Don't Squeeze the Payables!

[Guest erisafried]

Here is the scenario:

An underfunded DB plan experiences a partial termination when a sizable portion of its participants depart. The plan generally permits lump sum distributions (don't ask--not my idea) upon a termination of employment. The plan document is silent as to the timing of distributions, but they have historically been made "as soon as reasonably practicable" following termination of employment. The plan sponsor would like to sit on the distributions for a while (because of that massive increase in the plan's assets that's just around the corner--what can I say? They're optimists).

There are obviously exclusive benefit issues here and waiting too long runs the risk of encouraging participants to seek assistance from DOL and/or PBGC. Nevertheless, plan sponsor is trying to find the "line" so as to avoid stepping over it.

Anyone have any thoughts on this?

Thanks!

[AndyH]

Doesn't the partial termination vest benefits only to the extent funded? That's what I've been told, anyway. Just a thought.

[RTK]

AndyH, yes, benefits are required to vest upon partial termination only to the extent funded.

erisafried, you should carefully consider the participants required to be taken into account for a partial termination determination - e.g., I believe that only employer-initated terminations need to be included in numerator (excluding then voluntary termination of employment, etc.)

[Guest erisafried]

Thanks for the thought. All of the terminations at issue here are definitely employer-initiated, so I think that we're definitely on the hook from that standpoint.

[david rigby]

I have often wondered what it means to have vesting upon partial termination "to the extent funded". Perhaps you have to pretend the plan terminated, allocate as far as you can, and then award additional vesting if there is money left over. Probably would require some proration that might be arbitrary.

[Mike Preston]

There is no line. Deal with this immediately. Either delay the distributions "officially", or pay them out. In the same timeframe as others have been paid. If the client won't, resign. Or, at least, refer it to a lawyer to get yourself off the hook.

There are only two ways to officially deal with this that I can think of (maybe others can think of more) that might delay distributions. 1) Submit for a partial termination determination, along with your suggested amounts of distribution, based on the Plan Administrator's interpretation of "to the extent vested." Certainly it is not administratively practical to pay the benefits before an LOD, is it? 2) Make an amendment eliminating lump sums and submit the amendment to the Secretary of Labor. If the Secretary doesn't respond within 90 days I think it is, the cutback can take place. Don't try this one alone.