Purpose: To provide procedures and technical guidance on issues EP employees may have when reviewing Determination Letter (DL) applications for terminating and terminated retirement plans.

Audience: Employee Plans (EP) Determinations and Quality Assurance (QA) staff

Policy Owner: Director, EP

Program Owner: EP

Program Goals: The goal of EP Determinations is to:

For individually-designed plans (IDPs), with an FDL, verify that the form of the plan was properly amended for prior legislation. Begin your review with the last FDL.

For individually-designed plans (IDPs) with no FDL, verify that the form of the plan was properly amended for prior legislation.

For pre-approved plans, verify the form of the plan complied with:

If you can’t verify prior law, ask the plan sponsor to provide:

If a plan sponsor isn’t able to prove that the plan was timely amended for prior law, the plan is considered to have a plan document failure as described under Rev. Proc. 2021-30, and may need to enter into a closing agreement to correct the failure. Consult your manager and see IRM 7.11.8, EP Determinations Closing Agreement Program.

Use the Employee Plans - Terminations Focus Reports to determine whether new laws are relevant to a particular terminating plan. Find these reports on IRS.gov .

A plan must be established with the intent to be a "permanent" not "temporary" program. (26 CFR 1.401-1(b)(2)).

Review Form 5310, lines 3(d) and 5(a), to determine how long the plan has been in existence.

The prior qualification of a long-established plan and trust is not adversely affected by termination of the plan and trust without business necessity when all benefits are fully vested, are guaranteed, and the termination does not result in a prohibited transaction.

If a plan terminates within a few years after its initial adoption, the plan sponsor must give a valid business reason for the termination or there’s a presumption that the plan was not intended to be a permanent program from its inception. However, the qualification of a long-established plan that terminates without a valid business reason is not adversely affected. See Rev. Rul. 72-239.

Form 5310, line 53 lists the following reasons for plan termination:

Form 5310, line 53 also has a section for "Other" reasons for the plan termination. Other acceptable business reasons for plan termination could be:

Form 5310, line 57, is also used to determine permanency. Repeatedly failing to make contributions in a discretionary profit-sharing plan may indicate the employer lacked intent for the plan to be permanent.

Consult with your manager if you determine that there is a possible permanency issue.

If bankruptcy is the reason for termination for a pension plan:

This section only applies to plans not subject to IRC 412, such as profit sharing and stock bonus plans. For plans subject to IRC 412, see IRM 7.12.1.18, Minimum Funding Standards.

Pursue a possible discontinuance of contributions only if there are participants who had forfeitures during the years under consideration. See Form 5310, line 19(b).

If the plan sponsor stops making contributions or makes contributions that aren't substantial, the plan may have incurred a complete discontinuance. A profit sharing plan must make recurring and substantial contributions for employees. (26 CFR 1.401-1(b)(2)).

A plan may have had a complete discontinuance of contributions even if the plan sponsor made contributions, but the amounts aren’t substantial enough to reflect the plan sponsor’s intent to continue to maintain the plan. (26 CFR 1.411(d)-2(d)(1)).

Review Form 5310, line 57a, which indicates the employer contributions made for the current and the five prior plan years, to determine if the plan has had a complete discontinuance.

Consider all of a case’s relevant facts and circumstances; but generally, in a profit-sharing or stock bonus plan, consider the issue of discontinuance of contributions if the plan sponsor has failed to make substantial contributions in three out of five years.

A complete discontinuance (under 26 CFR 1.411(d)-2(d)(2)) becomes effective:

If the plan has incurred a complete discontinuance, all affected employees’ rights to benefits accrued to the date of discontinuance, to the extent funded as of that date, or the amounts credited to the employees’ accounts at that time, must be nonforfeitable (100% vested). See IRC 411(d)(3) and CFR 1.411(d)-2(a)(1)(ii).

Upon partial termination, all "affected employees" rights to all amounts credited to their account, and benefits accrued up to the date of the termination, become nonforfeitable. (IRC 411(d)(3)).

Only pursue a possible partial termination if there were participants who had forfeitures during the years under consideration.

If a partial termination occurs on account of turnover during an applicable period, all participating employees who had a severance from employment during the period must be fully vested in their accrued benefits, to the extent funded on that date, or in the amounts credited to their accounts. (Rev. Rul. 2007-43).

To determine if a plan has had a partial termination, first calculate the turnover rate (See IRM 7.12.1.5.1, Calculating the Turnover Rate) but also consider all of a case’s relevant facts and circumstances.

There’s a presumption that a qualified plan has partially terminated when the turnover rate for participating employees is at least 20%. If the turnover rate is less than 20%, it depends on the case’s facts and circumstances. (Rev. Rul. 2007-43).

