Considering terminating your company’s pension plan? While it might be the right decision after a merger, a plant shutdown, or merely as a way to reduce the company’s long-term liabilities, it’s not a strategic decision to be taken lightly. But when you make that decision, you want to make sure your plan is in good order. Government regulatory agencies will be scrutinizing your actions upon plan termination, so focus extra attention on operational and legal readiness now.
Don’t let regulatory risks delay the termination process and cause you to backtrack or have to pay fines or penalties. Your best bet might be to engage an expert to take a closer look at plan documents and operations well in advance of termination. To be better prepared to make this important strategic decision, here are 3 things you need to consider before deciding to terminate the company’s pension plan.
- Plan documents and operations will be closely scrutinized by the IRS and PBGC – so plan fiduciaries need to get their house in order well in advance of commencing the plan termination filing process. Know what documents and processes will be needed to comply with regulations to save time and make the process smoother. After all, fiduciary liability is at stake, as well as the tax-qualified status of every dollar that was ever contributed to or distributed from the plan.
- What distribution strategy will you use for termination? Annuity buyouts and/or lump sums? There are also many effective, emerging strategies for downsizing a plan prior to termination, including:
- Lumpsum cashouts for deferred vested participants, and potentially for active employees over age 62 and retirees as well. GM, Ford, and Verizon all offered lump sum cashouts to their employees which cleared their books of expensive future obligations and strengthened their company’s shareholder value.
- Partial annuity buyouts (aimed at retiree groups) where a company can buy a group annuity to settle or portion of plan assets and liabilities. An insurance company unconditionally takes on the obligation to provide benefits to a specified group of participants for the rest of their lives on behalf of the company.
- Annuity buy-in solutions. This strategy allows companies to acquire group annuity contracts from an insurance company in the form of a plan investment to better manage interest rate, market, and mortality risk.In the case of a buy‑in annuity, a premium is paid to the insurer and a single annuity contract is issued to the pension fund. The pensions are paid to retirees by the plan fund and not by the insurer. With the annuity contract valued as an investment made by the pension fund, the plan sponsor can better control funded status volatility while avoiding settlement accounting costs associated with annuity buyouts. This has been a very popular de-risking strategy in Europe for decades. Hickory Springs was first company in the U.S. to offer this solution to their employees in 2011.
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- A standard termination process can take 12 to 18 months, and more recently as long as 24 months, as the IRS continues to get further backlogged in their pension compliance reviews. Based on this time lag, expect to continue operating a plan for up to 2 years after the plan termination process starts. Needless to say, a lot can happen during two years. Investment risk will continue so a more time sensitive short-term investment and hedging strategy for interest rate and asset value changes is paramount. Talk with your pension consultant about strategies to manage your risk during the waiting period.
For help with choosing the right termination strategy and evaluating your operational and legal readiness, call (312) 762-5945 or email Kathy Tompkins now to set up a free, no-obligation consultation.
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