Issue Snapshot – Plan Termination: Failure to Timely Distribute Assets


This Snapshot discusses the holding in Rev. Rul. 89-87 about a plan that fails to timely distribute assets upon plan termination.

IRC Sections and Treas. Regulations

  • IRC Section 401(a)
  • Reg. Section 1.401-6(b)(1)
  • Reg. Section 1.411(d)-2(c)(3)
  • Reg Section 1.411(d)-2(c)(2)
  • IRC Section 412
  • IRC Section 6057
  • IRC Section 6058
  • IRC Section 6059


Internal Revenue Code (IRC) Section 401(a) states than an employees' trust is qualified only if it is part of a pension, profit-sharing, or stock bonus plan that meets the requirements of that section. So, if a plan has been terminated, the trust that formed a part of it cannot thereafter continue in a qualified status. Rev. Rul. 69-157.

Section 1.411(d)-2(c)(3) of the Income Tax (IT) Regulations states 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 sponsor voluntarily terminates it. Generally, the employer sets the proposed plan termination date by board resolution or plan amendment.

Treas. Regs. 1.411(d)-2(c)(2) specifies that the proposed termination date of a plan subject to Title IV of ERISA (most DB plans) is the date determined under ERISA.

The three types of terminations of single-employer DB plans under ERISA that are covered by this rule are described in the table below:

Termination Type ERISA Section Description
Standard termination 4041(b) The plan has sufficient assets to meet all of its liabilities at the date of termination.
Distress termination 4041(c) The plan assets aren't 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).
Involuntary termination 4042 PBGC terminates the plan involuntarily and generally decides the date of termination if it determines that the plan is unable to either:
  • Meet the minimum funding requirements.
  • Pay benefits when due.

Note: See IRM, Underfunded DB Plan at Termination

Although contributions under a plan may have been discontinued, a plan is not considered terminated until it distributes all assets to the participants. Rev. Rul. 69-157.

A qualified plan under which benefit accruals have ceased is not terminated if plan assets remain in the plan's related trust rather than being distributed as soon as administratively feasible. Rev. Rul. 89-87

Under Rev. Rul. 89-87, whether a distribution is made as soon as administratively feasible is determined under all the case's facts and circumstances but, generally, a distribution which is not completed within one year after the employer-specified date of plan termination, is presumed not to have been made as soon as administratively feasible.

A plan under which all assets are not distributed as soon as administratively feasible is an ongoing plan and must:

  • Meet the requirements of IRC Section 401(a) to continue its qualified status (which may require plan amendments and changes in plan operations if the law requires).
  • Meet the minimum funding requirements of IRC Sections 412 and 430, where applicable.
  • Comply with the information reporting requirements of IRC Sections 6057, 6058, and the actuarial reporting requirements of Section 6059 for defined benefit plans.

Audit Tips

  1. Review the plan's amendment to terminate the plan to determine the proposed date of plan termination.
  2. Determine if all assets have been distributed within one year of the termination date.
  3. If not, determine if the plan sponsor filed Form 5310 requesting a determination letter on the proposed termination of the plan. Doing so extends the one-year period considered "administratively feasible" under Rev. Rul. 89-87.
  4. Determine if the delay in distributions is reasonable based on all applicable facts and circumstances.
  5. If the agent determines the plan did not timely distribute assets, determine if the plan complies with IRC Section 401(a) both in form and operation.
  6. Determine if the plan complies with IRC Section 412 funding requirements and IRC Section 430 minimum required contributions.