part7-13

Applications for a determination letter upon termination
of a plan, including standardized plans, are filed on Form 5310, Application
for Determination Upon Plan Termination.

Applications for a determination letter upon partial
termination are filed on Form 5300, Application for Determination for Employee
Benefit Plan.

Each case file should contain a completed Form
6677, Plan Termination Standards Worksheet or other appropriate form on a
request for a determination letter upon plan termination.

Retroactive amendments that occur during the remedial
amendment period and after the remedial amendment period expires, are described.

Also described are the rules that apply to plans
that terminate before the IRC section 401(b) period expires.

The date of termination of a plan subject to Title
IV of ERISA is the date determined under ERISA 4048. See Reg. 1.411(d)–2(c).

The date of termination of a plan not subject
to Title IV of ERISA is the date on which the plan is voluntarily terminated
by the employer or employers maintaining the plan. See Reg. 1.411(d)–2(c)(3).

The date of the proposed termination may change
for a defined benefit plan that requires PBGC approval, if PBGC specifies
a different termination date.

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

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 section 401(a) (although
it may be considered terminated for other purposes, such as Title IV of ERISA)
and the plan’s qualified status must have been maintained until the
plan is terminated in fact. See Rev. Rul. 89–87, 1989–2 C.B. 2.

If the plan was actually terminated after the
proposed date of termination, (e.g., because assets will not be 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.

The minimum funding standards of IRC section 412
apply to defined benefit pension plans and money purchase pension plans, other
than those described in IRC section 412(h). Generally the minimum funding
standard applies to a plan until the end of a plan year in which the plan
terminates, even though the termination occurs prior to the last day of the
plan year.

In the case of a defined benefit plan, the charges
and credits are ratably adjusted to reflect the portion of the plan year before
the plan terminated. In the case of a defined contribution plan, the minimum
funding standard charges will reflect the entire amount of any contributions
due on or before the date of termination, but no contributions due after that
date.

If the employer fails to make a required contribution
to a pension plan on a timely basis, the plan could fail to meet the minimum
funding standards of IRC section 412. IRC section 4971(a) provides that a
10% excise tax will be imposed on an employer in a taxable year on any accumulated
funding deficiency as of the end of the plan year ending with or within that
taxable year. A termination does not relieve the employer of the obligation
to fund the accumulated funding deficiency as of the end of the plan year
in which the plan is terminated. If the deficiency is not corrected, reduced
to zero, the 100% penalty tax imposed by IRC section 4971(b) may apply. See
Rev. Rul. 79-237, 1979-2 C.B. 190, as modified by Rev. Rul. 89-87, 1989–2
C.B. 2.

For purposes of IRC section 412, contributions
for nonmultiemployer plans made within 8¹/₂ months after the
close of the plan year shall be treated as if made on the last day of the
preceding year if made on account of the prior plan year. Contributions for
multiemployer plans that are made within 2¹/₂ months after the
close of the plan year (up to 8¹/₂ months as extended by proposed
Reg. 1.412(c)(10)–1(b)) shall also be treated as if made on the last
day of the preceding year if made on account of the prior plan year. See IRC
section 412(c)(10).

Rev. Rul. 79–237, 1979–2 C.B. 190
also provides guidelines for determining the charges and credits to be made
to the funding standard account if a pension plan is terminated during a plan
year.

IRC section 4971(a) provides that a 10% tax (5%
for multiemployer plans) will be imposed on an employer in a taxable year
on any accumulated funding deficiency as of the end of the plan year ending
with or within that taxable year.

Upon termination of a plan, the accumulated funding
deficiency cannot be deemed corrected by having plan participants
”
waive”
their accrued benefits. Such a waiver violates IRC sections 411(d)(6),
411(a), and 401(a)(13).

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.

The quarterly contribution requirement under IRC
section 412(m) continues to apply during the year of termination. However,
the required annual payment under IRC section 412(m)(4) for the year in which
the plan terminates will reflect any prorated charges or credits for the funding
standard account in the year of termination.

If a waiver of the minimum funding standards (under
IRC section 412(d)) 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.

A money purchase 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 section 412(c)(8) allowing certain
retroactive benefit reductions.

