Minimum funding

[FAPInJax]

A client has a sole proprietor who has had a bad year(s) and does not want to make any contribution for the calendar year 2002. Unfortunately, there is no way this is going to happen with the facts. The SP and his advisor (do not know whether it is an attorney) has stated that they are willing to waive part of their accrued benefit such that a contribution will not be required.

I advised the client that the waiver is great for termination to make the plan whole BUT may not be recognized for minimum funding. The SP and their advisor want a specific IRS case or cite as to why they can not use the waiver (especially because there is only one participant).

The only thing I have been able to find is some very old Q&A / discussion whereby everyone agrees that it can not be done (it appears the reference is to 411(d)(6)???)

Any ideas??? Thanks in advance for any commentary.

[Blinky the 3-eyed Fish]

Why not ask them for a specific cite that ALLOWS the waiver? I am sure that there isn't a cite that allows you to escape minimum funding if you are a left-handed redheaded Capricorn with all your wisdom teeth, but that doesn't mean it's allowable.

[david rigby]

Agree with Blinky.

I believe the correct reference is IRC 411(d)(6). The ability of an owner to waive a portion of a benefit is from the PBGC, and is directed only to plan terminations.

[Guest dsyrett]

I recall that something was published about a year or two ago, perhaps a PLR, that specifically did not allow a waiver to reduce a funding requirement.

[rcline46]

Add my 2 cents worth - 411(d)(6) prevents ANY reduction in accrued benefit.

ERISA 4000 series on plan terminations permits distributions 'to the extent funded' so the IRS must agree. PBGC allows this to be applied to substantial owners first.

Just a suggestion - NRA 80 as a funding assumption might do the trick - if the actuary will go along. (or some younger age).

[FAPInJax]

Thanks for all the comments.

The client is adamant that they will do it with their attorney's help. Supposedly they even have 2 pages of stuff to file with the IRS to permit a retroactive amendment fixing the situation.

I repeated the 411(d)(6) argument but eventually the client is on his own (or the attorney if he is willing to stick his neck out).

Thanks again!!

[Guest RSNOW]

I believe Revenue Ruling 81-136 also addresses this issue by essentially stating that the election of a smaller benefit than accrued will cause the actuarial assumptions to be considered not reasonable in the aggregate.

[david rigby]

Find a Revenue Ruling here: http://www.taxlinks.com/rulings/findinglis...evrulmaster.htm

A funding waiver is another route to consider, at least in the future, but it appears to be too late for the facts given (no later than 2-1/2 months after end of plan year).

BTW, I'm not sure about rcline46's comment about "ANY reduction in accrued benefit."

IRC 411(d)(6) refers to plan amendments.

[rcline46]

PAX is correct. In fact the accrued benefit can be reduced in many ways, including requesting it thru the service! Or if the formula (integrated) causes it to happen, compensations were incorrect....

The point I was making is that one cannot just 'reduce' the accrued benefit to fit funding.

[RTK]

There was a Technical Advice Memorandum that addressed waiver of accrued benefit to correct accumulated funding deficiency at plan termination - 9146005

The validity of waivers has been litigated under ERISA, but as far as I know, has not been litigated under the Code

[david rigby]

PAX is correct.

If a man speaks in the forest, and there is no woman around to hear him, is he still wrong?

[rcline46]

pax - rhetorical question - cuz if a man is in the woods, he is hunting and he would NOT be speaking! So he couldn't be wrong!