7.12.1 Plan Terminations

Manual Transmittal

September 27, 2021

Purpose

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

Material Changes

(1) IRM 7.12.1.2 was updated to provide in more detail the verification needed to determine if a plan is properly amended for prior legislation and compliance with the applicable cumulative list. Example also updated for 2021 year.

(2) IRM 7.12.1.5 was updated to add note referencing Section 209 of the Consolidated Appropriations Act of 2021 concerning partial termination.

(3) IRM 7.12.1.6 (11) was added to clarify that the IRS defers to the PBGC as to the termination date for PBGC covered plans.

(4) IRM 7.12.1.12 (5), Line 21(a) was updated to specify what documents and verifications should be obtained to verify that the plan does not have a prohibited transaction with respect to “non-interest bearing assets.”

(5) IRM 7.12.1.12 (5), Lines 21(c)(7)(A) & (B) were updated to specify what documents and verifications should be obtained to verify whether real estate investments generated rental income.

(6) IRM 7.12.1.12 (5), Line 21(c)(9) was updated to specify if the loan stated limits with reference to the participant’s vested account balance. Verify whether the loan was granted due to a qualified relief effort authorized by law.

(7) IRM 7.12.1.12 (5), Line 21(c)(10) was added to specify what documents and verifications should be obtained to verify the terms of other loans.

(8) IRM 7.12.1.12 (5), Line 21(c)(12) was updated to ensure that insurance contracts are valued using total policy reserve value instead of stated cash surrender value.

(9) IRM 7.12.1.12 (5), Line 21(c)(13) was updated to specify what information should be obtained to verify other assets.

(10) IRM 7.12.1.12 (5), Lines 21(d)(1)&(2) were added to specify what information should be obtained to verify employer related investments.

(11) IRM 7.12.1.12 (5), Line 21(e) was updated to specify what information should be obtained to verify building equipment and other property used in plan operation.

(12) IRM 7.12.1.12 (5), Line 21(g) was updated to specify what information should be obtained to verify benefit claims payable.

(13) IRM 7.12.1.12 (5), Line 21(h) was updated to specify what information should be obtained to verify operating payables.

(14) IRM 7.12.1.12 (5), Line 21(i) was updated to specify what information should be obtained to verify acquisition indebtedness.

(15) IRM 7.12.1.12( 5), Line 21(i) was updated to specify what information should be obtained to verify other liabilities.

(16) IRM 7.12.1.17.1 was updated to provide a method to correct an overfunded plan at termination.

(17) IRM 7.12.1.17.1.1 was updated to provide a method for applying excess assets to plan participants.

(18) IRM 7.12.1.17.1.2 was updated to emphasize that for both PBGC and non-PBGC plans, the assets in an underfunded plan must be allocated under ERISA Section 4044.

(19) Updated to reflect current versions of annual revenue procedures.

Effect on Other Documents

This supersedes IRM 7.12.1 dated September 26, 2018.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(09-27-2021)

Eric D. Slack
Director, Employee Plans
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose: To provide procedures and technical guidance on issues EP employees may have when reviewing Determination Letter (DL) applications for terminating and terminated retirement plans.

  2. Audience: Employee Plans (EP) Determinations and Quality Assurance (QA) staff

  3. Policy Owner: Director, EP

  4. Program Owner: EP

  5. Program Goals: The goal of EP Determinations is to:

    1. Ensure that plans comply with the tax laws by reviewing applications for DLs and opinion letters.

    2. Protect the public interest by applying the tax law with integrity and fairness to all.

Background

  1. Plan sponsors who terminate their plans or have potential partial terminations may submit requests for a DL using the following forms:

    1. Form 5310, Application for Determination for Terminating Plan.

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

    3. Form 5300, Application for Determination for Employee Benefit Plan, for termination of collectively bargained multiemployer or multiple employer plan covered by Pension Benefit Guaranty Corporation (PBGC) insurance.

  2. When reviewing an application for a full or partial termination, complete:

    1. Form 5621, Technical Analysis Control Sheet.

    2. Form 6677, Plan Termination Standards Worksheet.

    3. Any other appropriate forms or worksheets.

  3. Use this IRM with IRM 7.11.1, Employee Plans Determination Letter Program, which gives general DL application processing procedures.

Acronyms

  1. These acronyms are used in this IRM:

    Acronym Term
    AFTAP Adjusted Funding Target Attainment Percentage
    CL Cumulative List
    CSV Cash Surrender Value
    DB Defined Benefit
    DC Defined Contribution
    DL Determination Letter
    EDS Employee Plans/Exempt Organizations Determination System
    EP Employee Plans
    ERISA The Employee Retirement Income Security Act of 1974
    FDL Favorable Determination Letter
    PBGC Pension Benefit Guaranty Corporation
    POA Power of Attorney
    PPA ‘06 Pension Protection Act of 2006
    PT Prohibited Transaction
    PVAB Present Value of Accrued Benefits
    QA Quality Assurance
    QJSA Qualified Joint & Survivor Annuity
    RAC Remedial Amendment Cycle
    RA List Required Amendment List
    ROBS Rollover Business Start-ups
    TEDS Tax Exempt Determination System
    UBI Unrelated Business Income

Determining the Scope/Verifying Prior Law

  1. Always verify that the plan was properly amended for prior legislation. Verify the plan complied with all items on the 2015 Cumulative List (CL).

    1. If the plan has a favorable determination letter (FDL) that gives reliance for a cumulative list (CL) after 2010, you only need to secure subsequent interim amendments and verify the plan sponsor adopted them timely.

    2. Verify compliance with: i) the applicable items on the Required Amendment Lists (RA List), and ii) any required provision or a provision that the employer has elected to put in place operationally, including items on the operational compliance list, effective on or after January 1, 2016 up through the date of termination.

    Example:

    A plan sponsor submits a Form 5310 application on March 15, 2021, and has a FDL that covers the 2013 CL. Start your review by verifying the plan timely complied with the interim amendments for 2014 and 2015. Verify compliance with all provisions effective up to the date of termination: This would include any items on the RA List and any required or employer-elected provisions that were effective on or after January 1, 2016, that the employer elected to put in place operationally.

    Example:

    A plan sponsor submits a Form 5310 application on June 15, 2021, and has a FDL that covers the 2007 CL. Start your review by verifying the plan timely complied with the 2015 CL. Verify compliance with all provisions effective up to the date of termination: This would include any items on the RA List and any required or employer-elected provisions that were effective on or after January 1, 2016, that the employer put in place in the plan’s operation.

  2. If you can’t verify prior law, ask the plan sponsor to provide either:

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

    2. The current and prior plan document or adoption agreement (including any applicable opinion or advisory letters), the trust document, and all discretionary or required amendments effective on or after 2016.

      Note:

      If you aren’t requesting any other information or if the POA/plan sponsor can’t find the prior DL, review EDS & TEDS to determine if the IRS issued a DL to the plan to satisfy the above compliance.

