ASPPA Cincinnati Pension Conference

1. ASPPA Cincinnati Pension Conference Plan Terminations & Cutbacks Cost Savings? Or Paperwork Nightmare!

2. Your client calls � I can�t afford this plan anymore! I didn�t sign up for this kind of liability exposure! This plan is too much trouble! My employees want their monies!

3. I�m selling the business I�m going out of business I�m going bankrupt

4. Or, the ultimate� I�m outta here � Catch me if you can!

5. Your client needs to know � When & how Benefits can be changed Payouts can occur Will further contributions be owed Required notices Timeframe What happens to plan in bankruptcy or a sale

6. Foreign language? Retirement plans � a foreign language to most! ERISA Fiduciary responsibility Talking in Code! Big words! Lingo to us � Greek to our clients!

7. Terminology � Defined benefit & defined contribution plans 401(k) plans, ESOPs, SEPs, SIMPLEs PBGC, DOL, IRS Termination, Freeze, Cutback Safe Harbors & Non-safe harbors 204h notices, restriction periods

8. Defined contribution plan Individual account plans Profit sharing 401(k) Money purchase ESOP

9. Defined benefit Traditional defined benefit Cash balance

10. Parties involved IRS, DOL, PBGC Employer Vendors Recordkeeper, TPA, Trustees, Investment Managers Participants

11. Dealing with drastic situations Client bankruptcy Sale of all or part of business Closing part of the business Orphan plans

12. Bankruptcy Contributions stuck in limbo Form 5500 filings � getting someone to sign Correcting operational errors Winding up the plan � documents & payouts Professional and administrative fees Pre-filing vs post filing Getting �appointed� � there must be a benefit to the bankrupt estate � i.e. avoiding fiduciary liability Court approval of actions

13. Sale of part or all of business Business sale Spinoff part of plan to buyer Transfer plan to buyer Terminate the plan Freeze plan and hold benefits Vesting? When can benefits be paid out?

14. Closing part or all of business Separate plan Employees vested Terminate the plan Merge the plan into another Part of larger plan Vesting a numbers test Distributions likely

15. Orphan plans Defined benefit � PBGC can take over Defined contribution � Signatures for distributions Signatures for Final 5500 Correcting prior qualification defects Adoption of termination amendment

16. Dealing with less drastic Your client is simply �fed up� Contributions too expensive Administration too time consuming Administration too expensive Design no longer fits goals Employees want their money out Fiduciary exposure too great

17. Reducing contributions Terminate the plan Freeze the plan Continue the plan but change the promised benefit Lower promised contributions Lower promised benefit formula Redefine who will get benefits

18. Termination �

19. Termination Means liquidation � Everyone gets paid out After payout � Plan no longer exists Final Form 5500 is filed for plan

20. Benefits of Termination All plan costs stop Legal fees Plan documents costs Administrative fees Actuarial cost Asset appraisals Audits & accounting fees

21. Disadvantages of Termination Expense to make document �current� Expense of IRS submission (recommended) Risk of post termination audits Additional funding for defined benefit Impact on employee morale

22. Freeze

23. Freeze No immediate payout Plan continues Form 5500 filings continue Audits continue Plan updates continue Administrative expense continues

24. Advantage of Full Freeze Stops accrual of new benefits Stops new participants coming into plan Avoids forced funding of unfunded benefits

25. Disadvantages of Freeze Documents updates continue Annual filings & audits continue Administrative cost continues No immediate payouts

26. Cutback without full freeze Benefits or contributions continue but at a lesser rate than before Examples: Match or contribution reduction Benefit formula reduction Change allocation or accrual requirements so fewer people benefit

27. When Can Contributions or Benefit Accruals Stop?

28. 401(k) plans Traditional 401(k) Discretionary contributions Fixed contributions Match vs nonelective Safe harbor 401(k) Safe harbor contributions Discretionary contributions

29. Safe harbor 401(k) contributions Safe harbor contribution promise for entire year termination vs freeze Mid-year full termination allowed Stopping mid-year without termination Match � allowed if follow rules Nonelective � only if business hardship

