plan termination

[thepensionmaven]

I am in the process of terminating a DB plan, accruals have been frozen, notices have been sent out but we have not yet filed with PBGC.

One of the principals has retired, wants to take his RMD and rol over the balance to an IRA.

Can he do this prior to filing with PBGC?

Interstingly enough, I called PBGC, spoke to one of their staff attorneys, and he has not been able to give me an answer.

[AndyH]

If he were entitled to a payment if not for plan termination (satisfied the conditions and the plan is not restricted by being funded < 110%), then yes it would be allowable with the termination. Normal payments are permitted during the termination process; payments that are available only due to the termination are not permitted during the PBGC review period.

Many people would advise against such a payment, but nothing prevents it.

[Andy the Actuary]

AndyH, you indicated, "Many people would advise against such a payment." On what basis would you deny a participant a distribution to which he is entitled under the terms of the plan upon termination of employment? Is there a chapter and verse you can reference.

[AndyH]

On the basis that since he is a Principal, he may be part of Management. Management may decide that it would be a prudent business decision to await governmental approval before proceeding with major distributions to the extent that they may be delayed.

[Andy the Actuary]

On the basis that since he is a Principal, he may be part of Management. Management may decide that it would be a prudent business decision to await governmental approval before proceeding with major distributions to the extent that they may be delayed.

But, how does this decision empower them to ignore the terms of the plan?

[AndyH]

Is that a question or sarcastic rhetoric?

Such a decision would of course be voluntary. If I implied otherwise that was certainly not my intent.

[Andy the Actuary]

Anything but scarcastic. So, if I understand, a former employee would have to agree not to apply for benefits. Is that what is meant?

[thepensionmaven]

If he were entitled to a payment if not for plan termination (satisfied the conditions and the plan is not restricted by being funded < 110%), then yes it would be allowable with the termination. Normal payments are permitted during the termination process; payments that are available only due to the termination are not permitted during the PBGC review period.

Many people would advise against such a payment, but nothing prevents it.

Thank you for the answer. Is there particular case law or a cite you could point to?

[AndyH]

I believe that it is spelled out clearly in the PBGC regs. I'll take a look when I get a minute

[tymesup]

Some of our plans say the Participant gets the money when it is administratively feasible. Waiting 60 days for PBGC might fit under that umbrella. Waiting six months to a year for the IRS letter would be a tougher sell.

The principal could well decide that waiting for an IRS letter is in his best interest.

[AndyH]

Here it is:

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.

[AndyH]

Some of our plans say the Participant gets the money when it is administratively feasible. Waiting 60 days for PBGC might fit under that umbrella. Waiting six months to a year for the IRS letter would be a tougher sell.

The principal could well decide that waiting for an IRS letter is in his best interest.

Agreed.

[JAY21]

Great Cite Andy ! Thanks for researching it out. That's a keeper for me.

[Andy the Actuary]

Andy, thank you.

[thepensionmaven]

Here it is:

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.

Thank you very much.

[david rigby]

Be careful. That is the correct cite, but it may not apply to this case. ERISA Sec. 4021(b) points out the plans that are exempt from Title IV; note especially paragraph (13). If this plan is exempt, then the cited regulation does not apply, and the plan should look to its own terms for guidance.

[Guest Kabert]

Also, make sure the top-25 rules under 401(a)(4) and the new section 436 accelerated payment rules don't apply....