  3. If a plan sponsor isn’t able to prove that the plan was timely amended for prior law, the plan is considered to have a plan document failure as described under Rev. Proc. 2019-19, and may need to enter into a closing agreement to correct the failure. Consult your manager and see IRM 7.11.8, EP Determinations Closing Agreement Program.

  4. Use the Employee Plans - Terminations Focus Reports to determine whether new laws are relevant to a particular terminating plan. Find these reports on the IRS website.

Permanency Requirements/Reasons for Termination

  1. A plan must be established with the intent to be a "permanent" not "temporary" program. (26 CFR 1.401-1(b)(2)).

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

  3. The prior qualification of a long-established plan and trust is not adversely affected by termination of the plan and trust without business necessity when all benefits are fully vested, are guaranteed, and the termination does not result in a prohibited transaction.

  4. If a plan terminates within a few years after its initial adoption, the plan sponsor must give a valid business reason for the termination or there’s a presumption that the plan was not intended to be a permanent program from its inception. However, the qualification of a long-established plan that terminates without a valid business reason is not adversely affected. See Rev. Rul. 72-239.

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

    1. Change in ownership by merger.

    2. Liquidation or dissolution of employer.

    3. Change in ownership.

    4. Adverse business conditions (sponsor must attach an explanation).

    5. Adoption of new plan (sponsor must describe the plan type).

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

    1. Substantial change in stock ownership.

    2. Employee dissatisfaction with the plan.

    3. Bankruptcy of employer.

      Note:

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

  7. Form 5310, line 19 is also used to determine permanency. Repeatedly failing to make contributions in a discretionary profit-sharing plan may indicate the employer lacked intent for the plan to be permanent.

  8. Consult with your manager if you determine that there is a possible permanency issue.

  9. If bankruptcy is the reason for termination for a pension plan:

    1. Review the Form 5310, line 17(h) to determine if there’s a funding deficiency or if the plan sponsor owes excise taxes.

    2. To verify the plan sponsor filed Form 5330 for excise taxes, get EMFOLT on the Integrated Data Retrieval System (IDRS) for Form 5500 for the year of the deficiency and look for TC 154, which lists the excise taxes filed for that year.

    3. To verify the plan sponsor paid the excise tax, go to BMFOLI and look for MFT code 76 to see the excise taxes filed for the current taxable year and other taxable years. Get a BMFOLT screen print for a specific plan year’s transcript.

    4. If the plan has a funding deficiency on Schedule SB and IDRS confirms they didn’t file Form 5330 and pay the excise taxes due, contact the bankruptcy coordinator for the state that the plan sponsor does business in.

    5. The bankruptcy coordinator will tell you the insolvency bankruptcy specialist assigned to the plan sponsor's bankruptcy case.

    6. Refer the case to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures, to calculate the excise tax and report that amount to the Bankruptcy specialist BEFORE the bar date.

      Note:

      EP Examinations must calculate the excise tax because it is an operational issue.

      Note:

      Don’t make a referral if the bar date has passed because we can no longer collect excise taxes after that date. Document the Form 5621 with your explanation.

    7. See IRM 5.9, Bankruptcy and Other Insolvencies.

Discontinuance of Contributions

  1. This section only applies to plans not subject to IRC 412, such as profit sharing and stock bonus plans. For plans subject to IRC 412, see IRM 7.12.1.18, Minimum Funding Standards.

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

  3. If the plan sponsor stops making contributions or makes contributions that aren't substantial, the plan may have incurred a complete discontinuance. A profit sharing plan must make recurring and substantial contributions for employees. (26 CFR 1.401-1(b)(2)).

  4. A plan may have had a complete discontinuance of contributions even if the plan sponsor made contributions, but the amounts aren’t substantial enough to reflect the plan sponsor’s intent to continue to maintain the plan. (26 CFR 1.411(d)-2(d)(1)).

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

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

  7. A complete discontinuance (under 26 CFR 1.411(d)-2(d)(2)) becomes effective:

    1. For a single employer plan, the last day of the employer’s tax year after the tax year for which the employer last made a substantial contribution to the profit-sharing plan.

    2. For a plan maintained by more than one employer, the last day of the plan year after the plan year within which any employer last made a substantial contribution.

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

Partial Terminations

  1. Upon partial termination, all "affected employees" rights’ to all amounts credited to their account, and benefits accrued up to the date of the termination, become nonforfeitable. (IRC 411(d)(3)).

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

  3. If a partial termination occurs on account of turnover during an applicable period, all participating employees who had a severance from employment during the period must be fully vested in their accrued benefits, to the extent funded on that date, or in the amounts credited to their accounts. (Rev. Rul. 2007-43).

  4. To determine if a plan has had a partial termination, first calculate the turnover rate (See IRM 7.12.1.5.1, Calculating the Turnover Rate) but also consider all of a case’s relevant facts and circumstances.

  5. There’s a presumption that a qualified plan has partially terminated when the turnover rate for participating employees is at least 20%. If the turnover rate is less than 20%, it depends on the case’s facts and circumstances. (Rev. Rul. 2007-43).

    Note:

    Section 209 of the Consolidated Appropriations Act of 2021 states that a plan isn’t considered to have a partial termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants the plan covered on March 31, 2021 is at least 80% of the number of active participants the plan covered on March 13, 2020.

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

    a. A plan may have a high turnover rate as part of its normal routine. Consider these facts to determine if the turnover is routine for a particular plan sponsor:
    • The turnover rate in other periods.

    • The extent to which terminated employees were actually replaced.

    • Whether the new employees performed the same functions, had the same job classification or title, and received comparable compensation.

    b. If there’s a significant increase in the turnover rate for a period, the plan may have incurred a partial termination.
    c. Consider if the plan has increased its possibility for prohibited discrimination.

  7. If a DB plan’s cessation or reduction of future benefit accruals creates or increases a potential for reversion, the plan is deemed to have a partial termination.

Calculating the Turnover Rate

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

  2. The turnover rate =

    The number of participating employees who had an "employer-initiated severance from employment" during the applicable period divided by
    The sum of all of the participating employees at the start of the applicable period plus the employees who became participants during the applicable period

  3. The applicable period depends on the circumstances:

    1. It’s the plan year (or, for a plan year less than 12 months, the plan year plus the immediately preceding plan year).

    2. It’s a longer period if the employer has had a series of related severances from employment.

  4. See Tipton and Kalmback, Inc. v. Commissioner, 83 TC 154 (1984); and Weil v. Retirement Plan Admin. Comm. of Terson Co., 933 F.2d 106, (1991).

  5. Turnover rate factors:

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

    2. "Employer-initiated severance from employment" generally includes any employee who severed from employment for a reason other than because of death, disability, or retirement on or after normal retirement age.

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

    4. The employer may be able to prove that an employees' severance was voluntary (not employer-initiated) by providing information from personnel files, employee statements, or other corporate records.

Examples of Partial Termination

  1. Employer discharging 95 of 165 participants under the plan in connection with dissolving one division of the employer’s business. (Rev. Rul. 81-27).

  2. Employer discharging 12 of 15 participating employees who refused to transfer to the employer’s new business location when the old location was closed. (Rev. Rul. 73-284).

