Can terminating plan make special funding contribution?

[Guest davesbpc]

Plan sponsor wants to terminate a non-PBGC plan and pay out participants in 2005. Benefit accruals have been frozen since 12/31/02. Using a funding interest assumption of 5%, the PYB 1/1/05 valuation has a $0 maximum deductible contribution. But when we calculate the lump sums payable at 4.86% (Dec. 2004 GATT rate), the plan's assets will come up short by about $30,000. There is a single HCE with a lump sum benefit of $355,000 (nowhere close to his 415 limit).

Is there any way to make a "just-in-time" deductible contribution in 2005 that is exactly enough to pay all benefits on the planned distribution date of 9/30/05?

Dave Peckham

[Effen]

There is no problem making a final deposit assuming it is permitted under the funding method. You may be able to increase the allowable contribution by adjusting your assumptions. Lower your interest rate, increase your mortality.

Are your sure your participant wants to put the money in?

[Blinky the 3-eyed Fish]

There is the unfunded current liability deduction under 404(a)(1)(D). Under PFEA you can still use the lowest rate under the old range, i.e. 4.59% for a 1/1/2005 valuation for valuing RPA CL for this purpose. That should allow your deductible contribution to be above the $30,000 range.

If this were a PBGC covered plan, then the unfunded liabilities replace the UCL in the year of term. Obviously, extraneous information that doesn't apply here.

(Edited since I put the wrong interest rate.)

[SRM]

There would be unfunded current liability assuming that there is a significant portion of the plan benefits attributable to female participants. The present value of benefits at 4.59% 1983 GAM (male) for current liability purposes may be less than the present value of benefits at 4.86% 1994 GAR proj. 2002 for 417(e) purposes.

Bad law. I vote for changing assumptions.

[Blinky the 3-eyed Fish]

Bad law? Why? A law that allows the plan to be brought up to full funding in a given year is bad? A law that gives the flexibility to fund more in good years is bad? It's always been available for plans with over 100 participants, so is it bad for them or is it just bad for plan with under 100 people? Proposed changes to pension plans would allow for MORE funding in good years, so that the underfunded problems we are seeing wouldn't be so prevalent. Still bad law?

And because it's bad, the actuary should change assumptions like lowering the interest rate to less than 5% or creating an artificially high mortality?

IMHO, it's anything but a bad law. I am really curious why you think so.

[SRM]

Sorry, I wasn't clear. I agree with you. I am extremely grateful that the law allows for funding to 100% of RPA CL.

I meant that it is bad law that provides for a calculation of the unfunded current liability that can possibly be less than the amount needed to bring the plan up to full funding for plan termination purposes.

I have gotten stuck a few times with valuations (for sponsors that want fully funded plans each year) that produce a maximum deductible contribution (based upon unfunded current liability) that is less than the amount needed to make the plan fully funded on a 417e basis because the majority of the benefits are attributable to male participants.

[Blinky the 3-eyed Fish]

Ah, that's clearer.

[Guest davesbpc]

Resurrecting this old post.

I dropped the funding assumption to 4.75% and GAR-94 and did indeed generate a normal cost of $13,326. However, both the IEAN accrued liability and the RPA '94 current liability at 5.49% were too low, and my deductible contribution was wiped out by the full funding limitation.

So, to reiterate my question, if the 1/1/05 valuation cannot be tweaked to allow a deductible contribution, is there any other way to fund a deductible contribution in 2005 in order to have just enough to pay out all the benefits without having to have the 50% owner take a $30,000 hit?

Thanks for any suggestions.

Dave Peckham

[david rigby]

Under PFEA you can still use the lowest rate under the old range, i.e. 4.59% for a 1/1/2005 valuation for valuing RPA CL for this purpose. That should allow your deductible contribution to be above the $30,000 range.

How about this to determine your UCL?

[Guest penman]

davesbpc,

If the plan termination date is in 2005, the amount necessary to satisfy all benefit liabilities is deductible under 404. EGTRRA changed the law from applying only to PBGC plans to applying to all plans in the year of termination. See 404(a)(1)(d)(iv).

