Inability to Fund after Death

[Dougsbpc]

We administer a small non-pbgc DB plan for a company with 10 employees. The 100% owner of the corporation recently died and the company will no go out of business. It appears the company will only have the resources to fund half of the 2006 pension contribution.

We know there is a 10% excise tax and if the deficiency is not corrected the IRS could potentially impose a tax of up to 100%. It appears we could ask for a waiver of the 100% if we can show it would cause a hardship.

Has anyone had experience with this?

[Mike Preston]

412c8

[Dougsbpc]

Mike

Thanks for the cite on this.

Sorry I wasnt clear. The plan year end in this case is 9/30/2006 so we are already past the 2 1/2 month deadline for the amendment.

[Mike Preston]

Tread very carefully here. The company owes the plan. The plan owes the beneficiaries, as per the plan participant. The estate's heirs own the company. They, in essense, owe the money to the plan's beneficiaries, as qualified plan money, eligible for rollover. If they aren't one and the same, there are competing interests. Even if they are one and the same, they may not understand that it is their best interests, most likely, to do whatever it takes to fund the liability.

Be very careful.

[SoCalActuary]

The company will "no" go out of business. Did you mean "not" or "now"?

If the company does not stick around, then pay off the pension liability to the extent funded.

If the company does continue, will it be able to afford the pension liability? If a benefit is paid

as a J&S form to the beneficiary, since HCE benefits are restricted, then the company will have

time to pay off its liability. But the stockholders will have to have the willpower to complete the

job.

There are some economic scenarios where the company would not wish to pay off the liability,

so a broad perspective is needed for all the tax effects. For example, if the company does not

have a tax liability for an extended period of time, funding the plan will produce taxable benefits

without deductible contributions. The stockholders need to negotiate which is better, a healthy

stock value or a pension account.

[himt4]

How about...

If there is no money to fund, pay the 10% penalty .

Terminate the Plan now with IRS filing. tell the IRS that the beneficiary(s)

of the owner have agreed to take a cut in their benefit to the extent needed to

pay all benefits of the Plan.

I don't think the IRS ever hits you with a 100% penalty after a Plan terminates.

Will this work???

[david rigby]

Not disagreeing with prior comments, I suggesst the company (and/or the estate) should discuss all of these issues with its own competent ERISA counsel. Decisions are not the prerogative of the TPA.

[Dougsbpc]

Thanks much for all the replies.

In this case the 100% owner who died has about 85% of the benefits, so the plan has plenty in the way of assets to pay all non-owner / non-key employee benefits even if the remainder of the contribution cannot be funded.

To clarify, the company will go out of business.

We are in the preliminary stages here and just wanted to see if others had experience with this. We will likely recommend they hire an ERISA attorney to provide guidance in the matter. There are other complicating factors. Yes, spouse much younger (separated but divorce not final) vs. the children from a previous marriage.

It seems though that terminating the plan through IRS and paying the 10% penalty makes sense. Again, the plan can easily pay all non-owner benefits. However, the spouse (as primary beneficiary) will likely contest this action, so the attorney must be hired by the estate.