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CCH® PENSION AND BENEFITS — 5/2/06

Final regs allow for termination of abandoned individual account plans

The Employee Benefits Security Administration (EBSA) has issued final regulations and a prohibited transaction class exemption (class PTE) providing guidance on the termination of abandoned individual account plans.

The purpose of the regulations is to provide guidance to custodians of 401(k) or other individual account pension plans after their sponsors abandon the plans due to employer bankruptcies, mergers and the like. Prior to the guidance contained in the regulations, custodians, such as banks, insurers and mutual fund companies, were left holding the assets of these abandoned plans without the authority to terminate such plans and make benefit distributions in response to participant requests. Under the new rules, effective May 22, 2006, a process has been created to terminate abandoned individual account plans so that benefit distributions can be made to participants and beneficiaries. The Abandoned Plan Coordinator in EBSA's Office of Enforcement will administer the Abandoned Plan Program.

The regulations establish standards for determining when a plan is abandoned, simplify procedures for winding up the plan and distributing benefits to participants and beneficiaries, and provide guidance on who may initiate and carry out the winding-up process.

Plan abandonment defined

The abandoned plan portion of the regulations sets forth the circumstances under which a plan will be considered abandoned and the financial institution holding the plan assets can terminate the plan and distribute benefits to the plan's participants and beneficiaries, with limited liability. A plan generally will be considered abandoned if no contributions to or distributions from the plan have been made for a period of at least 12 consecutive months and, following reasonable efforts to locate the plan sponsor, it is determined that the sponsor no longer exists, cannot be located, or is unable to maintain the plan.

A finding that the plan is abandoned must be done by a "qualified termination administrator" (QTA). To be a QTA, an entity must hold the plan's assets and be eligible as a trustee or issuer of an individual retirement plan under the Internal Revenue Code (that is, a bank, trust company, mutual fund group, or insurance company).

The regulations include model notices for the plan custodian to use to notify the sponsor of its intent to terminate the plan, to notify participants and beneficiaries of the termination of the plan, and to notify EBSA of the plan's abandonment, the custodian's intent to serve as a QTA, and the completion of the termination.

Fiduciary safe harbor provided

The final regulations also provide a fiduciary safe harbor when making distributions from terminated plans on behalf of participants and beneficiaries who fail to make an election regarding the form of benefit distribution. A QTA does not have an obligation to conduct an inquiry or review to determine whether or what breaches of fiduciary responsibility may have occurred with regard to the plan prior to it's becoming a QTA. In most cases, the account of a missing participant will be transferred directly to an individual retirement plan.

The rule includes a model notice to participants and beneficiaries of their distribution election procedure.

Simplified method for filing terminal report

The remaining portion of the new regulations establishes a simplified method for filing a terminal report for abandoned individual account plans. Under these rules, the QTA must complete and file a summary terminal report at the end of the winding-up process, but is not responsible for filing a Form 5500 Annual Report on behalf of an abandoned plan, either in the terminating year or for any previous plan year.

Class PTE issued

In connection with the new regulations, EBSA also issued a class PTE to exempt QTAs from certain prohibited transactions arising in connection with its activities as a QTA, including providing services in connection with terminating and winding up the abandoned plan, for services rendered to the plan prior to its becoming a QTA and for distributions from abandoned plans to IRAs or other accounts maintained by the QTA.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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