  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% of the employees in the affected divisions, and termination of 27% of the total plan participants. See Weil v. Terson Co. Retirement Plan Committee, 750 F.2d 10, 5 EBC 2537 (2nd Cir. 1984).

Percentage of Affected Employees
  1. In the partial termination examples (above), a significant percentage of employees were excluded from participating in the plan.

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

  3. The base period ordinarily should:

    1. Be a set of consecutive plan years (at least two) from which you can determine the normal turnover rate.

    2. Reflect a period of normal business operations rather than one of unusual growth or reduction.

    3. Include plan years that immediately precede the period in question.

Proposed Date of Plan Termination

  1. 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 who maintains the plan voluntarily terminates it. (26 CFR 1.411(d)-2(c)(3)). Generally, the plan sponsor establishes the proposed termination date by board resolution or plan amendment.

  2. The proposed termination date of a plan subject to Title IV of ERISA (DB plans) is the date determined under ERISA (26 CFR 1.411(d)-2(c)(2)). There are three types of DB terminations under ERISA:

    TerminationType 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). See IRM 7.12.1.17.2, Underfunded DB Plan at Termination.
    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.

    See IRM 7.12.1.17.2, Underfunded DB Plan at Termination.

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

  4. The DL application must include a copy of the resolution or amendment terminating the plan. If not submitted, request it.

  5. Compare the proposed termination date listed on the resolution or amendment to the date on Form 5310, line 5(a)(2). If the two dates don’t match, reconcile the discrepancy.

  6. The proposed termination date is important because:

    1. All affected participants must be 100% vested as of the proposed termination date.

    2. The plan should be amended for all law effective as of the proposed termination date.

    3. The plan should be fully funded up to the proposed termination date.

  7. When reviewing the documentation that terminates that plan, verify that the plan hasn’t incurred any IRC 411(d)(6) violations. Generally, this would not be an issue if the plan termination date is after the date the plan sponsor adopts the document to terminate the plan.

    Example:

    The plan sponsor of ABC Company decides to terminate their retirement plan on July 1, 2020, and adopts a resolution on June 25, 2020.

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

  9. For money purchase and target benefit plans, if the plan sponsor adopts an amendment (or resolution) to terminate the plan after the plan termination date and an allocation date falls within this time period, then the employer contribution would still be required.

  10. If a plan sponsor takes actions to terminate a plan but doesn’t distribute the assets as soon as administratively feasible, the plan isn’t considered terminated under IRC 401(a). The plan must remain qualified until it’s terminated.

  11. The minimum funding requirements apply to a plan until its termination date, but 26 CFR 1.430(a)-1(f)(5) clarifies that we defer to the PBGC for the termination date for PBGC-covered plans. For noncovered plans, 26 CFR 1.430(a)-1(f)(5)(ii)(B) states that they’re not considered terminated if the assets aren’t distributed timely, so they’d continue to be subject to minimum funding requirements. See Rev. Rul. 89-87, Treas. Reg. 1.430(a)-1(f)(5),and IRM 7.12.1.8, Wasting Trust Procedures.

  12. A plan isn’t terminated simply because the plan sponsor amends it to cease future accruals or "freezes" it. But, this type of amendment may trigger a complete discontinuance of contributions and require increased vesting under 26 CFR 1.411(d)-2(d)(i). See IRM 7.12.1.4, Discontinuance of Contributions.

  13. If the plan wasn’t terminated after the proposed date of termination, then determine if the plan was qualified as of the actual date of the plan termination. This could occur under the following circumstances:

    1. The assets haven’t been distributed as soon as administratively feasible.

    2. The participants weren’t timely notified of the plan termination.

    3. For plans subject to Title IV of ERISA, the plan sponsor didn’t timely notify PBGC of the plan termination.

Frozen Plans

  1. A frozen plan is one in which all future contributions or benefit accruals have ceased by plan amendment, but the plan sponsor hasn’t formally terminated the plan. The plan may also freeze participation so that no new employees are eligible to enter the plan. A plan stays frozen until it’s amended to either:

    • Continue further contributions/accruals.

    • Terminate.

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

    1. Top heavy minimum required contributions for frozen DC plans. This is because key employees receive no benefit so no contribution is required for non-key employees.

    2. Coverage testing is automatically satisfied per 26 CFR 1.410(b)-3.

  3. The Form 5310 doesn't directly ask about frozen plans, however, review line 17(b) to see if an amendment has been adopted which decreases plan benefits to any or all participants. If so, then verify that the amendment doesn’t violate IRC 401(b) or 411(d)(6).

Wasting Trust Procedures

  1. A qualified plan under which benefit accruals have ceased isn’t terminated if assets of the plan remain in the plan's related trust rather than being distributed as soon as administratively feasible (generally within one year) per Rev. Rul. 89-87.

  2. Rev. Proc. 2016-37, Section 4.03(2) states that an application is filed in connection with plan termination only if it is filed no later than the later of one year from the:

    1. Effective date of the termination, or

    2. The date on which the plan sponsor takes action to terminate the plan.

      Note:

      In no event may the application be filed later than 12 months from the date of distribution of substantially all plan assets in connection with the termination of the plan. See IRM 7.12.1.12.1, Terminating Plans with Zero Assets.

  3. If the Form 5310 application is submitted to the IRS within one year of the effective date of the termination, the plan administrator may generally delay distributing the assets until after the IRS issues the DL. However, a plan administrator may not delay distributing assets because EP Examinations or another IRS unit is auditing the employer.

  4. Compare the proposed plan termination date to the DL application's control date. If the control date is within one year of the proposed termination date, then there is not a wasting trust issue. If the time between the control date and the proposed termination date exceeds one year (and assets have not been distributed), then there is a wasting trust issue and:

    1. The plan sponsor must select a new proposed termination date.

    2. The plan must continue to meet the requirements of IRC 401(a) until the new proposed date of termination.

  5. Review Form 5310, line 5(b) to determine if distributions will be made as soon as administratively feasible. If not, then:

    1. Inform the plan sponsor that the plan must be continuously amended to comply with all current legislation to remain a qualified plan.

    2. If Form 5310, line 5(b) was answered incorrectly, then the application must be revised or a written statement should be secured from the plan sponsor.

    3. If the plan sponsor withdraws the Form 5310, return the case using the procedures in IRM 7.11.1.17, Withdrawal of Applications. If there are potential disqualifying features, refer the case to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures.

Forfeitures

  1. The date a plan forfeits the non-vested portion of the account balance or accrued benefit depends upon the plan terms.

  2. Review Form 5310, lines 16(a)(6) and 19(b). If line 16(a)(6) indicates any participant has terminated employment without full vesting then the information identified on line 16(b) must be submitted.

  3. Form 5310, line 16(a) shows six years of history of all participants who left without full vesting. Reconcile this information to the:

    1. Plan’s forfeiture and vesting terms.

    2. Form 5310, lines 16(a)(6) and 19(b).

  4. If there are any discrepancies or questions, secure additional information from the plan sponsor or their representative, if applicable. If the information on the Form 5310, line 16(a)(6) is incorrect, secure a corrected page to the application.

