Minimum Funding Requirements

[Guest SIGTWATCHER]

I am trying find out if there are specific, minimum funding requirements of private sector (public companies) DB plan sponsors that have underfunded plans. For example, if company XYZ is underfunded by greater than 20%, are they required to make a certain % contribution within a certain period of time? I understand that this is addressed within IRS code Title 26 Sec. 412, however, I am having a hard time understanding what is written there.

Also, are companies allowed to hold a certain % of their own debt or equity within a plan? If so, how much? For example, could company XYZ sell its stock to its plan in exchange for cash and then turn around and contribute that cash back to the plan?

You're help is greatly appreciately!

[Guest RSNOW]

Replies to your question might be limited given it almost requires teaching funding method principles too complex for short e-mail response. I'll reply and it might spark a desire in some to improve upon my response.

1. Yes, there are specific minimum funding requirements for all DB plans whether or not sponsored by private sector and regardless of whether or not under funded (although minimum funding might only require a zero contribution if well funded).

2. With an under funded plan the amount of the contribution cannot simply be determined as a % of the under funding percent (%), the actuarial funding methods are far more complex than that, and there is a variety of IRS approved methods that would all produce different short term funding results. For example some funding methods would amortize investment losses over a minimum period of 5 years whereas other funding methods would spread (make up) the loss over the average future lifetime of the employees. Also, plans with more than 100 participants that are under funded to a certain extent, have an additional funding component that is triggered to accelerate (increase) funding requirements. There are so many components and factors that go into the equation that typically sophisticated software is used for the calculations.

3. DB plans can hold 10% of their assets in qualifying company stock. Qualifying stock (up to 10% of assets) could be contributed to the plan which would be easier than the transaction you described. I'm not even sure offhand if the transaction you described is exempt from prohibited transaction rules, although it may be, so contributing the stock directly is probably preferrable.

[david rigby]

Additional information RE the "employer stock" question.

ERISA section 407(a) indicates that the 10% limit applies to "employer securities and employer real property".