termination does not relieve the employer of the 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 DC plan, the minimum funding standard charges will reflect the entire amount of any contributions due on account of accruals earned on or before the date of proposed termination, but no contributions due after that date.

      Example:

      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, a specialist should carefully review the proposed termination date. (See IRM 7.12.1.9, Proposed Date of Plan Termination.)

  5. Plans that do not distribute assets on the proposed date of termination or within a reasonable time thereafter and plans that have not provided proper notice of termination to participants may continue to have funding requirements accumulate under the plan. If the specialist makes a change to a proposed date of termination for any reason, the minimum funding requirement (as well as participants’ accrued benefits) will likely have to be adjusted to reflect the proper date of termination. After a specialist has determined the amount of the required contribution, the specialist should review line 11 on the Form 5310 to ensure that the proper amount was paid to the trust.

  6. IRC 4971(a) imposes a tax on plan sponsors who fail to make a required contribution to the plan on a timely basis. The specialist should verify the timing of the contribution by reviewing line 11 of the Form 5310. Securing proof of the contribution might be necessary.

    1. If a single employer plan does not make the required contribution within eight and one-half months after the close of the plan year, 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).

      Exception:

      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 close of the plan year (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).

    Note:

    For both single and multiemployer plans, if the deficiency is not corrected (reduced to zero) by the end of the taxable 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 by due date of tax return including extensions n/a
    Minimum funding purposes within eight and one-half months after close of plan year 10 percent tax
    Multiemployer plan For deductibility purposes by due date of tax return including extensions n/a
    For minimum funding purposes within two and one-half months after close of plan year (may be extended up to eight and one-half months) 5 percent tax

  7. The specialist should review line 17(f) on the Form 5310, to determine if a plan has an accumulated funding deficiency. Where a plan has a funding deficiency and the period for making timely contributions is still open, the specialist should ensure the contributions for the final plan year are made. If the period for making timely minimum funding contributions has expired, the employer must file Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, for the amounts due, or the specialist must make a referral made to the EP Classification Unit using a Form 5666, TE/GE Information Report as described in IRM 7.11.1.

  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 not to be decreased by amendment.

    Exception:

    If a plan participant is a majority owner (i.e., a participant with an interest in the employer in excess of 50%), he/she may, with spousal consent, agree to "forgo" receipt of all or part of his/ her benefit until the benefit liabilities of all other plan participants have been satisfied. This is not a "waiver" or forfeiture within the meaning of IRC 411 and does not affect the otherwise applicable minimum funding requirements of the plan in the year of termination. See PBGC Regs. 4041.2 and 4041.21(b)(2).

  9. A funding method may not be changed in the year in which the plan terminates unless either automatic approval is available to change the funding method of the plan or 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 a waiver of the minimum funding standards (under IRC 412(c)(3)) is being amortized in the year in which a plan terminates, all obligations of the employer with respect to the waiver as stated in the waiver ruling letter must be met in the year of termination. These include:

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

    2. A waiver amortization charge in the funding standard account is not prorated in the year of termination. An employer 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. A plan may not be amended in the year of termination to reduce or eliminate any contribution requirement for that year, unless all employees’ "accrued benefits" as of the later of the adoption or effective date of the amendment are protected, or the plan satisfies the requirements of IRC 412(d)(2) allowing certain retroactive benefit reductions.

    Note:

    A benefit is not considered "accrued" for this purpose unless all conditions to accrue the benefit under the plan have been satisfied. For example, if a DC plan document contains provisions which require that a participant earn an hour of service on the last day of the plan year, an amendment reducing contribution requirements adopted before the last day of the year will not violate IRC 411(d)(6). See Rev. Rul. 76-250, 1976-2 C.B. 124.

7.12.1.22  (07-16-2013)
Adjusted Funding Target Attainment Percentage (AFTAP)

  1. IRC 436, which was added by PPA 06, adds protections and restrictions to the benefits of all participants of single and multiple employer DB plans. IRC 436 does not apply to multiemployer or DC plans.

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

  3. If the 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. The following is a quick guide to the AFTAP restrictions, IRC 436 further explains the restrictions.

    If the Funding Ratio is: Then the Restrictions are:
    100 percent or higher
    • No restrictions on benefits.

    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.

7.12.1.23  (07-16-2013)
Interested Party Notices Upon Plan Termination

  1. Before a determination request may be processed, interested parties must be notified as required under ERISA 3001(b) and IRC 7476(b). See Treas. Reg. 1.7476- 1(a)(1).

  2. Interested party notices are reviewed for plans submitted on Form 5310. Specialists will review applications for an affirmative answer to the notice question and for the timeliness of the notice.

  3. The specialist will return the application as incomplete using Letter 1012 (DO/CG), Letter for Returning Incomplete EP Applications, and closing code "03" with a request for a copy of the notice, if the applicant:

    1. Fails to indicate whether or not notice was given.

    2. Indicates that the notice has not been given.

    3. Indicates the notice was provided but fails to provide the date that the notice was given.

    4. Based on the date entered, did not file notice timely.

    See IRM 7.11.1.17.2, Failure to Respond: Incomplete Application Packages for instructions.

7.12.1.24  (07-16-2013)
PBGC Notice on Plan Termination

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

  2. Additionally, a 60-day advance notice is required to be given to all affected participants at least 60 days and not more than 90 days before the proposed termination date. This notice is in addition to the Interested Party Notices discussed in IRM 7.12.1.23.

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

  4. If PBGC rejects a proposed termination date on an open application, all work should be stopped and the case should be returned to the employer with the full user fee (if applicable). The employer may submit a new Form 5310 application with a corrected proposed termination date if they wish.

  5. If a Form 5310 is not in inventory or a DL has already been issued, no action is necessary.

Exhibit 7.12.1-1 
EP Examinations Referral Mailing Address

The mailing address for all EP Examinations referrals is as follows:

Internal Revenue Service
EP Classification Unit
9350 Flair Drive, 2nd Floor
El Monte, CA 91731-2828

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