How do you evaluate the financial impact of a plan termination on your organization?

1 Plan termination reasons

There are different reasons why you may want to terminate your DB plan, such as reducing administrative costs, eliminating funding volatility, aligning with your business strategy, or complying with regulatory changes. However, before you make this decision, you should consider the potential benefits and drawbacks of keeping or ending your plan. For example, you may lose a valuable tool to attract and retain talent, face legal challenges from participants or regulators, or incur additional expenses for termination fees, insurance premiums, or taxes.

2 Plan termination process

The process of terminating a DB plan can be complex and time-consuming, involving multiple steps and parties. You will need to follow the rules and procedures set by the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC), as well as any applicable state laws. You will also need to communicate with your plan participants, service providers, consultants, and auditors throughout the process. Depending on the size and status of your plan, the termination process can take anywhere from a few months to several years.

3 Plan termination costs

One of the main factors that will affect the financial impact of a plan termination on your organization is the cost of settling your plan liabilities. This means that you will have to pay out the present value of all the benefits that your plan participants have earned, either as lump sums or annuities. The amount of these payments will depend on various assumptions and market conditions, such as interest rates, mortality rates, and inflation rates. You may also have to pay termination premiums to the PBGC, which are based on the number of participants and the amount of unfunded benefits in your plan.

4 Plan termination funding

Another factor that will affect the financial impact of a plan termination on your organization is the funding status of your plan. This means the difference between the value of your plan assets and the value of your plan liabilities. If your plan is overfunded, you may have a surplus that you can use for other purposes, such as paying taxes, reducing debt, or investing in your business. However, if your plan is underfunded, you will have a deficit that you will have to cover from your own resources, such as borrowing money, selling assets, or cutting expenses.

5 Plan termination accounting

A third factor that will affect the financial impact of a plan termination on your organization is the accounting treatment of your plan. This means how you report the effects of your plan on your financial statements, such as income, expenses, assets, and liabilities. Depending on the accounting standards that you follow, such as GAAP or IFRS, you may have to recognize different amounts of gains or losses, income or expense, and assets or liabilities related to your plan termination. These amounts may also vary depending on the timing and method of your plan termination.

6 Plan termination strategy

Given the complexity and uncertainty of terminating a DB plan, you should have a clear and comprehensive strategy to evaluate and manage the financial impact of a plan termination on your organization. This means that you should analyze the costs and benefits of different scenarios, such as terminating now or later, terminating fully or partially, or terminating with lump sums or annuities. You should also consider the risks and opportunities of different options, such as hedging your interest rate risk, diversifying your asset allocation, or negotiating with your service providers. Finally, you should monitor and adjust your strategy as the market conditions and regulatory environment change.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?