Restructuring DB Plan into Multiple Employer Plan

[Guest IRISH79]

I do not have much experience with Multiple Employer plans. A client is considering separating its DB plan into a multiple employer plan. There are 4 separate plans involved (they do not meet requirements for controlled group status). Does any one have a reference for procedures involved in restructuring the plan? Are separate agreements regarding funding obligations or termination liability of each company required or are these issues addressed within plan document?

[Effen]

separating its DB plan into a multiple employer plan.

There are 4 separate plans involved (they do not meet requirements for controlled group status

I don't really understand the question.

Separating into multiple employer plan? A multiple employer plan is one plan of unrelated employers.

Then you say they ARE 4 separate plans of unrelated employers? What they are trying to seperate?

[J Simmons]

I have some experience with a DB plan that was maintained by a single employer for some time since 1989, but then broken up into three separate companies without related ownership.

You have to test separately, of course. But in determining the minimum funding and who is entitled to what portions of the standard funding credits, you have the opportunity to either re-allocate the assets each year over the accrued benefits of all employees or to do separate tracking per employer until there is a certain type of event, such as a plan spin-off, the withdrawal of a sponsoring employer, or termination of the plan altogether. On those events, the re-allocation of assets across the benefits liabilities of all employees is required--this is because each employee in essence is entitled to have all of the sponsoring employers jointly and severally liable for the benefits promised that employee under the plan.

Until one of those events occurs, however, you can choose separate tracking or annual re-allocation. If all sponsoring employers are going to do nothing more than the bare minimum funding required, it won't make much difference. However, if one sponsoring employer might want to fund up--particularly now that you can go to 150%--in good years while the other sponsoring employers do not, then annual re-allocation will have the effect of those sponsoring employers doing the bare minimum receiving a windfall (i.e., a reduction in their share of the plan's overall underfunding) at the expense of the company that made an extra contribution. Separate tracking would give the company that contributes extra the opportunity in a later year (but before there is a plan spin-off, the withdrawal of a sponsoring employer, or termination of the plan altogether) to recoup some of the extra earlier contributed, without 'sharing' the credits created thereby with the other sponsoring employers, those that did the bare minimum all along.

Another issue you will have initially is the allocation of current assets to which benefits liabilities. This comes into play because there are retirees in pay status, former employees with vested benefits, current employees with vested benefits, and current employees with unvested benefits at the time you go from one plan sponsor to two or more. Who gets the retirees in pay status and/or former employees with vested benefits? If it's disproportionate, it will result in a disproportion of any underfunding between the companies sponsoring the plan, because of the priority in allocating assets to cover the benefits liabilities for first retirees in pay status, then former employees not yet in retiree status, before any assets may be allocated to cover the benefits liabilities of active employees. This may be determined incidentally by the documents that governed the business reorganization; if not, there will need to be agreement on which of those inactive employees with benefits accrued under the plan 'belong' to which of the sponsoring employers.

I would suggest that any one of the sponsoring employers that might be considering funding any more than the bare minimum required of it (a) first obtain an agreement for separate tracking from all other sponsoring employers, and (b) at that, consider the impact of re-allocation upon a plan spin-off, the withdrawal of a sponsoring employer, or termination of the plan altogether if any of those events occurs before perhaps recouping the benefit of the funding credits created through the earlier extra funding.