The ABCs for a Defined Contribution Plan Termination. William C. Grossman, ERPA,QPA, APA, MBA

Transcription

1 The ABCs for a Defined Contribution Plan Termination William C. Grossman, ERPA,QPA, APA, MBA

2 Agenda Termination Date and Valid Business Reason for Termination Participant Notification Requirements Plan Amendments Determination Letter Apply or Not? 5500 Reporting Final Year Compliance Testing Final Contributions/Allocations Vesting and Plan Terminations Distribution of Assets Successor-Plan Rules Deemed Termination MEP Terminations Terminations and Entity Transactions Recap of Termination Requirements For Reference: Abandoned-Plan Rules Partial Terminations Record Retention

3 Termination Documentation and Valid Reason for Plan Termination

4 Defined Contribution Termination Date and Documentation DC determination of when the plan terminates based on all the facts and circumstances as ERISA 4041 (for DBs) not applicable Cite: Treas. Reg (d)-2(c)(3) & (b) Usually, a resolution adopted by the employer is sufficient to establish the termination date (e.g., board resolution adopted by the board of directors of a corporate plan sponsor)

5 Defined Contribution Termination Date and Documentation For DC pension plans, such as money purchase plan or target benefit plans, the termination date is not effective before the ERISA 204(h) notice requirements are satisfied Unless plan is not subject to Title I of ERISA For pension plans frozen prior to their termination, provided the ERISA 204(h) notice was given at that time, then a resolution terminating the plan is sufficient to establish the termination date

6 Termination Documentation Notice to Employees Formal notice is NOT required for profitsharing plans nor 401(k) plans But, termination notice is generally recommended Safe Harbor 401(k) plans would require a supplemental notice Often included with a termination notice Money purchase/target benefit must distribute an ERISA 204(h) notice

7 Termination Documentation ERISA 204(h) Notice ERISA 204(h) notice Large plan 45 days Small plan (<100 participants) 15 days Failure to provide: amendment to reduce benefits is invalid, i.e. termination may be invalid More on the 204(h) notice later

8 Plans Are Intended to Be Permanent Reason for termination? Usually not questioned by IRS However, a qualified plan is intended to be permanent and if plan not in existence for very long, it could be of interest to an IRS agent Watch out for one-hit wonders Big contributions for only one year, and no further contributions (this would be a prospect for a SEP and not a qualified plan)

9 Valid Business Reasons for Terminating a Qualified Plan A QUALIFIED PLAN implies a permanent program IRS does not always question reason, unless Termination within a few years after adopted needs to be for a valid business reason Business necessity for termination: Must have been unforeseen when the plan was adopted, and Not within the control of the employer Valid business reasons would be: Bankruptcy Insolvency Discontinuance of the business by the employer

10 Valid Business Reasons for Terminating a Qualified Plan Other acceptable reasons depending on the facts and circumstances: Substantial change in stock ownership Merger Substitution of another type of plan Financial inability to continue the plan, though business will continue Employee dissatisfaction with the plan Substantial change in the law affecting retirement plans

11 Valid Business Reasons If the employer wants to ensure that the reason is valid they should apply for an IRS favorable determination letter upon plan termination (more on this later)

12 Required Participant Notifications 1. Notice of reduction in accruals/benefits ERISA 204(h) notice for money purchase or target benefit plans 2. Supplemental notice for Safe Harbor 401(k) 3. If Determination Letter is submitted, a notice to interested parties is required

13 204(h) Notice Money purchase & target benefit plans or a DC with these sourced funds: Written notice of any plan amendment or action that results in a reduction or cessation of future benefit accruals Distributed after adoption, not later than 45 days before the effective date; 15 days for small plans Provide to any participant that it is foreseeable to experience a reduction Current participants = yes Terminated participants = no Alternate payees under QDRO = yes Beneficiary(ies) = no

14 204(h) Notice Content Plain language IRC 4980F requirement, must be written in a manner to be understood by the average plan participant Must describe the benefit/allocation formula Prior to the amendment, After amended, and The effective date of the amendment Information must enable each participant to determine the approximate expected reduction for that participant

