1. Copyright © 2007, The American College. All rights reserved. Used with permission. Planning for Retirement Needs Plan Termination Chapter 14

2. Copyright © 2007, The American College. All rights reserved. Used with permission. Chapter 14: Plan Termination Deciding to terminate a plan Terminating defined-contribution plans Terminating DB plans Distributions Involuntary terminations

3. Copyright © 2007, The American College. All rights reserved. Used with permission. Why Terminate? Can’t afford Not appreciated by employees Change to another type of plan

4. Copyright © 2007, The American College. All rights reserved. Used with permission. Alternatives Cease benefit accruals Generally can amend into another type –However, a change from defined-benefit plan to a defined-contribution plan is treated as a termination

5. Copyright © 2007, The American College. All rights reserved. Used with permission. Limitations on Termination Temporary tax shelter Insufficient plan assets Plan problems

6. Copyright © 2007, The American College. All rights reserved. Used with permission. Defined Contribution Resolution Termination date 15 days after notice Remaining required contributions Update plan for law changes Liquidate plan assets Benefit distribution paperwork Final form 5500 IRS submission—Form 5310

7. Copyright © 2007, The American College. All rights reserved. Used with permission. Defined-Benefit Plans Covered by PBGC Can it be terminated? –Standard (assets equal present value of accrued benefits) –Distress (filed for bankruptcy and facing liquidation) Date 60 to 90 days after notification

8. Copyright © 2007, The American College. All rights reserved. Used with permission. Steps in PBGC Plan Termination Notice of intent to terminate Form 500 to PBGC within 120 days of proposed termination date Distribute assets within 240 days from filing

9. Copyright © 2007, The American College. All rights reserved. Used with permission. Reversion of Plan Assets Reversions subject to income tax Additional 50-percent excise tax unless –20 percent allocated to participants –25 percent transferred to qualified replacement plan –Then the reversion tax is 20 percent

10. Copyright © 2007, The American College. All rights reserved. Used with permission. Distributions Purchase a SPAC Distribution paperwork –Benefit election form –Qualified joint and survivor notices –Notice of direct transfer –Form 1099R for lump-sum distributions

11. Copyright © 2007, The American College. All rights reserved. Used with permission. Terminations by Operation of Law Partial terminations Profit-sharing plans Involuntary terminations Abandoned plan program

12. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions A plan termination means the complete dissolution of the plan, meaning that all assets are paid out of the plan. A defined-benefit plan can be effectively amended into a profit-sharing plan.

13. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions A defined-benefit plan covered by the PBGC program can be terminated at any time without concern. A defined-benefit plan with frozen benefit accruals does not have to file annual Form 5500s. It is much easier to terminate a defined- contribution plan than a defined-benefit plan covered under the PBGC insurance program.

14. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions To qualify for a standard termination, the plan generally must have sufficient assets to pay all promised benefits. Excess assets that revert to the employer are taxed as ordinary income to the employer and are subject to a 50 percent additional tax, unless a portion of the excess is shared with participants. If the employer fully vests all laid-off employees, then the partial termination rules will have no adverse affect on the plan.

15. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions If an employer stops making contributions to a profit-sharing plan for a number of years, the problem is that the IRS could require full vesting for all those participants who terminate after contributions have ceased. A single premium deferred annuity for a terminating defined-benefit plan is typically easy to price. If a plan changes the eligibility provision participants must be given a summary of material modification or an updated SPD.