Terminating a PBGC-covered 412(i) Plan

[Guest Carol the Writer]

I am in the process of terminating a PBGC-covered 412(i) Plan. There are two matters that have arisen.

First, is a 412(i) Plan subject to IRC 417(e)? Two of the three participants in the plan have cash surrender values greater than their so-called 417(e) minimum, but one does not. What to do? Make an additional er contribution for him to bring him up to speed?

Second, the plan's benefits were frozen as of 4/06, so there would be no 2006 accrual. However, the plan sponsor has not made the 2005 contribution yet, and does not want to do so. Is there a way around it? Is the 2005 contribution considered a minimum funding requirement, a receivable as a part of the definition of the cash value (read: accrued benefit), as well as a part of the exemption from the remainder of IRC 412? Does this lack of the 2005 funding mean that the Plan cannot terminate as a standard termination?

I called the PBGC, and they had no idea. One final question: what's so simple about 412(i) plans if a standard termination of such a plan requires an enrolled actuary's signature on unknown matters like this one? Or am I missing something?

Any thoughts or ideas would be appreciated. Thanks! Carol Caruthers

[Guest mjb]

Who told you 412i plans were simple? They are only simple to agent who sells them becase it is simple to determine the commission from the sale. Plan sponsors never are never told about the back end issues the will occur when a 412i plan is terminated or unwound. The problem with 412i plans is that they are sold with the premise that the larger pre tax contributions will result in a larger benefit when the plan is terminated which is not true since the a 412i plan is subject to the same limits as any other DB plan under IRC 415 and 417(e). Excess cash surrender value which is not part of the accrued benefit cannot be rolled over to an IRA and is a reversion to the employer subject to the 50% excise tax unless another plan is adopted.

[SoCalActuary]

The plan sponsor does not want to pay the 2005 premiums. Then it's not a 412i plan any more.

Now value the plan benefits using the same rules for all other db plans. Start the funding standard account for 2005. Complete the 417e minimum benefit calculations.

Charge the full actuarial and administrative fees for a regular plan.

[AndyH]

OK. DONE. But the person who sells these things should know how to service them.

[Effen]

Andy, you should edit your message to add an , otherwise people might actually think you were serious.

[Guest Carol the Writer]

Thank you, Effen. Actually, this is the first PBGC-covered 412(i) plan that I've terminated. As an aside, I'm not sure how many 412(i) plans the PBGC has ruled on.

By the way, I appreciate the suggestion of re-stating the plan as a standard db plan. However, the employer has an outside board of directors that met in April, 2006. They meet quarterly, or some such thing. Therefore, I don't think it would be possible to restate the plan back to 2005 (to get out of some or all of the 2005 funding requirement.) I do appreciate the reminder, however. I am getting forgetful (it's old age)! Carol Caruthers