  5. If you determine that a participant's accrued benefit or account balance has been forfeited incorrectly, obtain a written statement from the plan sponsor indicating they’ve restored the participant's accrued benefit or account balance. Include paragraph 26 on the DL.

  6. Forfeitures from profit sharing, stock bonus, or, effective for years after December 31, 1985, money purchase plans, can’t revert back to the plan sponsor. (Rev. Rul. 71-149). 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. 71-313 and Rev. Rul. 81-10.

  7. A DB pension plan can’t use forfeitures to increase benefits before plan termination. See IRC 401(a)(8) and 26 CFR 1.401-7.

  8. A fully insured DB plan may allow for forfeitures after 5 consecutive breaks in service. However, a forfeiture in a non-fully insured DB plan can only be triggered through a cash-out per IRC 411(a)(7).

Rollovers

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

    Note:

    For a plan to accept rollovers, the language must be stated in the plan document.

  2. Review Form 5310, line 19(c) to see if the plan received any rollovers in the last six years. If any amount appears to be questionable or excessive, then pursue the issue and follow-up with your manager, if necessary.

  3. Verify if the rollovers were from other qualified plans or traditional IRAs. A rollover can’t be made from Roth IRAs or Designated Roth Accounts to a qualified plan.

  4. Review safe harbor rollover procedures in Rev. Rul. 2014-9 for simplified procedures to reasonably conclude that the rollover is valid. They include:

    1. Employee certifying the source of the funds.

    2. Verifying the payment source (on the incoming rollover check or wire transfer) as the participant’s IRA or former plan.

    3. If the funds are from a plan, looking up that plan’s Form 5500 filing, if any, in the DOL EFAST2 database to make sure the plan is intended to be a qualified plan.

  5. If you discover that the rollover came from a Rollover Business Start-ups (ROBS) arrangement, see your manager as additional procedures may apply. See EP Director Memorandum dated October 1, 2008.

    Reminder:

    A ROBS is typically a one participant plan that allows the trust to invest in "Qualified Employer Securities."

Mode of Distribution

  1. Qualified plans must state the forms of distribution in which they will pay participants and beneficiaries. Distribution forms are either mandatory per the plan document language or may be decided by the participant or beneficiary. Per 26 CFR 1.411(d)-4, Q&A 4, the employer, or any other fiduciary or third party, can’t have the discretion to choose a participant's or beneficiary’s form of distribution.

  2. Upon plan termination, all plan assets must be distributed as soon as administratively feasible (generally within one year after the date of plan termination). See IRM 7.12.1.8. Generally, a pending DL application may extend this date; however, an IRS audit of the employer does not. See IRM 7.12.1.8 (3). Form 5310, line 20 indicates how distributions will be made upon termination. Verify the payment forms listed on the Form 5310 agree with the plan terms.

  3. If Form 5310, line 20 doesn’t match the plan document, request a corrected Form 5310 or an amendment to the plan.

    Example:

    The plan only allows lump sum distributions, but Form 5310 indicates that assets will be distributed in the form of an annuity upon plan termination. Request that the plan sponsor correct the application or amend the plan document.

  4. If a plan offers a Qualified Joint & Survivor Annuity (QJSA):

    1. The plan must distribute the assets in that form unless the participant (and spouse, if applicable) consent to a different form of benefit (such as a single-sum distribution) per IRC 417(a)(2).

    2. Review line 17(c) to verify that all of the benefit rights were correctly protected as required under IRC 401(a)(11) and IRC 417.

  5. A terminating DC non-money purchase plan that doesn’t offer an annuity distribution option may distribute a participant’s account balance without the participant’s consent, even if the account balance exceeds the involuntary cash-out limit in the plan (26 CFR 1.411(a)-11(e)).

    Exception:

    This rule doesn’t apply if the plan sponsor, or a member of its controlled group, maintains another DC plan. In this case, if the participant doesn’t consent to an immediate distribution, the plan sponsor may transfer his/her account balance, without the participant’s consent, to the other plan.

  6. Review Form 5310, line 17(j) when verifying that the plan made distributions correctly. This question lists the largest amount the plan distributed or applied to purchase an annuity contract within the last six plan years. If this line is completed, request additional information to verify:

    1. The plans terms were followed.

    2. The plan reported the distribution on Form 1099-R.

    3. The plan obtained spousal consent, if applicable.

    4. The plan distributed a rollover to an IRA, 401(a) plan, or another eligible retirement plan (confirm rollover recipient was one of these).

    5. The status of the participant who received the distribution (such as HCE, officer, trustee, owner etc.).

  7. If the plan fails to follow any of the above rules, refer the plan to exam per IRM 7.11.10, EP Examination and Fraud Referral Procedures. If a distribution to an HCE failed to conform to plan terms, in your referral, cite a potential violation of IRC 401(a)(4) - availability of benefits, rights and features.

401(k) Plan Distributions

  1. A terminated 401(k) plan is prohibited from distributing elective deferrals from a participant's account if the employer maintains or establishes a successor 401(k) plan within a certain period of time from the proposed termination date. (IRC 401(k)(10)(A)). If the terminating plan is a 401(k) plan and the employer:

    1. Has a successor 401(k) plan (see Form 5310, line 17(m)), the elective deferrals must be transferred to that plan. The elective deferrals are kept in the successor 401(k) plan until a distributable event occurs such as a severance from employment.

    2. Doesn’t have a successor plan, the 401(k) plan must distribute elective deferrals in a lump sum distribution according to IRC 401(k)(10)(B) and IRC 402(e)(4)(D).

In-Kind Distributions

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

  2. Examples of in-kind distributions include but aren’t limited to:

    • Real estate.

    • Art.

    • Stock.

    • Valuable metals.

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

    1. The plan allows in-kind distributions.

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

    3. How assets will be distributed.

    4. How the assets are valued.

  4. If a plan allows in-kind distributions, has invested all or some the assets of the trust in property or stock, and hasn’t liquidated these assets into cash before terminating the plan, the employer must give all participants the option of taking an in-kind distribution of their respective portion of the asset.

Trust Assets/Balance Sheet

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

  2. Add all assets and reconcile them to line 21(f).

  3. If the plan sponsor submits a Form 6088, Distributable Benefits From Employee Pension Benefit Plans, verify that the net assets available on the Form 5310 equal the benefit amounts listed on the Form 6088. If the amounts aren’t 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 7.12.1.17.1 or IRM 7.12.1.17.2

    .

  4. When reviewing the assets on line 21, consider:

    1. The type of assets.

    2. How they are valued.

    3. When they were contributed.

    4. How they are distributed.

  5. When reviewing the assets on Form 5310, line 21, follow these actions:

    Lines 21: Action
    (a) Review the required explanation to determine why assets are being held in "noninterest-bearing cash." In most circumstances, trust assets are held in investments that earn interest. Verify that the plan doesn't have a prohibited transaction (PT) with these assets by securing and reviewing the following:
    • A description of the asset.