[Blinky the 3-eyed Fish]

Interesting you say that penman as I don't agree. This topic has been discussed before at length. Here is one place. Care to elaborate your position?

http://benefitslink.com/boards/index.php?s...c=24115&hl=pbgc

[Guest penman]

I misspoke, it wasn't EGTRRA, it was a Tecnhical Correction to EGTRRA, it was Public Law 107-147, 3/9/02. It reads as follows:

(s) Amendment Relating to Section 652 of the Act.--Section

404(a)(1)(D)(iv) is amended by striking ``Plans maintained by

professional service employers'' and inserting ``Special rule for

terminating plans''.

Basically, MGB said the same thing in the post that you linked.

I don't really have a cite for you other than what is written in the amended 404(a)(1)(D)(iv). I do not think that just because 404(a)(1)(D)(iv) references the term "benefit liabilies" (which I think is a PBGC term), it means that the paragraph only applies to PBGC covered plans. An actuary I used to work with called the IRS on this topic and I believe they supported the "all plans" position but don't hold me to that. I can contact him if necessary.

As a separarte issue, I am wondering there would be a problem with doing an amendment increasing benefits in the year of plan termination which would generate a small asset/liability shortfall and therefore create a deductible contribution for an otherwise overfunded plan (before amendment) which is terminating. I do not think there is a two year amendment rule for HCE's in this situation like there is for the UCL "supermax" deduction for an ongoing plan. Any thoughts?

[Blinky the 3-eyed Fish]

(D) Special Rule In Case Of Certain Plans.--

(i) In General.--

In the case of any defined benefit plan, except as provided in regulations, the maximum amount deductible under the limitations of this paragraph shall not be less than the unfunded current liability determined under section 412(l).

(ii) Plans With 100 Or Less Participants.--

For purposes of this subparagraph, in the case of a plan which has 100 or less participants for the plan year, unfunded current liability shall not include the liability attributable to benefit increases for highly compensated employees (as defined in section 414(q)) resulting from a plan amendment which is made or becomes effective, whichever is later, within the last 2 years.

(iii) Rule For Determining Number Of Participants.--

For purposes of determining the number of plan participants, all defined benefit plans maintained by the same employer (or any member of such employer's controlled group (within the meaning of section 412(l)(8)©)) shall be treated as one plan, but only employees of such member or employer shall be taken into account.

(iv) Special Rule For Terminating Plans.--

In the case of a plan which, subject to section 4041 of the Employee Retirement Income Security Act of 1974, terminates during the plan year, clause (i) shall be applied by substituting for unfunded current liability the amount required to make the plan sufficient for benefit liabilities (within the meaning of section 4041(d) of such Act).

I copied the text in question for all to see. I do agree that (iv) is not worded the best so there is a bit of amiguity. However, I suppose without some formal guidance (or at least informal - has this been addressed in a Q&A) I would be hesitant to apply it to a non-PBGC covered plan.

As to your last question, I do think the 2-year rule applies for a terminating plan as (iv) madates the change in (i) and does nothing to negate the rule in (ii).

[Belgarath]

I'm with Blinky. I read EGTRRA 652(a), (which had an incorrect heading for this section (iv),) and then the Conference Committee report. The Conference Committee report on the Senate amendment specifically says,"The special rule does not apply to plans not covered by the PBGC termination insurance program."

The Conference Agreement "...follows the Senate amendment, with modifications" but removing this provision does not appear as one of the modifications.

Then the JCWAA 411(s) changed the heading on (iv) but did not change the language. I come out of it with the same opinion - I'd be hesitant to apply it to a non-PBGC plan. If forced to opine, then I'd say you can't use it for a non-PBGC plan.

[Guest penman]

You guys are probably right. After all, it does say "subject to Section 4041". As for the "separate issue" that I mentioned, when I reread that today and think about it, it sounds crazy.

[AndyH]

Now I have one of these, non-PBGC underfunded terminating plan. Anything new or any dissenting opinions on the applicability of this only to PBGC-covered plans?

[AndyH]

Another angle to this: Would an amount in excess of the 412(l) limit still be deductible over 10 years, as provided under the regs, or was this superceded by changes in the law under EGTRRA and the Technical Correction?