30. Substantial Business Hardship Standard = Waiver of Minimum Funding Requirements Operating at an economic loss Substantial unemployment in industry Sales & profits of industry depressed

31. Special Rules to Stop Safe Harbor Contributions Mid-year Notice � 30 days before stop Deferral change opportunity Amendment required Plan amendment says ADP testing based on entire year using current year testing Safe harbor requirements met through change date

32. Fixed benefit plans Pension plans Money purchase Defined benefit Profit sharing plans with fixed contributions All changes need an amendment

33. Mid-year terminations or cutbacks? Depends on accrual/allocation standard Last day rule � cutback allowed until last day No accrual requirement � prospective cutback only 1000 hour standard � cutback allowed until day employee reaches 1000 hours

34. Special rules for pension plans Any plan covered by Code �412 Money purchase, defined benefit Does not apply to profit sharing & 401(k) 204h notice required 100 + participants = 45 days before Under 100 = 15 days before

35. 204h notice penalties $100 per day per participant Egregious = change invalidated Plan must continue to operate as if amendment were never adopted

36. Special rules for defined benefit plans Stopping accruals does not equate to stopping further contributions� Plan underfunding = more contributions required Termination = must fund up all benefits to termination basis funding

37. Discretionary profit sharing � non-safe harbor (match & general) Anti-cutback rules apply But often the discretionary contribution is not declared until year end Advance notice strongly recommended Retroactive amendments not allowed

38. Payouts What you need to know before starting the process

39. Freeze = no payouts Payouts occur at normal plan times i.e., termination of employment, etc. Until payout, benefit continues to adjust For investment return in DC plan For actuarial value in DB plan

40. Termination = immediate payouts Plan is going away All assets will be paid out Question is When? To whom? What form?

41. How quickly can we start payouts? Depends on Kind of plan PBGC plans � one to two years DC plans � much quicker Whether seeking IRS approval Add one to two years

42. Deadline to complete payouts? Depends on kind of plan PBGC specific deadlines Non-PBGC � IRS & ERISA control IRS - as soon as �administratively feasible� Delay = presumption that termination has been abandoned

43. Termination Abandoned? Plan reverts to ongoing status = Further accruals No distributions permitted Document updates required To prevent further benefit growth - adopt benefit freeze with termination amendment

44. How long is too long? One year presumption Beyond one year, presume abandoned FDL application extends one year deadline Freeze amendment relieves one year pressure

45. Who do we pay & how? Depends on kind of plan & plan terms Different rules for Pension plans � DB & money purchase Profit sharing 401(k)

46. Pension plans � DB & money purchase All plan options must be offered Participant election controls If immediate distribution not elected (or isn't available under plan terms) Deferred annuity contracts must be purchased Exception for small balances

47. Profit sharing (non-401(k) plans) Forced lump sums permitted if � Plan has no annuity option, and No other DC plan exists (other than ESOP) Between termination date & distribution date Account size doesn't matter No consent required

48. Profit sharing with other plan If have another DC plan, Must transfer benefits to other plan No consent required

49. 401(k) benefits Special 401(k) contributions can be paid at plan termination only if Paid as lump sum and No other DC plan exists (other than ESOP) Restriction applies to deferrals, QNECs, safe harbor contributions

50. Post termination restriction period for 401(k) plan terminations No other DC plan can be sponsored (other than an ESOP) No SEP, SIMPLE, 403(b) or 457(b) or (f) Restriction period - termination date to date 12 months after final plan distribution Violation = disqualification

51. Vesting How much do we have to pay out?

52. Vesting on Freeze � Pension Plan Freeze = cessation of future benefit accruals Vesting depends on reversion potential If potential exists � vesting likely required If no potential for reversion (i.e. DC plan) � vesting unlikely

53. Vesting on freeze � profit sharing Freeze = contribution discontinuance Full vesting required If plan is later terminated & submits for IRS approval (or is audited) � IRS will look at when contributions stopped Vesting required back to first year when contributions stopped Insignificant contributions likely ignored

54. Vesting on Termination Full vesting required All plans Defined benefit plans Full vesting �to extent funded� Underfunded plan � payout only funded benefit

55. Special Termination Situations ESOPs & Defined Benefit Plans

56. Terminating an ESOP All ESOP stock delivered to participants Exception S corporation stock All remaining stock acquisition debt must be paid off What is stock is worth less than owed? How do you allocate any gain? Do the documents allow the payoff?

