Plan Terminations and AFTAP

[Guest Jcarolan]

At the office, a few of us have said at different times that once a plan terminates the AFTAP requirements no longer apply and the ability to pay out lump sums is not restricted by funding status. However, when pressed, none of us can find a cite for that opinion and only talk about informal guidance we heard somewhere.

Does anyone have a cite for this view, or against it?

[Andy the Actuary]

At the office, a few of us have said at different times that once a plan terminates the AFTAP requirements no longer apply and the ability to pay out lump sums is not restricted by funding status. However, when pressed, none of us can find a cite for that opinion and only talk about informal guidance we heard somewhere.

Does anyone have a cite for this view, or against it?

Suppose plan is terminated 12/31/2008 in a nondistress situation, then 430 ostensibly does not apply to 2009. Well, if it doesn't apply, then we wouldn't perform an actuarial valuation. Well, if we don't perform a valuation, how do we certify the AFTAP for 2009?

[Blinky the 3-eyed Fish]

It's illogical to think the restrictions apply after plan term, but my understanding is it's the IRS' position that they continue to apply.

As for your example Andy, I would use the 2008 funding status.

Maybe someday we will know for sure.

[ak2ary]

I have had many conversations with IRS / Treasury etc regarding this issue. The IRS believes that if 436 ever applied to a plan it applies forever and terminating plans are subject to distribution restrictions, unless and until IRS says otherwise. They repeated this at the ASPPAannual conference and at the COPA conference. They have been walked down the aisle of "436 only applies to plans to which 412 applies and the 412 regs say that 412 only applies until the end of the plan year containing the termination date" and they will not bite on letting 436 not apply beginning in the year after termination.

Their big concern is with plans that are not PBGC covered and perform a nondiscriminatory allocation of plan assets where the benefits of all the plan particicpants get reduced rather than simply the owners. They are looking for a solution, especially for PBGC covered plans that have an owner waiver but, in the meantime, they have suggested that you go for a DL and if you get one ...payout and dont look back.

[Andy the Actuary]

I have had many conversations with IRS / Treasury etc regarding this issue. The IRS believes that if 436 ever applied to a plan it applies forever and terminating plans are subject to distribution restrictions, unless and until IRS says otherwise. They repeated this at the ASPPAannual conference and at the COPA conference. They have been walked down the aisle of "436 only applies to plans to which 412 applies and the 412 regs say that 412 only applies until the end of the plan year containing the termination date" and they will not bite on letting 436 not apply beginning in the year after termination.

Their big concern is with plans that are not PBGC covered and perform a nondiscriminatory allocation of plan assets where the benefits of all the plan particicpants get reduced rather than simply the owners. They are looking for a solution, especially for PBGC covered plans that have an owner waiver but, in the meantime, they have suggested that you go for a DL and if you get one ...payout and dont look back.

Does the IRS contend the restrictions apply to a one-person, one-participant plan? So, not-frozen one-person employer becomes permanently and totally disabled and must cease working. Plan is less than 60% funded. Can't pay lump sum; can't even purchase an annuity. Cannot terminate plan. So, about the best you can do is start periodic payments but disabled person must continue to pay actuary in perpetuity?

But, the one-person is not disabled and wants to contribute about $150K annually. How do we advise this person. Contribute the money at your own risk as you may not be able to get it out of the plan if you need it?

Your comment suggests the IRS will wink at the one-person plan situation where whatever assets exist would be distributed in a lump sum. But, what if they won't?

When did we fall victim to the death of common sense?

[John Feldt ERPA CPC QPA]

That occurs each Nov. 6th, depending on who we've chosen.

[Guest merlin]

Ak2,

It sounds like the IRS is at least hinting that they're OK as long as the employees are kept whole. Is that right?

[JAY21]

It sounds to me like they are trying to invalidate or supercede, or believe PPA 06 itself invalidates parts of Rev. Ruling 80-229 which provides for a non-discriminatory allocation of plan assets upon plan termination including situations with an under funded DB plan.

Perhaps the IRS is not considering this Rev. Ruling superceded in situations where the AFTAP is over 80% (full lump sums available) but are less than 100% funded upon plan termination, since I believe this issue is only with AFTAPs less than 80%, right ?