waiver of benefits upon lplan termination

[thepensionmaven]

Which principals can waive benefits upon plan termination?

Do they have to own a certain percentage of stock in the company?

[John Feldt ERPA CPC QPA]

Generally, it's majority owners (50% or more ownership).

[thepensionmaven]

I've got a DB plan with 4 owners who each own 25%.

[Mike Preston]

Then they can't waive, unless they constructively own 50% or more. The only way that happens is if one or more of them have options one or more of the other's stock. Might be worth a trip to the ERISA lawyer's proverbial office to see if such an arrangement, if already in place or not, might work.

[Andy the Actuary]

My recollection is there was some guidance years ago regarding the PBGC's position. Can you point to some printed word regarding the IRS's position?

[Mike Preston]

There really isn't any guidance from the IRS beyond what they allow in their approved plans. Search for a phrase like "to the extent funded." Almost all plans have language that directly deal with the allocation of assets in the event that the plan has insufficient funds. The fact that the language is meaningless in the context of a PBGC covered plan is besides the point!

Well, maybe not meaningless. How about "almost meaningless"?

In any event, the IRS has always allowed an undefunded plan to allocate its assets on a non-discriminatory basis (I forget the basis for it, was it 81-202? Or 84-175? Will you settle for something "way back then"?). In that context, what the PBGC allows is certainly non-discriminatory from the IRS' perspective, so Jupiter aligns with Mars, etc., etc. when there is a PBGC plan termination where the PBGC allows a majority owner to accept, with spousal consent, a benefit less than that which is promised by the plan.

[John Feldt ERPA CPC QPA]

So an underfunded non-PBGC plan could, upon termination, cut back everyone's accrued benefits (down to the extent funded), as long as the cutback "allocation" is done in some non-discriminatory fashion. Would the resolution to terminate need to spell that method out? Could it just allocate assets proportionally using plan termination lump sum PVABs, or could that be a problem too?

[Mike Preston]

The IRS has allowed a post-termination amendment in conjunction with an LOD. Certainly allowable to put it in the resolution. Allocating on the basis of PVAB's doesn't always work because PVAB's already have a built in potential for discrimination (think permitted disparity). Certainly allocating excess assets on the basis of PVAB's has been given the heave ho by the IRS years ago if the underlying PVAB's have a non-uniform context.

It *should* be less problematic in the case of an underfunded plan. I'm just leery of using anything other than ratio of 1% of compensation times YOS as a benefit to use to determine the PVAB which, in turn, determines the share.

[John Feldt ERPA CPC QPA]

Right, we have always used the non-integrated portion of the accrued benefit to allocate excess assets.

For an underfunded non-PBGC plan, are you indicating that perhaps the accrued benefit itself should be ignored completely and a fully uniform formula be used for all benefit accrual years (is that your more conservative approach to smooth over any prior years where the formula was amended)? It would appear to avoid problems with 1.401(a)(4)-5(b)(2).

[thepensionmaven]

This is a plan we're terminating because the Company was sold. There are 4 equal shareholders. The plan is underfunded unless these principals waive their benefits, or unless their is a "non-descriminatory re-allocation of benefits on behalf of the owner-participants such that plan assets equal plan liabilities."

The plan has been filed with PBGC for termination, no intent as yet to file with IRS. It is my understanding, having dealt with PBGC before on this, that they consider a "substantial owner" as one who owns by attribution or otherwise, more than 10%.

[John Feldt ERPA CPC QPA]

From the PBGC website: Sec. 4041.2 Definitions.

...

Majority owner means, with respect to a contributing sponsor of a single-employer plan, an individual who owns, directly or indirectly, 50 percent or more (taking into account the constructive ownership rules of section 414(b) and © of the Code) of--

(1) An unincorporated trade or business;

(2) The capital interest or the profits interest in a partnership; or

(3) Either the voting stock of a corporation or the value of all of the stock of a corporation.

After reviewing the above, I recommend a reading of section B (entitled 'Schedule EAS') of the PBGC Standard Termination filing instructions, where it says "Special Rule for Majority Owners"

I'd be happy with 10% instead of 50%, but the PBGC hasn't given our clients any favors like that so far. How did you do the termination filing, standard termination (sufficient) or distress or otherwise? If you did a standard filing, there must be some agreement to make the plan sufficient for the filing to be valid, I think.

[thepensionmaven]

Standard termination.