If a plan has been in existence for more than
ten years, termination without a valid business reason has been held not to
affect its qualification. See Reg. 1.401–1(b)(2) and Rev. Rul. 72–239,
1972–1 C.B. 107.

If a plan is terminated within a few years after
its adoption, there is a presumption that it was not intended as a permanent
program from its inception.

Bankruptcy, insolvency or discontinuance of the
business of the employer would ordinarily be considered as prima facie evidence
of such business necessity. Business necessity also includes other valid business
reasons which significantly impair the attractiveness of a plan as a means
of providing employee compensation. Other acceptable reasons for termination
of a plan may, depending on the circumstances, include:

If bankruptcy is the reason for termination, and
it is determined a Form 5330 will have to be filed, notify the local insolvency
group to preserve the Service’s ability to collect any excise taxes
from the taxpayer. There is only a limited period during which creditors may
make claims against a party filing for bankruptcy. Therefore, the notice to
Collection must be given as soon as possible and must contain an estimate
of the amount of the taxpayer’s excise tax liability. See IRM 5.9, Bankruptcy.

IRC section 411(d)(3) requires that, in the case
of a plan to which IRC section 412 does not apply, upon complete discontinuance
of contributions under the plan, the rights of all affected employees to benefits
accrued to the date of such discontinuance, to the extent funded as of such
date, or the amounts credited to the employees’ accounts, must be nonforfeitable.
See Reg. 1.411(d)–2(a)(1)(ii).

If the employer has failed to make significant
contributions in years prior to the proposed year of termination, consider
whether an earlier discontinuance has occurred.

A temporary cessation of contributions in a profit-sharing
or stock bonus plan may not constitute a discontinuance of contributions.
However, if this becomes a discontinuance, the 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, if a single employer plan. In the
case of a profit-sharing 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 Reg. 1.411(d)–2(d).

To constitute a qualified trust, the plan of which
such trust is a part must satisfy IRC section 411.

When the accrual of benefits or the rate of employer
contributions is reduced or the eligibility or vesting requirements under
the plan are made more restrictive, facts and circumstances, other than the
mere fact that benefits, employer contributions, etc. have been cut back,
enter into the determination of whether there has been a partial termination.
Be aware however, that such cutbacks of protected benefits may constitute
violations of IRC section 411(d)(6) that must be remedied regardless of whether
a partial termination has occurred.

Reg. 1.411(d)–2(b)(2) sets forth an additional
rule for defined benefit plans which cease or reduce future accruals. In such
a case, a partial termination shall be deemed to occur if, as a result of
such cessation or decrease, a potential reversion to the employer is created
or increased. If no such potential for reversion is created or increased,
a partial termination shall not be deemed to occur solely by reason of the
cessation or decrease. Of course, a partial termination could occur because
of factors other than such cessation or decrease, such as a reduction in plan
participation.

The potential for reversion is a factor which
may also be used in considering whether there is a partial termination in
defined contribution plans. Forfeitures must be reallocated but reversions
may occur for amounts held in the IRC section 415 suspense accounts which
may not be reallocated. See Rev. Rul. 2002–42, 2002-28 I.R.B. 76. However,
in such plans, potential reversion is part of the facts and circumstances
test set out in Reg. 1.411(d)–2(b)(1).

Consideration of facts and circumstances in determining
whether a partial termination has occurred include the exclusion of a group
of employees who have previously been covered by the plan either by reason
of a plan amendment or severance of employment initiated by the employer,
or the reduction or cessation, of future benefit accruals under a plan that
results in a potential reversion to the employer. See Reg. 1.411(d)–2(b)(2);
Rev. Rul. 81–27, 1981–1 C.B. 228; and Rev. Rul. 73–284,
1973–2 C.B. 139.

All participant terminations are considered employer-initiated
unless the employer can provide proof that the employee terminations were
voluntary or on account of death, disability or attainment of normal retirement
age.

The ratio of the number of employer-initiated
terminations to the total number of plan participants during the applicable
period is the turnover rate for the plan. 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).

If there is a significant increase in the turnover
rate for a period, or for other reasons a partial termination has occurred,
and the employer failed to fully vest (to the extent funded) all affected
participants upon partial termination of the plan, the plan was not qualified
when it subsequently terminated.

