PBGC Insured Benefits

[Guest Not Amused]

Plan provides for a pre-retirement death benefit equal to the PV of the participants vested benefit.

Payment can be made in a LS or installments.

Owner dies, plan is underfunded, early termination benefit restrictions apply, so the LS payment is not an option. Benefits would therefore have to be paid as installment payments - based on the restricted benefit rules over the life expectancy of the participant.

The plan is then terminated. It is not subject to PGBC coverage, but plan provisions require an allocation of assets based on benefits that would be insured by the PBGC.

MY QUESTION IS -

Would the balance of the (restricted) death benefit be considered a 'pension benefit' for PBGC insurance purposes - and a portion of it guaranteed after adjustment for the dollar limit and substantial owner phase in? Or would the entire balance be excluded because it would not meet the criteria to be a 'pension benefit'?

PBGC Opinion 78-24 deals with a similar question, and seems to imply that the remaining death benefit may not be insured since it was not designed/intended to provide a maintenance income to survivors. If the benefit had not been restricted, I believe Opinion 78-24 would lead me to easily conclude that the benefit is a pre-termination obligation and would/could be paid in full from pre-termination assets. Or if the benefit was defined under the plan as a survivor annuity with a LS option, 78-24 seems pretty clear that the remaining installment payments would be guaranteed. But since the plan provides for a benefit equal to the PV the vested benefit (implied LS normal form), they seem to say that the even if the benefit is converted to installments payable over a lifetime, it is still not a 'pension benefit'.

If none of the benefit is insured, other participants get their full vested benefits and the remaining death benefit falls entirely into the next priority category along with the non-vested/non-insured benefits of all other participants. Given the dollar limit and 30 year phase-in that would apply even if the death benefit is an eligible benefit for PBGC purposes, the difference in the end result may not be very different. But I would still like to get this right......

[Effen]

Death benefits are exempt from the "top 25" restrictions.

Are there other participants in the plan? If so, are their other HCEs?

[Guest Carol the Writer]

Effen, Would you happen to have quickly a cite on the exclusion of death benefits? I have a client who is precisely in this situation, as well, and it would help much to get this matter nailed down. Thanks!

[Guest Not Amused]

I would like a cite for the death benefit exclusion also. That would mean the owner's estate gets their money first, and the only other NHCE employee gets whats left - or would the assets then have to be allocated in a nondiscriminatory manner under Rev Rul 80-229?

The owner/participant died only a about a month before the plan was terminated and no benefits have been paid, although the estate represenative did send an email requesting payment of the benefit. Does that affect how assets would be allocated on termination? Can the death benefit be treated as a "payable" or does it still go into the allocation pot?

By the way, both the owner and the other participant were only partially vested.

[SoCalActuary]

Tricky problem here. The trustee of the plan will have an obligation to the remaining participant, as well

as a duty to the beneficiary of the deceased owner. With the plan termination in process, a lot of issues are involved.

Vesting - full or partial on death of the participant?

PBGC benefit rules - how are they used in the plan document?

Why no life insurance if there was a large underfunded benefit payable on death?

Was it a bad design to put a large underfunded benefit at risk, or was the participant insurable at all?

You have two competing parties for the plan funds and probably a conflict of interest, in that the people who will pay for your work are probably related to the beneficiaries of the plan. Will you be explaining the fudiciary duties to the successor owners and/or trustees?

[Effen]

I'm just saying the death benefit is exempt from the top 25 restriction. You still need to follow the terms of the plan to resolve the actual benefit distributions.

Just because the primary died, doesn't mean the sponsor is dead. The termination of the underfunded plan may not have been proper. Did you file it with IRS? You need to follow the provisions of the plan and pay out benefits accordingly. That could mean everyone gets less, it could mean the plan needs to be funded. You need to be working with ERISA counsel.

I'm having trouble finding a cite, but I am sure it is true. I will keep looking, but maybe someone else can jump in. I have worked with the IRS on several top 25 violations and each time they state if the person has died, there is no problem. It may have something to do with the fact that the restricted employee is dead and the beneficiary is not necessary a restricted employee. I had a cite once, I will keep digging.

[Guest Not Amused]

Effen - I actually found this in the 2003 Gray Book contradicts your understanding that death benefits are excluded:

QUESTION 24

Restricted Employees: Payments Under Lump Sump Option and Rollover of Payments for High-25

a) If a “high-25” HCE elects a lump sum currently that cannot be distributed immediately, would this election lock in the interest and mortality assumptions as of the date the benefits would have commenced had they not been restricted under 1.401(a)(4)-5(b)?

b) If the HCE elects the lump sum now but cannot be received due to the restrictions under 1.401(a)(4)-5(b), are the monthly “single life annuity” payments equivalent to the accrued benefit that may be distributed eligible for rollover as the lump sum would be?

RESPONSE

a) The “high 25” limits do not restrict the participant’s choice of option, just the dollar amount that can be paid in any year until the restrictions are lifted. Restricting the payments should lead to a net result for the participant that is similar to actually paying the selected benefit and obtaining a bond or security interest. Thus the plan can provide that the remaining lump sum, including interest at the rate used to determine the lump sum, is payable at the time the restrictions no longer apply. Note that the high-25 limits no longer expire on death. The restrictions continue to apply to the beneficiary until the financial targets are met or the participant is no longer one of the highest 25 paid employees.

b) No.

The plan doesn not provide full vesting on death. This poses another question - the restricted benefit language says the unrestricted amount payable is a life annuity based on the accrued benefit. Would the plan therfore be able to pay a higher amount (not reduced for vesting) - understanding of course that the total value of the benefits ultimately paid would be limted the vested amount?

But my key question is whether the PBGC would guarantee any part of the death benefit in these circumstances. The PBGC issued an opinion (78-24) stating that death benefits payable as a lump sum or installments do not meet the definition of a “pension benefit” as defined in 2005.2, and are therefore not guaranteed. But the facts there seem fuzzy.

It is a messy situation, but I am still trying to determine how much of a difference all this could make in the final allocation results. I really appreciate all the input from you guys.