CPC Plan Termination & Mergers Flashcards

Upon an involuntary plan termination initiated by the PBGC, in what priority order are benefits satisfied?

Answer: Benefits are paid in the order: basic PBGC-guaranteed benefits, employee contributions, other vested benefits, non-vested benefits, and then benefit increases within 5 years

ERISA Section 4044 establishes six priority categories for asset allocation in involuntary terminations, starting with in-pay AVCs and retiree benefits backed by employee contributions, with full guaranteed benefits and non-guaranteed benefits following.

An employer that terminates a defined benefit plan with insufficient assets to cover guaranteed benefits may owe the PBGC an employer liability. What is the maximum amount of this liability?

Answer: 30% of the employer's net worth

Under ERISA Section 4062, the employer's liability to the PBGC for an underfunded plan termination is capped at 30% of the controlled group's net worth.

What happens to excess assets in an overfunded defined benefit plan upon plan termination?

Answer: They revert to the employer subject to a 50% excise tax unless transferred to a qualified replacement plan

Excess assets reverting to the employer are subject to a 20% excise tax (50% if no qualified replacement plan receives at least 25% of the surplus), in addition to regular income tax.

A spin-off of a portion of a defined benefit plan must satisfy which test at the time of the spin-off?

Answer: Each resulting plan must be at least as funded as the original plan on the spin-off date

Under IRS regulations, a defined benefit plan spin-off requires that each resulting plan be at least as well-funded (on a Section 414(l) basis) as the original plan immediately before the spin-off.

A plan merger occurs when Company A acquires Company B. Company B's 401(k) plan is merged into Company A's 401(k) plan. Which statement is correct?

Answer: Company B participants must be entitled to at least the same benefits after the merger as they had before

ERISA Section 208 requires that each participant's benefit after a plan merger be at least equal to what they would have received had the plan been distributed on the date of the merger.

When a 401(k) plan terminates and a successor plan exists, can participants receive their accounts as cash distributions without the 10% early withdrawal penalty?

Answer: No, a successor plan blocks penalty-free distributions; participants must roll over or wait until age 59½

The plan termination exception to the 10% early withdrawal penalty does not apply to 401(k) plans if the employer establishes or maintains a successor plan within 12 months after distributing assets.