A participant that separated from service without
incurring a break in service that did not receive a distribution prior to
the plan terminating, must be 100% vested.

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. 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. In the case of a plan other than a multiemployer
plan, by reason of mistake of fact. In the event of a termination of a defined
benefit plan, amounts in excess of that required to satisfy all liabilities
with respect to employees and their beneficiaries may revert to the employer
if such amounts are the result of an erroneous actuarial computation. See
IRC section 401(a)(2) and Reg. 1.401–2.

To reserve the employer’s right to recover
a reversion of excess assets, plans that are subject to Title IV of ERISA
must provide for the reversion. Any plan provision or amendment providing
for a reversion or increasing the amount which may revert to the employer
is not effective until the earlier of the end of the 5th calendar year following
the date the plan provision was adopted or the plan’s effective date.
See ERISA 4044(d).

A 50% excise tax on the amount of any employer
reversion from a qualified plan is imposed on the employer maintaining the
plan on account of reversions occurring after 9/30/1990. See IRC section 4980.
If participants in a terminating plan are provided with additional benefits,
with a replacement plan, or the employer is in bankruptcy liquidation, the
excise tax is reduced to 20%.

To have the 20% reversion tax rate applied to
the amount of the reversion rather than the higher 50% rate, the employer
must demonstrate that he/she—

The tax under IRC section 4980 is reported on
Form 5330 and is due on the last day of the month following the month in which
the reversion occurs. See IRC section 4980(c)(4).

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

The approach taken by the Implementation Guidelines
is to treat a spinoff/termination as if the entire plan had been terminated
since the substance of the termination is similar to a termination of the
entire plan followed by creation of a second plan.

In general, a plan involved in a spinoff/termination
or termination/reestablishment is considered to have satisfied the Implementation
Guidelines only if:

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 such 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. See Rev. Proc. 2002–5,
2002–1 I.R.B. 173 (revised annually).

IRC section 414(l)(2) essentially provides that
in the case of a spinoff/termination (or other similar transaction) involving
defined benefit plans within a controlled group, excess assets must be allocated
proportionately among spun-off plans. IRC section 414(l)(2) is generally applicable
to transactions occurring after 7/26/1988.

If IRC section 414(l)(2) and the Implementation
Guidelines are not satisfied, neither the terminated nor the ongoing portions
of the plan shall be considered qualified. Further, an employer statement
that a particular vesting schedule or benefit level will be provided in a
future plan is not sufficient to give the employees an enforceable right under
Title I of ERISA. Consequently, determination letter requests for the ongoing
and terminated plans must be submitted simultaneously.

A trust forming part of a defined benefit pension
plan is precluded from using forfeitures to increase benefits prior to plan
termination. See IRC section 401(a)(8) and Reg. 1.401–7.

Funds in a stock bonus, profit-sharing or, for
years beginning after 12/31/1985, money purchase plan arising from forfeitures
must be allocated to the remaining participants. See Rev. Rul. 2002–42,
2002-28 I.R.B. 76. However, such allocations must not result in prohibited
discrimination. See Reg. 1.401–4(a)(1)(iii).

Upon plan termination, the mode of distribution
must be either by single sum or annuity contract(s). If annuity contract(s)
are distributed, the contracts must comply with IRC section 411(d)(6), the
minimum distribution rules under IRC section 401(a)(9) and the survivor annuity
requirements under IRC sections 401(a)(11) and 417.

In general, if a participant (and spouse, to the
extent required) does not consent to a single-sum distribution, the participant’s
benefits upon termination must be provided by an annuity contract. To comply
with IRC section 411(d)(6), the annuity contract must provide for all of the
participant’s benefits and all optional forms of the participant’s
benefits that are protected by IRC section 411(d)(6).

