Terminating 401(k) and Other Defined Contribution Plans

1 Terminating 401(k) andOther Defined Contribution PlansWilliam C. Grossman, ERPA, QPA, APAWCG ERISA CONSULTING, LLCE-mail: Valid Business Reason for Termination Termination Date and Documentation Participant Notification Requirements plan Amendments Determination Letter Apply or Not? 5500 Reporting Final Year Compliance Testing Final contributions /Allocations2 Agenda Vesting Distribution of Assets Successor- plan Rules Abandoned- plan Rules Partial Termination Deemed Termination MEP Terminations Recap of Termination Requirements3 Termination Date and DocumentationDefined Contribution Termination Date and Documentation DC determination of when the plan terminates based on all the facts and circumstances as ERISA 4041 not applicable Cite: Treas. Reg. (d)-2(c)(3) & (b) Usually, a resolution adopted by the employer is sufficientto establish the termination date ( , 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 date6 Termination DocumentationNotice to Employees Formal notice is NOT required for profit-sharing Plans nor 401(k) Plans However, Safe Harbor 401(k) Plans would require a supplemental notice Money purchase/target benefit must distribute an ERISA 204(h) notice7 Termination DocumentationERISA 204(h)

2 Notice ERISA 204(h) notice Large plan 45 days Small plan (<100 participants) 15 days Failure to provide may subject the sponsor to penalties and void the termination More on the 204(h) notice later8 Plans Are Intended to Be Permanent Reason for termination? Usually not questioned, however, 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 in one year and plan goes away thereafter9 Valid Business Reasons for Terminating a Qualified Retirement PlanValid Business Reasons IRS does not always question reason, The term QUALIFIED plan implies a permanent program 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 employer11 Valid Business Reasons Valid business reasons would be: Bankruptcy Insolvency Discontinuance of the business by the employer12 Valid Business Reasons Other acceptable reasons depending on the circumstances.

3 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 plans13 Valid Business Reasons If the employer wants to ensure that the reason is validthey should apply for an IRS favorable determination letter upon plan termination (more on this later)14 Participant Notification RequirementsRequired Notices Notice of reduction in accruals/benefits ERISA 204(h) notice for money purchase or target benefit Plans Supplemental notice for Safe Harbor 401(k) If DL submitted, a notice to interested parties is required16204(h) Notice Money purchaseor target benefit Plans or DC plan that has these sourced funds: Written notice of any plan amendment or actionthat results in a reductionor cessationof future benefit accruals Distributed after adoption, not later than 45 days before the effective date, 15 days for small plans17204(h) Notice Provideto any participant that it is foreseeable to experience a reduction Current participants = yes Terminated participants = no Alternate payees under QDRO = yes Beneficiary(ies) = no18204(h)

4 Notice Content Plain language IRC 4980F requirement, must bewrittenin 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 provided must enable each participant to determine the approximate magnitude of the expected reduction for that participant19 Submitting for a DL, Then anInterested Party Notice Required Interested party notice to be 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 QDRO20 Interested Party NoticeTimeframe for Providing Not less than ten days, no more than 24 days in advance of termination date Do not need to include copy of notice in determination submission Form 5310 asks if completed21 Interested Party Notice Content Description of the class(es)

5 Of employees eligible to participate in the plan A statement on any previous IRS determination letters A statement that any person receivingthe notice may submit, or request the DOL to submit, to EP determinations a comment on the question of whether the plan meets qualification requirements22 Interested Party Notice Content The specific datesby which comments must be received The number of interested parties needed for the DOL to comment A description of a reasonable procedure for interested parties to obtain additional information Brief description identifying class(es) of interested parties notice addresses plan name, plan ID number, plan administrator name Name and TIN of the applicant Statement that an applicationfor a determinationon the qualified status of the plan is being made to the IRS for aplan termination23 Interested Party Notice: Additional Information for Less Than 26 Participants A description of: plan s requirements regarding eligibility for participation and benefits plan s benefit formula plan s provisions providing for nonforfeitable benefits Circumstancesthat may result in ineligibility, denial, or loss of benefits24 Interested Party Notice: Additional Information for Less Than 26 Participants A description of: 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/eliminatedby the plan amendment25 plan AmendmentsAmendment of plan to Conform to Current Law(s) and RegulationsTermination AmendmentPlan Amendments Amendment to formally terminate plan , zero-out Contribution formula, etc.

6 Timeliness important Due to potential last day of year employment requirement27 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 plan28 plan AmendmentsPlans 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 plan29 plan AmendmentsList of Amendments PPA document amendments Clean restatement without any interim amendments Optional in- plan Roth amendment for adding conversion of amounts without a distributable event30 plan AmendmentsList 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.

7 2009 for calendar-year plans31 plan AmendmentsList of Amendments Example of EGTRRA era document amendments HEART, 2010 EESA, Mid-West Storms, 2010 401(a)(35) Amendment, 2010 Employer securities diversification WRERA, 2011 2009 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, 201132 Determination Letter Submission DecisionTo Submit or Not to Submit:That Is the Question!Determination Letter Optional last chance to get it right Audit chances decrease or increase??? Reliancein case of future audit Who will gather information for future audit34 Determination Letter Submission: For Your Consideration Benefit of receiving DL upon termination Reliancethat plan qualified at termination IRS examination later will not find fault Rolloversare 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 end35 Determination Letter Submission: For Your Consideration Concerns about submitting for a DL Cost of Form 5310 submission Form 5310 feefor submissions made afterFebruary 1, 2017 $2,30036 Determination Letter Submission: For Your Consideration Missing documents IRS discovery ofmissing prior documents, results in a substantial IRS fee In the 2016 version of EPCRS (Rev.)

8 Proc. 2016-51), the IRS special fee table Less than audit CAP but more than VCP37 Number of ParticipantsEmployer s 2ndof 5 or 6 Remedial Amendment Cycle (PPA)Employer s 1stof 5 or 6 yearRemedial Amendment Cycle (EGTRRA)GUST/401(a)(9)RegsUCE/OBRA 93 TRA 86T/D/RERISA20 or fewer$2,500$3,000$3,500$4,000$4,500$5,00 0$5,50021 50$5,000$6,000$7,000$8,000$9,000$10,000$ 11,00051 100$7,500$9,000$10,500$12,000$13,500$15, 000$16,500101 500$12,500$ $17,500$20,000$22,500$25,000$27,500501 1000$17,500$21,000$24,500$28,000$31,500$ 35,000$38,5001,001 5,000$25,000$30,000$35,000$40,000$45,000 $50,000$55,0005,001 10,000$32,500$39,000$45,500$52,000$58,50 065,000$71,500 Over10,000$40,000$48,000$56,000$64,000$7 2,000$80,000$88,000 Fee for Non-Amenders Discovered During DL Application Process38 EPCRS; Rev. Proc. 2016-51, Section 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?

9 If documents are missing, this is a non-compliant scenario, and a VCP submission is required39 EPCRS: VCP Fees as of February 1, 2017, Rev. Proc. 2017-4, Appendix ANumber of ParticipantsFee As of 2/1/1620 or fewer$50021 to 50$75051 to 100$1,500101 to 1,000$5,0001,001 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 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 plan41 Determination Letter Submission: Information for Submission Information needed for DL submission to the IRS.

10 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 Attorney42 Form 5500 Form 5500 Filing Continue to file Form 5500 each year until all assets are paid out When last assets distributed: Filefinal Form 5500to terminate plan by the last day of seventh month following final distribution, plus extensions44 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 assets45 Compliance TestingFinal 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)