Partial Termination Relief: Section 209 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and Division EE of the Consolidated Appropriations Act of 2021 states that a plan isn’t considered to have a partial termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants the plan covered on March 31, 2021, is at least 80% of the number of active participants the plan covered on March 13, 2020.

Partial Termination Relief applies during any plan year if any part of the plan year falls within the period beginning on March 13, 2020, and ending on March 31, 2021. Relief applies to the entire year even if part of the plan year falls outside the date range. For example, for a calendar year plan, the 80% test applies to both the December 2020 plan year and the December 2021 plan year, because both plan years include a part of the statutory 3/13/2020 - 3/31/2021 relief period. Also, determine the 80% by looking strictly at the number of active participants on each date, without regard to whether they were the same individuals. This allows for consideration of new hires.

Some facts and circumstances to consider when you decide if a plan has had a partial termination:

If a DB plan’s cessation or reduction of future benefit accruals creates or increases a potential for reversion, the plan is deemed to have a partial termination.

The proposed termination date of a plan NOT subject to Title IV of ERISA (DC plans) is the date the plan sponsor who maintains the plan voluntarily terminates it. (26 CFR 1.411(d)-2(c)(3)). Generally, the plan sponsor establishes the proposed termination date by board resolution or plan amendment.

The proposed termination date of a plan subject to Title IV of ERISA (DB plans) is the date determined under ERISA (26 CFR 1.411(d)-2(c)(2)). There are three types of DB terminations under ERISA:

The type of termination can impact the date of the proposed termination.

The DL application must include a copy of the resolution or amendment terminating the plan. If not submitted, request it.

Compare the proposed termination date listed on the resolution or amendment to the date on Form 5310, line 5a. If the two dates don’t match, reconcile the discrepancy.

The proposed termination date is important because:

When reviewing the documentation that terminates that plan, verify that the plan hasn’t incurred any IRC 411(d)(6) violations. Generally, this would not be an issue if the plan termination date is after the date the plan sponsor adopts the document to terminate the plan.

The proposed termination date may not be retroactive except when it won’t reduce any participant's accrued benefit.

For money purchase and target benefit plans, if the plan sponsor adopts an amendment (or resolution) to terminate the plan after the plan termination date and an allocation date falls within this time period, then the employer contribution would still be required.

If a plan sponsor takes actions to terminate a plan but doesn’t distribute the assets as soon as administratively feasible, the plan isn’t considered terminated under IRC 401(a). The plan must remain qualified until it’s terminated.

The minimum funding requirements apply to a plan until its termination date, but 26 CFR 1.430(a)-1(f)(5) clarifies that we defer to the PBGC for the termination date for PBGC-covered plans. For noncovered plans, 26 CFR 1.430(a)-1(f)(5)(ii)(B) states that they’re not considered terminated if the assets aren’t distributed timely, so they’d continue to be subject to minimum funding requirements. See Rev. Rul. 89-87, Treas. Reg. 1.430(a)-1(f)(5), and IRM 7.12.1.8, Wasting Trust Procedures.

A plan isn’t terminated simply because the plan sponsor amends it to cease future accruals or "freezes" it. However this type of amendment may trigger a complete discontinuance of contributions and require increased vesting under 26 CFR 1.411(d)-2(d)(i). See IRM 7.12.1.4, Discontinuance of Contributions.

If the plan wasn’t terminated after the proposed date of termination, then determine if the plan was qualified as of the actual date of the plan termination. This could occur under the following circumstances:

A frozen plan is one in which all future contributions or benefit accruals have ceased by plan amendment, but the plan sponsor hasn’t formally terminated the plan. The plan may also freeze participation so that no new employees are eligible to enter the plan. A plan stays frozen until it’s amended to either:

A frozen plan must continue to meet the requirements of IRC 401(a) (including changes in the law) except for:

The Form 5310 doesn't directly ask about frozen plans, however, review line 17(b) to see if an amendment has been adopted which decreases plan benefits to any or all participants. If so, then verify that the amendment doesn’t violate IRC 401(b) or 411(d)(6).

A qualified plan under which benefit accruals have ceased isn’t terminated if assets of the plan remain in the plan's related trust rather than being distributed as soon as administratively feasible (generally within one year) per Rev. Rul. 89-87.

Rev. Proc. 2016-37, Section 4.03(2) states that an application is filed in connection with plan termination only if it is filed no later than the later of one year from the:

If the Form 5310 application is submitted to the IRS within one year of the effective date of the termination, the plan administrator may generally delay distributing the assets until after the IRS issues the DL. However, a plan administrator may not delay distributing assets because EP Examinations or another IRS unit is examining the employer.

