Waiver of Benefits

[Gary]

Under PPA the funding is based on a unit credit method.

So a plan freeze may not reduce a funding to $0 since the FT may be greater than assets.

Alternatively, it is my understanding that an owner can irrevocably waive benefits in order to reduce funding requirement.

So let's say an owner's AB is 40,000.

Can the owner waive 10,000 to result in an AB of 30,000? Or does h e have to waive the entier AB?

So, for example if the owner can waive 10k he can in effect still have his gross AB increase and then be offset by 10k which would presumably be an irrevocable wiaver.

Curious to get thoughts and cites (notice, rev rul, etc.) if popssible.

Thanks.

[Mike Preston]

"Alternatively, it is my understanding that an owner can irrevocably waive benefits in order to reduce funding requirement."

Based on what?

[david rigby]

I'm aware of waiver in the case of termination of a PBGC-covered plan, the intent being to make a plan fully funded in a standard termination. Is there another scenario?

[Gary]

My knowledge is consistent with yours.

My reference in this thread re: waiver of benefits comes from Q 8:29 of the 2009 Pension Answer Book.

Q 8:29 is entitled "What alternative is available if IRS will not waive the minimum funding standards?"

In the answer it states in part "To keep the pension plan in compliance with the minimum funding standards (pre PPA vernacular, though the author of the pension answer book sees no reason why this wouldn't apply post PPA too), owners of the company may have to waive their benefits irrevocably."

So not sure what exactly is being addressed (since no known cite by me on this) in the above comment from the pension answer book.

In conclusion, the point being, is that there are small DB plan sponsors who would like to not have to fund their plans now. A funding waiver is very expensive and only helps matters for that year and a plan freeze helps some, but not necessarily enough due to the unit credit PPA funding method now versus old individual aggregate.

Thes plans have unfunded FTs since they are relatively new plans with past service credits at inception and 1005 of pay formulas.

Thanks.

[Mike Preston]

The Pension Answer Book is wrong.

[Andy the Actuary]

Hate to agree with Preston though I'm not sure why I hate to agree with Preston but nevertheless agree with Preston.

A plan cannot be amended nor can employee elect to waive his/her accrued benefit. That said, in certain small plan situations, the IRS has issued a D-letter upon plan termination pursuant to an alternate asset allocation where assets are not sufficient to fulfill all obligations. In such case, we were talking about an (usually one) HCE and Key Employee taking the hit and spousal consent was obtained to the effect that the spouse was potentially foregoing benefits.

What all of this means is don't ask the IRS (or Mike Preston) whether you can waive an accrued benefit because they (and so would I) say "no." However, . . .

[2/24/2009 addendum] Since my initial pontification, I have found the following from the outline from Session 705 of 2004 EA meeting: "in Announcement 94-101, Section 5(11)1 (Examination Guidelines for Plan Terminating without a Determination Letter), the IRS took the position that a majority owner of the plan sponsor may forego receipt of plan benefits from an underfunded plan, and this does not constitute a forfeiture of benefits. The PBGC takes the same position. See PBGC Reg. Section 4041.21(b)(2)."

[D Syrett]

My understanding: You can waive becoming a particpant BEFORE getting into the plan but not after.

[Guest mjb]

Hate to agree with Preston though I'm not sure why I hate to agree with Preston but nevertheless agree with Preston.

A plan cannot be amended nor can employee elect to waive his/her accrued benefit. That said, in certain small plan situations, the IRS has issued a D-letter upon plan termination pursuant to an alternate asset allocation where assets are not sufficient to fulfill all obligations. In such case, we were talking about an (usually one) HCE and Key Employee taking the hit and spousal consent was obtained to the effect that the spouse was potentially foregoing benefits.

What all of this means is don't ask the IRS (or Mike Preston) whether you can waive an accrued benefit because they (and so would I) say "no." However, . . .

There is an old IRS ruling, 81-140, which states that vested benefits cannot be forfeited so it is odd to think that the IRS would allow an owner to reduce accrued benefits upon termination of an underfunded plan. While it has been frequently posted that the IRS will permit an owner to waive accrued benefits in the termination of an underfuned plan, in PLR 9146005 the IRS ruled that a funding deficiency could not be corrected by the waiver of a key employee's benefits upon plan termination. I will leave it to greater minds to reconcile these seemly inconsistent positions.