    • Purchase documentation.

    • Appraisal within the last three years.

    • Verification that the plan allows for in-kind distributions.

    • Verification that all participants are given the option for in kind distributions.

    • An explanation of allocation to participants.

    • An explanation of where the item is located.

    (b) Verify that the receivables were paid to the trust:
    • On time - If Form 5310, line 21(b) indicates receivables, review line 15 which lists the amount and date of the last employer contribution. If the amount on line 15 equals the amounts listed on line 21(b) and the contribution was made timely, you don't have to investigate further.

    • By the employer's federal tax return due date (plus extensions) to be deductible under IRC 404(a)(6) for profit sharing, money purchase, stock bonus and employee stock ownership plans (ESOP).

    • By 8 1/2 months after the close of the plan year for minimum funding. See IRM 7.12.1.18, Minimum Funding Standards.

    • As soon as practicable, but no later than the 15th day of the month following the month in which the employer withheld the elective deferral contributions or after-tax contributions from a 401(k) plan. DOL permits a safe-harbor for plans with fewer than 100 participants to deposit employee contributions within seven business days. (DOL Regulations 2510.3-2510.3-102(a)(2) and (b)(1)).

    (c)(6) Verify whether a partnership identified as a general partner had UBI. A partnership/joint venture is when two or more entities partner 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.
    Also, if the investment relates to a disqualified person, it’s a PT.
    For asset amounts listed on this line, secure an explanation stating the type of business and who the parties are who are involved to determine if the plan has Unrelated Business Income or PTs. Request the most recent Form 1065.
    (c)(7)(A) & (B) Verify whether real estate investments:
    1. Generated rental income on real property and/or personal property.

    2. Were involved in a PT between the trust and a disqualified person. See IRM 7.12.1.13, Prohibited Transactions

    3. Secure the following items:

      • Explanation of the purpose of real estate.

      • Purpose or lease documentation.

      • Appraisal of real estate within the last three years.

      • Inquire whether debt financed.

      • Verify the plan allows for in-kind distributions.

      • Verify that participants are given the option of in-kind distributions.

      • Verify no UBI or PTs. See IRM 7.12.1.14, Unrelated Business Income.


    Inspect:
    • The purchase or lease documents.

    • The real estate appraisal within the last three years.

    (c)(8) Loans (other than to participants) secured by mortgages. Secure:
    • Explanation of the purpose of the loan.

    • Loan documentation.

    • Verification of the terms of the loan and maturity date.

    (c)(9) Verify for participant loans:
    • Verify plan allows loans, and if so, allows more than one outstanding loan at one time (for multiple loans to one person).

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

    • Verify if any participant is a disqualified person and if so, the loan has met the requirements to be exempt under the PT rule.

    • Verify the dollar amount of each loan didn't exceed 50% of the participant's vested account balance, with a cap of $50,000. If the loan exceeds these limits, verify whether the loan was granted due to a qualified relief effort authorized by law.

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

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

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

    • Verify if either: the participant will repay the outstanding balance before any distribution, or the plan will offset the participant’s distribution by the outstanding loan amount for outstanding loans at the plan’s proposed date of termination.

    • Report the amount as income to the participant, if the plan has violated IRC 72(p) by referring the case to EP Examinations per IRM 7.11.10, EP Examination and Fraud Referral Procedures. Prepare a Form 5666, TE/GE Referral and Information Report, you normally prepare.

    (c)(10) Other Loans
    Secure an explanation of the purpose of the loan(s)
    • Secure loan documentation.

    • Verify terms of the loan(s) and loan(s)’ maturity dates.

    • Review the information you secure to verify there are no PTs.
       

    (c)(12) Insurance Contracts
    Verify that the plan values contracts using total policy reserve value instead of stated cash surrender value.
    • Ensure any resulting increase is included in the distributee’s taxable income upon distribution.

    • Prepare Form 5666 to report the increase in participant’s taxable income.

    • Refer to IRM 7.12.1.2.21 for additional guidance on springing cash value contracts.

    (c)(13) Other Assets
    Secure an explanation or description of the investment.
    • Determine what the investment is and if needed, ask for additional information such as purchase documentation, valuation reports, appraisals, etc.

    • Review the information you receive to verify there are no PTs or UBI.

    (d)(1) & (2) Employer Related Investments
    1. Secure the following:

      • Description of property or securities.

      • How property or securities were acquired.

      • Documentation of the purchase.

      • Recent appraisal or valuation.

      • Whether property or securities are debt financed.

    2. If the plan is not designed to primarily invest in qualified employer securities, determine the percentage of employer securities that are held in relationship to all plan assets. Generally, the plan should invest in 10% or less in employer securities.

    3. Verify no PTs or UBI.

    (e) Building equipment and other property used in plan operation
    Secure an explanation of description of the investment.
    • Determine what the investment is and if needed, ask for additional information such as purchase documentation, valuation reports, appraisals, etc.

    • Review the information you receive to verify there are no PTs or UBI.

  6. Lines 21(g), (h), (i), or (j), plan liabilities. If there are amounts listed on these lines, request:

    (g) Benefit claims payable
    • Name of person being paid.

    • Nature of the payable.

    • Estimated date and amount of the payment.

    (h) Operating payables
    • Detailed explanation of the nature of the payable.

    • Documentation of the amount and date of the payment.

    • Verification that the operating payables are allowable.

    (i) Acquisition indebtedness
    • A detailed explanation of the transaction.

    • When you determine what the debt is, ask for additional information, if needed, such as purchase documentation, valuation reports, appraisals, etc.

    (j) Other liabilities
    • A detailed explanation of the liability.

    • When you determine what the debt is, ask for additional information, if needed, such as purchase documentation, valuation reports, appraisals, etc.

  7. 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:

    1. Determine whether these issues impact plan qualification.

    2. Discuss the case with your group manager before taking further action.

    3. Document the file to show the actions you considered and your conclusion.

Terminating Plans with Zero Assets

  1. In some cases, a plan sponsor submits a Form 5310 application after they’ve distributed all assets to plan participants and line 21 will show zero plan assets.

  2. In this case, secure written documentation showing the:

    1. Date of distribution of all assets.

    2. Investment allocation of all assets before distribution.

    3. Allocation of assets to participants.

  3. The plan sponsor may not file the Form 5310 application after 12 months from the date they distribute substantially all plan assets in connection with the plan termination per Rev. Proc. 2016-37, Section 4.03(2). (IRM 7.12.1.8 (2)).

  4. Therefore, if the plan distributed assets more than one year before they filed Form 5310 (use the 5310 control date), return the case using a Letter 1924. Use selectable paragraph "1" with a variable of "Rev. Proc. 2016-37."

  5. If the plan sponsor filed the application within 12 months from the date the assets were distributed, follow the normal case processing procedures.

Prohibited Transactions

  1. If you determine there is a PT, refer the case to EP Examinations using the procedures in IRM 7.11.10, EP Examination and Fraud Referral Procedures, to ensure that the disqualified person pays the proper taxes and the PT is corrected. See IRM 4.72.11, Prohibited Transactions.

