Plan Termination and new 415 Limit

[Dougsbpc]

A Single employee corporation wants to adopt a new DB. The sole shareholder and participant previousely sponsored a DB under which he accrued a benefit of $5,000. Under the new plan his salary will be $10,000/mo and his projected benefit will be $10,000.

Under the new plan we must adjust for his accrued benefit under the prior plan for the 415 100% of pay limit.

Question: suppose they terminated the prior plan in 2003 with insufficient assets (i.e. the shareholder participant accepted a major reduction in benefits). For purposes of adjusting his benefit under the new plan, must we use $5,000 or the reduced equivalent of his benefit.

Thanks much.

[Blinky the 3-eyed Fish]

The 415 limit would be reduced by the benefit previously distributed, not by what was earned. Of course this is good news here, but would be bad news if the prior plan had excess assets allocated.

[AndyH]

Am I reading this correctly, that an insufficient DB plan was terminated in 2003 with the owner waiving. Then in 2004 another DB plan is being started?

Is this really being considered, or is it just hypothetical? Talk about flip flop funding!

[Dougsbpc]

This is actually a hypothetical.

The fact is that this plan is an active PBGC plan with several issues. There is a single 100% shareholder participant and six other participants. The employee benefits are relatively small.

This may be a takeover case for us and I'm not sure what happened in the past. They probably invested too heavily in the market in the late 1990's and got clobbered. One thing is for sure, they will have high PBGC premiums. This leads us to think they may just want to terminate the plan and then adopt a new one starting 1/1/05. The premium savings could be $20,000 over four years.

A DB plan is right for them as the business has consistent profits. With a small reduction in benefits for the owner, it makes sense.

[mwyatt]

Don't want to get on a high horse here, but your situation really illustrates a problem for small plans. Unless your client breaks the law by ignoring the top-25 restrictions, where is the PBGC's liability here? I suspect that if you limited your owner's benefit to the PBGC guaranteed amount, your plan would be fully funded. So where exactly does the PBGC come off trying to get extreme premiums from this small plan client to subsidize the steel industry?

[David MacLennan]

Complete agreement with Mwyatt on the outrageous PBGC premiums.

One thing to add to the original post issue: remember the 100% limit is not adjusted for age of commencement. This sometimes leads to errors with respect to how the prior distribution offsets the 415 limit.

[AndyH]

David, would you mind elaborating? I understand your first sentence of your second paragraph but am curious about your second. I find these rules to be less than clear.

[Dougsbpc]

Mwyatt

This is exactly right. Where is the PBGC's liability?

In fact, they have almost no liability for the vast majority of small plans. They should allow all plans to reduce the value of benefits (on the schedule A) by the benefit of any greater than 50% owner participant. It would be so simple and so fair.

[david rigby]

It would be so simple and so fair.

We're talking about the government here?

[mwyatt]

Actually, it's even more hysterical because the maximum PBGC guarantee for a Substantial Owner phases in over a 30 year time period!

[AndyH]

Ronny RayGun would certainly agree. And he liked nothing better than getting up on that high horse. Appropriate comments

[David MacLennan]

Andy - Re the offset, I believe the offset to reduce the 100% Hi-3 limit should be the actuarial equiv annuity of the lump-sum distribution, the annuity commencing at the age of distribution. You would not make the offset the a.e. annuity commencing at, for example, the NRA.

[flosfur]

Mwyatt

This is exactly right. Where is the PBGC's liability?

In fact, they have almost no liability for the vast majority of small plans. They should allow all plans to reduce the value of benefits (on the schedule A) by the benefit of any greater than 50% owner participant. It would be so simple and so fair.

The PBGC wants its pound of flesh whether or not they have a liability exposure, especially now that they are strapped for cash.

A plan terminated under Standard Termination on January 31, 2004. The assets have not been distributed yet. PBGC won't waive the variable premium for 2004 and won't even allow pro-rating of the variable premium based on the period from 1/1/04 thru 1/31/04 and insists on pro-rating based on the period from 1/1/04 thru the date final $ is distributed, if distributed during 2004, which could be July/August!

Yet, if the plan had terminated a month before on 12/31/2003, there would have been no variable premium for 2004!

[AndyH]

I am the last person to agree with anything the PBGC does, but any waiver requires the consent of the spouse within the waiver period, me thinks.

[Guest lerieleech]

I have wondered about this myself.

Theoretically, it makes no sense to charge based on the value of benefits that are not protected.

[david rigby]

... it makes no sense...

See my comment above.