Is Your Defined Benefit Plan Ready for Termination? Part IV
Part 4 – Plan Administration
This post is the fourth in a series on plan termination readiness. Previously, we discussed both the level and the risk of the plan’s funded status. This week, we’ll be focusing on plan administration.
Before starting a plan termination, sponsors must ensure the various aspects of the plan’s administration are buttoned up tightly. These aspects are numerous, and include plan documents (the formal plan document as well as the summary plan description, or SPD), election forms, notices, and benefit administration. It is hard for any plan to keep all these details perfect, and under review, most plans would likely identify some areas for improvement.
Generally this is not a cause for concern. However, as part of the plan termination process, the PBGC and IRS will review documents, notices, and election forms. The PBGC will audit many, if not most, plan terminations, including all plans with more than 300 participants; the IRS may also audit plans either during or after the termination. Identifying any issues before the termination process begins will save time, money, and headaches. Issues that arise during the plan termination process can slow down or potentially stop the process.
Some aspects to consider:
Plan documents: Technical required regulatory amendments that have little or no impact to the plan are often missed. The plan document should also contain language specific to a plan termination (e.g. annuity purchase, asset reversion, non-vested terminations, etc.). SPDs need to be updated every 5 years – even for frozen plans. You should consider having your plan document reviewed by ERISA counsel to ensure all necessary provisions are included, with an eye towards eventual plan termination. This is especially important now that the five-year determination cycle has ended.
Benefit provisions: Ancillary benefits that exist within your plan can scare away annuity providers and result in a higher cost to terminate. Certain unprotected provisions can be amended out of the plan to mitigate this impact. This maximizes the number of annuity providers interested in the purchase and helps reduce the purchase cost. Benefit accruals will need to be frozen for all participants prior to beginning the plan termination process and participant notices need to be sent prior to freezing benefits.
Plan administration: Even well-run plans can fall into traps. Election forms get stale with time and need to be compared against the plan document to ensure consistency. Vested terminated participants often fail to provide the plan with up-to-date address information and “disappear,” but such participants should be put into pay status once they reach their minimum required distribution date (typically around age 70.5). Proper spousal consents can also be difficult to obtain if they weren’t originally done correctly.
Action items: Sponsors should audit all aspects of their plan administration, and answer the following questions.
• Are the plan documents up-to-date and ready for termination?
• Are the administrative forms complete, consistent, and compliant?
• Have the benefits for all participants been properly administered?
• Are all plan provisions required to be maintained?
Reviewing and amending provisions now will better position the plan for and help expedite an eventual plan termination. The plan document review may also identify unnecessary or over complicated provisions that can be removed to lower the cost of buying annuities. Discovery of a document or operational failure as part of an IRS or PBGC audit during the plan termination process could cause serious delays in the process, and even jeopardize its completion.
Next week, we’ll wrap up this series with a discussion of data quality.
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