Underfunded frozen plan

[Effen]

I'm working on a plan that has been underfunded and frozen since late 70s. It contains no substantial owners, no key employees, no HCEs. Just a few long service employees. It is < 100 participants, so the AFC's don't apply.

The funding ratio is around 50%, although they have never missed a required contribution. We have been using unit credit method w/ relatively conservative assumptions (6%), but due to a large credit balance, there hasn't been a required contribution for years. Since it they aren't required, the employer isn't putting anything in and the funding levels continue to drop each time someone is paid out. (It does pay lump sums.)

All of the remaining participants are now approaching retirement age, but the plan doesn't contain enough money to pay them all.

Is there anything that would force the employer to make a contribution before the credit balance is used up? What if it runs out of money? Is there a Reg that would force them to make a contribution to cover the benefit? Plan document doesn't really address it. The employer is solvent, although they aren't rolling in cash.

[Blinky the 3-eyed Fish]

First, there is no reg that requires a contribution here. However, the combination of the plan being underfunded and there being a huge credit balance has to mean that there are very large amortization bases. Aren't these working to reduce the credit balance each year? Then if the you state that the funding levels are dropping with each LS payout, this would just add to the experience loss for next year. Eventually these factors will eliminate the credit balance and force contributions. Also, 6% may be too high a rate for funding if lump sum payouts are the norm and you are going to have a slew of them in the near future.

This client has to be getting killed in PBGC premiums. Isn't that an incentive to put more money into the plan?

[Effen]

Yes, all that is happening and the CB is almost gone so they will need to put something in relatively soon, but I don't think it will be enough in the short term. This is also a relatively small plan (< $100K) so the PBGC premiums aren't really "killing" them.

It is kind of an acedemic question. It's easy for us to say "just put the $60K into the plan and get rid of it", but until the plan runs out of money, I don't see anything that would force them to fund it. I guess I'm realizing that it is possible for a plan to run out of money and still have a credit balance so that no contribution would be required. If that happens, what (other than morals) would force them to make a contribution?

[Blinky the 3-eyed Fish]

Time? Sure it's possible to run out of money and have a credit balance, but in time the funding method will cause the plan to be fully funded. Barring future experience losses, from any point, you can expect the plan to be fully funded in 5 years (It would seem those pesky amendment bases have to be gone by now). The fact that this client would rather dump his money on you and the PBGC is beyone me, but you can lead a horse to water...

[WDIK]

If the two of you would be kind enough to tutor me for a moment...

What are the ramifications in the situation you describe if benefits to a participant are due and payable and yet the plan has no assets and a credit balance? Is such a scenario impossible, does the fact that a benefit is payable require a contribution to be made, or is the participant out of luck?

Thanks for indulging my curiosity.

[david rigby]

It is < 100 participants, so the AFC's don't apply.

Perhaps not relevant, but this is not exactly the condition for avoiding the AFC.

BTW, is there a concern under Reg. 1.401-4©(2)?

[Effen]

Thanks PAX, but neither applies. This is the employer’s only DB plan and they are all relatively low paid participants. This is the remnants of an old hourly plan.

[SoCalActuary]

You would do the plan and participants a favor by projecting the liquidity needs of the plan using reasonable assumptions of future retirement dates. Then have the assets either converted to securities with similar liquidity dates, or have the employer plan to contribute enough each year to cover the benefit payment needs.

I believe the trustees have a duty to protect the benefit payments due the participants, and to inform the employer of consequences from failure to have sufficient assets for benefit payment, and I would guess that the trustees are relying on you to give them good information.

[mbozek]

Has any one asked for an opinion of counsel as to the liability of the plan's fiduciaries if the plan does not have sufficient assets available to pay benefits when a distribution is due. This isnt a funding issue- its a fiduciary liability issue. Plan fids have been sued where they failed to make sure that there were sufficient assets available to pay benefits.

[Guest Brian4]

As the plan sponsor has lesss than 100 participants in defined benefit plans, it would be exempt from the liquidity funding rule in Internal Revenue Code section 412(m).

One possibility is a regulatory agency taking action if the plan was unable to pay benefits when due. This is one of the grounds for plan termination.

[Guest Happy Actuary]

As referred to above, I think the "action" you could take w/b to decrease the interest rate assumption to 5% and use GAR94.

I disagree that 6% is conservative in this situation