CH 14 - Plan Termination Flashcards
What are the THREE concerns prior to terminating a plan?
- make sure the plan is not considered a temporary tax shelter (within 10 years) unless you demonstrate business reason for termination
- DB plans are NOT allowed to terminate due to insufficient plan assets
- termination due to compliance problems is not a good reason and failing to get IRS determination letter can trigger an audit
What are the TWO alternatives to terminating a plan?
- cease/freeze current accrual benefits and continue 5500 filings
- amend/change into another type (eg - DB to DB)
What is the difference between a standard and a distress termination in a PBGC plan?
standard termination = assets equal present value of accrued benefits
distress termination = cannot remain in business unless plan is terminated
Reversions of plan assets to the employer are subject to an excise tax. How much is the excise tax?
50%,
unless a portion of the assets are shared with the participants. In this case, the tax is lowered to 20%
When can excess assets of a DB plan revert back to the employer?
If it’s allowed by the plan document.
What is a SPAC?
A single premium group annuity contract obtained by an employer to help cover terminating DB plans. (aka - insurance)
How are SPAC priced?
They are customized products which makes them difficult to price.
What THREE scenarios that would trigger an involuntary plan termination by the PBGC?
- Failure to meet funding requirements
- PBGC’s risk exposure becomes unreasonable; or
- Benefits cannot be paid out
What happens if a profit-sharing plan completely discontinue contributions?
It’s considered a termination by “operation of law” and participates become fully vested.
Even a partial termination by “operation of law” requires _________ for terminated employees.
full vesting
It will be considered a partial termination when the presumption termination rate is ______% or more.
20%