In general, to satisfy IRC sections 401(a)(11)
and 417, the plan must provide that, absent waiver by the participant and
spousal consent, the participant’s vested accrued benefits will be paid
in the form of a qualified joint and survivor annuity (QJSA) to any participant
under the plan and in the form of a qualified preretirement survivor annuity
(QPSA) to the participant’s surviving spouse if the participant dies
before his or her annuity starting date. These minimum survivor annuity requirements
apply to all plans except profit-sharing and stock bonus plans that satisfy
the following conditions:

To satisfy IRC section 401(a)(9), the entire interest
of each employee must be distributed by the required beginning date, or must
be distributed beginning by the required beginning date over the life (or
life expectancy) of the employee or the lives (or life expectancies) of the
employee and a designated beneficiary. See proposed Reg. 1.401(a)(9)–1.
These rules are generally effective for years beginning after 12/31/1984.
However, the distribution of an annuity contract is not a distribution for
purposes of IRC section 401(a)(9). See Reg. 1.401(a)(9)–1, Q&A H–6.

IRC section 4974 enforces the minimum distribution
requirements by imposing on the employee a 50% tax equal to the amount by
which the minimum required distribution exceeds the actual amount distributed
during the taxable year. This penalty may be waived for reasonable cause.

The distribution method must also satisfy the
incidental death benefit rules. For calendar years after 1988, the distribution
method must satisfy the MDIB requirements set out in Prop. Reg. 1.401(a)(9)–2,
which generally parallel the minimum required distribution rules under Prop.
Reg. 1.401(a)(9)–1.

Stock bonus plans must generally permit the election
of the distribution of benefits in employer securities. IRC section 401(a)(23).

To qualify for the exception to the distribution
limitations under IRC section 401(k) on account of an event described in IRC
section 401(k)(10) (i.e., termination of the plan without reestablishment
of another defined contribution plan or disposition of corporate assets or
a subsidiary) the distribution made by reason of such event must be the balance
to the credit of the participant and in the form of a single-sum distribution.

Defined benefit plans that require mandatory employee
contributions must provide that accrued benefits derived from mandatory contributions
will be calculated from the employee’s accumulated contribution in accordance
with IRC sections 411(a)(7) and 411(c)(2).

An employee’s accumulated contribution for
purposes of determining the accrued benefit derived from mandatory contributions
to a defined benefit plan is the sum of all mandatory contributions by the
employee and interest calculated as specifically provided under IRC section
411(c)(2).

An employer that has maintained both a defined
contribution and defined benefit plan is subject to the limitations of IRC
section 415(e). IRC section 415(e) was repealed for limitation years beginning
on or after 1/1/2001. The employer is not required to delete IRC section 415(e)
language. However, if the employer does not delete the IRC section 415(e)
language, the plan would fail uniformity requirements; and thus would no longer
be a safe harbor plan unless only deleted for non-highly compensated employees.
For a non-safe harbor plan the employer may be required to submit a Demo 6
along with the termination application for a ruling on the qualified status
of the plan. In addition, failure to remove the IRC section 415(e) language
could result in reductions of accrued benefits under a plan because of accruals
under another plan in violation of IRC section 411(d)(6).

The distribution to each plan participant upon
termination of his/her account balance under a terminated defined contribution
plan will not result in prohibited discrimination if the allocation formula
and method of allocation has been nondiscriminatory up to the date of termination.
However, amounts held in an IRC section 415 suspense account are not to be
allocated if an excess allocation under IRC section 415 would result. Such
amounts must revert to the employer. See Reg. 1.401(a)–2(b).

In a terminating defined benefit plan, determine
whether the formula for computing benefits as of the date of termination would
have been discriminatory if the plan had not terminated. If the formula would
not have been discriminatory if the plan had continued, the guidelines set
forth in Reg. 1.401(a)(4)–5 are applicable in determining whether the
asset allocation is discriminatory upon termination.

If the value of assets in a defined benefit plan
exceeds the present value of the accrued benefits as of the date of termination,
the plan will not be considered discriminatory if such excess reverts to the
employer or is applied to increase benefits in a nondiscriminatory manner.
The new benefit structure must satisfy all requirements of the law (e.g.,
IRC section 411(d)(6) , IRC section 415 and Reg. 1.401(a)(4)–(5).

If the value of plan assets is less than the present
value of benefits as of the date of termination, assets must be allocated
in accordance with ERISA 4044, regardless of whether the plan is covered by
the PBGC. See ERISA 403(d)(1) and Reg. 1.411(d)–2(a)(2)(ii).

