A client would like to spin off a portion of its defined benefit plan and allocate the excess assets entirely to the old plan. The old plan would then cover a group of participants whose benefits are already fully annuitized. The old plan would then be terminated and the annuities distributed. The excess would revert to the employer.

Is there anything wrong with this picture? I know gov't plans aren't subject to the excise tax on reversions, or to the requirements of Code section 414(l). How about the requirement in the Internal Revenue plan termination handbook that the new plan must be fully annuitized in a spin-off/termination? They don't want to do that.

Has anyone had experience with reversions from gov't plans?

I have not had experience with a governmental plan spin-off/termination. However, the portion of the spin-off/termination guidelines which requires full vesting is based on Internal Revenue Code section 401(a)(7), the current version of which incorporates by reference section 411. The pre-ERISA version of this section, which also requires full vesting on termination, applies to governmental plans. See Internal Revenue Code section 411(e)(2).
__________________
Employee benefits legal resource site

Hi. In the posted question it is taken for granted that 414(l)(2) does not apply to governmental plans. Is there statutory authority for this position? Similarly, to what extent woud you apply the "Joint Guidelines" to a governmental plan undertaking a spin-off termination, particularly annuity and interest rate requirements. Thanks

Code section 414(l) is not applicable to governmental plans. Code section 401(a)(12) is the section which makes 414(l) applicable to most qualified plans. However, the flush language at the end of Code section 401(a) states that 401(a)(12) does not apply to governmental plans.

As far as the "Joint Guidelines" go, there is no specific authority as to the extent to which they apply to governmental plans. Clearly, they are not 100% applicable, since they reference Titles 1 and 4 of ERISA, and Code sections 411 and 414(l), none of which apply to governmental plans. Nevertheless, governmental plans are subject to the pre-ERISA Code section 401(a)(7) requirement of full vesting upon plan termination (see Code section 411(e)(2)), and the Joint Guidelines may be useful in interpreting that section to the extent that it corresponds with present-day Code section 411(d)(3).

You can click here to see more about which Code sections do and do not apply to governmental plans.

Thanks for the quick reply. However, please elaborate on why 414(l) cannot stand independently from 401(a)(12).

How about Treas. Reg. § 1.414(l)-1(a)(1), which states as follows:

Sections 401(a)(12) and 414(l) apply only to plans to which section 411 applies without regard to section 411(e)(2).
[/list]Since a governmental plan is not one of those plans, section 414(l) does not apply to it.

I meant other than for the obvious.....Thanks again!

Going back to the original question regarding the requirement to aquire annuities for the existing accrued benefits under the ongoing plan, the Joint Guidelines appear to indicate that this requirement relates, at least in part, to the exclusive benefit rule. Because the exclusive benefit rule applies to governmental plans I would be interested in hearing your thoughts and experiences with regard to this requirement. Similarly, it would be nice to know what happened to the plan in the original question. Thanks

Does the pre-Erisa section 401(a)(7)that requires full vesting upon termination apply to local governments? (I konw it applies to governments, but it was a little unclear as to whether it applies to state & local governments). We have a local government defined benefit plan that wants to terminate the plan and join the state plan. The three employees are have only three years of service. The employer wants to be able to purchase past service with the state plan, but cannot if they receive an accrued benefit, since it would be counting years of service for benefits twice. Can they amend their plan to allow for just return of employee contributions made so they can purchase the past credit?