Non PBGC Termination Assets Less than Accrued Benefits

[Guest elem]

We have a professional corporation with a terminating DB plan. Assets are appoximatley 60% of accrued liabilities on a termination basis (assets are approximately 70.5% of Vested Accrued Benefits, this is important to the question).

The plan has been around for 4 years, so most participants are 60% vested, with a couple at 40%. The owner is 100% vested due to reaching the Normal Retirement Date.

The owner does not wish to make further contributions or waive benefits in order to pay participants 100% of their accrued benefits. Using RR 80-229, we are proposing to terminate and pay benefits at 60% of the accrued benefit amount (vesting ignored).

The owner asked whether or not it is possible to pay benefits prorata based on the percentage of Vested Accrued Benefit that is funded.

Example:

Total Assets 240,000

Total Accrued Liabilities 400,000

Owner Accrued Liability 250,000

Non-Owners Combined AL 150,000

Total Vested AL 340,000

Owner Vested AL 250,000

Non-Owners Combined VAL 90,000

All benefits are in PCs 5 and 6.

Based on RR 80-229, I think the nondiscriminatory allocation should be $150,000 to the owner and $90,000 to the non-Owners (prorata based on Accrued Benefit).

Using the funded Vested Accrued benefits as an allocation basis would produce, $176,470 to the owner and $63,529 to the non-owners (prorata based on Vested Accrued Benefit).

Is there any basis for allocating the assets based on the Vested Accrued benefits rather than the total accrued benefits? When paying benefit amounts that are less than 100% of the Accrued Benefit, is it prudent to file a 5310?

[david rigby]

Before getting to your specific concerns, does the plan already address how benefits will be distributed upon plan termination?

[rcline46]

Don't forget that upon termination all participants become 100% vested, so PVVAB is irrelevant.

Also the document must discuss priorities on termination, and even though you do not have to file with the PBGC, bet the doc uses the same priorities.

[Guest elem]

The document addresses termination in the following way:

Vesting -

"...all amounts shall be allocated in accordance with the provisions hereof and the Accrued Benefit, to the extent funded as of such date, of each affected Participant shall become fully Vested and shall not thereafter be subject to forfeiture."

Priority of Distributions -

"Such distributions shall be allocated in the following order to the extent of the sufficiency of such assets, basing such allocation on the Accrued Benefit for each such Participant at the date of termination of the Plan:

(1) to provide pensions to retired Participants who have retired under the Plan prior to its termination...

(2) to provide Normal Retirement Benefits to Participants who have reached their Normal Retirement Dates but have not retired on the date of termination, ...

(3) to provide Normal Retirement Benefits to Participants who have not yet reached their Normal Retirement Date on the date of termination,..."

Additionally, the next section of the doc places further limits on Highly Comps:

"In the event of Plan termination, the benefit of any Highly Compensated Participant or any Highly Compensated Former Employee shall be limited to a benefit that is nondiscriminatory under Code Section 401(a)(4)."