Applications for a determination letter upon termination of a plan, including standardized plans, are filed on Form 5310, Application for Determination Upon Plan Termination.

Applications for a determination letter upon partial termination are filed on Form 5300, Application for Determination for Employee Benefit Plan.

Each case file should contain a completed Form 6677, Plan Termination Standards Worksheet or other appropriate form on a request for a determination letter upon plan termination.

Retroactive amendments that occur during the remedial amendment period and after the remedial amendment period expires, are described.

Also described are the rules that apply to plans that terminate before the IRC section 401(b) period expires.

The date of termination of a plan subject to Title IV of ERISA is the date determined under ERISA 4048. See Reg. 1.411(d)–2(c).

The date of termination of a plan not subject to Title IV of ERISA is the date on which the plan is voluntarily terminated by the employer or employers maintaining the plan. See Reg. 1.411(d)–2(c)(3).

The date of the proposed termination may change for a defined benefit plan that requires PBGC approval, if PBGC specifies a different termination date.

A plan is not terminated simply because it is amended to cease future accruals. Such amendment may require increased vesting under Reg. 1.411(d)–2 but, because assets have not been distributed and are not in the process of prompt liquidation, the plan is not considered terminated for qualification purposes. See Rev. Rul. 89–87, 1989–2 C.B. 2.

If actions are taken to terminate a plan but the assets are not distributed as soon as administratively feasible, the plan is not considered terminated for purposes of IRC section 401(a) (although it may be considered terminated for other purposes, such as Title IV of ERISA) and the plan’s qualified status must have been maintained until the plan is terminated in fact. See Rev. Rul. 89–87, 1989–2 C.B. 2.

If the plan was actually terminated after the proposed date of termination, (e.g., because assets will not be distributed as soon as administratively feasible or because proper and timely notice has not been given in the case of a plan subject to Title IV of ERISA) , a determination must be made as to whether the plan was qualified as of the actual date of termination.

The minimum funding standards of IRC section 412 apply to defined benefit pension plans and money purchase pension plans, other than those described in IRC section 412(h). Generally the minimum funding standard applies to a plan until the end of a plan year in which the plan terminates, even though the termination occurs prior to the last day of the plan year.

In the case of a defined benefit plan, the charges and credits are ratably adjusted to reflect the portion of the plan year before the plan terminated. In the case of a defined contribution plan, the minimum funding standard charges will reflect the entire amount of any contributions due on or before the date of termination, but no contributions due after that date.

If the employer fails to make a required contribution to a pension plan on a timely basis, the plan could fail to meet the minimum funding standards of IRC section 412. IRC section 4971(a) provides that a 10% excise tax will be imposed on an employer in a taxable year on any accumulated funding deficiency as of the end of the plan year ending with or within that taxable year. A termination does not relieve the employer of the obligation to fund the accumulated funding deficiency as of the end of the plan year in which the plan is terminated. If the deficiency is not corrected, reduced to zero, the 100% penalty tax imposed by IRC section 4971(b) may apply. See Rev. Rul. 79-237, 1979-2 C.B. 190, as modified by Rev. Rul. 89-87, 1989–2 C.B. 2.

For purposes of IRC section 412, contributions for nonmultiemployer plans made within 8¹/₂ months after the close of the plan year shall be treated as if made on the last day of the preceding year if made on account of the prior plan year. Contributions for multiemployer plans that are made within 2¹/₂ months after the close of the plan year (up to 8¹/₂ months as extended by proposed Reg. 1.412(c)(10)–1(b)) shall also be treated as if made on the last day of the preceding year if made on account of the prior plan year. See IRC section 412(c)(10).

Rev. Rul. 79–237, 1979–2 C.B. 190 also provides guidelines for determining the charges and credits to be made to the funding standard account if a pension plan is terminated during a plan year.

IRC section 4971(a) provides that a 10% tax (5% for multiemployer plans) will be imposed on an employer in a taxable year on any accumulated funding deficiency as of the end of the plan year ending with or within that taxable year.

Upon termination of a plan, the accumulated funding deficiency cannot be deemed corrected by having plan participants " waive" their accrued benefits. Such a waiver violates IRC sections 411(d)(6), 411(a), and 401(a)(13).

