A firm currently has an overfunded defined benefit pension plan and is short of cash. The chief financial officer (CFO) is considering terminating the defined benefit plan to recapture the “excess assets.” The firm will replace the defined benefit plan with a defined contribution plan to continue to provide pension benefits to its employees. What are the tax and nontax costs and benefits of the CFO’s planned action? What alternatives to the termination are available to the firm? Briefly compare these alternatives to a termination.
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