Underfunded Plan Termination in 2008

[Guest Sus95]

Do we have any new information on distributing assets in a small (1 person) underfunded plan in 2008? AFTAP less than 80% but greater than 60%. The last I heard, the benefit restrictions apply and this plan can terminate in 2008 but cannot pay out until it is funded properly, or until 2009 when an AFTAP will not be required.

[ak2ary]

I was involved in a meeting with senior IRS and treasury personnel where this was discussed. IRS feeling was that 436 restrictions do not end after 412 coverage ceases and the benefit restrictions, they thought, would continue indefinitely.

At least in the case of substantial owner waivers for PBGC covered plans, they felt that for policy reasons it may make sense to allow a standard termination plan to distribute based on the waiver, but at this point they haven't got a better answer

[Andy the Actuary]

I was involved in a meeting with senior IRS and treasury personnel where this was discussed. IRS feeling was that 436 restrictions do not end after 412 coverage ceases and the benefit restrictions, they thought, would continue indefinitely.

Let's extrapolate. Calendar year plan. Plan Terminates 12/31/2008. Plan files for D-Letter in April 2009. IRS doesn't issue D- Letter until 3/15/2011. Election packages target distribution for June 1, 2011. Further, lets suppose AFTAP 1/1/2008 = 89%. If as of 4/1/2009, certification has not been made, deemed AFTAP is 79% so restrictions apply. If by 10/1/2009, no certification has been made, AFTAP is <60% so lump sums cannot be paid at all. Ergo, you must certify for 2009, 20010, and even 2011, because if you don't certify within 30 days of a restriction, your in violation.

Now, only way you can certify is to perform a valuation. So, employer has terminated the plan but still must pay for three more valuations, principally because of IRS delay. This is interesting since for the EA to certify that Plan will be fully funded, he should obtain commitment letter from Plan Sponsor to make sufficient contributions.

[ak2ary]

Commitment letter is no good...presumably...since you cannot rely on a receivable contribution for you r certificationafter 2008. The employer would have to actually fund to 80%

[Mike Preston]

If that cockamamie position of the IRS is a reasonable interpretation of the law, then the law, as written, needs to be modified through Technical Corrections. Strong letter to follow.

[Andy the Actuary]

Commitment letter is no good...presumably...since you cannot rely on a receivable contribution for you r certificationafter 2008. The employer would have to actually fund to 80%

But, even if fund to 80%, still have to keep certifying, which means continuing to have to perform costly valuations. You're now issuing valuation reports for the sole purpose of providing documentation to support the AFTAP certification.

[ak2ary]

"keep certifying" is too strong, for a 2009 termination you would only have to certify for 2010, since if you ain't paid out within a year of the plan term, your termination is void

Mike I agree with you. I was kinda shocked that that was their interpretation since 436 says it only applies to plans subject to 412 and 1.412(b)(2) or (4) says that a plan is only subject to 412 until the end of the year containing the termination date. They seemed interested from a policy perspective in making it work but....

[Andy the Actuary]

"keep certifying" is too strong, for a 2009 termination you would only have to certify for 2010, since if you ain't paid out within a year of the plan term, your termination is void

I belive "ain't" is too strong, because the PBGC allows for the possible delay of obtaining an IRS determination letter. See the following words from PBGC.GOV. (Apparently, the PBGC once have must requested a D-Letter !!!).

* Is there a deadline for distributing assets from a terminating plan?

Yes, there is a deadline for distributing assets to provide for all benefits under the plan, either by paying lump sums (as permitted) or buying an annuity contract. The deadline is normally the later of (a) 180 days after the end of the PBGC's 60-day (or extended) review period or (b) if the plan administrator has timely submitted a valid IRS determination letter request, 120 days after receipt of a favorable determination letter. The deadline may be extended. (See the instructions for the plan termination forms booklet for more details .) (This deadline does not apply to distributions of excess assets to participants or to the plan sponsor.)

[ak2ary]

True..the one year is actually an IRS rule...which is also usually delayed if the plan has a determination letter pending on the termination

[david rigby]

Is that (or any) PBGC rule relevant for the plan described in original post?

[Guest Sus95]

This is all crazy stuff. I have a few small one person plans that may want to terminate, say in 2008, because the owner(s) are retiring and are closing their business. I need to tell them they can't get their money out of their plan?

My thought was to terminate in 2008 so 2008 would be the last year for a funding valuation and for an AFTAP, and therefore 2009 plan year would NOT require a funding valuation NOR an AFTAP, and therefore a distribution can be made in 2009??? Does anyone disagree with this scenario at this time?

[ak2ary]

The IRS and Treasury disagree with that scenario. I think you are right. Of course if I say you're right and the IRS and Treasury say you're wrong, I believe that would make you .......whats the word I am looking for....oh yeah...wrong

[Andy the Actuary]

Is that (or any) PBX rule relevant for the plan described in original post?

Oops, lost sight of the proverbial forest. Thanks for reeling us back in.

[Andy the Actuary]

Does anyone disagree with this scenario at this time?

"Their's not to make reply,

Their's not to reason why,

Their's but to do and die"

Though I would change Mr. Tennyson's words to "do or die"

[zimbo]

So, in effect, what is being said here (understandably under protest) is that an underfunded DB with an AFTAP below 80% can never distribute lump sums until the AFTAP rises to 80%. Plan Termination is no excuse. So, taken to its logical(?) conclusion, an employer may have to keep funding their DB Plan even for years after the Plan Termination and even when the sole participant is the HCE/owner?

Please tell me that I am missing something!!

[ak2ary]

That appears to be their position..in effect it gets rid of (or restricts) the concept of "to the extent funded" and majority owner waivers for PBGC, but they don't like the result either so maybe it will change

[Andy the Actuary]

Following this literally, a one-person plan sponsor for which the sponsor is the only participant could be subjected to the draconian penalties if he doesn't give himself a notice that lump sum benefits are restricted !

[AndyH]

Is that (or any) PBX rule relevant for the plan described in original post?

Oops, lost sight of the proverbial forest. Thanks for reeling us back in.

What's a PBX rule and how'd you misquote Mr. err Rugby?

[Andy the Actuary]

i wAs HavinG a bOd Dae (or at least my bady was)

[Mike Preston]

i wAs HavinG a bOd Dae (or at least my bady was)

First, I thought you were the Terminator's relative, but then I found out you were related to Ted Kennedy. Hey, are you Maria Shriver?

[Guest webuck]

I was involved in a meeting with senior IRS and treasury personnel where this was discussed. IRS feeling was that 436 restrictions do not end after 412 coverage ceases and the benefit restrictions, they thought, would continue indefinitely.

At least in the case of substantial owner waivers for PBGC covered plans, they felt that for policy reasons it may make sense to allow a standard termination plan to distribute based on the waiver, but at this point they haven't got a better answer

Did those officials indicate whether there were any technical corections to this in any of the bills floating around Congress?

[ak2ary]

There aren't. Likely there will not be until and unless the IRS takes this position formally

For 2008 terminations 436 clearly applies in 2008, the question is whether it applies in 2009, my reading is that it doesn't IRS' reading is that it does. Its mentioned in ASPPA's comment letter maybe final regs will deal with it and maybe they will see their way clear to fixing it.