Floor-Offset Plans - Minimum Funding and PBGC Premiums

[Guest rocnrols2]

A consultant has suggested the adoption of an ESOP to be used in a floor-offset arrangment with a company's existing defined benefit plan. This raises the following questions, for which I have not as yet seen any answers: (1) is the floor DB plan subject to minimum funding standards? (2) if so, how do contributions and assumed benefits under the ESOP affect the funding requirements under the DB plan? (3) Does the floor DB plan have to pay PBGC premiums or is it subject to Title IV of ERISA at all? If so, do contributions to the ESOP affect the possibility of a variable premium?

[Blinky the 3-eyed Fish]

The only change is that now the defined benefit accruals are offset by the actuarial equivalent of what participants receive in the ESOP. The DB plan still has to maintain an FSA, pay PBGC premiums, etc.

An example would be this:

Person has an accrued benefit of X. This accrued benefit is reduced by the actuarial equivalent of ESOP balance Y. Net benefit in the DB is X-Y, but not less than zero.

Hopefully, you have an actuary that is familiar with these sorts of arrangements to consult on the details.

[david rigby]

... and, one hopes, the plan sponsor thinks this thru, a lot, before doing this.

Remember Enron?

[MGB]

Actually, if Enron still had a floor-offset plan with their ESOP, then no one would have lost any money from the loss in value of the ESOP (they still would have lost the stock they had in their 401(k)). That is because when the ESOP value went to zero, the defined benefit plan would have picked up the difference.

However, they got out of the floor-offset arrangement in the late 90s and froze the amount of the offset based on the share prices at that time. So, when the shares went to zero, the defined benefit plan was no longer a floor and they lost out.

[Guest Brian4]

Note that this type of arrangement may not be feasible under current law. For plans established since 1987, assets and employer securities in the individual account plan will apply toward the 10% employer security limit. Enron's plan was grandfathered, as it existed before this rule was established.

Also, for PBGC purposes, employees in the defined benefit plan with no benefit liabilities would not be counted for the per capita premium.

[MGB]

Brian,

Do you have a cite for your last comment? It's been over twenty years since I worked with a floor-offset plan, so I haven't had to think about this in a long time. The exemption from PBGC premiums for some participants is surprising.

[Blinky the 3-eyed Fish]

Brian is correct that there was a change in the definition of participant for premium payment purposes effective for 2001 premium payment years. The instructions to the forms clearly spell this out in the definition of participant or the what's new section of the 2001 forms.

Again note that this change is only effective for determining the amount of the premium and has no bearing on determining coverage. I have a few plans with 40-50 lives, but only the owner has a net DB benefit. So far they've had to pay $19 per year.

[Guest Brian4]

When David Strauss was at PBGC, they gave some premium relief to floor offset plans. The 2001 PBGC Blue Book, Question 9, gives some informal guidance - see below. It seems that interest in floor offset plans has declined - comments?

QUESTION 9

Premiums — Floor Offset Plans

Under a floor-offset defined benefit plan, a participant’s benefit is reduced by the benefit attributable to the participant’s account balance in a separate defined contribution plan. Suppose that the benefit attributable to a floor-offset plan participant’s defined contribution plan account balance completely offsets the participant’s benefit under the floor-offset plan as of the premium snapshot date. In view of the change in the definition of “participant” for plan years beginning after 2000 (under which an individual is counted as a participant only if the plan has benefit liabilities with respect to the individual as of the snapshot date), must the plan pay premiums for the participant?

RESPONSE:

For administrative convenience, the PBGC will accept a simplified test for excluding the participant from the participant count in a floor-offset plan. Under the simplified test, the plan administrator would determine whether, under the terms of the floor-offset plan, a benefit would have been payable to the participant from the plan if, on the premium snapshot date, the participant had been fully vested, had terminated employment, and had been eligible for a distribution. If no benefit would have been payable, the participant may be excluded from the count. In the case of a deceased participant with one or more living beneficiaries not in pay status, the plan administrator would apply the same test to each beneficiary, assuming (for purposes of the test) that the beneficiary was eligible for a distribution on the snapshot date.

Whether a participant’s benefit must be taken into account in computing unfunded vested benefits for purposes of the variable-rate premium depends on whether the plan has a current liability for vested benefits of the participant. A floor-offset plan has no vested current liability for a participant if and only if the offset equals or exceeds the gross vested benefit from the floor-offset plan at every decrement age for every type of decrement the actuary would use to value vested current liability. Similar rules would apply for a deceased participant with a living beneficiary not in pay status.