Terminated DBP distributes prior to end of PBGC 60-day review period

[Trekker]

A fully-funded terminated DBP wants to distribute 90-95% of benefits to participants before the end of the PBGC 60-day review period. The remainder would be distributed after approvals.

The plan is in good shape, is following all the rules (except the one I'm asking about), but for financial statement purposes, needs to make distributions sooner rather than later.

What are the consequences, penalties, jail terms, etc.?

[Blinky the 3-eyed Fish]

The quick response is a PBGC covered plan must go through the process to have a valid termination. If you go off that path, you risk invalidating the termination, and if you do that, you most likely have plan distributions without a distributable event. That failure to follow the plan's terms could result in plan disqualification.

[John Feldt ERPA CPC QPA]

Listen to Blinky, wait the 60 days.

For employees who are actually separated from service, you may distribute their benefits as usual.

It is possible to submit the 500 before the date of plan termination (DOPT). Last year we submitted one 60 days before the official date of plan termination (we gave out the notice of intent to terminate and the individual notices of plan benefits, among other things, before the 500 was submitted). Then, since we did not receive a notice of non-compliance from the PBGC, we began distributing after the 60 day period was over (but not before the DOPT).

[david rigby]

I agree with above advice.

You could read ERSIA sec. 4041(b)(2)(D) either way, since it uses "commence" and "final". However, also see 4041(b)(3), and (especially) the corresponding Reg. 4041.22. IMHO, that regulation makes it clear how the PBGC views the statute.

[AndyH]

Here is the PBGC reg/ERISA language:

"Sec. 4041.22 Administration of plan during pendency of termination process.

(a) In general. A plan administrator may distribute plan assets in connection with the termination of the plan only in accordance with the provisions of this part. From the first day the plan administrator issues a notice of intent to terminate to the last day of the PBGC's review period under Sec. 4041.26(a), the plan administrator must continue to carry out the normal operations of the plan. During that time period, except as provided in paragraph (b) of this section, the plan administrator may not--

(1) Purchase irrevocable commitments to provide any plan benefits; or

(2) Pay benefits attributable to employer contributions, other than death benefits, in any form other than an annuity.

(b) Exception. The plan administrator may pay benefits attributable to employer contributions either through the purchase of irrevocable commitments or in a form other than an annuity if--

(1) The participant has separated from active employment or is otherwise permitted under the Code to receive the distribution;

(2) The distribution is consistent with prior plan practice; and

(3) The distribution is not reasonably expected to jeopardize the plan's sufficiency for plan benefits. "

Pretty clear to me. Dunno the non compliance penalties, but I suspect they are potentially severe along the lines of a fiduciary breach.

[Trekker]

Thank you all.

I also found Treasury Reg. 1.411(d)-2©, in essence stating that the IRS considers a plan terminated on a particular date if the requirements of ERISA 4041 are satisfied. Additionally, there was a case in 1998 where the IRS disqualified a plan for several years because it did not follow the PBGC requirements.

We will stick to the rules!

[Blinky the 3-eyed Fish]

We will stick to the rules!

Words to live by.

[AndyH]

Live long and prosper.

By the way, I think Blinky is the best ever and the Yankees rule! (This add-on has been brought to you by Blinky. I just became a moderator and wanted to test my powers for the one and only time.)