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

The trust balance sheet should accurately reflect
all assets and liabilities of the plan and should reconcile with distributable
benefits.

If it appears there is an issue involving a funding
deficiency, a prohibited transaction, unrelated business income, unrelated
debt-financed income, or diversion of assets, consideration should be given
to an examination.

If there are indications of IRC section 415 violations,
discuss the case with the group manager and decide whether the case be examined
prior to proceeding with the determination process.

The plan must have operated in accordance with
IRC sections 410 and 411. See text 1.4.3, also Alert Guidelines.

IRC sections 411(a)(10) and 411(d)(6) generally
prohibit any plan amendment which would decrease the nonforfeitable percentage
applicable to any participant or decrease or eliminate an IRC section 411(d)(6)
protected benefit. See Reg. 1.411(d)–4.

IRC section 411(a)(10) relates to plan amendments
changing 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 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:

The regulations under IRC section 411(d)(6) provide
that IRC section 411(d)(6) protected benefits, to the extent they have accrued,
are subject to the protections of IRC section 411(d)(6) and the definitely
determinable requirement of IRC section 401(a), and therefore, cannot be reduced,
eliminated, or made subject to employer discretion except to the extent permitted
in the regulations. See Reg. 1.411(d)–4 Q&A–1. Protected benefits
include—

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 Reg. 1.411(d)–3(b).

IRC section 411(d)(6) protected benefits may not
be eliminated by reason of a transfer or any transaction amending or having
the effect of amending a plan or transferring benefits. The defined benefit
feature of an employee’s benefit under a defined benefit plan and the
separate account feature of an employee’s benefit under a defined contribution
plan are IRC section 411(d)(6) protected benefits. Thus, for example, the
elimination of the defined benefit feature by reason of a transfer of benefits
to a defined contribution plan violates IRC section 411(d)(6) unless the transfer
satisfies the following conditions which are described in Reg. 1.411(d)–4
Q&A–3(b):

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

A termination may cause a violation of IRC section
411(d)(6) if the effective date of termination preceded the date of adoption
of the amendment terminating the plan.

If the adopting employer is a member of a controlled
group of corporations within the meaning of IRC section 414(b), a group of
trades or businesses under common control within the meaning of IRC section
414(c), or an affiliated service group within the meaning of IRC section 414(m),
all employees of each of these groups will be treated as employed by a single
employer for purposes of certain qualification requirements. See IRC sections
414(b), (c) and (m); Rev. Rul. 81–105, 1981–11 C.B. 228; and Regs.
1.414(b)–1, 1.414(c)–1, and 1.414(m)–1.

In addition, leased employees within the meaning
of IRC section 414(n) will be treated as employees of the recipient employer
unless the safe harbor described under IRC section 414(n)(5) applies.

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

If the application does not indicate if proper notice has been given,
contact will be made to determine if the notice had been given timely.

A plan under which benefit accruals have ceased
is not terminated if, after an amendment is adopted to terminate the plan,
the plan assets are not distributed as soon as administratively feasible but
are held in the trust which remains in existence. Thus, a plan is not actually
terminated on the date specified by the employer if the trust forming part
of the plan does not distribute assets as soon as administratively feasible.
Instead the plan is an ongoing plan which must continue to satisfy the requirements
of IRC section 401(a) to remain qualified even though such amendment may require
increased vesting under Reg. 1.411(d)–2. See Rev. Rul. 89–87,
1989–2 C.B. 2.

Whether a distribution is made as soon as administratively
feasible is determined under all the facts and circumstances of a given case,
but generally, a distribution which is not completed within one year following
the date of termination is presumed not to have been made as soon as administratively
feasible. See Rev. Rul. 89–87, 1989–2 C.B. 2.

A transfer of benefits pursuant to the elective
transfer rules of the regulations under IRC section 411(d)(6) is generally
treated as a distribution of the participant’s accrued benefit for purposes
of IRC section 401(a) other than paragraph (9). See Reg. 1.411(d)–4
(Q&A–3).

