DB Plan in distress

[jkdoll2]

I have a plan the is frozen as of 12/31/05. The AFTAP for them is only at 56%. They have sold part of the business and all the employees are now with the new company. All that is left is the owners under the old company. There are still 2 employees that have not been paid out yet do to the low AFTAP. The owners are struggling to keep the company alive and told me they will not be able to make the contribution for 2008 or 2009. They just want to terminate the plan and pay out the employees left and they take what is left over. There is enough money in the plan for that.

What do I do about the contribuiton owed? They will not be able to pay the excess tax if they cant afford the contribution already. There has to be something that can be done to just terminate the plan. They are PBGC covered.

The money that goes into the plan right now is just money that would go back to the owners since the plan has been frozen since 2005. It doesnt make sense to have to struggle to make the contribution and then turn around and pay it back out to the owners. They have enough already to pay the 2 remaining balances for the participants that have been gone since 2006.

Thanks

[david rigby]

I know this is a long shot, but here goes.

Is there a Carryover Balance?

[jkdoll2]

I know this is a long shot, but here goes.

Is there a Carryover Balance?

No - unfortunatly - they have been wanting to terminate for awhile but couldnt becuase of the AFTAP.

[carrots]

Presumably, they will file for a standard termination with the PBGC.

The 2008 contribution should only be the 7 year ammortization of the Funding Shortfall (no TNC).

Can they take a loan from the plan to pay that?

After the PBGC approval, it makes absolutely no sense whatsoever to not pay the rank and file - in fact they are required to pay the benefits within 180 days (I think).

Then, distribute the remainder to the owners.

I wouldn't let a poorly thought out and worded law get in the way of doing what is obviously right.

Okay, shoot me down.

[jkdoll2]

Presumably, they will file for a standard termination with the PBGC.

The 2008 contribution should only be the 7 year ammortization of the Funding Shortfall (no TNC).

Can they take a loan from the plan to pay that?

After the PBGC approval, it makes absolutely no sense whatsoever to not pay the rank and file - in fact they are required to pay the benefits within 180 days (I think).

Then, distribute the remainder to the owners.

I wouldn't let a poorly thought out and worded law get in the way of doing what is obviously right.

Okay, shoot me down.

I dont think they would want to take a loan to pay the contribution - plus loans are not allowed in the plan.

They just want to pay out the remainder employees and take the rest and roll it to an IRA. Thanks

[Andy the Actuary]

I wouldn't let a poorly thought out and worded law get in the way of doing what is obviously right.

You are doing what many have wanted to do: Telling off your ignoramus boss. Of course, you will get fired.

This is my convoluted way of saying that while your civil disobedience may be applauded by some, you just can't go around making up your own law and yet avoid pension prision.

[jkdoll2]

I wouldn't let a poorly thought out and worded law get in the way of doing what is obviously right.

You are doing what many have wanted to do: Telling off your ignoramus boss. Of course, you will get fired.

This is my convoluted way of saying that while your civil disobedience may be applauded by some, you just can't go around making up your own law and yet avoid pension prision.

i dont think the intention is to make up their own law. Just trying to see what can be done for the customer legally. Thanks

[Blinky the 3-eyed Fish]

I really don't see it as an AFTAP issue. I think you will find that final regs will not require a plan's AFTAP to be sufficient in order to terminate.

This is definitely a PBGC issue. You need to have a majority owner to be able to waive benefits in the plan. My vague recollection is the determination of who qualifies as a majority owner is determined any time after the NOIT is issued.

This is definitely a funding issue. You don't think they want to take out a loan (the plan could be amended to allow for loans), well they better do something. I doubt they want to pay a huge excise tax either.

[jkdoll2]

I really don't see it as an AFTAP issue. I think you will find that final regs will not require a plan's AFTAP to be sufficient in order to terminate.

This is definitely a PBGC issue. You need to have a majority owner to be able to waive benefits in the plan. My vague recollection is the determination of who qualifies as a majority owner is determined any time after the NOIT is issued.

This is definitely a funding issue. You don't think they want to take out a loan (the plan could be amended to allow for loans), well they better do something. I doubt they want to pay a huge excise tax either.

I guess at theACOPA conference last week Jim Holland said the IRS final regulations "coming soon" will permit plan terminations and lump sum distributions when the AFTAP is low. That is good news.

Also - TAG (Technical Answer Group) stated that the plan can allow (or amend to allow) for participant loans. The owners would take the loans to pay the contribution or pay excise taxes. As long as the participant loan requirements are followed.

I will have to check with my client to see if this is something they are willing to do. Thanks for all your help.