Compare the proposed plan termination date to the DL application's control date. If the control date is within one year of the proposed termination date, there is not a wasting trust issue. If the time between the control date and the proposed termination date exceeds one year (and assets have not been distributed), then there is a wasting trust issue and:

The date a plan forfeits the non-vested portion of the account balance or accrued benefit depends on the plan terms.

Review Form 5310, lines 55a(6) and 57b. If line 55(a)(6) indicates any participant has terminated employment without full vesting then the information identified on line 55b must be submitted.

Form 5310, line 55a shows six years of history of all participants who left without full vesting. Reconcile this information to the:

If there are any discrepancies or questions, secure additional information from the plan sponsor or their representative, if applicable. If the information on the Form 5310, line 55a(6) is incorrect, secure a corrected page to the application.

If you determine that a participant's accrued benefit or account balance has been forfeited incorrectly, obtain a written statement from the plan sponsor indicating they’ve restored the participant's accrued benefit or account balance. Include paragraph 26 on the DL.

Forfeitures from profit sharing, stock bonus or, effective for years after December 31, 1985, money purchase plans, can’t revert back to the plan sponsor. (Rev. Rul. 71-149). Forfeitures must be allocated to the remaining participants or used to reduce the employer contributions that are otherwise required under the plan. See Rev. Rul. 71-313 and Rev. Rul. 81-10.

A DB pension plan can’t use forfeitures to increase benefits before plan termination. See IRC 401(a)(8) and 26 CFR 1.401-7.

A fully insured DB plan may allow for forfeitures after five consecutive breaks in service. However, a forfeiture in a non-fully insured DB plan can only be triggered through a cash-out per IRC 411(a)(7).

Plans under IRC 401(a), IRC 403(b), and IRC 457(b) may receive rollovers from other plans under IRC 401(a)(31) and IRC 402(c). For a plan to accept rollovers, the language must be stated in the plan document.

Review Form 5310, line 57c to see if the plan received any rollovers in the last six years. If any amount appears to be questionable or excessive, pursue the issue and follow-up with your manager, if necessary.

Verify if the rollovers were from other qualified plans or traditional IRAs. A rollover can’t be made from Roth IRAs or Designated Roth Accounts to a qualified plan.

Review safe harbor rollover procedures in Rev. Rul. 2014-9 for simplified procedures to reasonably conclude that the rollover is valid. They include:

If you discover that the rollover came from a Rollover Business Start-ups (ROBS) arrangement, discuss the case with your manager as additional procedures may apply. See EP Director Memorandum dated October 1, 2008, "Guidelines regarding rollovers as business start-ups" EP Director Memorandum dated October 1, 2008.

Qualified plans must state the forms of distribution in which they will pay participants and beneficiaries. Forms of distribution provided by a plan are either stated as a default, or provide for participant or beneficiary election. Neither the employer nor any other fiduciary or third party can exercise discretion to select a participant's or beneficiary’s form of distribution. See 26 CFR 1.411(d)-4, Q&A 4.

Upon plan termination, all plan assets must be distributed as soon as administratively feasible (generally within one year after the date of plan termination). See IRM 7.12.1.8. Generally, a pending DL application may extend this date; however, an IRS examination of the employer does not. See IRM 7.12.1.8 (3). Form 5310, line 20 indicates how distributions will be made upon termination. Verify that the payment forms listed on the Form 5310 agree with the plan terms.

If Form 5310, line 58 doesn’t match the plan document, request a corrected Form 5310 or an amendment to the plan.

If a plan offers a Qualified Joint & Survivor Annuity (QJSA):

A terminating DC non-money purchase plan that doesn’t offer an annuity distribution option may distribute a participant’s account balance without the participant’s consent, even if the account balance exceeds the involuntary cash-out limit in the plan (26 CFR 1.411(a)-11(e)).

If the plan fails to follow any of the above rules, refer the plan to EP Examinations per IRM 7.11.10, EP Examinations and Fraud Referral Procedures. If a distribution to an HCE failed to conform to plan terms, in your referral, cite a potential violation of IRC 401(a)(4) - availability of benefits, rights and features.

Form 5310, line 59 requires plan sponsors to provide a statement of trust assets as of the proposed termination date or the last valuation date.

Add all assets and reconcile them to line 59f.

If the plan sponsor submits a Form 6088, Distributable Benefits From Employee Pension Benefit Plans, verify that the net assets available on the Form 5310 equal the benefit amounts listed on the Form 6088. If the amounts aren’t equal, reconcile any differences, keeping in mind that assets may be computed using different dates and the Form 6088 may include amounts already distributed.