A funding method may not be changed in the year in which the plan terminates unless either automatic approval is available to change the funding method of the plan or the plan administrator obtains approval for a change in funding method.

The quarterly contribution requirement under IRC section 412(m) continues to apply during the year of termination. However, the required annual payment under IRC section 412(m)(4) for the year in which the plan terminates will reflect any prorated charges or credits for the funding standard account in the year of termination.

If a waiver of the minimum funding standards (under IRC section 412(d)) is being amortized in the year in which a plan terminates, all obligations of the employer with respect to the waiver as stated in the waiver ruling letter must be met in the year of termination.

A money purchase plan may not be amended in the year of termination to reduce or eliminate any contribution requirement for that year, unless all employees’ "accrued benefits" as of the later of the adoption or effective date of the amendment are protected, or the plan satisfies the requirements of IRC section 412(c)(8) allowing certain retroactive benefit reductions.

If a plan has been in existence for more than ten years, termination without a valid business reason has been held not to affect its qualification. See Reg. 1.401–1(b)(2) and Rev. Rul. 72–239, 1972–1 C.B. 107.

If a plan is terminated within a few years after its adoption, there is a presumption that it was not intended as a permanent program from its inception.

Bankruptcy, insolvency or discontinuance of the business of the employer would ordinarily be considered as prima facie evidence of such business necessity. Business necessity also includes other valid business reasons which significantly impair the attractiveness of a plan as a means of providing employee compensation. Other acceptable reasons for termination of a plan may, depending on the circumstances, include:

If bankruptcy is the reason for termination, and it is determined a Form 5330 will have to be filed, notify the local insolvency group to preserve the Service’s ability to collect any excise taxes from the taxpayer. There is only a limited period during which creditors may make claims against a party filing for bankruptcy. Therefore, the notice to Collection must be given as soon as possible and must contain an estimate of the amount of the taxpayer’s excise tax liability. See IRM 5.9, Bankruptcy.

IRC section 411(d)(3) requires that, in the case of a plan to which IRC section 412 does not apply, upon complete discontinuance of contributions under the plan, the rights of all affected employees to benefits accrued to the date of such discontinuance, to the extent funded as of such date, or the amounts credited to the employees’ accounts, must be nonforfeitable. See Reg. 1.411(d)–2(a)(1)(ii).

If the employer has failed to make significant contributions in years prior to the proposed year of termination, consider whether an earlier discontinuance has occurred.

A temporary cessation of contributions in a profit-sharing or stock bonus plan may not constitute a discontinuance of contributions. However, if this becomes a discontinuance, the discontinuance becomes effective not later than the last day of the taxable year of the employer following the last taxable year of such employer for which a substantial contribution was made under the profit-sharing plan, if a single employer plan. In the case of a profit-sharing plan maintained by more than one employer, the discontinuance is effective not later than the last day of the plan year following the plan year within which the last substantial contribution was made by any employer. See Reg. 1.411(d)–2(d).

To constitute a qualified trust, the plan of which such trust is a part must satisfy IRC section 411.

When the accrual of benefits or the rate of employer contributions is reduced or the eligibility or vesting requirements under the plan are made more restrictive, facts and circumstances, other than the mere fact that benefits, employer contributions, etc. have been cut back, enter into the determination of whether there has been a partial termination. Be aware however, that such cutbacks of protected benefits may constitute violations of IRC section 411(d)(6) that must be remedied regardless of whether a partial termination has occurred.

Reg. 1.411(d)–2(b)(2) sets forth an additional rule for defined benefit plans which cease or reduce future accruals. In such a case, a partial termination shall be deemed to occur if, as a result of such cessation or decrease, a potential reversion to the employer is created or increased. If no such potential for reversion is created or increased, a partial termination shall not be deemed to occur solely by reason of the cessation or decrease. Of course, a partial termination could occur because of factors other than such cessation or decrease, such as a reduction in plan participation.

