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DB Plan Termination - PBGC Plan for Owners?


Dougsbpc

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We adminster a small DB plan. 3 owners and 10 non-owner common law employees. Last year all 10 non-owner employees terminated employment. A partial plan termination occured so we made all employees 100% vested and distributed their benefits. All that remians are greater than 20% shareholders of the corporation. The company will not ever have employees again.

This company was recently approched by a potential buyer who wants to make a stock purchase.

My understanding is the plan is no longer covered by PBGC since only greater than 20% shareholders remain as participants. Is anyone aware of a cite that proves this? Or disproves this?

This is important because the plan is underfunded and shareholders are willing to waive a portion of their benefits. However, if the plan is still a PBGC plan, they cannot waive benefits and the potential buyer will run away as they feel the underfunded plan will be their liability.

Thanks.

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Doug: the company needs to retain counsel to determine if it is still subject to PBGC regulation if the plan terminates. No buyer will purchase the company if a plan is underfunded and subject to PBGC because the buyer will be responsible for the underfunding.

mjb

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Good advice.

The counsel will also advise that, under some circumstances, an owner may be able to waive a portion of benefit upon plan termination, in order to "wipe out" the underfunding. Since this is a PBGC rule, the question about PBGC coverage must come first.

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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The plan is absolutely not covered by the PBGC because the only participants are now substantial owners as described in 4022(b)(5). To advise a 3 person plan to retain counsel to determine if this plan is PBGC covered, to me, is a waste of money. An actuary would be far more qualified to know this rule.

In fact, even if the actuary doesn't know the rule, you can easily have the PBGC make a coverage determination by writing to them. See the premium instructions for the address.

The determination of what plans are covered by the PBGC is in 4021.

"What's in the big salad?"

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

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Blinky:

I always thought that advising clients regarding the interpretation of statutes constitutes the practice of law.

What leads you to conclude that an actuary is more competent to practice law than an attorney?

Based on 25 years of experience, I don't think it is a fair assumption to presume that an actuary is necessarily more familiar with the intricacies of Title IV than an ERISA attorney.

Kirk Maldonado

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Kirk, under that guise I then should contact an attorney to tell me how to interpret statutes like 412(l)? Of course that would be ridiculous. The idea that interpreting ALL statutes is the practice of law and therefore should be entrusted to attorneys would certainly lead to more harm than good if the statutes I am interpreting are ones I deal with every day.

I am not saying that attorneys do not have a place in the pension world. In fact I believe quite the contrary, as I know many ERISA attorneys who provide valuable services.

What I am saying, however, is specific to this case. A 3-person plan covering no one but substantial owners is certainly not covered by the PBGC. There aren't intricacies here.

"What's in the big salad?"

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

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I think that Blinky is right on point.

I have dealt with similar situations and have received both written and verbal verification from the PBGC indicating that such a plan is not covered under Title IV because "substantial owners" are the only employees.

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

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My reason for suggesting that the client retain counsel is that ERISA 4021(b)(9) exempts only plans established and maintained exclusively for substantial owners. Since the plan did cover non owners there is an issue as to whether the plan is exempt from PBGC coverage under (b)(9) after termination of all of the non owners since it was not maintained exclusively for substanital owners. I dont think an acutary is qualified to render a legal opinion that the plan is exempt from PBGC coverage.

Before writing to the PBGC it would be good to know if there is a favorable precedent instead of waiting for a response from the agency.

mjb

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I dont think an acutary is qualified to render a legal opinion that the plan is exempt from PBGC coverage.

Before writing to the PBGC it would be good to know if there is a favorable precedent instead of waiting for a response from the agency.

I can tell you there definitely is a favorable precedent because I have submitted for coverage determinations (actually more along the lines of informing the PBGC the plans were no longer covered) many times where a plan once covered non-substantial owners and later only covered substantial owners.

It is that experience that I, as an actuary, have in day to day operations that is invaluable. Other actuaries who work on small plans would surely have this experience as well, which is why I definitely think an actuary is more qualified in this situation by a long shot.

Not to disparage you in any way mbozek because you certainly know far, far more than I do not regarding pension plans, but this proves my point. You are an ERISA attorney who does not know the answer to this specific question.

"What's in the big salad?"

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

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mbozek's comment about 4021(b)(9) is valid. There is ambiguity in the statute.

Equally valid is anybody's experience with it. I wish Blinky had said that first.