15 Submitting for a DL, Then an Interested Party Notice Required Interested party notice provided to participants only when a DL request is filed on plan termination Notice given to: All present participants with accrued benefits All vested terminated participants Beneficiaries of deceased participants in pay status Alternate payees under a QDRO Timeframe for Providing Between 10 and 24 days in advance of termination date Do not need to include copy of notice in determination submission Form 5310 asks if completed

16 Interested Party Notice Content Statement that any person receiving the notice may submit, or request the DOL to submit, to IRS EP determinations a comment on whether the plan meets qualification requirements The number of interested parties needed for the DOL to comment The specific dates by which comments must be received A reasonable procedure to obtain additional information Brief identification of class(es) of interested parties notice addresses A statement on any previous IRS determination letters Plan name, plan ID number, plan administrator name Name and TIN of the applicant Statement that an application for a determination on the qualified status of the plan is being made to the IRS for a plan termination

17 A description of: Interested Party Notice: Additional Information for Less Than 26 Participants Plan s requirements regarding eligibility for participation and benefits Plan s benefit formula Plan s provisions providing for nonforfeitable benefits Circumstances that may result in ineligibility, denial, or loss of benefits The source of the plan s financing The identity of any organization through which benefits are provided Code Section 411(d)(6) optional forms of benefit reduced/eliminated by the plan amendment

18 Plan Amendments Amendment of Plan to Conform to Current Law(s) and Regulations Termination Amendment

19 Plan Amendments Amendment to formally terminate plan, zero-out contribution formula, etc. Timeliness important Due to potential last day of year employment requirement

20 Plan Amendments Accelerated remedial amendment period Six-year cycle: not applicable The termination of a plan ends the plan s remedial amendment period, and will generally shorten the remedial amendment cycle for the plan

21 Plan Amendments Plans must be brought up to date!! Required provisions Required amendments are necessary for all guidance in effect as of the date of termination Not necessarily the cumulative list in effect for the applicable cycle Optional provisions Optional provisions of laws/regulations being used by plan must be amended into the plan

22 Plan Amendments List of Amendments PPA document amendments PPA DC Preapproved plans: A clean restatement i.e. without any interim snap-on amendments Optional in-plan Roth amendment for adding conversion of amounts without a distributable event

23 Plan Amendments List of Amendments Example of EGTRRA era document amendment 415 amendment, with adoption PPA by end of 2009 Accelerated vesting Rollovers to Roth IRA Hardships for beneficiaries Money purchase in service at age 62 Automatic enrollment Pre-62 NRA amendment to age 62 for Money purchase, target benefit, and DC plans containing MP/TB/DB Assets Due by June 30, 2009 for calendar-year plans

24 Plan Amendments List of Amendments Example of EGTRRA era document amendments HEART, 2010 EESA, Mid-West Storms, (a)(35) Amendment, 2010 Employer securities diversification WRERA, RMD suspension Non-spouse beneficiary rollover In-plan Roth conversion for funds with a distributable event, optional, later of end of plan year utilized or December 31, 2011

25 Determination Letter Submission Decision To Submit or Not to Submit: That Is the Question!

26 Determination Letter Optional last chance to get it right Audit chances decrease or increase??? Reliance in case of future audit Who will gather information for future audit

27 Determination Letter Submission: For Your Consideration Benefit of receiving DL upon termination Reliance that plan qualified at termination IRS examination later will not find fault Rollovers are from a qualified plan Rollovers made from a plan that is not qualified are not eligible rollover distributions Rollovers from plan with DL at termination may be made without concern that they are not eligible for rollover These applications processed currently Do NOT have to wait for six-year cycle to end No worry about no one around for future questions or an audit

28 Determination Letter Submission: For Your Consideration Concerns about submitting for a DL Cost of Form 5310 submission Form 5310 fee for submissions made after February 1, 2017 $2,300 Missing documents IRS discovery of missing prior documents, results in a substantial IRS fee In the 2016 version of EPCRS (Rev. Proc ), the IRS special fee table Less than audit CAP but more than VCP