The potential for reversion is a factor which may also be used in considering whether there is a partial termination in defined contribution plans. Forfeitures must be reallocated but reversions may occur for amounts held in the IRC section 415 suspense accounts which may not be reallocated. See Rev. Rul. 2002–42, 2002-28 I.R.B. 76. However, in such plans, potential reversion is part of the facts and circumstances test set out in Reg. 1.411(d)–2(b)(1).

Consideration of facts and circumstances in determining whether a partial termination has occurred include the exclusion of a group of employees who have previously been covered by the plan either by reason of a plan amendment or severance of employment initiated by the employer, or the reduction or cessation, of future benefit accruals under a plan that results in a potential reversion to the employer. See Reg. 1.411(d)–2(b)(2); Rev. Rul. 81–27, 1981–1 C.B. 228; and Rev. Rul. 73–284, 1973–2 C.B. 139.

All participant terminations are considered employer-initiated unless the employer can provide proof that the employee terminations were voluntary or on account of death, disability or attainment of normal retirement age.

The ratio of the number of employer-initiated terminations to the total number of plan participants during the applicable period is the turnover rate for the plan. See Tipton and Kalmback, Inc. v. Commissioner, 83 TC 154, 5 EBC 1976 (1984); and Weil v. Terson Co. Retirement Plan Committee, 750 F.2d 10, 5 ECB 2537 (2nd Cir. 1984).

If there is a significant increase in the turnover rate for a period, or for other reasons a partial termination has occurred, and the employer failed to fully vest (to the extent funded) all affected participants upon partial termination of the plan, the plan was not qualified when it subsequently terminated.

A participant that separated from service without incurring a break in service that did not receive a distribution prior to the plan terminating, must be 100% vested.

In general, no part of the corpus of the trust of a qualified plan may revert to the employer. However, a reversion may occur in a plan under certain circumstances. In the case of a multiemployer plan, reversions may occur by reason of mistakes in law or fact or return of any withdrawal liability payment. In the case of a plan other than a multiemployer plan, by reason of mistake of fact. In the event of a termination of a defined benefit plan, amounts in excess of that required to satisfy all liabilities with respect to employees and their beneficiaries may revert to the employer if such amounts are the result of an erroneous actuarial computation. See IRC section 401(a)(2) and Reg. 1.401–2.

To reserve the employer’s right to recover a reversion of excess assets, plans that are subject to Title IV of ERISA must provide for the reversion. Any plan provision or amendment providing for a reversion or increasing the amount which may revert to the employer is not effective until the earlier of the end of the 5th calendar year following the date the plan provision was adopted or the plan’s effective date. See ERISA 4044(d).

A 50% excise tax on the amount of any employer reversion from a qualified plan is imposed on the employer maintaining the plan on account of reversions occurring after 9/30/1990. See IRC section 4980. If participants in a terminating plan are provided with additional benefits, with a replacement plan, or the employer is in bankruptcy liquidation, the excise tax is reduced to 20%.

To have the 20% reversion tax rate applied to the amount of the reversion rather than the higher 50% rate, the employer must demonstrate that he/she—

The tax under IRC section 4980 is reported on Form 5330 and is due on the last day of the month following the month in which the reversion occurs. See IRC section 4980(c)(4).

Implementation Guidelines for Termination of Defined Benefit Pension Plans were issued to provide that any attempt to recover surplus assets in a termination/reestablishment, or spinoff/termination will be treated as a diversion of assets for a purpose other than the exclusive benefit of employees and their beneficiaries unless certain conditions are met. See Treasury News dated 5/24/1984, as supplemented by a teletype dated 6/1/1984, and entitled "Processing Employee Plan Cases that Terminate with Reversion of Surplus Assets to the employer."

The approach taken by the Implementation Guidelines is to treat a spinoff/termination as if the entire plan had been terminated since the substance of the termination is similar to a termination of the entire plan followed by creation of a second plan.

In general, a plan involved in a spinoff/termination or termination/reestablishment is considered to have satisfied the Implementation Guidelines only if:

In general, an employer may not attempt to receive a reversion in a termination/reestablishment or spinoff/termination earlier than 15 years following any previous such transaction. If it is determined that a spinoff/termination or termination/reestablishment is not part of an integrated transaction subject to the Implementation Guidelines, technical advice must be requested to resolve the case. See Rev. Proc. 2002–5, 2002–1 I.R.B. 173 (revised annually).