Under the following exceptions, even though a
frozen plan must continue to comply with all the qualification requirements
of IRC section 401(a) to remain qualified, the plan may not be subject to
the minimum coverage and participation requirements of IRC sections 401(a)(26)
and 410(b), if the plan is frozen and no benefits (including forfeitures,
top-heavy minimums, or accruals due to an increase in average compensation)
are allocated or accrued during the plan year:

A frozen plan has not terminated unless:

If the distribution was not completed within one
year following the date of termination, the trust may not have been liquidated
as soon as administratively feasible. Thus, if distributions occurred more
than one year after the date of plan termination, the plan is treated as if
it were an ongoing plan unless there are valid reasons for the distributions
not being made within one year.

In general, a distribution is deemed to have been
made as soon as administratively feasible if commencement of the distribution
was delayed because of circumstances outside the control of the plan administrator.

However, 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.

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, 1989–2 C.B. 2.

A defined benefit plan subject to Title IV of
ERISA will not be considered to have terminated unless the requirements in
paragraph (2) above are satisfied even though its date of termination for
purposes of Title IV has passed.

A plan that has not satisfied these requirements
is an ongoing plan which must continue to satisfy the requirements of IRC
section 401(a) to remain qualified.

Under a plan that has not terminated, additional
vesting, funding and benefit accruals may be required and additional qualification
requirements may have become effective after the proposed date of plan termination,
i.e., the date the plan was frozen.

Where an employer redeems employer securities
held under an ESOP, the distribution of such amounts realized by the ESOP
to participants does not constitute applicable dividends under IRC section
414(k)(1) and therefore, deductible thereunder. See Rev. Rul. 2002-6, 2002-1
I.R.B. 203.

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 B, if applicable, must be filed for
the plan.

IRC section 503(b) governs whether a transaction
which was entered into prior to 1/1/1975 constitutes a prohibited transaction.
However, even on or after 1/1/1975, IRC section 503(b) continues to apply
to government plans and church plans with the exception of church plans that
have made the election under IRC section 410(d) to be subject to ERISA. See
IRC sections 503(a)(1)(B) and 4975(g).

Effective 1/1/1975 the IRC section 4975 taxes
are imposed on a disqualified person who entered into a prohibited transaction
for the period on or after 1/1/1975. Such taxes are not imposed on transactions
involving government or church plans except for church plans that have made
the IRC section 410(d) election.

Generally, IRC section 4975 governs whether a
transaction is a prohibited transaction. When the transaction is subject only
to IRC section 4975, the qualification of the plan is not affected by the
transaction; rather, the disqualified person participating in the transaction
is subject to the IRC section 4975 taxes.

In general, under IRC section 4975, a disqualified
person may not engage in a transaction which constitutes a direct or indirect:

IRC section 4975(a) imposes an excise tax of 10%
of the amount involved for prohibited transactions occurring after 8/20/1996.
A 15% excise tax applies for prohibited transactions occurring after 8/5/1997.

IRC section 4975(b) imposes an excise tax of 100%
of the amount involved for prohibited transactions that are not corrected
within the taxable period.

The primary purpose of a plan must be to benefit
employees and their beneficiaries. Reg. 1.401–1 outlines the conditions
under which a plan is considered to be for the exclusive benefit of employees
or their beneficiaries.

Typically, a
“springing cash value
”
life insurance contract is purchased by a plan for an employee when
the plan terminates. 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. Following the end of the
specified period, the cash surrender value
“springs up”
,
becoming greater than the total plan assets used to purchase the contract.

In Announcement 88–51, 1988–13 I.R.B.
34, the Service cautioned that a valuation method that more accurately reflects
the fair market value of the rights distributed may have to be used for determining
the taxable amounts under IRC section 72 rather than the cash surrender value.
In addition, any distribution in excess of the accrued benefits payable under
the plan may result in the loss of the plan’s qualified status. See,
e.g., IRC sections 401(a)(4) and 415.

Notice 89–25, 1989–1 C.B. 662, Question
10, states that an employee can not use the cash surrender value for purposes
of determining the amount includible in gross income under IRC section 402(a)
where the total policy reserves (including life insurance reserves (if any)
computed under IRC section 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 section 415 limits).