29 Fee for Non-Amenders Discovered During DL Application Process Number of Participants Employer s 2 nd of 5 or 6 Remedial Amendment Cycle (PPA) Employer s 1 st of 5 or 6 year Remedial Amendment Cycle (EGTRRA) GUST/ 401(a)(9) Regs UCE/ OBRA 93 TRA 86 T/D/R ERISA 20 or fewer $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5, $5,000 $6,000 $7,000 $8,000 $9,000 $10,000 $11, $7,500 $9,000 $10,500 $12,000 $13,500 $15,000 $16, $12,500 $ $17,500 $20,000 $22,500 $25,000 $27, $17,500 $21,000 $24,500 $28,000 $31,500 $35,000 $38,500 1,001 5,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000 $55,000 5,001 10,000 $32,500 $39,000 $45,500 $52,000 $58,500 65,000 $71,500 Over 10,000 $40,000 $48,000 $56,000 $64,000 $72,000 $80,000 $88,000 EPCRS; Rev. Proc , Section 14.04

30 Determination Letter Submission For Your Consideration Missing documents Before deciding to submit for a DL at termination, the consideration has to be: Are all earlier plan documents (restatements and amendments) able to be retrieved? If documents are missing: this is a non-compliant scenario, and under EPCRS, a VCP submission is required

31 EPCRS: VCP Fees as of Feb. 1, 2017, Rev. Proc , Appendix A Number of Participants Fee As of 2/1/16 20 or fewer $ to 50 $ to 100 $1, to 1,000 $5,000 1,001 to 10,000 $10,000 Over 10, 000 $15,000 Special situations: RMD (<151 participants): $500; 151 to 300 $1,500, Interim amendments (before expiration of extended RAP): $375; Loans (25% participants or less), based on number of failures; non-amenders (less than one year) 50% off; egregious, higher than schedule

32 Determination Letter Submission: Timing of Submission An application will be deemed to be filed in connection with plan termination if it is filed no later than the later of: (i) One year from the effective date of the termination, or (ii) One year from the date on which the action terminating the plan is adopted Information needed for submission to the IRS: Form 8717, user fee for employee plan determination Form 5310, application for determination for terminating plan

33 Determination Letter Submission: Information for Submission Information needed for DL submission to the IRS: A copy of the plan document A copy of the latest approval letter determination letter from the IRS or opinion/advisory letter for pre-approved plans A copy of all amendments since the last determination letter Copies of all records of all action taken to terminate the plan A statement explaining how the amendments affect or change the plan Form 2848, Power of Attorney

34 Form 5500

35 Form 5500 Filing Continue to file Form 5500 each year until all assets are paid When last assets distributed: File final Form 5500 to terminate plan by the last day of seventh month following final distribution, plus extensions

36 Form 5500 Filing Last return must be marked as final return, showing zero assets Final form also required for plans exempt from filing requirements For example, ongoing plans with less than $250,000 in assets

37 Final Year Compliance Testing

38 Final Year Testing All compliance testing applies in the year of termination IRC 401(a)(4) Nondiscrimination/Cross-Test IRC 401(k) - ADP IRC 401(m) - ACP IRC 402(g) Deferral Limits IRC 404 Deduction Limits IRC 410(b) Coverage Requirements IRC 415 Annual Additions Limits IRC 416 Top-Heavy

39 Final Year Testing Short Plan Year Compensation limit pro-rate Deferral limit not pro-rated Employer allocations pro-rate compensation and pro-rate social security integration level Annual additions pro-rate limit ADP/ACP test on short-year data

40 Final Year Testing Gather all typical year-end census data through termination date and perform tests Corrections must be made if tests fail, such as: ADP fails, corrections must be made ACP fails, correction must be made If 402(g) deferral limits are exceeded, corrections must be made If 415 limits are exceeded, corrections must be made If any newly eligible employees was not given the right to defer, corrections for those individuals would be required Corrections under short-term missed deferrals under Rev. Proc may apply If the plan WAS a Safe Harbor plan, then it must revert to current year testing for ADP and ACP, if applicable

41 401(k) Safe Harbor Plan Termination Short-Plan Year Exceptions Year of plan termination, and short-plan year SH contribution made, there will be NO testing, IF: Plan termination is in connection to: 1. Merger or acquisition, or 2. Business hardship as defined in 412(d): Operating at a business loss Substantial unemployment or under-employment in trade or business and in the industry concerned Sales and profits of industry depressed/declining Reasonable to expect plan to continue if waiver granted

