Underfunded Plan Valuation

[Guest Lisa P]

We have a 2-participant (one owner, one employee) DB plan that is terminating as of December 31, 2002 and is under funded, but the owner has signed a waiver of his benefits. In the meantime, we need to prepare a January 1, 2002 valuation with the goal of $0 contribution for 2002. With the decline in asset values this plan has experienced, the goal appears to be impossible to obtain.

From a practical standpoint, there is no advantage for the employer to make a contribution because the company is no longer profitable and so would not get a tax benefit, and no disadvantage to the only employee if no contribution was made.

Is there an alternative method for avoiding a plan contribution in this situation?

[Blinky the 3-eyed Fish]

There is no alternative to making the contribution. The waiver of beneifts can't be considered for the valuation. You are limited in switching funding methods under Rev Proc. 2000-40 because your valuation is in the year of termination. That hampers you greatly and leaves you with perhaps changing assumptions as an alternative. Though, chances are that the effect is not great enough.

Have you thought of recinding the termination and reestablishing it in 2003? It seems unlikely it will help, but then you could then possibly benefit from a asset methodology change or a funding method change to individual aggregate.

[Guest RSNOW]

Lisa I don't think you're going to find any great options in this situation. I have seen some actuaries occassionally take an aggressive position that in the final year of plan termination the Election to Limit Distribution (correct term for your waiver) can be considered in the valuation to reduce/eliminate the contribution, but this is probably aggressive as I believe there is a Revenue Ruling that expressly states it's an unreasonable assumption to assume someone will ultimately take a benefit less than what they have earned. It may be possible to argue this Rev. Ruling applies more to when the plan was in existence, than the year of plan termination, but you won't have much to hang your hat on if you take this position, and you still need an actuary willing to sign off on this approach. Any chance the owner could lend the money to the company to make the contribution ? The issue really isn't the tax deduction here but rather meeting minimum funding requirements.

[david rigby]

As Blinky states, Rev.Proc. 2000-40 is not available. However, a funding method change might still be available thru application.

BTW, depending on the adoption dates, you might be able to do your 2002 valuation recognizing the plan freeze (you did specify both a plan freeze and a plan termination didn't you?). A freeze might automatically change a method, such as from PUC to UC. But then there might be a different problem: the IRS has stated (Gray Book, Q&A 99-6) that it is unreasonable to use an aggregate funding method when the plan is frozen or there are no active participants. Here is an earlier discussion about this topic:

http://www.benefitslink.com/boards/index.p...50&hl=gray+book

RSNOW refers to a Rev. Ruling. I think this is 81-136. http://www.taxlinks.com/rulings/findinglis...evrulmaster.htm

[Guest RSNOW]

I had interpreted Blinky's comment on Rev. Proc. 2000-40 to mean that you are limited in what funding methods you can change to under the automatic approved changes under that Rev. Proc. and I think the unit credit funding method is probably the main (only ?) option there (without seeking individual approval).

[Blinky the 3-eyed Fish]

RSNOW, you can't change to unit credit with automatic approval in the year of termination unless the plan is sufficiently funded.

[Guest RSNOW]

Thanks for the clarification Blinky.