Jump to content

Huge increase in plan contribution due to investment losses during pandemic


Recommended Posts

          I have a client composed of husband and wife doctors and 4 employees. The assets in their defined benefit plan as of 1/1/22 were about $5,260,000. Due to investment losses, the 12/31/22 balance dropped to about $4,500,000. In 2021, there was a surplus in the plan of about $235,000. In order to bring the surplus down, no contribution was made into the plan for Plan Year 2021. Given that the plan is going to be terminated early in 2025, we were hoping that this would lower the surplus. Due to the large investment losses in 2022, not only did the surplus disappear, but, a minimum contribution of almost $100,000 was generated. At this point, the medical practice is not generating very much income and coming up with the $100,000 for the contribution is a problem. To avoid having a potentially large contribution in 2023, the plan is being frozen before anyone accrues a benefit for 2023.   My question is, what are their alternatives for getting the money to make the required contribution of almost $100,000?

Potential alternatives:

1. Have the doctors personally lend the money to the PA and then have the PA make the contribution. What are the tax consequences if the PA can't pay the loan to them back? Are     there other tax concerns to be aware of?

2. Amend the plan to allow for in-service distributions. This would seem like there could be double taxation. Again, what other tax concerns could crop up?

3. What if the contribution is not made by 9/15? Aside from paying the 10% penalty, is there any advantage to this?

        I would appreciate any advice on this.

Link to comment
Share on other sites

1. Consultation with accountant and/or lawyer would be advisable before pursuing, do not think this is area for retirement plan practitioners.

2. In-service so they could turn around and lend to the PA to contribute? If that was advisable (very questionable, yes possibly indirect double taxation), how could they comply with the requirement that the plan be 110% funded AFTER the distribution to HCE(s)? This is basically #1 but getting the personal funds via plan distribution.

3. Funding deficiency and excise tax, which if made up before too long may not be a big deal, but can go to 100% if not made up timely and get IRS notice. If they can fund a portion of MRC by 9/15 to minimize the funding deficiency, that would be advisable. If the PA could borrow to fund (may require personal guarantees) that might also be advisable.

Terminating now (and taking owner haircuts) does not relieve 2022 minimum funding, unfortunately.

Good luck.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

Link to comment
Share on other sites

Is there something magical about 2025 that the plan was going to be terminated at that time?  If the doctors are contemplating selling the practice or pursuing some other exit strategy and if revenues are low and declining, then there is very little time between now and early 2025 to fund the minimum from revenue, to experience asset growth, or to pay off loans to the business.  If the plan was to sell the practice, they may want to consider accelerating their plan and use part of the proceeds to make up the funding (at least for the employees and a possible haircut for themselves).

I agree with CuseFan that they should involve an accountant or lawyer in formulating a strategy.  They also should give some serious thought to working with a financial adviser who can help them manage their investment risk with such a short time horizon.  

Link to comment
Share on other sites

also, you can possibly think of a method change to possibly "shift" the benefits from the FTNC to FT.  That way you get a benefit of 15 years amortization which will drive your numbers down.  Not sure if it would fall under the "automatic approval" of method change though - please see the rev proc. 2017-56?

Link to comment
Share on other sites

Why wouldn't you have the doctors waive the unfunded portion of their benefit? Although this is not a PBGC Plan (small PC sponsor) my experience is that PBGC allows owner waivers for plans under its jurisdiction. I've never had a problem with IRS on owner waivers, either. Why use after tax money so that the corporation can contribute for a worthless deduction and convert the after tax contribution into a taxble benefit? 

Link to comment
Share on other sites

9 minutes ago, gc@chimentowebb.com said:

Why wouldn't you have the doctors waive the unfunded portion of their benefit? Although this is not a PBGC Plan (small PC sponsor) my experience is that PBGC allows owner waivers for plans under its jurisdiction. I've never had a problem with IRS on owner waivers, either. Why use after tax money so that the corporation can contribute for a worthless deduction and convert the after tax contribution into a taxble benefit? 

Sure on termination the majority owners could waiver benefits, forego benefits, take a hair cut, whatever you want to call it.

However IRS stated position, the Internal Revenue Code, and Treasury Regs concerning minimum funding rules are all consistent in the rules required in that owners are not allowed to forego benefits to reduce minimum funding requirements. Even if you have had the IRS agree to that in specific cases, it's not something you can rely upon under the law.

 

Link to comment
Share on other sites

I agree with Lou S.  In fact, there is a PLR that supports his answer.

A more complicated solution, if you could figure out where to file the application, would be to pay the 10% excise tax and then file for a waiver of the 100% tax. The smart actuaries at ASPPA have thought this through.  https://www.asppa.org/news/browse-topics/defined-benefit-plan-termination-funding-deficiency  

A waiver and an actuary who will recognize it is the practical approach. 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...