PBGC Plan Termination Funding Deadline

[YankeeFan]

A non-profit corporation sponsors a defined benefit plan that terminated effective December 31, 2005. The plan has about 30 or so participants as of the current date. The plan was submitted to the PBGC (in a standard

termination) and the plan was also concurrently submitted to the IRS for a favorable determination letter. The plan sponsor is still waiting for the favorable determination letter from the IRS. The plan sponsor would like to await approval from the IRS prior to distributing the plan assets.

As of the current date, the termination liabilities are greater than the market value of plan assets although the plan sponsor intends to fully fund the plan prior to distribution of assets. The regulations state that terminating plans covered under Title IV of ERISA for the plan year in which the plan terminates are allowed to contribute the amount required to make the plan assets sufficient to satisfy all plan termination liabilities and permit the plan to terminate in a standard termination.

(1) Obviously, the plan's minimum funding deadline for the 2005 plan year is September 15, 2006. Since the plan terminated effective December 31, 2005, is 9/15/06 the date by which the plan must be fully funded (on a termination basis)? Is there an opportunity to fund the plan after 9/15/06?

(2) Assuming there is no required contribution for the 2005 plan year, can the plan sponsor fully fund the plan some time after 9/15/06 although the plan is not subject to the minimum funding standards for the 2006 plan year?

[AndyH]

Opinions from a Red Sox fan:

1a. Not necessarily. 9/15/06 is the date that any amounts needed to avoid a funding deficiency on the 2005 Schedule B must be deposited. So it depends upon the 2005 412 calculations. The minimum amount due for 412 purposes is the minimum amount must be deposited by 9/15, which may be less than the termination liability.

1b. Yes

2. Yes.

[Guest merlin]

I put the same question to Jim Holland at the ASPPA conference 2 years ago. His opinion was that any amounts contributed after the minimum funding deadline for the year of termination could only be deducted over 10 years, unless you re-started the termination. Only an opinion, in an informal venue, no cites. Take it FWIW.

[Blinky the 3-eyed Fish]

Merlin, it's a non-profit, so they don't care about the deduction. It's for that reason too there is no non-deductible issue and they plan can be funded after 9/15/06.

[Guest merlin]

True enough in this instance, but what if they were a for-profit entity?. What do you think of Holland's answer in that case?

[AndyH]

Thanks for the line, Blinky, but it doesn't save me. I don't think JH's comment makes any sense at all. I would like to know the reasoning, cite, etc. Merlin, maybe you can spin some magic and get him to post?

I've looked at a few text books since this thread and nobody's touching it.

Does anybody actually comply with that, make the "final" contribution before the final amount is known? Now that is magic.

p.s. Actually, the EOB says (I think) that the deductible amount is only up to the Full Funding Limit. Since there would be no FFL in the year after termination, that is probably JH's argument. So that is probaby the safe thing to do although it seems impractical to me.

[Guest merlin]

Q5 from the 2004 ASPPA conference:

Application of IRC 404(a)(1)(D)iv): A plan subject to Title IV terminates as of 12/31/03. Assuming a calendar plan and fiscal year, what is the date as of which the plan's unfunded benefit liabilities are calculated for purposes of 401a1Div? If the date is 12/31/03, what happens if the ultimate unfunded benefit liabilityat the date of distributionis more or less than the amount calculated at date of termination? If the calculation is to be done at the date of distribution, what happens if that date is after 9/15/04?

A: We believe the sponsor should be able to deduct the amount necessary to make the full distributions due.

Can the sponsor contribute and deduct at least the 412 minimum and deduct it on his 12/31/03 tax return?

A: yes.

Can the sponsor then contribute the remainder of the UBL and deduct that amount at 12/31/04, even thoughthe funding standard account stopped at 12/31/03?

A: Yes (After which I have a handwritten notation "Maybe not, per Jim Holland. 404 requires a plan and the plan stopped at 12/31/03", hence my question to him after the Q&A session).

I didn't get (and still don't get) the notion about the plan stopping at the date of termination. What about RR 89-87? It would have made more sense to me if he had said the clock stops at 9/15/04 because that's when the funding standard account, and therefore the FFL, stops. I couldn't talk to him further because he was off to another meeting.

Any thoughts from anyone else?

[rcline46]

It is not a 412 issue, it is a 404 issue (and indirectly a 162) issue. And therefore it is not a MFSA issue. So if it is deductible under 404, there is no 10 year issue. Amortization basis cover both 412 and 404, but this is not a base issue. Consequently, in my opinion, it is all deductible in the year deposited.

[Guest Jeff Hartmann]

Q5 from the 2004 ASPPA conference:

Application of IRC 404(a)(1)(D)iv): A plan subject to Title IV terminates as of 12/31/03. Assuming a calendar plan and fiscal year, what is the date as of which the plan's unfunded benefit liabilities are calculated for purposes of 401a1Div? If the date is 12/31/03, what happens if the ultimate unfunded benefit liabilityat the date of distributionis more or less than the amount calculated at date of termination? If the calculation is to be done at the date of distribution, what happens if that date is after 9/15/04?

A: We believe the sponsor should be able to deduct the amount necessary to make the full distributions due.

Can the sponsor then contribute the remainder of the UBL and deduct that amount at 12/31/04, even thoughthe funding standard account stopped at 12/31/03?

A: Yes (After which I have a handwritten notation "Maybe not, per Jim Holland. 404 requires a plan and the plan stopped at 12/31/03", hence my question to him after the Q&A session).

Any thoughts from anyone else?

Those Answers (other than Jim's) surprise me, because the Special Rule in 404(a)(1)(D)(iv) says "In the case of a plan which ..... terminates DURING THE PLAN YEAR ....". The plan did not terminate during 2004, so I don't see how you can apply 404(a)(1)(D) for 2004 and come up with a deduction that exceeds the unfunded current liability. I think the higher deduction is only available for 2003, the year of termination.