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Keep These Items in Mind When Considering Pension Plan Termination

May 26, 2016 3 Min Read Employee Benefit Plans
Roman Leshak, Jr., CPA
Roman Leshak, Jr., CPA Director, Audit & Accounting, Employee Benefit Plan Group Leader

Pension plan termination

Towers Watson estimated the aggregate pension funded status to be 82 percent at the end of 2015, unchanged from 2014. Market volatility, changes in interest rates, and changes to mortality tables are all factors that leave plan management with little control over the funded status of their plans. Even the best market returns can be derailed by an unanticipated change in the discount rate, leading many organizations toward plan termination.

Many of our clients’ pension plans have implemented a plan participation freeze and are starting to discuss partial or full plan termination. If you are in the same position, consider the following items as you manage your plan towards termination:

Coordination With Plan Advisors

Discussing your options with and including all plan advisors in the decision-making process will help identify potential unanticipated risks or roadblocks. Coordination between the actuary, investment advisors, ERISA counsel, and accountant is critical to understanding the rules and regulations associated with plan termination. These advisors will be able to present scenarios such as partial versus full termination and the related risks and costs associated with each option.

Managing Headcount

The plan sponsor should perform a detailed review of the census data to eliminate duplicate records and verify proper demographic data and vesting calculations. If you terminate a pension plan without accurate information, you risk increasing PBGC premiums and unnecessary audit costs, among other issues.

Adopting a Liability Driven Investment (LDI) Strategy

Investment advisors should work with plan sponsors to manage their plan assets in accordance with LDI strategies to avoid the dramatic swings associated with equity investments as the plan moves toward termination.

Understanding the Cost and Timing of Plan Termination

The current year plan unfunded status does not represent the cost of a plan termination. Specific funding rules and removing future plan liability projections result in a much higher termination contribution. In addition, filing for IRS approval and certain participant notices are required prior to termination.
Communication with Plan Participants

Plan participants may feel that something is being taken away from them if the plan is terminated. Educating your plan participants on the impact to their benefits and providing as much information as possible should be at the top of your to do list to avoid any confusion or rumors that may start.

Considering Financing Options

The financial statement impact is one of the most important factors that plan sponsors must consider when making a decision to cash out participants or terminate the plan. Some of the potential funding options utilized to terminate plans are:

  • Use of excess cash or company investments
  • Owner distributions and related party loans back
  • Traditional financing options to lock in a fixed monthly payment

Whatever part of the plan termination process your company may be in, keep in mind that communication with employees and plan advisors is key. There are several ways to go about terminating a plan and management should utilize competent service providers to solicit advice and direction in this potentially complicated transaction.

Roman Leshak, Jr. can be reached at Email or 215.441.4600.


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Roman Leshak, Jr., CPA

Roman Leshak, Jr., CPA

Director, Audit & Accounting, Employee Benefit Plan Group Leader

Employee Benefit Plans Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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