When reviewing the assets on line 59, consider:

When reviewing the assets on Form 5310, line 59 , follow these actions:

Lines 59g, h, i, or j, plan liabilities. If there are amounts listed on these lines, request:

If the Form 5310 or any documentation submitted with the application indicates that there are issues relating to the plan or trust currently pending before the IRS or another government agency:

If you determine there is a PT, refer the case to EP Examinations using the procedures in IRM 7.11.10, EP Examinations and Fraud Referral Procedures, to ensure that the disqualified person pays the proper taxes and the PT is corrected. See IRM 4.72.11, Prohibited Transactions.

A qualified trust under IRC 501(a) generally is exempt from tax on any income derived from the "intended activity," which is investing and saving for retirement.

However, if the plan or trust is involved in generating any income outside it's "intended activity," that amount is considered UBI and is subject to tax.

A common source of UBI is when a trust invests in either a partnership or joint venture. IRC 512(c) notes that the trust's share of the partnership income should be treated as if it were carrying on the trade or business of the partnership. Therefore, unless the income meets one of the exclusions in IRC 512(b), it’s considered UBI for the trust.

If you determine that the trust has possible UBI, refer the case to EP Examinations per IRM 7.11.10, EP Examination and Fraud Referral Procedures.

Plans can use life insurance to fund the retirement plan as either an "incidental" benefit or the sole benefit. See IRM 7.12.1.15.2, Fully Insured Contract Plans, if 100% of the trust's assets are invested in insurance or annuity contracts.

If a plan isn’t a fully insured contract plan, then the life insurance must meet the requirements to be considered an "incidental" benefit to the main purpose of retirement benefits in the plan. For life insurance coverage to be incidental:

If Form 5310 line 59c(12) shows that plan assets are invested in life insurance contracts, check if the plan is a fully insured contract plan. If the plan isn’t a fully insured contract plan, reconcile the assets and ensure that the benefits are incidental to the plan's main purpose of providing a retirement benefit (and not solely a death benefit).

Ask if the life insurance contracts are springing cash value contracts. See IRM 7.12.1.15.1, Springing Cash Value.

IRC 414(k) accounts combine funding features, for example, a DB feature and a DC feature.

Contributions going into the IRC 414(k) separate account are subject to the IRC 415(c)(1) allocation limits. Unlike a DB plan, there’s no limit on the amount the plan distributes.

The distributions coming from the DB plan are subject to the IRC 415(b)(1) distribution limit. Except for IRC 404 and IRC 412, there’s no limit on the amount an employer may contribute to the plan.

When a 414(k) plan establishes a separate account at normal retirement age, it’s considered an amendment that eliminates the DB feature of a participant's benefit under a DB plan and violates IRC 411(d)(6) unless the plan meets the exception in 26 CFR 1.411(d)-4, Q&A 3. Therefore, review the plan’s separate account feature and determine if the transfer meets the following rules:

The option to transfer benefits under the above rules constitutes an optional form of benefit under the plan per IRC 401(a). Accordingly, the transfer is subject to the:

The IRS doesn’t rule on a plan with a IRC 414(k) separate account provision if it doesn’t meet the exception rules in paragraph IRM 7.12.1.16 (4) above. Request the plan sponsor to submit a written request to withdraw the application and return the case on Letter 1924 using procedures in IRM 7.11.1.3.1, Procedures When Not Authorized to Issue a DL.

If you determine that the IRC 414(k) account violates IRC 411(d)(6), refer the case to EP Examinations per IRM 7.11.10, EP Examination and Fraud Referral Procedures.

In the event of plan termination, assets in the trust after the satisfaction of the funding standards are allocated to participants under section 4044 of ERISA. This applies whether the plan is overfunded or underfunded. A review of the ERISA 4044 allocations determines whether an overfunded plan satisfies the nondiscrimination and reversion requirement. A review of the ERISA 4044 allocations or reallocations under an underfunded plan determines whether the available assets are allocated under the terms of the plan and the plan satisfies the nondiscrimination to the extent required by law. Review the Form 6088, Distributable Benefits From Employee Pension Benefit Plans, and Form 5310, line 59, to determine if the plan is overfunded or underfunded.

Section 4044(a) of Title IV of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 1974-3 C.B. 1, sets forth the rules applicable to the allocation of assets to participants and beneficiaries by priority categories in the event of the termination of a defined benefit plan.