Unrelated Business Income (UBI)

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

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

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

  4. If you determine that the trust has possible UBI, refer the case to EP Examinations per IRM 7.11.10, EP Examination and Fraud Referral Procedures.

Life Insurance Contracts

  1. Plans can use life insurance to fund the retirement plan as either an "incidental" benefit or the sole benefit. See IRM 7.12.1.15.2, Fully Insured Contract Plans, if 100% of the trust's assets are invested in insurance or annuity contracts.

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

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

    2. For a DB plan, the insurance face value generally can’t exceed 100 times the participant's projected monthly retirement benefit.

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

  4. Ask if the life insurance contracts are springing cash value contracts. See IRM 7.12.1.15.1, Springing Cash Value.

Springing Cash Value

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

    Note:

    Fully insured contract plans are described in IRC 412(e)(3).

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

  3. A springing cash value life insurance policy gives employers tax deductions for amounts far in excess of what the employee recognizes in income and aren’t permitted.

  4. The IRS cautioned taxpayers to use a more accurate valuation method to determine the taxable amounts under IRC 72 rather than the CSV (Announcement 88-51). Therefore, if a plan is distributing a "springing cash value" contract, it must value the contract using the total policy reserve value and not the stated CSV.

  5. An employee can’t use the CSV to determine the amount to include in gross income under IRC 402(a) when the total policy reserves including life insurance reserves (if any) computed under IRC 807(d), plus any reserves for advance premiums, dividend accumulations, etc., more accurately approximate the fair market value of the policy (Notice 89-25, Question 10). If a plan inappropriately uses the CSV to value the amount distributed, thereby allowing a greater distribution than would otherwise be allowed, the distribution could be treated, in part, as an employer reversion. Also, in certain circumstances, these types of distributions could disqualify the plan (such as, distributions in excess of the IRC 415 limits).

  6. If a plan is incorrectly valuing the contracts, obtain a corrected value using total policy reserve value instead. Refer any resulting adjustment to the participant's taxable income to EP Examinations per IRM 7.11.10, EP Examination and Fraud Referral Procedures.

Fully Insured Contract Plans

  1. If Form 5310, line 7(e) is marked "Yes" or line 21(c)(12) shows 100 percent of assets invested in life insurance contracts, the plan is:

    1. A fully insured contract plan.

    2. Funded exclusively by purchasing individual insurance contracts.

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

  3. For all fully insured contract plans:

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

    2. Ensure that all premium payments have been made timely.

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

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

  4. Review the benefit formula to ensure that it is nondiscriminatory. All of the contracts must have a cash value based on the same terms (including interest and mortality assumptions) and the same conversion rights. See 26 CFR 1.401(a)(4)-(3)(b)(5) for rules for safe-harbor insurance contract plans.

  5. Fully insured contract plans are currently part an EP Examinations Abusive Transaction project. See EP Abusive Tax Transactions on the Knowledge Management Portal.

Segregated Account IRC 414(k)

  1. IRC 414(k) accounts combine funding features, for example, a DB feature and a DC feature.

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

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

  4. When a 414(k) plan establishes a separate account at normal retirement age, it’s considered an amendment that eliminates the DB feature of a participant's benefit under a DB plan and violates Section 411(d)(6) unless the plan meets the exception in 26 CFR 1.411(d)-4, Q&A 3. Therefore, review the plan’s separate account feature and determine if the transfer meets the following rules:

    1. The transfer must be voluntary.

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

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

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

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

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

  5. The option to transfer benefits under the above rules constitutes an optional form of benefit under the plan per IRC 401(a). Accordingly, the transfer is subject to the:

    1. Nondiscrimination provisions of IRC 401(a)(4).

    2. Cash-out rules of IRC 411(a)(11).

    3. Early termination provisions of IRC 411(d)(2).

    4. QJSA requirements of IRC 401(a)(11) and IRC 417.

    Note:

    Transferring benefits from the DB to the 414(k) account isn’t a distribution for purposes of the minimum distribution requirements of IRC 401(a)(9).

  6. The IRS doesn’t rule on a plan with a 414(k) separate account provision if it doesn’t meet the exception rules in paragraph IRM 7.12.1.16 (4) above. Request the plan sponsor to submit a written request to withdraw the application and return the case on Letter 1924 using procedures in IRM 7.11.1.3.1, Procedures When Not Authorized to Issue a DL.

  7. If you determine that the 414(k) account violates IRC 411(d)(6), refer the case to EP Examinations per IRM 7.11.10, EP Examination and Fraud Referral Procedures.

Overfunded/Underfunded Plan at Termination

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

  2. A Form 6088 is required for:

    1. All DB plans.

    2. Underfunded DC plans.

    3. Each employer who has adopted a multiple employer plan.

    4. Collectively bargained plans, only if: i) the plan benefits employees who aren’t collectively bargained employees or ii) more than 2% of the employees covered by the plan are professional.

    5. Each employer employing employees in a multiemployer plan.

Overfunded Plan at Termination

  1. If the present value of accrued benefits (PVAB) of all participants (Form 6088, column h) is less than the total assets (Form 5310, line 21), the plan is overfunded. If the assets equal the liabilities, work the case as an underfunded plan until facts are known.

  2. The plan sponsor can correct overfunding in one of these ways:

    1. Apply the excess to the participants. See IRM 7.12.1.17.1.1, Excess Assets Applied to Participants.

    2. Revert assets to the plan sponsor. See IRM 7.12.1.17.1.2, Reversion of Excess Assets.

    3. Establish a replacement plan per IRC 4980(d). Follow the processing procedures in IRM 7.12.1.17.1.2 (5), Reversion of Excess Assets.

  3. Plan sponsors may also attempt to recover surplus assets in a termination/reestablishment or spin-off/termination. They must follow the conditions in:

  4. If the plan is overfunded, determine which methods the plan sponsor used to correct the overfunding and ensure they applied it in a nondiscriminatory manner.

Excess Assets Applied to Participants
  1. A plan that has assets in excess of the PVAB (whether or not vested) may apply the excess assets to participants. Excess assets means that plan assets are more than sufficient to pay all benefits under the plan without either a majority owner using an agreement to forego receipt of benefits or other future promises. Do not use this section for plans that have this type of agreement or condition.

  2. The plan may apply the excess to increase the participants’ accrued benefit in a nondiscriminatory manner. Generally, plans without any permitted disparity formulas in their benefit formula are permitted to allocate excess plan assets based upon the ratio of each participant’s PVAB to the PVAB of all plan participants without testing for nondiscrimination. If the current or past benefit formula either partially or fully used permitted disparity including super integrated formulas, the plan may need to run a IRC 401(l) test or general test. Rev. Rul. 80-229 contains rules and examples on nondiscriminatory allocation of excess assets.

  3. The plan sponsor may only apply excess assets to participants if the plan already has a provision allowing it or they adopt an amendment or resolution for it. Review Form 5310, line 17(k) and the applicable plan provision or amendment to make sure that the plan reallocated excess assets in a nondiscriminatory manner. Verify no participant exceeded the IRC 415 limits when the plan reallocated excess assets.

