Overfunded Union Plan - how to terminat/merge/convert?

[Guest Dressageho]

I have an overfunded, collectively-bargained DB Plan that the employer wants to get rid of...in favor of a 401(k) Profit-Sharing Plan.

I am wondering if anyone can share a really creative idea for how to terminate/convert/merge this Plan out of existence. Unfortunately, I am not familiar with collectively-bargained plans and there is approximately $20,000,000 in overfunding (can you believe it in this economy?!?!?!), so I really don't want to mess this up and have excise tax imposed on that large of a sum.

My gut reaction is to terminate and have the vested assets rolled into a new 401(k) Profit-Sharing Plan (to the extent the Participants choose that), and to have a successor Cash Balance Pension Plan put in place until the overfunded assets are "burned" into new accrued benefits.

I am curious though, if a conversion/merger is possible. I know the employer would rather have admin costs for only one plan (and a 401(k) PS Plan would obviously be cheaper). I keep coming back to Treas. Reg. 1.414(l)-(1)(l), but have seen a lot of discouragement from experts here.

I guess my questions are:

1. Any ideas about the above?

2. Any issues that need to be taken into considerations with a collectively-bargained plan?

[Andy the Actuary]

Presumably, this is a single-employer and not a multi-employer plan?

What does the Plan say happens with the excess assets?

What does the signed bargaining agreement say?

If, indeed, this plan is so grossly overfunded, then there are a couple of likely positive possibilities:

(1) The Plan is not requiring contributions,

(2) The Plan is spilling off income.

So, why does the employer want to terminate a plan that costs him nothing and generates income?

Second, who calculated the $20,000,000 overfunding and was it an estimate based upon Schedule B or FASB numbers? Such numbers may or may not be a good proxy for the Plan's funded status upon termination. For example, if a plan allows for unreduced retirement after a rule of 85 is satisfied, the settlement upon plan termination would need to assume that employees can grow into the subsidy and this could eat up a lot of the overfunding. For example, an employee age 45 with 20 years of service would be assumed to satisfy the rule of 85 in 10 years. Thus, the settlement would not be the accrued benefit payable at age 65 but rather the accrued benefit payable at age 55.

In short, the first step before you start strategizing is to get a solid fix on the funded status. If you've already done so, my apologies for lecturing.

[Effen]

I have an overfunded, collectively-bargained DB Plan that the employer wants to get rid of...in favor of a 401(k) Profit-Sharing Plan.

This is the kind of thinking that drives me batty! Why throw away $20 million?

So what you are saying is this employer would rather terminate the plan and either give a large chunk of the excess assets to the participants (without really getting anything in return) or give a significant portion to the feds in excise taxes, or probably both. Instead of using the excess assets to negotiate higher benefits or to pay for future cost of benefits as they are earned (without having to make cash contributions), he would rather terminate it and send real cash into a 401(k). Add to that the fact that he would be giving a bunch of lunch box guys the responsibility to invest their retirement savings instead of building better widgets. Statistics prove over and over that participants do a poor job of investing, let alone the loss of productivity due to the added responsibility.

I say, use the excess assets to provide better or future benefits. Accomplish that through negotiations where you get something in return. Closely monitor the excess on a termination basis and then shut it down when there are no excess assets and no shortfall.

If "everyone" wants a DC plan, freeze the db, make the future accruals in a cash balance so it looks like a dc so everyone gets used to the concept. Once all the excess is used up through cash balance accruals, terminate the db and make future dc contributions equal to the previous cash balance accruals.

And hire a better consultant...

[Ron Snyder]

How about using a IRC section 420 transfer to retiree medical accounts?

IRS has approved in PLRs distributing excess assets to charity after all benefit liabilities are paid out.

[david rigby]

Amen and amen.

[Guest Dressageho]

All I have in my hands right now is the most recent 5500, which is where I got the numbers. Unfortunately, this client is very new to my firm and seems to be the type of client who wants to see what we have to offer before trusting us with their information.

Maybe I misrepresented what they want in my initial entry. They are looking for a cheaper plan design, do not mind if all participants become 100% vested (i.e. termination if necessary), and haven't indicated whether they intend to have the investments self-directed (though I don't believe that is the intent). They certainly do not want to throw away any money either, so charitable giving and excise taxes are not really options.

I have yet to figure out how they became so incredibly overfunded, but I think they were given the runaround (so to speak) by the former advisors, which would explain their current distrust of all advisors.

I would like to make a couple different recommendations in order to gain their trust, but I am not putting in heavy research at this time. I just wondered if anyone had any ideas I wasn't coming up with or could point out pitfalls often arising with union plans. I do appreciate the advice on here as it often directs my research.

Thanks again for the imput.

[RCK]

I'm thinking that if you have a 5500 and or Schedule B, it is for a plan year that ended before 7/1/08.

And therefore the "overfunding" has gone away. Problem solved.

[mwyatt]

"Overfunded" and "Union DB Plan". Isn't that an oxymoron (and that 7/1/2008 val date comment is pretty relevant).

Interested to see the responses as I've yet to see such an animal in real life.

[Guest Dressageho]

I'm thinking that if you have a 5500 and or Schedule B, it is for a plan year that ended before 7/1/08.

And therefore the "overfunding" has gone away. Problem solved.

You'll have to excuse me, but I'm the attorney on this, not an actuary by any means. I was not able to find information to let me know why July 1, 2008 is relevant. Would you please direct me to a cite or link?

[Guest Dan Moore]

I'm thinking that if you have a 5500 and or Schedule B, it is for a plan year that ended before 7/1/08.

And therefore the "overfunding" has gone away. Problem solved.

You'll have to excuse me, but I'm the attorney on this, not an actuary by any means. I was not able to find information to let me know why July 1, 2008 is relevant. Would you please direct me to a cite or link?

He's deducing the reporting period for the 5500 based on the filing deadline. Also, as you may have heard, the stock market dropped significantly from 9/2008 to present.

[Guest Dressageho]

Oh...haha...yeah, pretty much stuck in my head on this one and missed the obvious. I've been assured there's still substantial overfunding, but the client still hasn't given us anything, so who knows what the status actually is. I thank you all again for your comments.