Merger of pension plan into profit-sharing plan is not partial termination.

Two situations address money-purchase pension plans (MPPPs).

Situation 1. Employer J maintains an MPPP qualifying under Sec. 401(a). The plan provides that, on a termination or partial termination of the plan, all affected participants will vest 100% in their account balances. J converts the MPPP into a profit-sharing plan that covers the same employees and contains the same vesting schedule. The plan also provides that assets and liabilities in the profit-sharing plan that originated in the MPPP retain their MPPP attributes, in accordance with Rev. Rul. 94-76.

Situation 2. Employer L maintains an MPPP qualifying under Sec. 401(a). This plan provides that, on a termination or partial termination of the plan, all affected participants will vest 100% in their account balances. L also maintains a profit-sharing plan qualifying under Sec. 401(a). L amends the MPPP to cease future employer contributions and to merge the MPPP into the profit-sharing plan in a transaction that satisfies Sec. 414(1) requirements. Following the merger, the profit-sharing plan covers the same employees and contains the same vesting schedule as the MPPP. Simultaneously, L amends the profit-sharing plan to provide that assets and liabilities transferred from the MPPP to the profit-sharing plan retain their MPPP attributes, in accordance with Rev. Rul. 94-76.

Analysis

Sec. 411(d)(3) requires that a plan provide that, on its termination or partial termination, the rights of all affected parties accrued to the date of such termination or partial termination (to the extent funded as of such date) or the amounts credited to the employees' accounts, are nonforfeitable.

Regs. Sec. 1.411(d)-2(b)(1) provides that whether or not a partial termination of a defined-contribution or defined-benefit plan has occurred depends on the facts and circumstances. Such facts and circumstances include the exclusion (by reason of a plan amendment or severance by the employer) of a group of employees who have previously been covered by the plan and plan amendments that adversely affect the employees' rights to vest in plan benefits. Regs. Sec. 1.411(d)-2(b)(2) contains a special rule providing that, if a defined-benefit plan ceases or decreases future benefit accruals under the plan, a partial termination will be deemed to occur if, as a result of such cessation or decrease, a potential reversion to the employer maintaining the plan (determined as of the date such cessation or decrease is adopted) is created or increased.

Regs. Sec. 1.401(a)-2(b) provides that a plan may provide that on termination, assets held in a Sec. 415 suspense account may revert to the employer.

Under Rev. Rul. 85-6, a defined-benefit plan with a surplus resulting from actuarial error may allow that surplus to revert to the employer on the plan's termination. Rev. Rul. 80-155 provided that a profit-sharing plan, stock-bonus plan or MPPP (i.e., a defined-contribution plan) will not satisfy plan-qualification requirements unless all funds are allocated to participants' accounts under the plan in accordance with a definite formula (although certain exceptions are allowed, such as the use of a suspense account in accordance with Sec. 415).

Rev. Rul. 94-76 provided that, under Sec. 414(1), the transfer of assets and liabilities from an MPPP to a profit-sharing plan is considered a spinoff of the assets and liabilities from the MPPP and a merger of those assets and liabilities with those of the profit-sharing plan. The merger does not divest the assets and liabilities of the MPPP of their attributes as MPPP assets and liabilities. Rev. Rul. 94-76 applies when an employer converts an MPPP into a profit-sharing plan.

The special rule provided in Regs. Sec. 1.411 (d)-2(b)(2) for determining whether a partial termination has occurred is limited to defined-benefit plans. The facts and circumstances mentioned in Regs. Sec. 1.411(d)-2(b)(1) do not include the creation of a potential reversion as a factor in determining whether a defined-contribution plan has been partially terminated. Unlike a defined-benefit plan, in a defined-contribution plan all assets must be allocated to participants' accounts, with the exception of amounts held in a Sec. 415 suspense account. Therefore, on the termination of a defined-contribution plan, the only amounts that may revert to the employer are amounts in a Sec. 415 suspense account, and then only to the extent the amounts in such account are not required to be allocated as provided under Regs. Sec. 1.415-6(b)(6).

In a defined-contribution plan, the cessation or reduction of benefit accruals does not create or increase the potential for reversion. Accordingly, the creation or increase of a potential reversion is not a relevant fact or circumstance in determining whether there has been a partial termination in a defined-contribution plan as a result of the cessation or reduction of benefit accruals.

In Situations 1 and 2, (1) all of the employees covered by the converted or merged MPPP remain covered under the continuing profit-sharing plan, (2) the MPPP assets and liabilities retain their characterization under the profit-sharing plan and (3) the employees vest in the continuing profit-sharing plan under the same vesting schedule that existed under the MPPP. Under these facts and circumstances, no partial termination has occurred.

REV. RUL. 2002-42, IRB 2002-28

REFLECTIONS: ERISA Section 204(h), as amended by the Economic Growth and Tax Relief Reconciliation Act of 2001, provides that a defined-benefit pension plan may not be amended to provide a significant reduction in the rate of future benefit accrual, unless the plan administrator provides notice describing the reduction to each individual whose benefit is adversely affected and to each employee organization representing these individuals; the plan is subject to an excise tax under Sec. 4980F if such notice is not provided.

When an MPPP is converted (or merged) into a profit-sharing plan, there is necessarily a significant reduction in the rate of future benefit accrual under the MPPP. Allocations under a profit-sharing plan are not benefit accruals under the MPPP for purposes of determining if there is a reduction in the rate of future benefit accrual for ERISA Section 204(h) or Sec. 4980F purposes. Consequently, under either Situation 1 or 2, proper notice must be given to the affected individuals.