[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.401-6]

[Page 24-25]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.401-6  Termination of a qualified plan.

    (a) General rules. (1) In order for a pension, profit-sharing, or 
stock bonus trust to satisfy the requirements of section 401, the plan 
of which such trust forms a part must expressly provide that, upon the 
termination of the plan or upon the complete discontinuance of 
contributions under the plan, the rights of each employee to benefits 
accrued to the date of such termination or discontinuance, to the extent 
then funded, or the rights of each employee to the amounts credited to 
his account at such time, are nonforfeitable. As to what constitutes 
nonforfeitable rights of an employee, see paragraph (a)(2) of Sec. 
1.402(b)-1.
    (2)(i) A qualified plan must also provide for the allocation of any 
previously unallocated funds to the employees covered by the plan upon 
the termination of the plan or the complete discontinuance of 
contributions under the plan. Such provision may be incorporated in the 
plan at its inception or by an amendment made prior to the termination 
of the plan or the discontinuance of contributions thereunder.
    (ii) Any provision for the allocation of unallocated funds is 
acceptable if it specifies the method to be used and does not conflict 
with the provisions of section 401(a)(4) and the regulations thereunder. 
The allocation of unallocated funds may be in cash or in the form of 
other benefits provided under the plan. However, the allocation of the 
funds contributed by the employer among the employees need not 
necessarily benefit all the employees covered by the plan. For example, 
an allocation may be satisfactory if priority is given to benefits for 
employees over the age of 50 at the time of the termination of the plan, 
or those who then have at least 10 years of service, if there is no 
possibility of discrimination in favor of employees who are officers, 
shareholders, employees whose principal duties consist in supervising 
the work of other employees, or highly compensated employees.
    (iii) Subdivisions (i) and (ii) of this subparagraph do not require 
the allocation of amounts to the account of any employee if such amounts 
are not required to be used to satisfy the liabilities with respect to 
employees and their beneficiaries under the plan (see section 
401(a)(2)).
    (b) Termination defined. (1) Whether a plan is terminated is 
generally a question to be determined with regard to all the facts and 
circumstances in a particular case. For example, a plan is terminated 
when, in connection with the winding up of the employer's trade or 
business, the employer begins to discharge his employees. However, a 
plan is not terminated, for example, merely because an employer 
consolidates or replaces that plan with a comparable plan. Similarly, a 
plan is not terminated merely because the employer sells or otherwise 
disposes of his trade or business if the acquiring employer continues 
the plan as a separate and distinct plan of its own, or consolidates or 
replaces that plan with a comparable plan. See paragraph (d)(4) of Sec. 
1.381(c)(11)-1 for the definition of comparable plan. In addition, the 
Commissioner may determine that other plans are comparable for purposes 
of this section.
    (2) For purposes of this section, the term termination includes both 
a partial termination and a complete termination of a plan. Whether or 
not a partial termination of a qualified plan occurs when a group of 
employees who have been covered by the plan are subsequently excluded 
from such coverage either by reason of an amendment to the plan, or by 
reason of being discharged by the employer, will be determined on the 
basis of all the facts and circumstances. Similarly, whether or not a 
partial termination occurs when benefits or employer contributions are

[[Page 25]]

reduced, or the eligibility or vesting requirements under the plan are 
made less liberal, will be determined on the basis of all the facts and 
circumstances. However, if a partial termination of a qualified plan 
occurs, the provisions of section 401(a)(7) and this section apply only 
to the part of the plan that is terminated.
    (c) Complete discontinuance defined. (1) For purposes of this 
section, a complete discontinuance of contributions under the plan is 
contrasted with a suspension of contributions under the plan, which is 
merely a temporary cessation of contributions by the employer. A 
complete discontinuance of contributions may occur although some amounts 
are contributed by the employer under the plan if such amounts are not 
substantial enough to reflect the intent on the part of the employer to 
continue to maintain the plan. The determination of whether a complete 
discontinuance of contributions under the plan has occurred will be made 
with regard to all the facts and circumstances in the particular case, 
and without regard to the amount of any contributions made under the 
plan by employees.
    (2) In the case of a pension plan, a suspension of contributions 
will not constitute a discontinuance if--
    (i) The benefits to be paid or made available under the plan are not 
affected at any time by the suspension, and
    (ii) The unfunded past service cost at any time (which includes the 
unfunded prior normal cost and unfunded interest on any unfunded cost) 
does not exceed the unfunded past service cost as of the date of 
establishment of the plan, plus any additional past service or 
supplemental costs added by amendment.
    (3) In any case in which a suspension of a profit-sharing plan is 
considered a discontinuance, the discontinuance becomes effective not 
later than the last day of the taxable year of the employer following 
the last taxable year of such employer for which a substantial 
contribution was made under the profit-sharing plan.
    (d) Contributions or benefits which remain forfeitable. The 
provisions of this section do not apply to amounts which are reallocated 
to prevent the discrimination prohibited by section 401(a)(4) (see 
paragraph (c) of Sec. 1.401-4).
    (e) Effective date. This section shall apply to taxable years of a 
qualified plan commencing after September 30, 1963. In the case of the 
termination or complete discontinuance (as defined in this section) of 
any qualified plan during any such taxable year, the rights accorded to 
each employee covered under the plan must conform to the requirements of 
this section. However, a plan which is qualified on September 30, 1963, 
will not be disqualified merely because it does not expressly include 
the provisions prescribed by this section.

[T.D. 6675, 28 FR 10120, Sept. 17, 1963]