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

  2. In general, no part of a qualified plan's trust may revert to the employer, but a reversion may occur under certain circumstances. See IRC 401(a)(2), 26 CFR 1.401-2, and ERISA 403.

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

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

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

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

    1. If the plan has not allowed reversions for at least five calendar years preceding the plan proposed termination date, excess plan assets must be applied to plan participants under existing plan provisions.

    2. A plan may reduce the excess by adopting a qualified replacement plan. See QA manager's email titled Reversion of excess assets in the "Terminations" folder in the "Worksheets" folder on the shared server.

    3. Generally, plan participants aren’t entitled to excess assets unless the plan specifically allows it. Excess assets are not part of the accrued benefits.

  4. If review of the application determines that the sponsor plans to establish a replacement plan in accordance with IRC 4980(d), the specialist should follow the processing procedures in paragraph IRM 7.12.1.17.1.2 (5), below. While the applicant indicates the intent to transfer the amount, we will not have documentation prior to the closing of the case that this was actually done in operation; thus, the sponsor should be advised of the excise tax ramifications if the exception under IRC 4980(d) is not met. In such case we assume a reversion could take place so prepare the case as if there will be a reversion.

  5. Reversion processing procedures:

    1. Use paragraphs 1 and 3 on the 1132 letter. Include Form 15091, which can be found in the repository.

    2. Prepare a Form 5666, TE/GE Referral Information Report.

    3. Refer the case to EP Examinations per IRM 7.11.10, EP Examination and Fraud Referral Procedures.

    4. Discuss in your report whether the plan sponsor has both: included the reversion as income on its tax return and paid excise tax on it. See IRM 7.12.1.17.1.3.

    5. Send reversion cases exceeding $5,000,000 to Quality Assurance using the mandatory review indicator process. Attach Form 3198-A, TE/GE Special Handling Notice, when you’re done with the case.

  6. In general, a plan sponsor may not attempt to receive a reversion in a termination/reestablishment or spin-off/termination earlier than 15 years following any previous similar transaction. If you've determined that a spin-off/termination or termination/reestablishment is not part of an integrated transaction in the Implementation Guidelines, request technical advice to resolve the case. See IRM 7.11.12, Preparing Technical Advice Requests.

Tax on Reversion
  1. Reversions are:

    1. Taxable income to the plan sponsor in the year they receive it.

    2. Taxed under the applicable federal tax rates.

    3. Subject to an excise tax of 50% of the reversion amount under IRC 4980(d).

  2. The 50% excise tax is reduced to 20% if the plan sponsor shows in writing that it meets one of the exceptions below:

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

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

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

      Note:

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

  3. If Form 5310, lines 5(c) and 17(i) show a reversion has taken place, verify the plan sponsor filed Form 5330 and paid the tax and excise tax (if applicable) on the reversion.

Underfunded DB Plan at Termination

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

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

    1. Make a supplemental employer contribution (beyond the minimum funding requirement) to make the plan whole.

    2. Allocate trust funds according to ERISA 4044.

    3. The majority owner may forgo his distribution. Support this method if chosen by the plan sponsor.

  3. For a plan that is not subject to the PBGC, the terms standard and distress termination are not used. It’s either underfunded or it is sufficient.

    Note:

    For both PBGC and non-PBGC plans, the assets in an underfunded plan will be allocated under ERISA 4044 (29 USC 1344) even if a majority owner foregoes all of his or her benefit to make the plan eligible to use a standard termination or a sufficient plan.

    Example:

    If a plan is able to terminate as a "standard" termination or a "sufficient" termination because one or more majority owners forgoes receipt of payment, the plan must still allocate trust funds per ERISA 4044. For example, if the plan indicates that assets equal liabilities, the plan may follow ERISA 4044 until it’s sure all assets are allocated if there is any doubt that assets are sufficient.

  4. If the plan sponsor needs to allocate trust funds according to ERISA 4044 (29 USC 1344), refer to Rev. Rul. 80-229 and Form 6088 instructions to ensure that allocations don’t violate IRC 401(a)(4). A plan doesn’t have to specify ERISA 4044 allocation since this is a code requirement. ERISA Section 403(d)(1) (29 USC 1103(d)(1)) provides that ERISA plans that are not subject to PBGC must also allocate assets in accordance with Section 4044 of ERISA.

  5. If one or more plan participant(s) is a majority owner (in other words, a participant with 50% or more interest in the employer), they may, with spousal consent, provide a statement agreeing to "forgo" receipt of all or part of their benefit until the plan satisfies the benefit liabilities of all other plan participants. Keep in mind that whether the plan is subject to the PBGC, the majority owner’s agreement to forgo receipt is never required and should be considered a gift to the other participants. So, treat it as a gift.

    1. This is not a "waiver" or forfeiture under IRC 411(a).

    2. This doesn’t affect the plan's otherwise applicable minimum funding requirements in the year of termination.

      Note:

      See PBGC Reg. 4041.2 and 4041.21(b)(2) https://www.pbgc.gov/prac/laws-and-regulations/code-of-federal-regulations

       

    3. Forgoing receipt of benefits cannot be accomplished under an amendment or resolution; otherwise it would violate the anti-cutback provisions of 411(d)(6).

    4. If a plan accepts an agreement to allow a participant or spouse to waive benefits, it violates the forfeiture rules in Section 411(a).

    5. If a plan allows a participant or spouse to assign benefit to others in the plan, the plan violates the anti-assignment rules in 401(a)(13).

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

    1. Except as provided in d) below, the plan assets are allocated according to PBGC, ERISA 4044(a)(1), (2), (3), and (4)(A). PBGC has authority to approve this allocation. Allocations in these categories aren’t reallocated to avoid discrimination because they’re deemed nondiscriminatory.

    2. If there are any assets left in ERISA 4044(a)(4)(B), (5) and (6) categories, the assets are allocated, to the extent possible, so that nonhighly compensated employees receive at least the same proportion of the PVAB (whether or not forfeitable) as highly compensated employees.

    3. Despite any other paragraphs, the plan may reallocate assets restricted by 26 CFR 1.401(a)(4)-5 to the extent necessary to help satisfy b) above within each category.

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

  7. If the plan sponsor hasn't corrected a funding deficiency or filed Form 5330, refer the case to EP Examinations per IRM 7.11.10, EP Examination and Fraud Referral Procedures.

Minimum Funding Standards

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

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

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

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

    3. Multiemployer plan to fund the trust for the plan year in an amount so that the plan doesn’t have an accumulated funding deficiency. (IRC 431).

      Note:

      Multiemployer plans that fall into endangered or critical status have additional funding rules (added by PPA '06). (IRC 432).

  3. A plan termination doesn’t relieve the plan sponsor of its obligation to fund the plan.

    1. For a DB plan, the charges and credits are ratably adjusted for the part of the plan year before the proposed plan termination date.