[mwyatt]

Trying to think this loan thing through and what the ramifications would be to the owner.

Say the 430 contribution is under the loan limits (let's pick $40k). Actual assets are $500,000, owe participants $50k (to throw number out). Owner takes a loan of $40k out of plan, immediately circles around and pays the contribution due of $40k.

But now assets are actually $540k ($500k of assets plus outstanding loan of $40k).

Distributions are made; $50k paid out to participants. Remaining $450k is paid to owner physically, but in fact $490k is paid to owner because of loan. $450k is rolled over, $40k shows as income on umpaid loan, but offset by deduction of $40k for contribution to plan (so a wash - hopefully 59 1/2 excise taxes don't apply, and that value of deduction can be taken to offset the "income" of the distributed loan).

[SoCalActuary]

Presumably, they will file for a standard termination with the PBGC.

The 2008 contribution should only be the 7 year ammortization of the Funding Shortfall (no TNC).

Can they take a loan from the plan to pay that?

After the PBGC approval, it makes absolutely no sense whatsoever to not pay the rank and file - in fact they are required to pay the benefits within 180 days (I think).

Then, distribute the remainder to the owners.

I wouldn't let a poorly thought out and worded law get in the way of doing what is obviously right.

Okay, shoot me down.

Generally your approach has some merit.

No, you are required to payout in a reasonable time period, which might be subject to waiting for the IRS FDL. If you don't payout within the 180 days, why not? If there is a good reason, you better tell the PBGC, and also take action to eliminate the obstacles.

Taking the loan to pay the last funding charge might make good sense if the owners intended to take a taxable distribution in any event.

Here's your scenario:

Loan > meets funding requirements > loan defaults because they didn't have the funds in any event > taxable income. Taxable income is charged tax at current rates.

But an alternate scenario is:

No loan > fails 412 > 10% excise tax > all remaining plan assets are rolled without tax > funding deficit is gone when plan is fully distributed.

Now you have choices, based on the best tax scenario for the client.

[jkdoll2]

Presumably, they will file for a standard termination with the PBGC.

The 2008 contribution should only be the 7 year ammortization of the Funding Shortfall (no TNC).

Can they take a loan from the plan to pay that?

After the PBGC approval, it makes absolutely no sense whatsoever to not pay the rank and file - in fact they are required to pay the benefits within 180 days (I think).

Then, distribute the remainder to the owners.

I wouldn't let a poorly thought out and worded law get in the way of doing what is obviously right.

Okay, shoot me down.

Generally your approach has some merit.

No, you are required to payout in a reasonable time period, which might be subject to waiting for the IRS FDL. If you don't payout within the 180 days, why not? If there is a good reason, you better tell the PBGC, and also take action to eliminate the obstacles.

Taking the loan to pay the last funding charge might make good sense if the owners intended to take a taxable distribution in any event.

Here's your scenario:

Loan > meets funding requirements > loan defaults because they didn't have the funds in any event > taxable income. Taxable income is charged tax at current rates.

But an alternate scenario is:

No loan > fails 412 > 10% excise tax > all remaining plan assets are rolled without tax > funding deficit is gone when plan is fully distributed.

Now you have choices, based on the best tax scenario for the client.

Thanks for all your help.

[Guest pm01]

In reference to the idea of paying the 10% excise tax and then distributing assets, Can a plan be terminated if it has an outstanding funding deficiency?

[SoCalActuary]

In reference to the idea of paying the 10% excise tax and then distributing assets, Can a plan be terminated if it has an outstanding funding deficiency?

Two different agencies here. Underfunded plans with deficiencies are terminated on a routine basis, and the IRS accepts this without a problem. PBGC accepts this as well, but they might try to hold a lien on plan sponsor assets if possible.

[david rigby]

I'm not sure if that is what the questioner asked.

Does "funding deficiency" refer to the use of that term in the IRC 412 sense? something else?

[Guest pm01]

I was referring to a funding deficiency within the meaning of 412. I thought a funding deficiency would need to be made up before a plan was terminated. Also, doesn't the excise tax become 100% if the deficiency is not made up? Does the IRS actually try to collect this?

[SoCalActuary]

The excise tax is the problem of the plan sponsor.

The plan can be terminated independently of the plan sponsor's tax problem.

There is a long history of this with many distressed plan sponsors who could not possibly make the deficiency up.

PBGC deals with these cases all the time, sometimes as abandoned plans. If the plan is in distress, then they try to get the shortfall of funds from the plan sponsor.

The IRS does not impose the 100% penalty unless they can find an employer who can afford it. That is also why plans get terminated and paid out ASAP, because it stops the funding requirement and limits the extent of the penalty.