Termination of underfunded DB Plan - reduction of benefit

[Guest jvanheyde]

Company Z is owned 35% by Employee A, 15% by his nonemployee son, and 50% by Employee B, who is not otherwise related to Employee A. Company Z is terminating an underfunded DB Plan, and the Company would like to eliminate the underfunding by cutting back A's accrued benefit. The question is "can this be done, given his ownership percentage." The nonemployee son is an adult, and Employee A has the right to buy Employee B's stock pursuant to their shareholders agreement upon Employee B's death, disability or retirement.

[Draper55]

From a practical and PBGC standpoint I believe the answer is yes if A is willing to suffer the reduction.

I believe the pure IRS position is that it is a cutback in accrued benefits anf therefore impermissible.

Draper1

[FAPInJax]

PBGC will only allow a more than 50% stockholder to waive his benefits to make the plan whole (standard termination). The rules for determining this ownership would have to be reviewed.

IRS will not permit the waive of any benefit when funding the plan for purposes of the minimum funding standards. It has been my experience that if the funding is handled correctly, they will not object to paying all the employees first and then splitting the remaining monies amongst the owners.

[ak2ary]

I agree with Frank.... the PBGC will only allow a waiver by a 50% or greater owner...so if the plan is PBGC covered, you have a real problem. If its not the IRS will look for a nondiscriminatory allocation of the assets so the allocation to A could be restricted