IRC section 414(l)(2) essentially provides that in the case of a spinoff/termination (or other similar transaction) involving defined benefit plans within a controlled group, excess assets must be allocated proportionately among spun-off plans. IRC section 414(l)(2) is generally applicable to transactions occurring after 7/26/1988.

If IRC section 414(l)(2) and the Implementation Guidelines are not satisfied, neither the terminated nor the ongoing portions of the plan shall be considered qualified. Further, an employer statement that a particular vesting schedule or benefit level will be provided in a future plan is not sufficient to give the employees an enforceable right under Title I of ERISA. Consequently, determination letter requests for the ongoing and terminated plans must be submitted simultaneously.

A trust forming part of a defined benefit pension plan is precluded from using forfeitures to increase benefits prior to plan termination. See IRC section 401(a)(8) and Reg. 1.401–7.

Funds in a stock bonus, profit-sharing or, for years beginning after 12/31/1985, money purchase plan arising from forfeitures must be allocated to the remaining participants. See Rev. Rul. 2002–42, 2002-28 I.R.B. 76. However, such allocations must not result in prohibited discrimination. See Reg. 1.401–4(a)(1)(iii).

Upon plan termination, the mode of distribution must be either by single sum or annuity contract(s). If annuity contract(s) are distributed, the contracts must comply with IRC section 411(d)(6), the minimum distribution rules under IRC section 401(a)(9) and the survivor annuity requirements under IRC sections 401(a)(11) and 417.

In general, if a participant (and spouse, to the extent required) does not consent to a single-sum distribution, the participant’s benefits upon termination must be provided by an annuity contract. To comply with IRC section 411(d)(6), the annuity contract must provide for all of the participant’s benefits and all optional forms of the participant’s benefits that are protected by IRC section 411(d)(6).

In general, to satisfy IRC sections 401(a)(11) and 417, the plan must provide that, absent waiver by the participant and spousal consent, the participant’s vested accrued benefits will be paid in the form of a qualified joint and survivor annuity (QJSA) to any participant under the plan and in the form of a qualified preretirement survivor annuity (QPSA) to the participant’s surviving spouse if the participant dies before his or her annuity starting date. These minimum survivor annuity requirements apply to all plans except profit-sharing and stock bonus plans that satisfy the following conditions:

To satisfy IRC section 401(a)(9), the entire interest of each employee must be distributed by the required beginning date, or must be distributed beginning by the required beginning date over the life (or life expectancy) of the employee or the lives (or life expectancies) of the employee and a designated beneficiary. See proposed Reg. 1.401(a)(9)–1. These rules are generally effective for years beginning after 12/31/1984. However, the distribution of an annuity contract is not a distribution for purposes of IRC section 401(a)(9). See Reg. 1.401(a)(9)–1, Q&A H–6.

IRC section 4974 enforces the minimum distribution requirements by imposing on the employee a 50% tax equal to the amount by which the minimum required distribution exceeds the actual amount distributed during the taxable year. This penalty may be waived for reasonable cause.

The distribution method must also satisfy the incidental death benefit rules. For calendar years after 1988, the distribution method must satisfy the MDIB requirements set out in Prop. Reg. 1.401(a)(9)–2, which generally parallel the minimum required distribution rules under Prop. Reg. 1.401(a)(9)–1.

Stock bonus plans must generally permit the election of the distribution of benefits in employer securities. IRC section 401(a)(23).

To qualify for the exception to the distribution limitations under IRC section 401(k) on account of an event described in IRC section 401(k)(10) (i.e., termination of the plan without reestablishment of another defined contribution plan or disposition of corporate assets or a subsidiary) the distribution made by reason of such event must be the balance to the credit of the participant and in the form of a single-sum distribution.

Defined benefit plans that require mandatory employee contributions must provide that accrued benefits derived from mandatory contributions will be calculated from the employee’s accumulated contribution in accordance with IRC sections 411(a)(7) and 411(c)(2).