Appropriate "non-Discrimatory Reallocation of Assets" signed by each principal prior to the termination date.

[Mike Preston]

I would call it "inappropriate". Need to hie thee to an ERISA lawyer.

[John Feldt ERPA CPC QPA]

Thanks Mike. Any thoughts on this:

For an underfunded non-PBGC plan, are you indicating that perhaps the accrued benefit itself should be ignored completely and a fully uniform formula be used for all benefit accrual years (is that your more conservative approach to smooth over any prior years where the formula was amended)? It would appear to avoid problems with 1.401(a)(4)-5(b)(2).

[Mike Preston]

It is one approach I've used. It certainly works. Each case stands on its own. There are many other approaches, depending on the number of HCE's, how much the plan is underfunded, benefit history, etc.

[JAY21]

Rev. Ruling 80-229 might still have some value on this issue. See section 4 of the attached ruling.

To my knowledge it hasn't been superceded per se though I realize the (a)(4) regs are newer.

Rev._Ruling_80_229.pdf

[Mike Preston]

That's it!

[flosfur]

So an underfunded non-PBGC plan could, upon termination, cut back everyone's accrued benefits (down to the extent funded), as long as the cutback "allocation" is done in some non-discriminatory fashion. Would the resolution to terminate need to spell that method out? Could it just allocate assets proportionally using plan termination lump sum PVABs, or could that be a problem too?

No, not everyone's - not in standard termination. The benefits must be 100% covered after majority owner's waiver or sponsor's commitment to make make the plan whole by depositing additional funds. Otherwise, no standard termination!

[Guest mjb]

So an underfunded non-PBGC plan could, upon termination, cut back everyone's accrued benefits (down to the extent funded), as long as the cutback "allocation" is done in some non-discriminatory fashion. Would the resolution to terminate need to spell that method out? Could it just allocate assets proportionally using plan termination lump sum PVABs, or could that be a problem too?

No, not everyone's - not in standard termination. The benefits must be 100% covered after majority owner's waiver or sponsor's commitment to make make the plan whole by depositing additional funds. Otherwise, no standard termination!

Q1: even if the plan can be terminated under IRS rules, dont the non owner plan participants have a claim for suing the employer and plan for violating the cutback rule of ERISA?

#2 don't the non owner participants have to be notified of the plan temination and the reduction of their benefits as part of the IRS termination process?

#3 Dont they have the right to object to the termination of the plan?

[Mike Preston]

So an underfunded non-PBGC plan could, upon termination, cut back everyone's accrued benefits (down to the extent funded), as long as the cutback "allocation" is done in some non-discriminatory fashion. Would the resolution to terminate need to spell that method out? Could it just allocate assets proportionally using plan termination lump sum PVABs, or could that be a problem too?

No, not everyone's - not in standard termination. The benefits must be 100% covered after majority owner's waiver or sponsor's commitment to make make the plan whole by depositing additional funds. Otherwise, no standard termination!

Uh, you missed the part about this being a non-PBGC plan, huh?

[Mike Preston]

So an underfunded non-PBGC plan could, upon termination, cut back everyone's accrued benefits (down to the extent funded), as long as the cutback "allocation" is done in some non-discriminatory fashion. Would the resolution to terminate need to spell that method out? Could it just allocate assets proportionally using plan termination lump sum PVABs, or could that be a problem too?

No, not everyone's - not in standard termination. The benefits must be 100% covered after majority owner's waiver or sponsor's commitment to make make the plan whole by depositing additional funds. Otherwise, no standard termination!

Q1: even if the plan can be terminated under IRS rules, dont the non owner plan participants have a claim for suing the employer and plan for violating the cutback rule of ERISA?

#2 don't the non owner participants have to be notified of the plan temination and the reduction of their benefits as part of the IRS termination process?

#3 Dont they have the right to object to the termination of the plan?

Q1: The plan has language in it to deal with underfunding on plan termination. That is what they are entitled to under ERISA. Neither the Code nor ERISA requires a plan sponsor to actually fund a benefit.

Q2: Of the termination? Sure. Of a "reduction"? No. There is nothing that precludes explaining it, though.

Q3: If PBGC they have plenty of time. If non-PBGC only if submitted to IRS. That is the purpose of the NTIP and the deadlines stated therein for comments to be received by the IRS and the DOL. If non-PBGC and not submitted to IRS, then only option is going to court, as far as I know.