42 401(k) Safe Harbor Plan Termination Short-Plan Year Exceptions If SH 401(k) plan terminated with a short-plan year for a reason other than on prior slide, then: Short plan year SH contribution is to be made Employees are to be provided with a supplemental notice Plan must pass current year testing or make corrections The plan may follow the regulation for reducing or suspending a safe harbor contribution and perform ADP/ACP test

43 Final Contributions/Allocations

44 Final Contributions Money Purchase and Target Benefit Money purchase/target benefit are subject to minimum funding so must make a contribution, if benefits have been accrued If the plan is subject to the last day of the year requirement or 1,000 hours, then contribution not required unless satisfied

45 Final Contributions Profit Sharing and 401(k) Plans Profit sharing (including 401(k) plans) If the contribution is fixed use same rules as the money purchase plan If the contribution is discretionary then it is, of course, optional Elective deferrals are allowed only with compensation up to the termination date Matching contributions unless discretionary, must be made If plan provides for last day/1,000-hour rule, then not required, unless satisfied

46 Final Contributions Safe Harbor 401(k) Plans Safe Harbor 401(k) plans Watch out because this is a required contribution No allocation requirements Failure to make the required contribution may cause the plan to be disqualified

47 Top-heavy plans Final Contributions Top-Heavy Plans Even if termination date is not the last day of the plan year, the top-heavy contribution is due based on the termination date being the last day of the plan Termination date is considered last day of plan year for top-heavy allocation purposes Some practitioners had viewed this differently in the past, but the IRS at the ASPPA National Conference stated that the termination date is the last day and that a top-heavy allocation is due as of that time

48 Final Contribution Issues Forfeitures Disposition of the forfeitures is determined based on the plan language, but forfeitures may not revert to the employer Forfeitures may be used to: Offset required contributions QNEC/QMAC for correcting failed ADP/ACP Pay ordinary plan fees and/or Be reallocated to participants Fees related to the plan termination would be settlor costs and cannot be paid by the forfeitures

49 VESTING AND PLAN TERMINATIONS

50 Vesting Rules Plan termination = 100 percent vesting Internal Revenue Code 411(d)(3) requires 100 percent vesting of all affected employees when a plan is terminated Applies to: Active participants Terminated participants who have not forfeited their non-vested balance as of the termination date Those who have been paid out or had five one-year breaksin-service are out of luck

51 Vesting Rules For a DC plan, an "affected employee" is: An employee or former employee who has not forfeited his non-vested interest as of the termination date Citation: GCM and FSA Where the non-vested interest has not been forfeited at the time of the plan s termination, IRC 411(d)(3) operates to vest that amount

52 Vesting Examples Current employee JT is 20-percent vested when plan termination occurs JT becomes 100-percent vested Jim, severed service January 2, 2015 and was 40 percent vested at severance Jim has not taken a distribution Plan termination date is October 15, 2017 Jim becomes 100 percent vested; because Jim had not taken a distribution, nor incurred five one-year breaks-in-service

53 Vesting Rules: Zero-Percent Vested Terminated Participants Some plans stipulate that zero-percent vested terminated participants are deemed to have taken a distribution The deemed cash-out permits the non-vested 100 percent amount to be forfeited If forfeited before the plan termination, then those participants are not 100 percent vested at plan termination

54 Vesting Rules: Zero-Percent Vested Terminated Participants Plan has three-year cliff vesting Lucille terminates service after two years of vesting service and is zero percent vested Plan states: an employee who is zero percent vested at severance is deemed to have taken a distribution of the vested portion The plan forfeits Lucille s balance The following year, the plan terminates Lucille is not entitled to become 100 percent vested as the money had been forfeited away before the plan termination

55 Vesting Rules Five Consecutive One-Year BIS If a participant terminates employment and then incurs five consecutive one-year breaks-in-service, the non-vested portion is forfeited away If the plan termination occurs after that time, the participant does not become 100 percent vested in the amount that was forfeited away If the plan termination occurs before the five one-year BIS have occurred, then the participant is 100 percent vested in the money in his/her account