An employee’s accumulated contribution for purposes of determining the accrued benefit derived from mandatory contributions to a defined benefit plan is the sum of all mandatory contributions by the employee and interest calculated as specifically provided under IRC section 411(c)(2).

An employer that has maintained both a defined contribution and defined benefit plan is subject to the limitations of IRC section 415(e). IRC section 415(e) was repealed for limitation years beginning on or after 1/1/2001. The employer is not required to delete IRC section 415(e) language. However, if the employer does not delete the IRC section 415(e) language, the plan would fail uniformity requirements; and thus would no longer be a safe harbor plan unless only deleted for non-highly compensated employees. For a non-safe harbor plan the employer may be required to submit a Demo 6 along with the termination application for a ruling on the qualified status of the plan. In addition, failure to remove the IRC section 415(e) language could result in reductions of accrued benefits under a plan because of accruals under another plan in violation of IRC section 411(d)(6).

The distribution to each plan participant upon termination of his/her account balance under a terminated defined contribution plan will not result in prohibited discrimination if the allocation formula and method of allocation has been nondiscriminatory up to the date of termination. However, amounts held in an IRC section 415 suspense account are not to be allocated if an excess allocation under IRC section 415 would result. Such amounts must revert to the employer. See Reg. 1.401(a)–2(b).

In a terminating defined benefit plan, determine whether the formula for computing benefits as of the date of termination would have been discriminatory if the plan had not terminated. If the formula would not have been discriminatory if the plan had continued, the guidelines set forth in Reg. 1.401(a)(4)–5 are applicable in determining whether the asset allocation is discriminatory upon termination.

If the value of assets in a defined benefit plan exceeds the present value of the accrued benefits as of the date of termination, the plan will not be considered discriminatory if such excess reverts to the employer or is applied to increase benefits in a nondiscriminatory manner. The new benefit structure must satisfy all requirements of the law (e.g., IRC section 411(d)(6) , IRC section 415 and Reg. 1.401(a)(4)–(5).

If the value of plan assets is less than the present value of benefits as of the date of termination, assets must be allocated in accordance with ERISA 4044, regardless of whether the plan is covered by the PBGC. See ERISA 403(d)(1) and Reg. 1.411(d)–2(a)(2)(ii).

Plan assets allocated in accordance with the following priorities generally will be deemed to be nondiscriminatory:

The trust balance sheet should accurately reflect all assets and liabilities of the plan and should reconcile with distributable benefits.

If it appears there is an issue involving a funding deficiency, a prohibited transaction, unrelated business income, unrelated debt-financed income, or diversion of assets, consideration should be given to an examination.

If there are indications of IRC section 415 violations, discuss the case with the group manager and decide whether the case be examined prior to proceeding with the determination process.

The plan must have operated in accordance with IRC sections 410 and 411. See text 1.4.3, also Alert Guidelines.

IRC sections 411(a)(10) and 411(d)(6) generally prohibit any plan amendment which would decrease the nonforfeitable percentage applicable to any participant or decrease or eliminate an IRC section 411(d)(6) protected benefit. See Reg. 1.411(d)–4.

IRC section 411(a)(10) relates to plan amendments changing the vesting schedules. A change in vesting schedules is any change, direct or indirect, that alters the manner in which the nonforfeitable percentage is determined. See Reg. 1.411(a)–8(c). An example of an indirect change is a change in the service counting rules or a change to or from a top heavy vesting schedule. In the case of such a change:

The regulations under IRC section 411(d)(6) provide that IRC section 411(d)(6) protected benefits, to the extent they have accrued, are subject to the protections of IRC section 411(d)(6) and the definitely determinable requirement of IRC section 401(a), and therefore, cannot be reduced, eliminated, or made subject to employer discretion except to the extent permitted in the regulations. See Reg. 1.411(d)–4 Q&A–1. Protected benefits include—

For purposes of determining whether or not any participant’s accrued benefit is decreased, all plan provisions affecting accrued benefits must be considered including changes in service counting rules, break-in-service rules, accrual rules, and actuarial factors for determining optional or early retirement benefits. See Reg. 1.411(d)–3(b).