[SoCalActuary]

There is an old IRS ruling, 81-140, which states that vested benefits cannot be forfeited so it is odd to think that the IRS would allow an owner to reduce accrued benefits upon termination of an underfunded plan. While it has been frequently posted that the IRS will permit an owner to waive accrued benefits in the termination of an underfuned plan, in PLR 9146005 the IRS ruled that a funding deficiency could not be corrected by the waiver of a key employee's benefits upon plan termination. I will leave it to greater minds to reconcile these seemly inconsistent positions.

No contradiction. The IRS collects excise tax for failure to meet minimum funding standards. Pay benefits to the extent funded upon liquidation of the plan. Show a funding deficiency, because the required costs were not paid. Pay excise taxes. The IRS is perfectly consistent here, and totally protecting their own interests.

[Guest Dressageho]

Strong arguments exist for allowing a majority owner to waive his own benefit regardless of what prior IRS authority has said. These arguments are based on the rationale that a small plan is usually just a tax vehicle (legal tax shelter, if you like) for small businesses. The objective for funding requirements is to ensure that the rank and file receive their promised benefits.

The question to ask is what happens when a majority owner foregos his benefit.

Who complains? Not the rank and file.

Who is hurt? Not the rank and file.

What benefit is there to allowing a majority owner to forego his benefit? He has the available cash flow to stay in business, keep the rank and file employed (and paying their own taxes), and keep the plan in existence (for at least the benefit of the rank and file). Furthermore, because the plan continues to exist, the likelihood of the employer dumping it on the PBGC if forced out of business decreases substantially.

What happens to the money that the majority owner foregos? Instead of a current tax deduction and tax-deferred earnings, he recognizes it as income and pays tax on it (potentially at two levels if the employer is a C corporation).

The IRS has no pressing motivation to penalize a majority owner who foregos a benefit because the IRS is not hurt, nor are the rank and file employees, the protection for whom the funding requirements were created.

Feel free to disagree with me, but I would take the case.

[J Simmons]

Would a waiver of benefits that relieves the ER of its funding obligation to an otherwise underfunded DB plan generate debt-foregiveness income to the ER under IRC § 108?

[SoCalActuary]

Would a waiver of benefits that relieves the ER of its funding obligation to an otherwise underfunded DB plan generate debt-foregiveness income to the ER under IRC § 108?

I assume you are kidding us.

[J Simmons]

Would a waiver of benefits that relieves the ER of its funding obligation to an otherwise underfunded DB plan generate debt-foregiveness income to the ER under IRC § 108?

I assume you are kidding us.

Yes, I am (because the obligation that is relieved would have been one that generated a tax deduction if paid by the ER).

[tymesup]

Note that allowing owners to waive benefits enables them to manipulate their tax deductions. The feds view this manipulation as a giant cash-or-deferred-arrangement (CODA), circumventing the 401(k)/402(g) limit.

They can stomach a one-time irrevocable election before participation, but that's about it until the plan terminates.

[dan.jock]

Another twist on waiving a benefit. Say there is a 2-person organization, both owners. One owner wants a plan, the other doesn't. I'll fail 401(a)(26) by excluding one of them. Can that owner forgo his right to the benefit under the plan?

[Mike Preston]

Nope.

[david rigby]

...but they don't have to have the exact same benefit.

[My 2 cents]

Tough situation when Mr. Marley wants a plan and Mr. Scrooge doesn't.

[rcline46]

Second owner gets a benefit of $1.00 per month at retirement.

[Effen]

would $1 be "meaningful" under (a)(26)? Since it is an HCE the IRS might not care, but might consider something a little higher.

Could they fund a larger benefit and then have a side deal where Scrooge agrees to waive benefit on termination?

We had a similar situation once where one partner wanted the plan and the other didn't. They set the plan up and things were good for a number of years. Then the partner who wanted the plan quit, which left the partner who didn't want the plan responsible for funding it. He was not happy.. The plan is sponsored by the entity, not the individual. If they go forward, make sure both partners are properly protected if one leaves.

[Mike Preston]

No, $1 would not satisfy 401(a)(26). Reed has had one too many egg nogs.