CPC CPC Plan Termination & Mergers 2 — Questions and Answers
Question 1: Upon an involuntary plan termination initiated by the PBGC, in what priority order are benefits satisfied?
- All benefits are paid equally regardless of type
- PBGC-guaranteed benefits are paid first, then non-guaranteed benefits from remaining assets
- 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 (Correct answer)
- Active employees are paid before retirees
Correct 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.
Question 2: 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?
- 30% of the employer's net worth (Correct answer)
- 100% of the unfunded benefit liabilities
- The present value of all future PBGC premiums
- 5% of plan assets at termination
Correct 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.
Question 3: What happens to excess assets in an overfunded defined benefit plan upon plan termination?
- They must be distributed pro-rata to all participants
- They revert to the employer subject to a 50% excise tax unless transferred to a qualified replacement plan (Correct answer)
- They are transferred to the PBGC automatically
- They remain in trust indefinitely
Correct 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.
Question 4: A spin-off of a portion of a defined benefit plan must satisfy which test at the time of the spin-off?
- The spun-off plan must be 100% funded
- Each resulting plan must be at least as funded as the original plan on the spin-off date (Correct answer)
- The spun-off plan must have at least 50 participants
- IRS approval must be obtained before any spin-off is effective
Correct 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.
Question 5: 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?
- Company B participants must receive a distribution before the merger
- Company B participants must be entitled to at least the same benefits after the merger as they had before (Correct answer)
- Company B's plan must be terminated before assets can be transferred
- The merger requires PBGC approval
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.
Question 6: 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?
- Yes, plan termination is always an exception to the 10% penalty
- No, a successor plan blocks penalty-free distributions; participants must roll over or wait until age 59½ (Correct answer)
- Yes, but only for participants with fewer than 5 years of service
- No, the distribution must occur within 60 days of termination
Correct 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.
CPC CPC Plan Termination & Mergers 2
Upon an involuntary plan termination initiated by the PBGC, in what priority order are benefits satisfied?