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I have a situation where a plan covered by the PBGC is terminating. All along the two 50% owners have deposited their "share" of the contribution each year into an account that they direct as trustees separately.

Upon termination the assets of the plan will be less than the benefit liabilities, so the two majority owners will waive benefits. My question is would it be permissible to have them agree to waive benefits so that each owner ends up with the value in his respective account?

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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Good catch, Kirk.

I meant to say that the way the termination is handled, you will end up with the same thing as if they had waived. Instead, you merely have them (and their spouses) sign an agreement agreeing to accept less than their full benefit, and relieving PBGC from any liability. The form of document I've used is something like the following. This was originally drafted pursuant to the old PBGC reg 4041.7(B), and there may be a corresponding provision in the new regs, but I found this first, and that is good enough for a Friday afternoon:

[PBGC Reg § 4041.7(B)(a)]

A sample waiver form follows:

Waiver of Benefits

I, , being a majority owner of , and a participant in the plan hereby agree to accept a benefit that is lower than my accrued benefit under the terms of the Plan if, upon termination of the Plan and allocation of assets pursuant to plan section , assets are insufficient to cover all such benefits.

I understand that my signature on this form will release the Pension Benefit Guaranty Corporation from any and all liability to myself or my beneficiaries with respect to my benefits under the above mentioned plan.

Date: Signed:

Participant/Majority Owner

Married: Yes No

As the spouse of the majority owner mentioned above, I also agree to release the Pension Benefit Guaranty Corporation from any liability to myself or my beneficiaries with respect to benefits under the above mentioned plan. I understand that by signing this form I may be giving up valuable benefits under the plan.

Date: Signed:

Date:

Signed:

(Witness or Notary)

All defined benefit plans have language that allow for benefits to be paid only to the extent funded. Further, the IRS typically allows the allocation of assets on plan termination to be consistent with RR 80-229 (basically requiring that the allocation be non-discriminatory). Having the owners stand last in line is usually consistent with RR 80-229.

The IRS will most assuredly approve any such termination and the PBGC is happy to go along with it.

There is the distinct possibility that a majority owner or spouse may have buyer's remorse and bring an action later, but that is a small risk to undertake, IMO.

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I have an additional question relating to plan terminations. Below is the section of the plan document that describes the asset allocation process in case the plan assets are not sufficient to satisfy the benefit liabilities. Note below in (a)(5) the document specifically describes benefits guaranteed by the PBGC. If the plan is not covered by the PBGC, does this subcategory apply to the allocation?

I believe that this is just poor document drafting and that the provisions of RR 80-229 would still govern the distribution. In other words, applying the PBGC priority category 4044(a)(4)(A) would still apply even if the plan is not covered by the PBGC.

"(a) Priority Of Payment: If the Trust Fund cannot provide such costs in full, it will be allocated in the following order of priority, with allocations within the last category for which assets are available being made in proportion to the costs within that category for each Participant: (1) benefits accrued for Participants from Employee contributions; (2) costs for Participants who have been receiving benefits or who have been eligible to receive Normal Retirement Benefits in accordance with Section 5.1 for more than three years as of the date of termination; (3) costs for Participants who have been receiving benefits or who have been eligible to receive Normal Retirement Benefits in accordance with Section 5.1 for less than three years as of the date of termination; (4) costs for Participants who were eligible to receive early retirement benefits as of the date of termination; (5) costs for all other benefits insured by the Pension Benefit Guaranty Corporation; and (6) costs for any other benefits.

(B) Discrimination Not Permitted: If the allocation made under paragraphs (a)(5) and (a)(6) above results in discrimination in favor of Participants who are officers, shareholders, or Highly Compensated Employees, then the assets allocated under paragraph (a)(5) and paragraph (a)(6) will be reallocated to avoid such discrimination. All amounts allocated under this paragraph shall be nonforfeitable, to the extent Fund assets are sufficient. After allocation, the Employer will determine whether to make lump sum payments of the Actuarial Equivalent of benefits from the Trust Fund or whether to purchase immediate or deferred annuities from an insurance company in whatever amounts the monies so allocated will provide. If the Trust Fund has sufficient assets to cover the cost of all Accrued Benefits and full settlement of all such benefits is made by lump sum payments of the Actuarial Equivalent of benefits or through the purchase of a group annuity contract or individual annuity contracts, then any balance remaining in the Trust Fund will be refunded to the Employer."

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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You hit the part of my first response that I wrote and then erased! I meant to put it back, but forgot. If you go through the priority categories, you very, very rarely end up with anything other than what a normal allocation under 80-229 will allow you to do. Only if there is a very longstanding plan with significant early retirement benefits, and HCe entitled to those early retirement benefits, do you even approach anything other than the owners are last in line. At least that has been my experience.

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  • 2 years later...

Related question:

What happens if the sponsor of a PBGC covered plan goes bankrupt and there is insufficient funds of the owner to waive and the corporation has unsufficient funds. Can the PBGC claim assets of the (closely held business) owner personally?

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  • 4 weeks later...

Not sure if this is of any significance: in the original post above, Blinky asks about two 50% owners. More than one of the responses refer to majority owners. In all my math classes, 50% was less than a majority. Anyone have any cites or other input?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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From the PBGC Standard Termination Filing Instructions (page 4):

Making Plans Sufficient. To facilitate the termination of a plan and the distribution of assets in a standard termination, a contributing sponsor or controlled group member may make a commitment in writing to the plan to contribute, by the distribution date, the amount necessary to make the plan sufficient for all plan benefits (see the specific instructions to item 5, Schedule EA-S). In addition, majority owners (individuals owning 50 percent or more of the interest of the employer) may agree to forgo receipt of all or part of their plan benefits until the benefits of all other plan participants have been satisfied (see the specific instructions to item 6, Schedule EA-S).

...but then again, What Do I Know?

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