PBGC Coverage

[Guest GG]

A DB plan covers a sole proprietor and his spouse. Is this plan subject to PBGC coverage?

Thanks.

[david rigby]

Probably not. See subsection (B)(9) or (B)(13) of this section of ERISA:

http://www4.law.cornell.edu/uscode/29/1321.html

[Blinky the 3-eyed Fish]

The plan would cover substantial owners (more than 10% ownership) which is one of the situations in which a DB plan is exempt from PBGC coverage.

[pmacduff]

I looked at the PBGC premium form filings and under "Who must file" it says..."The plan administrator of each single employer plan and multiemployer plan covered under section 4021 of ERISA. I began reading through that section, but it's pretty long, I figure it should answer your question................

[mwyatt]

I would say no, since you obviously qualify for 5500-EZ filing. Now, if kids enter the picture, PBGC coverage would be present unless they have ownership percentage that would qualify them as substantial owners.

As an aside, this is good that your client doesn't qualify, as they sure wouldn't be getting any "coverage" from this insurance anyway. One little gotcha in the PBGC coverage is that the maximum benefit paid by PBGC for substantial owners is subject to a 30-year phase in. (Don't mean to be going into a rant, but we just closed down a 90 life plan today that was underfunded with significant premiums paid by the client over the last few years - of course underfunding was purely due to a benefit to owners of company that was well in excess of what PBGC would guaranty, never mind waivers signed by owners, so that close to 6 digit premium payment over the last 7 years was "insuring" $0 potential hit to PBGC).

[Hojo]

Has anyone revisited this topic recently? From some things I'm reading, the answer has changed (although the regulations have not).

[david rigby]

Please tell us what these other things are.

[Hojo]

Please tell us what these other things are.

Specifically in regards to something on the ACOPA message board.....I'm quoting directly from someone on there,,,

Facts:

1. DBPP sponsored by a sole proprietor in a Community Property State (CA);

2. The only rank-and-file participant in a DBPP was cashed out by 12/31/2013;

3. As of 1/1/2014 the only participants are the sole proprietor and his wife.

In a letter last November sent only to the Plan Sponsor with no copy to me, the representative who filed the request for determination, the PBGC ruled that even though the wife "owns 50% of your 100% ownership of the Company, this ownership stake still falls below the threshold for substantial owner status in a sole proprietorship. See 29 USC section 1321(d). Furthermore, because the Company is not a corporation, the constructive ownership rules, including the rule for spousal attribution, do not apply. Accordingly, the fact that California is a community property state does not make X a substantial owner of the Company for purposes of Title IV of ERISA. Therefore, the Plan is not maintained for a substantial owner and is a covered pension plan under title IV of ERISA."

After some conversation, it was held that the family attribution rules under IRC 1563 only apply to corporations (which do not include sole-prop) and thus their response is "technically" correct. This was also brought up at a recent conference (I believe ASPPA).

[Dougsbpc]

We had an almost identical scenario as Hojo states.

The PBGC ruled that the spouse was not a substantial owner. In our initial response, we brought up the community property issue. Next we received a letter from the PBGC indicating a fine of $21,000 for failure to file 6 years of back premium filings. The PBGC indicated that we need to complete the filings and pay the premiums and penalties first. Then in the event their ruling is in agreement, a refund would be forthcoming. Their ruling was received, we filed the 6 years and are still working with them regarding the $21,000.

[AndyH]

Unbelievable.

[rcline46]

I got a plan OUT of PBGC coverage when the son was issued an option to purchase 11% of the stock in the corp. It was a hassle because the front line person did not understand the law, but when it went to their manager, it was approved.

[Hojo]

I got a plan OUT of PBGC coverage when the son was issued an option to purchase 11% of the stock in the corp. It was a hassle because the front line person did not understand the law, but when it went to their manager, it was approved.

That's because the son became a substantial owner (over 10%). I think the problem here is that attribution rules don't apply to sole-props. It's crazy, but from everything I've gathered it's true.

[Calavera]

Look at the bright side. Sole proprietor hire his spouse, and both of them in the DB/DC plans covered by PBGC with the full DC contribution up to 25% of net income.

[AndyH]

And only people who read this thread know this trick and trap. Everybody else pays penalties.