IRC section 411(d)(6) protected benefits may not be eliminated by reason of a transfer or any transaction amending or having the effect of amending a plan or transferring benefits. The defined benefit feature of an employee’s benefit under a defined benefit plan and the separate account feature of an employee’s benefit under a defined contribution plan are IRC section 411(d)(6) protected benefits. Thus, for example, the elimination of the defined benefit feature by reason of a transfer of benefits to a defined contribution plan violates IRC section 411(d)(6) unless the transfer satisfies the following conditions which are described in Reg. 1.411(d)–4 Q&A–3(b):

The option to transfer benefits pursuant to the above rules will constitute an optional form of benefits under the plan for purposes of IRC section 401(a). Accordingly, the transfer is subject to the nondiscrimination provisions of IRC section 401(a)(4), the cash-out rules of IRC section 411(a)(7), the early termination provisions of IRC section 411(d)(2), and the QJSA requirements of IRC sections 401(a)(11) and 417. It is not, however, a distribution for purposes of the minimum distribution requirements of IRC section 401(a)(9).

A termination may cause a violation of IRC section 411(d)(6) if the effective date of termination preceded the date of adoption of the amendment terminating the plan.

If the adopting employer is a member of a controlled group of corporations within the meaning of IRC section 414(b), a group of trades or businesses under common control within the meaning of IRC section 414(c), or an affiliated service group within the meaning of IRC section 414(m), all employees of each of these groups will be treated as employed by a single employer for purposes of certain qualification requirements. See IRC sections 414(b), (c) and (m); Rev. Rul. 81–105, 1981–11 C.B. 228; and Regs. 1.414(b)–1, 1.414(c)–1, and 1.414(m)–1.

In addition, leased employees within the meaning of IRC section 414(n) will be treated as employees of the recipient employer unless the safe harbor described under IRC section 414(n)(5) applies.

Before a determination request may be processed, interested parties must be notified as required under ERISA 3001(b) and IRC section 7476(b). See Reg. 1.7476–1(a)(1).

If the application does not indicate if proper notice has been given, contact will be made to determine if the notice had been given timely.

A plan under which benefit accruals have ceased is not terminated if, after an amendment is adopted to terminate the plan, the plan assets are not distributed as soon as administratively feasible but are held in the trust which remains in existence. Thus, a plan is not actually terminated on the date specified by the employer if the trust forming part of the plan does not distribute assets as soon as administratively feasible. Instead the plan is an ongoing plan which must continue to satisfy the requirements of IRC section 401(a) to remain qualified even though such amendment may require increased vesting under Reg. 1.411(d)–2. See Rev. Rul. 89–87, 1989–2 C.B. 2.

Whether a distribution is made as soon as administratively feasible is determined under all the facts and circumstances of a given case, but generally, a distribution which is not completed within one year following the date of termination is presumed not to have been made as soon as administratively feasible. See Rev. Rul. 89–87, 1989–2 C.B. 2.

A transfer of benefits pursuant to the elective transfer rules of the regulations under IRC section 411(d)(6) is generally treated as a distribution of the participant’s accrued benefit for purposes of IRC section 401(a) other than paragraph (9). See Reg. 1.411(d)–4 (Q&A–3).

Under the following exceptions, even though a frozen plan must continue to comply with all the qualification requirements of IRC section 401(a) to remain qualified, the plan may not be subject to the minimum coverage and participation requirements of IRC sections 401(a)(26) and 410(b), if the plan is frozen and no benefits (including forfeitures, top-heavy minimums, or accruals due to an increase in average compensation) are allocated or accrued during the plan year:

A frozen plan has not terminated unless:

If the distribution was not completed within one year following the date of termination, the trust may not have been liquidated as soon as administratively feasible. Thus, if distributions occurred more than one year after the date of plan termination, the plan is treated as if it were an ongoing plan unless there are valid reasons for the distributions not being made within one year.

In general, a distribution is deemed to have been made as soon as administratively feasible if commencement of the distribution was delayed because of circumstances outside the control of the plan administrator.

However, a plan administrator does not meet the burden of showing that all plan assets were distributed as soon as administratively feasible merely because such distribution was delayed on account of an audit of the employer by the Service.

