Category Archives: Termination

20 Questions on Terminations, Partial Terminations and Severance from Employment

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Restating a Defined Contribution Plan Prior to Terminating

Now that the annual -6 Revenue Procedure has been released – Rev. Proc. 2010-6 – I’m starting to receive a lot of questions about Section 12.07 of that Rev. Proc. Does it really say that a terminating plan does not need to be restated???

A quick check of Section 12.07 shows that it says exactly that. It states:

“Restatement not required for terminating plan

.07 A terminating plan generally does not have to be restated. However, see .06 above.”

I’ve bolded the “However” in Section 12.07 because it is one of those classic IRS caveats. The “However” means that Section 12.07 is not giving a free pass for not updating a plan document prior to termination. Section 12.06 of Rev. Proc. 2010-6 is the requirement that a terminating plan must be amended to comply with any changes in the law from the time it was last restated up through the termination date. It states:

“Termination prior to time for amending for change in law

.06 A plan that terminates after the effective date of a change in law, but prior to the date that amendments are otherwise required, must be amended to comply with the applicable provisions of law from the date on which such provisions become effective with respect to the plan. Because such a terminated plan would no longer be in existence by the required amendment date and therefore could not be amended on that date, such plan must be amended in connection with the plan termination to comply with those provisions of law that become effective with respect to the plan on or before the date of plan termination. (Such amendments include any amendments made after the date of plan termination that were required in order to obtain a favorable determination letter.) In addition, annuity contracts distributed from such terminated plans also must meet all the applicable provisions of any change in law. See also section 8 of Rev. Proc. 2007-44.”

On a historical note, Section 12.07 of Rev. Proc. 2010-6 is not new. Section 12.07 of last year’s -6 Revenue Procedure – Rev. Proc. 2009-6 – said the same thing. As did Section 12.07 of Rev. Proc. 2008-6.

I had to go back to Rev. Proc. 2007-6 to find even a slight change in the language of Section 12.07. It states:

“Termination prior to end of the on-cycle submission period

.07 A plan that terminates prior to the end of the on-cycle submission period does not have to be restated. However, see .06 above.”

Section 12.07 was added in Rev. Proc. 2007-6, so the difference in language between Rev. Proc. 2007-6 and Rev. Proc. 2008-6 may be that the IRS decided a slight change in the language may help clarify the meaning of Section 12.07.

The -6 Revenue Procedure for 2006 – Rev. Proc. 2006-6 – does not contain Section 12.07. In Rev. Proc. 2006-6, Section 12 ends with Section 12.06.

Termination Premiums are not Pre-Petition Claims Dischargeable in Bankruptcy

In PBGC v. Oneida, No. 08-2964-bk (CA 2nd, April 8, 2009), the Court of Appeals for the 2nd Circuit reversed the decision of the U.S. Bankruptcy Court for the Southern District of New York. The 2nd Circuit found that payments due to the PBGC as a result of an employer’s termination of a pension plan while undergoing reorganization in bankruptcy are not a contingent pre-petition claim which is dischargeable in bankruptcy.

At issue in this case were the Termination Premiums which Oneida disputed it owed to the PBGC for terminating its defined benefit plan while in Chapter 11 bankruptcy. Oneida contended that the Termination Premium was an unsecured, pre-petition bankruptcy claim under Section 101(5) of the Bankruptcy Code. As such, Oneida would be able to evade paying the Termination Premium to the PBGC since Oneida was seeking reorganization in bankruptcy. At stake for Oneida was a Termination Premium equal to $1,250 multiplied by the number of individuals who were participants in the plan immediately before the termination date. When Oneida terminated the plan in 2006, there were 1,846 participants in the plan according to the final Form 5500 filed with the IRS, making the Termination Premium a tidy sum that Oneida would be obligated to pay to the PBGC.

The 2nd Circuit determined that, in the case of termination due to reorganization, the employer’s obligation to pay a Termination Premium on a pension plan that is terminated during the course of the bankruptcy does not even arise until the bankruptcy itself is terminated. As such, the PBGC’s right to a Termination Premium does not apply to such plan until the date of the discharge or dismissal of the employer. Thus, Oneida’s Termination Premium was not a pre-petition claim which could be discharged in bankruptcy.

[tag]pension protection act, ppa, PBGC, termination premium, bankruptcy, 2nd Circuit, Oneida, ERISA[/tag]