DB Sub Owner Waiver - New IRS Guidance

[mwyatt]

We have a plan currently in for review on plan termination. Our case has a 100% owner and his two kids as the sole participants. Plan was underfunded on a termination basis so we had the owner execute a waiver (I know, not the correct language, more like agreement to not take full benefits) as we have on other cases in the past without question.

The IRS reviewer (we in MA, IRS in CA) came back recently and said that there had been a "sea change" on the part of the IRS with regards to these waivers. She was requesting that the waiver be rescinded and in its place that the plan document be amended (her language) to "provide that rank and file participants be paid in full prior to the owner". Note that she was NOT stating that the IRS would no longer go along with the concept, rather that the plan be formally amended rather than the waiver be executed.

Has anyone else been running into this recently? Not sure where to start on their amendment as her language doesn't look entirely appropriate (what is a "rank and file" employee under the Code - what about HCE nonowners). Any guidance would be appreciated (BTW, turnaround time on these term DL apps has been recently running over 12 months before initial contact).

[Guest Pensions in Paradise]

Can't speak to your waiver issue, but be aware that the IRS reviewer may not have any experience with DB plans. If the reviewer is telling you something which sounds peculiar, you should bump the issue up the chain of command.

We had a DB plan which was submitted in January 2004 for GUST approval. The IRS finally got around to reviewing it earlier this year, and the IRS reviewer really had no clue what she was doing. By that time the client had decided to terminate the plan anyway, so we submitted a Form 5310 for the term and lo and behold, the same reviewer was assigned the termination. This woman couldn't handle a 5307 review, let alone a 5310 DB termination. When I brought the issue up with her, she admitted that the IRS was short-handed so they were assigning people from other departments to review plans. Oh well. Sorry for the rant.

[mwyatt]

As an update, talked to Relius to see if they'd heard anything about this; they hadn't. Got a voice mail today from the IRS agent; said she had talked to the reviewer and he would be calling with some sort of "backup material" on Monday.

Really puzzled by the amendment, especially what she was asking for - what about the NON rank and file who aren't owners? Is the IRS now saying that they can be shortchanged on termination - kind of goes against the PBGC regs. Also doesn't address spousal consent on the waiver issues - PBGC was real big on getting this with the waiver...

PensionsinParadise, hope you're right and I've run into a DC background agent (of course that will make it more fun to resolve the issue for sure).

[RTK]

A comment.

I don't know if your plan is subject to Title IV. One of my GUST applications was for the termination of a db plan not subject to Title IV that did not have sufficient assets to cover all benefits. The plan covered at that point a participant owner and a spouse receiving benefits under a j&s. I did not have the owner waive benefits. Instead, I relied on plan language providing for the payment of benefits solely from plan assets (and on ERISA 403(d)(1) providing for an allocation upon termination in accordance with ERISA 4044) in determining distributable benefits upon termination. I explained this to the IRS agent and got the favorable determination on this basis.

If your plan is subject to Title IV, I think what the IRS is proposing is not going to allow a standard termination (assuming you don't have sufficent assets to cover benefit liabilities). As you probably know, there have been a number of prior threads on whether waivers for PBGC purposes will be accepted by the IRS (with respect to nonforfeitability). I have not tried the waiver approach - my underfunded plan terminations have been "agreed to" involuntary terminations by the PBGC (in lieu of a distress voluntary termination).

[AndyH]

"agreed to" involuntary terminations by the PBGC (in lieu of a distress voluntary termination).

RTK, would you be willing to provide an example of a situation that might fit this description? Or is it the same thing by a different description?

And, Mike, I haven't heard of what you described, but I would second PIP's comments about an increase in non-DB-experienced reviewers auditing db plans.

But then again, it sounds like something brewing on the left coast where everything originates.

[SoCalActuary]

Judging from the original post, the reviewer wants you to change the original doc language to a new order of priority on distributions at termination.

The oldest rules were the original PBGC categories, i.e., voluntary accts, mandatory contrib accts, retirees, covered vested benefits, other vested benefits, then all other benefits.

This doc language would get dad paid first, and the kids nothing.

Now the IRS is saying the doc should match the order set by the PBGC for standard terminations: Pay everyone else first, then the substantial owner last. If so, I like the new IRS document provisions. It eliminates the conflict between regs and the plan doc.

[mwyatt]

Both plans were Title IV covered, both were fairly simple (1 100% owner). My problem with this "sea change" (her language, not mine) is that the language is fairly simple and introduces a common sense term of rank and file employees which unfortunately doesn't seem to come up too well in my Checkpoint searches of the Code/ERISA. I'll let you all know what happens on Monday. My Relius contact was basically shaking his head over the phone...

[david rigby]

Documentation is important for the reviewer as well as the sponsor. Merely stating a change of thinking is not enough; support is needed.

[AndyH]

Now the IRS is saying ...

And to state the obvious, a comment by one IRS reviewer does not necessarily represent the official position of the IRS.

[RTK]

Andy

Client was bankrupt and the plan would have satisifed requirements for distress termination under ERISA 4041. PBGC contacted me after the filing of the notice of reportable event for client bankruptcy and proposed that the plan adminstrator agree to termination of the plan under ERISA 4042.

Essentially ended up at the same place, but no distress termination application had to be prepared and filed.

[AndyH]

Thanks, I was curious because I have a client who was on the brink of a similar situation and was exploring all the what-if's but did not qualify for distress, kind of an in-betweener.