In addition, a distribution that was delayed merely for the purpose of obtaining a higher value than current market value is generally not deemed to have been made as soon as administratively feasible. See Rev. Rul. 89–87, 1989–2 C.B. 2.

A defined benefit plan subject to Title IV of ERISA will not be considered to have terminated unless the requirements in paragraph (2) above are satisfied even though its date of termination for purposes of Title IV has passed.

A plan that has not satisfied these requirements is an ongoing plan which must continue to satisfy the requirements of IRC section 401(a) to remain qualified.

Under a plan that has not terminated, additional vesting, funding and benefit accruals may be required and additional qualification requirements may have become effective after the proposed date of plan termination, i.e., the date the plan was frozen.

Where an employer redeems employer securities held under an ESOP, the distribution of such amounts realized by the ESOP to participants does not constitute applicable dividends under IRC section 414(k)(1) and therefore, deductible thereunder. See Rev. Rul. 2002-6, 2002-1 I.R.B. 203.

In any year in which the trust assets have not been distributed, the plan is subject to information requirements. The appropriate 5500 series form, including the Schedule B, if applicable, must be filed for the plan.

IRC section 503(b) governs whether a transaction which was entered into prior to 1/1/1975 constitutes a prohibited transaction. However, even on or after 1/1/1975, IRC section 503(b) continues to apply to government plans and church plans with the exception of church plans that have made the election under IRC section 410(d) to be subject to ERISA. See IRC sections 503(a)(1)(B) and 4975(g).

Effective 1/1/1975 the IRC section 4975 taxes are imposed on a disqualified person who entered into a prohibited transaction for the period on or after 1/1/1975. Such taxes are not imposed on transactions involving government or church plans except for church plans that have made the IRC section 410(d) election.

Generally, IRC section 4975 governs whether a transaction is a prohibited transaction. When the transaction is subject only to IRC section 4975, the qualification of the plan is not affected by the transaction; rather, the disqualified person participating in the transaction is subject to the IRC section 4975 taxes.

In general, under IRC section 4975, a disqualified person may not engage in a transaction which constitutes a direct or indirect:

IRC section 4975(a) imposes an excise tax of 10% of the amount involved for prohibited transactions occurring after 8/20/1996. A 15% excise tax applies for prohibited transactions occurring after 8/5/1997.

IRC section 4975(b) imposes an excise tax of 100% of the amount involved for prohibited transactions that are not corrected within the taxable period.

The primary purpose of a plan must be to benefit employees and their beneficiaries. Reg. 1.401–1 outlines the conditions under which a plan is considered to be for the exclusive benefit of employees or their beneficiaries.

Typically, a "springing cash value " life insurance contract is purchased by a plan for an employee when the plan terminates. The stated cash surrender value of the policy for a specified number of years (e.g., the first 5 years) is very low compared to the plan assets used to purchase the contract. At a time when the cash surrender value is low, the policy is distributed to the employee. Following the end of the specified period, the cash surrender value "springs up" , becoming greater than the total plan assets used to purchase the contract.

In Announcement 88–51, 1988–13 I.R.B. 34, the Service cautioned that a valuation method that more accurately reflects the fair market value of the rights distributed may have to be used for determining the taxable amounts under IRC section 72 rather than the cash surrender value. In addition, any distribution in excess of the accrued benefits payable under the plan may result in the loss of the plan’s qualified status. See, e.g., IRC sections 401(a)(4) and 415.

Notice 89–25, 1989–1 C.B. 662, Question 10, states that an employee can not use the cash surrender value for purposes of determining the amount includible in gross income under IRC section 402(a) where the total policy reserves (including life insurance reserves (if any) computed under IRC section 807(d), together with any reserves for advance premiums, dividend accumulations, etc.), represent a more accurate approximation of the fair market value of the policy. If a plan inappropriately uses the cash surrender value in valuing the amount distributed, thereby allowing a greater distribution than would otherwise be allowed, the distribution could be treated, in part, as an employer reversion. In addition, in certain circumstances, such distributions could disqualify the plan (e.g., distributions in excess of the IRC section 415 limits).