Underfunded Abandoned Pension Plan

[Saiai]

We have a client that sold substantially all of its assets (everything but the pension plan) in an asset sale to an unrelated buyer.  Company is no longer an ongoing concern but the prior owners are trying to wrap up the pension plan and terminate it.  The plan is underfunded and there were zero proceeds from the sale to fund the pension (the owners also got nothing from the sale, the sale proceeds were only sufficient to pay off bank loans).  The PBGC is involved and we are trying to get direction as to whether they will take over the plan and wrap it up but they have been "examining the case" for months with not direction.  In the meantime, the company continues to file Form 5500s and obtain plan audits....further eroding the plan assets and excise taxes are accruing due to funding shortfalls, etc.  Any recommendations on how to terminate this plan and wrap it up?

[jpod]

PBGC can be very aggressive, assuming SOL has not expired.  Did the owners personally guarantee any of the company's debt that was paid off with the sales proceeds?

[Saiai]

Agreed....aggressive and slow!  That's a good question and I'm not sure of the answer.  We provided the PBGC with all the financials regarding the owners and the company and I didn't see anything along those lines.  I partly expect the PBGC to try and go after the new owners despite the transaction structure; however, that approach hasn't panned out for the PBGC in court.

[Luke Bailey]

I'm not sure there is a relevant statute of limitations, but would be interested in jpod's further thoughts on that.

I would look at the economics of the plan. Was there just one or perhaps two majority owner(s)? Is the plan sufficiently funded to pay rank and file benefits if benefits for substantial owners are short-paid? Since you say the plan requires an annual audit, it is presumably > 100 participants, so likely that the owners' benefits are only a small proportion, however.

Don't forget that you also have the minimum funding excise tax to be concerned with as well.

Check if the owner(s) own(s) other companies, because the liability is on the entire controlled group. If there is no controlled group liability, whether the PBGC can go after the owners generally depends on whether they have respected the corporate form or not, so that the corporate veil can be "pierced." Note that the IRS minimum funding excise tax will follow the owners as successors to the corporation, so they cannot rely on fact that corporation was the taxpayer for the excise tax. However, successor liability should be limited to the proceeds of the liquidation, which you say were nil. However, if some of the debt repaid was personally guaranteed, IRS could see that as a distribution.

[jpod]

I was only suggesting that the PBGC might argue that the relief from personal guarantee was in effect a distribution/conveyance to the owners to the detriment of other creditors, including the Plan, although unless there is some case law out there to support that I think it would be a bit of a stretch.

[Saiai]

The excise tax is also a concern due the failure to make the required contributions.  The company has no assets and the owners cannot afford the excise taxes due.  Should they file the 5330 but not submit payment? 

[Saiai]

Also, I should add that the plan sponsor is not part of a controlled group -- there are no other corporate entities to look to for the plan liabilities.

[shERPA]

Had a similar situation back in the late 90s.  Non-owner employees were owed about $100K.  Plan had less than this, company was insolvent.  We helped plan attorney with PBGC reportable event filling and tried to engage PBGC in what they wanted us to do.  I think we also filed a distress termination filing but don't remember the details.   PBGC dragged their feet for a couple of years, plan assets continued to be depleted for attorney fees, administration fees, etc.  

We lost track of the owner/trustee, he moved, had some health issues, again I don't recall all the details.  We resigned.  Over the next three years we got a couple of inquiries from PBGC asking us about owners' assets.  We replied that he was no longer a client and that request should be directed to the trustee and/or his attorney.  

I don't think PBGC ever did anything and I don't think the participants ever got any money. 

[Luke Bailey]

One more thought: Hard to believe that they did not have a missed reportable event at some point along the way, but maybe not.