57. Terminating a non-public ESOP Rollovers difficult Put option applies = $ drain on company Current appraisal required Can�t require sale of stock Welcome your new shareholders Shareholder rights under state law

58. Terminating a Defined Benefit Plan Termination can trigger required additional funding Notices and timing required to accomplish termination depends on PBGC status of plan

59. Defined Benefit Plan � Funding Termination liability higher than ongoing plan If assets insufficient, funding required Majority owner may take reduced benefit PBGC will allow but IRS won't if waiver is to Escape accumulated funding deficiency Increase a reversion to the employer

60. Defined benefit plans � payment form Lump sum payouts can�t be forced All plan payment forms must be offered Deferred annuity contract must be offered Spousal consent requirements continue to apply

61. Plans not covered by PBGC Standard ERISA and tax notices apply No PBGC required notices Owner only plans Small plans of professionals - never had more than 25 active participants

62. Plans covered by the PBGC Detailed schedule of notices required Can�t terminate without notice to PBGC

63. PBGC - notices to participants Notice of Intent to Terminate At least 60 days but no more than 90 days before Notice of Plan Benefits No later than 180 days after proposed term date Notice of Annuity Information No later than 45 days before distribution date Notice of Annuity Contract No later than 30 days after all benefits distributed

64. PBGC - required notices to PBGC Standard termination notice (fully funded plans) No later than 180 days after proposed term date PBGC has 60 days to review If PBGC issues Notice of Noncompliance, termination is nullified, and plan reverts to ongoing status Distress termination At least 60 days but no more than 90 days before

65. Notice to PBGC after completion Post Distribution Certification No later than 30 days after all benefits distributed

66. Distribution deadline � PBGC plans Standard termination � distribution by later of 180 days after PBGC�s 60 day review period 120 days after receiving IRS determination letter Failure to timely distribute assets Plan termination may be nullified Plan reverts to ongoing status

67. Document requirements

68. In connection with a freeze � Plan amendment required to freeze Document updates & interim amendments DL updates on same schedule � no change

69. In connection with a termination � Termination amendment Board action declaring termination = poor choice Plan document must be fully up to date Termination amendment must Add to plan law & reg changes that are in effect but not yet reflected in formal plan document Remedial amendment extension that delays adoption deadline is cut short by termination i.e., HEART Act amendment, PPA amendment

70. Notice requirements

71. 204h notice Required for any significant benefit reduction to a pension plan

72. To the IRS & DOL � No advance notice required Freeze requires no notice Termination requires filing Final Form 5500 Filing deadline is earlier than normal 7 months from last payout

73. To the IRS � filing for �approval� Voluntary filing with IRS � Form 5310 Seeks assurance that termination won�t disqualify Doesn't guarantee plan qualification Often required by outgoing trustee

74. IRS Form 5310 Form gathers historical operational info Review of info often points out problems Most frequent problems = missing amendments failure to provide 100% vesting on participant reductions or discontinuance of profit sharing plan contributions Fix problems before filing (otherwise audit CAP = big fee)

75. To PBGC � Host of notices required To participants, beneficiaries, alternate payees, unions To PBGC Good materials available on PBGC website i.e., Filing Instructions for Form 500

76. To participants - SMM All ERISA plans 210 days after end of year No required advance notice � but highly recommended

77. To participants � 401(k) plan Notice that deferrals will stop � not required but strongly recommended Safe harbor plan � notice required to stop safe harbor contributions mid-year

78. To participants � distribution imminent Required tax notice IRS model recently updated Direct rollover election opportunity General communications on status Not required but strongly recommended

79. To unions � PBGC defined benefit - notice to unions required (60 to 90 days before) Freeze of benefits - Typically requires advance negotiation with union Termination of plan - Typically requires advance negotiation with union SMM must go to union

80. Questions & Answers

81. Thank you for your attention