IRS Updates Info on Failure to Distribute Assets on Time

The IRS has updated the comprehensive information it provides on distributing assets on time and the failure to do so.

In “Issue Snapshot – Plan Termination: Failure to Timely Distribute Assets” the IRS discusses the holding in Revenue Ruling (Rev. Rul.) 89-87 about a plan that fails to timely distribute assets upon plan termination.

The IRS cites Rev. Rul. 69-157, which states that although contributions under a plan may have been discontinued, a plan is not considered terminated until it distributes all assets to the participants. And it notes that under Rev. Rul. 89-87, a qualified plan under which benefit accruals have ceased is not terminated if plan assets remain in the plan's related trust rather than being distributed as soon as administratively feasible.

Rev. Rul. 89-87 states that whether a distribution is made as soon as administratively feasible is determined under all the case's facts and circumstances. However, the IRS adds, generally a distribution which is not completed within one year after the employer-specified date of plan termination is presumed not to have been made as soon as administratively feasible.

The IRS says that if all assets are not distributed as soon as administratively feasible, a plan is considered to be an ongoing plan and must:

• Meet the requirements of Code Section 401(a) to continue its qualified status (which may require plan amendments and changes in plan operations if the law requires).
• Meet the minimum funding requirements of Code Sections 412 and 430, where applicable.
• Comply with the information reporting requirements of Code Sections 6057 and 6058, as well as the actuarial reporting requirements of Code Section 6059 for DB plans.

The IRS offers audit tips as well:

1. Review the plan’s amendment to terminate the plan to determine the proposed date of plan termination.
2. Determine if all assets have been distributed within one year of the termination date.
3. If not, determine if the plan sponsor filed Form 5310 requesting a determination letter on the proposed termination of the plan. Doing so extends the one-year period considered "administratively feasible" under Rev. Rul. 89-87.
4. Determine if the delay in distributions is reasonable based on all applicable facts and circumstances.
5. If the agent determines the plan did not timely distribute assets, determine if the plan complies with Code Section 401(a) both in form and operation.
6. Determine if the plan complies with Code Section 412 funding requirements and Code Section 430 minimum required contributions.