56 Vesting Examples Jenny severed service April 18, 2010 and was 60 percent vested at severance Jenny leaves her money in the plan and after five consecutive one-year BIS; the plan forfeits Jenny s nonvested 40 percent away in 2016 Upon plan termination in May 22, 2017, Jenny does not become 100 percent vested

57 Vesting Rules: Former Employee Cashes Out Vested Amount If a participant terminates employment and withdraws the vested portion; then the non-vested portion is forfeited away Since the plan termination occurs after the non-vested amount was forfeited, the participant does not become 100 percent vested as the non-vested amount had been forfeited away before the plan termination If the plan termination had occurred before the forfeiture of the non-vested amount, then the participant would become 100 percent vested

58 Vesting Examples Hank severed service January 2, 2014 and was 25 percent vested at severance Hank takes a full distribution of his vested amount on April 12, 2014 The plan forfeits Hank s 75 percent non-vested portion and reallocates forfeiture later in 2014 Upon plan termination on March 15, 2017, Hank does not become 100 percent vested To recap, because Hank had taken a distribution, and the nonvested amount had been forfeited and reallocated, the five oneyear breaks-in-service didn t come into play

59 Distribution of Assets

60 Distribution Rules Apply Subject to normal distribution paperwork and timing If J&S review period of 30 to 180 days May be waived down to seven days 402(f) notice Special Tax Notice for Distributions, 30 to 180 days in advance of distribution, may be waived down to 0 days

61 Distribution Rules Apply Amounts Under $5,000 If J&S rules apply, they are not applicable for amounts less than $5,000 Amounts between $1,000 and $5,000 may be automatically rolled to IRA if no response from participant Amounts under $1,000 may be paid directly to participant Assumes document provisions provide this

62 Distribution Rules Most distributions are made in cash Check document provisions to see if in-kind distributions are allowed

63 Distribution Rules Apply Insurance Contracts Insurance contracts Cannot rollover an insurance contract Participant Options, depending on plan provisions: Participant can pay cash surrender value to plan and receive a distribution of the policy Then can distribute or rollover all the cash in the plan (account for pre-tax and after-tax (PS-58)); or Surrender policy and cash value placed in participant s account, (account for pre-tax and after-tax (PS-58)); or Distribute policy and report cash-value as taxable, less PS-58 cost

64 Distribution Rules Apply Participant Loans Participant loans Due and payable Loan cannot be rolled to an IRA Participant Options: (other then to just pay tax) Roll to another employer plan IF that plan has loans and accepts rollovers Participant can roll equivalent amount of cash as was in the outstanding loan within 60 days of loan s distribution.

65 Distribution Rules Apply Non-Spouse Beneficiary Rollovers Non-spouse beneficiary rollovers Automatically apply for a terminated plan Must be moved by a direct rollover Must treat as an inherited IRA and continue payouts!!!

66 Distribution Rules Apply Required Minimum Distributions Require Minimum Distributions RMDs may not be rolled-over Any participant subject to RMD rules must be paid the RMD for the year, if not already paid earlier in the year Where plan defines RBD for non-five-percent owner s as the later of April 1, after year in which age 70½ is reached or after year of retirement; RMDs are not required to be paid to non-five-percent owners who are working and over age 70½ when the plan terminates.

67 Termination Distributions 12-Month Requirement Distributions must be completed as soon as practicable but within 12 months of the plan termination date Citation: Rev. Rul If a determination letter is requested, then they must be distributed within six months after DL s receipt (assuming this goes beyond 12-month deadline)

68 Distribution Rules Apply No Forced Merger Upon a plan termination, cannot merge assets to another plan without the participant s request Must offer participants the right to receive funds There are some brokers..