A Form 6088 is required for:

In the case where the assets equal liabilities, the specialist must determine why that is the case. In such case, a plan may have in its possession an agreement by one or more majority owners to forego their benefit, may have made promises to make the plan whole or may have completed the Form 6088 incorrectly. The instructions for the Form 6088 state "do not adjust for an election of a majority owner to forego receipt of a distribution under PBGC Regulations section 4041.21(b)(2)." The specialist should check for contributions receivable for any possible entry for promises to make the plan whole. The result of this determination must be documented on the Form 5621.

IRC 412 imposes minimum funding standards on certain types of plans to protect a participant's promised benefits. Plan sponsors are subject to a tax under IRC 4971 if they don't meet the funding standards.

IRC 412(a)(2) requires plan sponsors of a:

A plan termination doesn’t relieve the plan sponsor of its obligation to fund the plan.

Because the funding standard continues to be in effect until the end of a plan year in which a plan is properly terminated, carefully review the proposed termination date. (See IRM 7.12.1.6, Proposed Date of Plan Termination.) The plan year is not automatically ended with the plan termination. See 26 CFR 1.401(a)(4)-12 and 26 CFR 1.410(b)-9.

These plans may continue to have funding obligations:

If you change a proposed date of termination for any reason, the minimum funding requirement (and participants’ accrued benefits) will likely have to be adjusted to reflect the new termination date. After you’ve determined the amount of the required contribution, review Form 5310, line 54 to ensure that the employer paid the correct amount.

IRC 4971(a) imposes a tax on plan sponsors who fail to make a required contribution to the plan by the funding due date. Verify that the contribution was paid within 8 1/2 months after the plan year end by reviewing Form 5310, line 54. You may need to secure proof of the contribution.

Use the table below to determine a single employer and multiemployer plan’s contribution due date for both funding and deductibility and the applicable tax for minimum funding, if paid late.

Review Form 5310, line 27a to determine if a plan has an accumulated funding deficiency or aggregate unpaid minimum required contributions. If it does and the period for making timely contributions:

Some plans or a majority owner may attempt to correct an accumulated funding deficiency or aggregate unpaid minimum required contributions by waiving or by having plan participants "waive" their accrued benefits. These types of waivers violate: IRC 401(a)(13) assignment and alienation, IRC 411(a) minimum vesting standards and/or IRC 411(d)(6) accrued benefit not to be decreased by amendment.

A plan administrator may not change the plan's funding method in the year in which the plan terminates unless the plan administrator obtains approval for a change in funding method. See Rev. Proc. 2000-40, Section 4.02.

If the plan amortizes a funding waiver (under IRC 412(c)(3)) in the year in which it terminates, the plan sponsor must meet all obligations for the waiver as stated in the waiver ruling letter in the year of termination:

The plan sponsor may not amend the plan in the year of termination to reduce or eliminate any contribution requirement for that year, unless either:

IRC 436, added by PPA '06, adds protections and restrictions to the participant's benefits in single and multiple employer DB plans. In addition, the plan may need a required amendment to comply with the Highway Transportation and Funding Act of 2014, Section 2003. P. L. 113-159.

For a single employer DB plan, request:

If a single employer DB plan is underfunded for any plan years beginning after December 31, 2007, there could be possible restrictions on:

This chart is a quick guide to the AFTAP restrictions. See IRC 436 for further explanation on the restrictions.

The plan sponsor must notify interested parties of their plans to file an application request to terminate the plan 10 - 24 days before they send it to the IRS. See Rev. Proc. 2022-4, Section 20.02 (updated annually).

Review Form 5310, line 19 and the copy of the "Notice to Interested Parties" to ensure that notice was provided 10–24 days before the application’s control date.

If the application is received without the notice, request a copy.

If the plan sponsor didn’t give the notice timely, return the application incomplete using a Letter 1924. Use paragraph 1 with a variable. "Rev. Proc. 2022-4, Section 10.12 (updated annually)" , and request a copy of the notice.

Plans not exempt from the PBGC requirements under ERISA 4021(c) must file either of these forms with the PBGC for their proposed termination:

Also, the plan sponsor must give advance notice to all affected participants 60 - 90 days before the proposed termination date. This notice is in addition to the Interested Party Notice in IRM 7.12.1.20.

If the plan sponsor doesn't file the required form or give notice to affected participants, PBGC may reject the proposed termination date. When this happens, PBGC notifies:

If PBGC rejects a proposed termination date on an open application, stop all work and return the case to the plan sponsor with the full user fee refund (if applicable). The plan sponsor may submit a new application with a corrected proposed termination date, if they wish.

If you don’t have the Form 5310 in your inventory or if you've already issued a DL, no action is necessary.