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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How about this to add even more assurance to Blinkys position:

What if the current owners establish a new corporation and have that corporation become a successor plan sponsor? Then surely the plan should not be a PBGC plan as it will only cover greater than 20% shareholders of a non-related plan sponsor. In this case we would change the current plan year (and limitation year) from 9/30 to 12/31. Then, presumably when this plan terminates in the next plan year, there should not be any controlled group questions.

For what its worth, I did find an opinion letter (90-6 dated October 31, 1990) on a similar question. The letter indicates that while the plan was not established exclusively for substantial owners, it is presently so maintained and therefore exempt from coverage.

DK

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Guest dsyrett

The easy answer here as noted above is simply to write the PBGC asking for a coverage determination. The PBGC should give this as soon as they are assured that there will not be any more "rank & file" ees.

I done quite a few of these and its simple and easy.

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I've written the PBGC before too. The problem is that it usually takes them about 6 months to respond. That would usually not be a problem but in this case a buyer is considering purchasing the stock of the company that sponsors the plan. The buyer wants to seal the deal by December 15.

Even though they cannot find anything on point, the buyers attorney somehow thinks we have a PBGC plan even though only greater than 20% owners remain as participants.

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Here is a copy of that opinion letter:

Opinion Letter 90-6

October 31, 1990

I write in response to your request for a determination regarding whether the above-captioned pension plan (the "Plan") is covered by Title IV of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1301-1461 (1988).

You state that, from its inception, the Plan covered three employees, one of whom was the 100% owner of the Plan sponsor. However, the two other Plan participants who held no ownership in the Plan sponsor retired during 1988. Each of these participants was paid the benefit that he accrued under the Plan. Thus, the Plan now covers only the 100% owner of the Plan sponsor.

Section 4021(b)(9) of ERISA, 29 U.S.C. § 1321(b)(9), excludes from coverage any plan "which is established and maintained exclusively for substantial owners . . . ." A substantial owner is defined as an individual who "in the case of a corporation, owns, directly or indirectly, more than 10% in value of either the voting stock of that corporation or all the stock of that corporation." ERISA section 4022(b)(5)(A)(iii), 29 U.S.C. § 1322(b)(5)(A)(iii). Therefore, while the plan was not "established" exclusively for substantial owners, it is presently so "maintained."

The PBGC has declined to interpret the conjunction of the terms "established and maintained" strictly in the context of the exemption from Title IV coverage for governmental plans, ERISA section 4021(b)(2), 29 U.S.C. § 1321(b)(2), because doing so would frustrate the intent of Congress in providing the exemption. See PBGC Op. Ltr. 75-44. In that context, the court in Rose v. Long Island R.R. Pension Plan, 828 F.2d 910 (2nd Cir. 1987), sanctioned the PBGC's "sensible" approach, recognizing that "the status of the entity which currently maintains a particular pension plan bears more relation to Congress' goals in enacting ERISA and its various exemptions than does the status of the entity which established the plan."

The same principle applies to plans maintained exclusively for substantial owners. Substantial owners have greater control over the level of, and funding for, plan benefits than do other plan participants, and are thus less in need of the protections of Title IV. Consequently, in the present case, where the Plan is maintained exclusively for a substantial owner, and there are no longer any other participants in the Plan, the PBGC has determined that the Plan is exempt from Title IV coverage under Section 4021(b)(9) of ERISA. The PBGC notes, however, that if the current status of the Plan should change at any time, this determination may no longer apply.

This letter constitutes an initial determination subject to appeal under 29 C.F.R. Part 2606, Rules for Administrative Review of Agency Determinations (a copy of which is enclosed). Anyone who is an "aggrieved person" (as defined in § 2606.2 of the regulation) may file an appeal addressed to: Appeals Board, Pension Benefit Guaranty Corporation, 2020 K Street N.W., Suite 2500, Washington, D.C. 20006-1806.

Appeals must be filed within 45 days after the date of this letter. 29 C.F.R. § 2606.53. Any such appeal must: (a) be in writing; (b) be clearly designated as an appeal; © contain a statement of the grounds for appeal and the relief sought; (d) reference all pertinent information already in the possession of the PBGC and include any additional information believed to be relevant; (e) state whether the appellant desires to appear in person or through a representative before the Appeals Board; and (f) state whether the appellant desires to present witnesses to the Appeals Board, and how such witnesses will further the decision making process.

If you should have any questions regarding this matter, feel free to contact Sara B. Eagle at (202) 778-8824.

Jeanne K. Beck

Deputy General Counsel

Kirk Maldonado

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Wow! Common sense.

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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