69 Distribution Rules Apply Non-Responsive Participants If participant has an account balance of more than $5,000 and is in a plan subject to J&S: Go buy a deferred annuity Usually the threat of this will cause the nonresponsive participant to take action

70 Non-Responsive Participants with More Than $5,000 VAB Upon a plan termination in a plan not subject to J&S, Amounts over $5,000 VAB may be auto-cashout rolled to an IRA without consent if: Plan is a profit sharing or stock bonus (not a money purchase nor a target benefit) There are no annuity options offered Another DC plan is not maintained by employer, including other members of a controlled group Excluding an ESOP Citation: Treas. Reg (a)-11(e)

71 Steps in Locating Missing Participants in Terminated DC Plans: FAB Required steps in reasonable attempt to locate: 1. Certified mail 2. Check related plan and employer records 3. Contact designated beneficiaries on beneficiary form 4. Electronic search tools Additionally, as appropriately cost effective, use locator service

72 Options: Steps in Locating Missing Participants in Terminated DC Plans: FAB Preferred option: rollover to IRA 2. QJSA over $5,000: purchase annuity 3. If #1 is not possible, and #2 does not apply, an interest-bearing savings account in a federally insured financial, or state unclaimed-property fund, may be considered. However, taxability to participant must be considered. PBGC once final regulations on DC missing participant program Does your document allow you to forfeit amounts under $1,000?

73 401(k) Successor-Plan Rules

74 Successor-Plan Rules Plan termination will not be a distributable event for elective deferrals if the employer maintains or establishes another DC plan within 12 months Plans that may not be opened: Plans that may be opened: Another DC plan such as: 401(k) Plan Profit Sharing Plan Money Purchase Plan Target Benefit Plan Okay to have: 403(b) Plan 457(b) plan ESOP Defined Benefit Plan Including Cash Balance SEP-IRA SIMPLE IRA

75 Successor-Plan Rule Two-Percent Exception If fewer than two percent of the employees eligible under the 401(k) plan as of the date of plan termination are eligible under alternative 401(k) plan, the successor-plan rule does not apply Measuring period begins 12 months before the plan termination and ends 12 months after distribution of all assets

76 Deemed Termination

77 Discontinuance of Contributions Profit-sharing plan may be deemed to be terminated if contributions cease Rule of thumb = three years Do not count years in which employer can demonstrate that a contribution would be harmful to the company Effect participants become 100 percent vested

78 MEP: Withdrawing or Terminating

79 Exiting a MEP If participating employer who is exiting the MEP wishes to continue to maintain a plan: Spin-off the participating employer s employee s plan assets Create a mirror plan and then transfer the assets No distributable event

80 How Does One Participating ER Terminate Its Portion of the MEP? If a participating employer wants to terminate its portion of the MEP plan: Spin-off that participating employer s plan Participating employer creates and adopts a mirror plan and then transfer the assets to that plan No distributable event After new plan established and assets transferred from MEP, board resolution to terminate the new plan established by the former participating employer This is a distributable event

81 May Lead ER Terminate the MEP? Most plan documents have a provision permitting the lead ER to terminate the MEP plan The plan document would have a provision including notification to participating ERs (generally 30 days in advance) Generally, participating ERs options are: 1. Spin-off to a new plan that participating ER starts 2. Terminate participating ER portion of plan also 3. Spin-off to new MEP

82 Business Entity Transactions

83 Understanding the Different Transactions There are three types of transactions: Stock purchase Company A buys Company B Asset purchase Company A buys some of Company B s assets. For example, Bank A buys the New Jersey branches of Bank B; but Bank B continues with its other branches in 15 other states. Merger Company A and Company B Merge forming either New Company C, or Successor Company A or B

84 Stock Purchase Buyer purchases a majority of the shares of stock of the target If buyer is a company, target becomes a subsidiary Transaction does not change which benefit plans are sponsored by the target (except to the extent that the target participates in the seller s plans) To get rid of the target s plans, generally must terminate the plans Before not after. Why?

85 Successor 401(k) Plan Any alternative defined contribution plan, not an ESOP, existing at any time during the period beginning on the 401(k) plan s termination date and ending 12 months after distribution of all the 401(k) plan's assets. Reg (k)-1(d)(4). Maintained by the same employer that maintained the terminated 401(k) plan.

86 Transition Rules Apply during year transaction occurred until the end of the following year. Employees could be eligible for more than one plan so advance document work may be needed. No significant plan alterations (amendments) At transition s end plans could still stand alone

87 What Constitutes a Significant Alteration? Changing eligibility rules, age/service/classifications Eliminating or adding a match Adding the Roth feature? Adding a catch-up provision? Significant employee lay offs?

