Underfunded Non-PBGC Plan, Spinoff, and Restricted Distributions

[SRM]

Consider the following facts:

Single employer, Non-PBGC covered Plan

3 owners are only participants.

Plan is underfunded and cannot pay unrestricted lump sum.

1 owner is retirement age and wants lump sum distribution. He would be willing to take lump sum equal to non discriminatory, fair share of allocated assets if plan could pay unrestricted lump sum.

Clearly the plan could terminate and each could receive a lump sum distribution equal to non discriminatory and fair allocation of assets. A new plan could be adopted for the remaining 2 owners. However, the 2 remaining owners do not want to terminate plan and potentially lose future contributions based upon prior accrued benefits (i.e. IRS position that benefit for 415 purposes attributable to prior plan distribution is not based upon actual lump sum but accrued benefit in prior plan).

Any problem with spinning off the 2 remaining participants into a new plan, allocating assets between the two plans, terminating the original plan and paying the lump sum equal to allocated assets?

Must the allocation of assets follow the priority class allocation or is another reasonable allocation available (document just indicates that benefits after spinoff are equal to amount payable before spinoff if plan terminated)?

Assume other restricted benefit payment options (restricted IRA, escrow, bond) are off the table. Assume administrative cost of spinoff, termination, and new plan are not relevant.

Any thoughts are appreciated.

[JAY21]

Did the final 415 regs lock us into using the prior plan accrued benefit vs. the amount distributed ? If so too bad as I believe at least informally before that they were allowing the actual distribution amount to be used but I haven't had this issue come up since proposed/final regs were issued.

[SoCalActuary]

401(a)(26) issue comes up if you spin off only 1/3 of the group, without changing the employee count.

If it were my problem, I would freeze benefits until funding reaches an acceptable level, adjusting their

individual contributions to get the desired result. By that, I mean that the older person who wants their

pension must also take responsibility to get it funded first. The remaining two would also have to adjust

their funding to get what they have accrued.

My understanding of the rules on terminated plans is that 415 only acts on the benefits actually paid.

This is an old position, and I do not recall seeing authority for the IRS to change it by offsetting the new

plan benefit by the old accrued benefit that was never paid. But, someone else is welcome to correct

my impression.

[SRM]

Thank you for your comments.

I haven't thought about the 415 issue for a while, so I could be wrong.

Assuming that minimum participation issue can be addressed by a timely termination of the original plan or providing minimum benefits if needed, any other concerns with the design? The retiring owner is terminal so the goal is to address the situation and pay out sooner rather than freezing and funding over time.

[Guest awacs]

401(a)(26) issue comes up if you spin off only 1/3 of the group, without changing the employee count.

Well, the plan covering one participant could be frozen, and the other plan would cover two out of two employees, and therefore be in compliance, right?

[ak2ary]

Couple things

Although IRS is redrafting their multiple Annuity Starting Date rules in the proposed regs, the position they took in the proposed regs is that it is the actual payment that matters, not the old plan's accrued benefit. In fact, in this situation under the proposed regulations, the benefit paid to the remaining partners (which would offset the maximum benefit in any new plan) WOULD CHANGE EVERY TIME 417E RATES CHANGED. This falls in the "careful what you ask for" department. The correct answer is that the accrued benefit actually paid by the old plan should offset 415...but others disagree

Anyway, if the one participant you are spinning to a separate plan is terminated or is not accruing under the separate plan 401(a)(26) is not violated cuz no HCE accrues a benefit under the plan that benefits less than 40%

[SRM]

Thank you for your comments. I appreciate them.

Any thoughts on the mechanics of determining the allocated assets to split between the plans? Must this amount be determined by using the pbgc priority class method (it is non pbgc covered plan) or could a simpler method be employed (for example if the plan is 80% funded on a lump sum basis, then split the assets by applying 80% to each participants lump sum pvab). The plan document language refers to each participant being able to receive benefits after the spinoff no less than the available accrued benefits if the original plan would have terminated before spinoff (and it is owner only plan).