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

      Example:

      If a money purchase plan terminates before the last day of the plan year and has a "last day requirement" to earn an allocation, no contribution is required for that year. However, if a money purchase plan terminates in August and the plan requires a participant to work 1,000 hours of service to earn a benefit accrual and doesn’t have a last day requirement, the plan has a minimum funding obligation for participants who worked 1,000 hours or more.

  4. Because the funding standard continues to be in effect until the end of a plan year in which a plan is properly terminated, carefully review the proposed termination date. (See IRM 7.12.1.6, Proposed Date of Plan Termination.) The plan year is not automatically ended with the plan termination. See 26 CFR 1.401(a)(4)-12 and 26 CFR 1.410(b)-9.

  5. These plans may continue to have funding obligations:

    1. Plans that don’t distribute assets on the proposed date of termination or within a reasonable time.

    2. Plans that haven’t given proper notice of termination to participants.

  6. If you change a proposed date of termination for any reason, the minimum funding requirement (and participants’ accrued benefits) will likely have to be adjusted to reflect the new termination date. After you’ve determined the amount of the required contribution, review Form 5310, line 15 to ensure that the employer paid the correct amount.

  7. IRC 4971(a) imposes a tax on plan sponsors who fail to make a required contribution to the plan by the funding due date. Verify that the contribution was paid within 8 1/2 months after the plan year end by reviewing the Form 5310, line 15. You may need to secure proof of the contribution.

    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)).

    1. If a single employer plan doesn’t make the required contribution within 8 1/2 months after the plan year end, the IRS imposes an excise tax of 10% of the aggregate unpaid minimum required contributions for all plan years. (IRC 430(j)(1)).

    2. If a multiemployer plan doesn’t make the required contribution within 2 1/2 months after the plan year end (may be extended up to a total of 8 1/2 months), the IRS imposes an excise tax of 5% 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 plan sponsor doesn't correct the deficiency (reduce it to zero) by the end of the tax year in which the plan is terminated, the 100% penalty tax described in IRC 4971(b) may apply.

  8. Use the table below to determine a single employer and multiemployer plan’s contribution due date for both funding and deductibility and the applicable tax for minimum funding, if paid late.

    Timing of Contributions for Pension Plans
    Type of Plan Purpose Due Date If contribution late...
    Single employer plan Deductibility Plan sponsor's tax return due date including extensions. n/a
    Single employer plan Minimum funding Within 8 1/2 months after plan year end. 10% tax
    Multiemployer plan Deductibility Plan sponsor's tax return due date including extensions. n/a
    Multiemployer plan Minimum funding Within 2 1/2 months after plan year end (may be extended up to 8 1/2 months). 5% tax

  9. Review Form 5310, line 17(h)(2) to determine if a plan has an accumulated funding deficiency. If it does and the period for making timely contributions:

    1. Is still open, make sure that the plan sponsor made the contributions for the final plan year.

    2. Has expired, the plan sponsor must file Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, for the amounts due, or you must make a referral to the EP Classification Unit on Form 5666, TE/GE Referral Information Report.

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

    Exception:

    A majority owner may "forgo" receipt of their benefit. See IRM 7.12.1.17.2, Underfunded Plan at Termination.

  11. A plan administrator may not change the plan's funding method in the year in which the plan terminates unless the plan administrator obtains approval for a change in funding method. See Rev. Proc. 2000-40, Section 4.02.

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

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

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

  13. The plan sponsor may not amend the plan in the year of termination to reduce or eliminate any contribution requirement for that year, unless either:

    1. All employees’ accrued benefits are protected as of the later of: the amendment's adoption or effective date.

    2. The plan satisfies the requirements of IRC 412(d)(2) allowing certain retroactive benefit reductions.

    Note:

    Discretionary plan amendments, adopted within the first 2½ months of the current plan year, that increase accrued benefits retroactively based on service during the immediately prior plan year under IRC 412(d)(2), don’t violate the discretionary amendment deadlines under Rev. Proc. 2016-37, Section 8.02 per the Memorandum from Robert S. Choi issued December 16, 2015.

    Note:

    A benefit is not considered "accrued" for this purpose unless a participant satisfies all conditions to accrue the benefit under the plan.

    Example:

    A DC plan requires that a participant earn an hour of service on the last day of the plan year to receive a contribution. A plan sponsor's amendment to reduce its contribution requirements doesn’t violate IRC 411(d)(6) if they adopt it before the last day of the plan year. (Rev. Rul. 76-250).

Adjusted Funding Target Attainment Percentage (AFTAP)

  1. IRC 436, added by PPA '06, adds protections and restrictions to the participant's benefits in single and multiple employer DB plans. In addition, the plan may need a required amendment to comply with the Highway Transportation and Funding Act of 2014, Section 2003. P. L. 113-159.

    Note:

    IRC 436 doesn’t apply to multiemployer or DC plans.

  2. For a single employer DB plan, request:

    1. Schedule SBs for plan year that contains the termination date and the two prior plan years.

    2. All AFTAP certifications for year of termination and two prior plan years. Also, request any interim AFTAPs and range certifications.

    3. Any 101(j) notices the plan sponsor provided in the year of termination and two prior years.

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

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

    2. Plan amendments increasing liability for benefits under IRC 436(c).

    3. Accelerated benefit distributions under IRC 436(d).

    4. Benefit accruals for plans with severe funding shortfalls under IRC 436(e).

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

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

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

    More than 60% but less than 80%
    • 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%
    • No shutdown or other Unpredictable Contingent Event Benefits.

    • Elimination of future accruals.

    • Full restrictions of prohibited payments.

Interested Party Notices Upon Plan Termination

  1. The plan sponsor must notify interested parties of their DL application 10 - 24 days before they send it to the IRS. See Rev. Proc. 2021-4, Section 20.02 (updated annually).

  2. Review Form 5310, line 8 and the copy of the "Notice to Interested Parties" to ensure that notice was provided 10 to 24 days before the application’s control date.

  3. If the plan sponsor didn’t give the notice timely, return the application incomplete using a Letter 1924. Use paragraph 1 with a variable. "Rev. Proc. 2021-4, Section 10.12 (updated annually)" , and request a copy of the notice.

PBGC Notice on Plan Termination

  1. Plans not exempt from the PBGC requirements under ERISA 4021(c) must file either of these forms with the PBGC for their proposed termination:

    1. Form 500, Standard Termination Notice Single Employer Plan Termination

    2. Form 601, Distress Termination Notice Single Employer Plan Termination

  2. Also, the plan sponsor must give advance notice to all affected participants 60 - 90 days before the proposed termination date. This notice is in addition to the Interested Party Notice in IRM 7.12.1.20.

  3. If the plan sponsor doesn't file the required form or give the notice to affected participants, PBGC may reject the proposed termination date. When this happens, PBGC notifies:

    1. The plan sponsor that a termination has not occurred and that it must begin the termination process again.

    2. The IRS to check for any open Form 5310 applications for the plan sponsor.

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

  5. If you don’t have the Form 5310 in your inventory or if you've already issued a DL, no action is necessary.