88 Transition Period Example Company J acquires 100% ownership of Company R on March 26, Company J has a 401(k) plan with a $/$ match up to 5% and Company R has a plan with a $/$ match up to 2%. Company J may operate the 2 plans separately until December 31, 2018.

89 Acquisition of Company with a Safe Harbor 401(k) Acquisition where one company has safe harbor 401(k) and the other does not. The transition rule [410(b)(6)(C)] permits them to operate the plans separately until the end of the year following the year of the transaction. By the end of the transition period the plans must be merged and either both must be safe harbor or neither may be safe harbored. However, if the plans can pass coverage separately after the transition period, they may continue separately.

90 Asset Acquisition Buyer purchases all or some of the target s assets and assumes all or some of the target s liabilities Stock remains owned by the sellers: if all assets are sold, company is a shell with just the consideration for the transaction Seller/target remains the sponsor of all plans unless buyer affirmatively adopts them Employees are terminated by seller and hired by buyer (to the extent desired)

91 Asset Acquisition Employees will generally be eligible for distributions from the seller s plan Concern for seller: partial plan termination Rule of thumb: 20% involuntary decrease Revenue Ruling ; (in reference slides) Result: full vesting (Can apply in stock sale setting, too, if employees no longer participate in seller s plan)

92 Company Merger Two companies combine and one of them or a new company survives the transaction The survivor owns and owes all of what either company owned or owed before the transaction by operation of law The survivor sponsors all employee benefit plans sponsored by either company before the transaction by operation of law Make sure to understand the transaction and to communicate it to the various service providers Be sure that service contracts survive the transaction Be sure that everyone knows the new structure so that they can help you with the post-transaction transitions

93 Mid-year Plan Merger and Testing If both plans are current year and merger is mid-year, three possible options: Test everything in the surviving plan for the year ; or Test both plans through merger date, then surviving plan from merger through end of plan year; or Test disappearing plan for part of year before merger, then test surviving plan for the full year, reflecting merged-in people as new entrants

94 Mid-year Plan Merger and Testing If plans are not the same testing method: Can change acquired plan to match buyer s plan regardless of normal current year/prior year limitations Do so before the merger Last day to do so: end of transition period

95 Due Diligence Review Which plans need to be reviewed? ALL When do they need to be reviewed? Before the business transaction Is the retirement plan a priority during the business entity transaction? Usually, not at all

96 Recap of Termination Requirements

97 Recap of Termination Requirements In general order: 1. Determination of Valid Business Reason 2. Resolution and Notification of Intent to Terminate, 204(h) Notice for Pension Plans 3. Amendment of Plan to Conform to Current laws and regulations 4. Optional: submission for a Determination Letter; Notice to Interested Parties

98 Recap of Termination Requirements 5. Compliance Testing and Corrections 6. Contribution/Allocations: don t Forget Mr. Forfeiture, Top-Heavy and Safe- Harbor Allocations 7. Vesting 8. Distribution of Assets: Non-responsive or Missing Participants/Loans/RMDs, etc., Election Forms and Forms 1099-R 9. Final 5500 Filing Zeroed Out 10. Record Retention of Documents

99 FOR REFERENCE Abandoned Plans Partial-Plan Terminations Record Retention Guidleines

100 Abandoned-Plan Rules

101 Abandoned-Plan Rules Department of Labor guidance Abandoned Plan is: 1. Sponsor no longer exists 2. Cannot be located, reasonable efforts to locate sponsor must be made 3. No contributions or distributions made for 12 months

102 Abandoned-Plan Rules Qualified Termination Administrator (QTA) may shut down plan Must be an entity that is allowed to hold plan assets under ERISA Bank, trust company, insurance company, mutual fund company, etc. Must be asset custodian/administrator Must be approved by DOL

103 Abandoned-Plan Rules QTA must: Notify DOL and participants within 90 days Locate and update records Calculate benefits payable Notify participants and beneficiaries of their rights Distribute benefits File final 5500 report with DOL, with Special Terminal Report, and Final Notice to DOL within two months QTA does NOT have to: Amend document Prepare Final Form 5500 QTA may charge reasonable fees

104 Partial-Plan Terminations Revenue Ruling Presumed if more than 20 percent of employees are involuntarily severed from employment that a partial termination has occurred Those affected become 100 percent vested Those still employed do not!!

105 Partial-Plan Terminations Severance is for other than: Routine turnover Retirement Death Disability Timeframe to measure the 20-percent turnover rate Generally the plan year If a short-plan year, the applicable period is the short-plan year plus the immediately preceding plan year Applicable period can be a longer period if there are a series of related terminations

106 Turnover determination Divide Partial-Plan Terminations Turnover Determination Number of participating employees who had an employer-initiated severance during the applicable period By the sum of All participating employees at the start of the applicable period and Employees becoming participants in applicable period All participants taken into account, both vested and non-vested participants

107 Partial-Plan Terminations Employer-Initiated Terminations Employer-initiated termination is: Any involuntary termination other than: Death Disability or Retirement on or after normal retirement age Even if it is caused by reasons outside of the employer s control, e.g., depressed economic conditions Note: no exception provided for terminations due to good cause

108 Partial-Plan Terminations: Voluntary Terminations and Routine Turnover Excluded Voluntary terminations are disregarded in determining the 20 percent, if employer can support a determination that the termination is in fact voluntary Don t count employees who voluntarily chose to leave, even if they left because they were afraid they might be involuntarily terminated Routine turnover can be excluded from the partial termination determination Relevant factors in determining routine turnover include: Information as to the turnover rate in other periods The extent to which terminated employees were replaced Whether the new employees perform the same job functions, had the same job classification or title, and received comparable compensation

109 Partial-Plan Terminations If it is determined that a partial termination occurred: 100 percent vesting of former employees who were involuntarily terminated during the applicable period 100 percent vesting of former employees who left voluntarily during the applicable period. Do not 100 percent vest the ongoing employees IRS guidance did not address small plans For example, a plan with four participants in which one is involuntarily let go would have a partial termination at 25 percent If the termination was voluntary, there would be no partial termination

110 Record Retention Guidelines

111 Record Retention Background ERISA sets forth specific reporting and disclosure obligations with respect to qualified retirement plans. ERISA requires plan sponsors to retain for a fixed period of time the records that support the information included in the 5500 filing and other reports.

112 Record Retention Background The short answer is that all plan-related materials should be kept for a period of at least six years after the date of filing of an ERISA-related return or report, and the materials should be preserved in a manner and format (electronic or otherwise) that permits ready retrieval. All records that support the plan s annual reporting and disclosure should be retained. The responsibility to retain these records lies with the plan administrator (the employer).

113 Record Retention How Long? Good practice suggests that certain records should be kept for the life of the plan; this would include all plan documents dating from the plan s inception. As a practical matter, plan sponsors may want to keep records for a longer period of time in case of legal actions from participant divorce actions (QDROs) or lawsuits from disgruntled employees.

114 Record Retention What is to be Retained? For ERISA purposes the following: 1. The original signed and dated plan document, and all original signed and dated plan amendments. Make sure the dates and signatures are easily visible, 2. Copies of all corporate/partnership actions and administrative committee actions relating to the plan, 3. Copies of all communications to employees. These include Summary Plan Descriptions, Summaries of Material Modifications, and anything else describing the plan that is provided to participants or beneficiaries. Remember to include copies of videos, slides, and s,

115 Record Retention What is to be Retained? 4. A copy of the most recent determination letter from the IRS, or the form to request that determination letter, if one is pending, 5. All financial reports, including Trustees reports, journals, ledgers, certified audits, investment analyses, balance sheets, and income and expense statements, 6. Copies of Form 5500, 7. Payroll records used to determine eligibility and contributions including details supporting any exclusion from participation. It is critical that sponsors keep complete census data, not just data on those who are eligible,

116 Record Retention What is to be Retained? 8. Hours of service and vesting determinations, 9. Plan distribution records, including Form 1099Rs, 10. Corporate income tax returns (to reconcile deductions), 11. Evidence of the plan s fidelity bond, 12.Documentation supporting the trust s ownership of the plan s assets, 13.Copies of all documents relating to plan loans, withdrawals, and distributions. Include copies of spousal consent, 14.Copies of nondiscrimination and coverage test results, 15. Any other plan-related materials, such as claims against the plan,,,

117 Questions Thanks for attending!!!