PBGC Coverage Question

[Doghouse]

If we have a plan that previously covered only the owner, and then a rank-and-file employee enters the plan, but the plan is frozen before there are any benefit accruals for the plan year, is the plan required to be PBGC-covered? The rank-and-file individual is still employed. There seems to be some indication that if the person did not accrue any benefits, they are not "covered". Any thoughts appreciated!

[Andy the Actuary]

We presume that this plan would not be exempt (e.g., professional corp)

First, the census date is the last date of the preceding plan year so if participant entered this year, then not included for this year under any circumstance, so not covered. Second, here is how PBGC form instructions define participant:

"How to Count Participants

For premium purposes, “participant” means an individual (whether active, inactive, retired, or deceased) with respect to whom the plan has Benefit Liabilities."

Hopefully, these thoughts are of some help.

[Blinky the 3-eyed Fish]

The definition of participant for premium payment purposes and for coverage purposes are two different things. Thus if you have a participant in the plan but with no benefit liabilities, this can trigger the plan being covered by the PBGC even if you aren't paying a premium for that person.

Next, I don't agree with Andy's assessment of coverage. The plan becomes covered the moment it no longer meets an exception for coverage. The participant count date is the first day of the plan year for a newly covered plan and is the last day of the prior year normally. However, this is only for the determination of the amount of the premium, not whether or not the plan is covered.

In this case, when the plan was frozen, was eligibility frozen as well? If not, assuming you don't meet a standard coverage exemption, you have plan now covered by the PBGC. Blame whomever prepared the amendment for not doing it properly if eligibility was not frozen.

[Doghouse]

Blinky, you took my next question right out of my mouth. That's what I was afraid of. The freeze amendment was done after the person had already become eligible, so probably a case of sloppy timing rather than sloppy drafting.

Thank you both for your input!

[Andy the Actuary]

First of all, I do not disagree with Mr. 3-eyed. However, here is where I was coming from:

Plan is grossly underfunded and employer, who sells monacles to 3-eyed fish, goes out of business. Employer pulls this sham to get Plan covered following 3-eyed's train of thought. Plan terminates under distress. Are you suggesting PBGC will pick up liability up to guarantees?

[Blinky the 3-eyed Fish]

I can't imagine pulling a sham like this would net the owner anything. After all there's a 30-year phase in for substantial owner benefits. I will keep in it mind though for future consulting.

[Andy the Actuary]

You have truly blinked me out of my league on this one, though the 30 years, I thought, is based upon years of plan participation. I will let all this rest and concede I did not give a good answer.

[Blinky the 3-eyed Fish]

I agree it's based on plan participation. How many small plans last 30 years though?

[Andy the Actuary]

approximately zero

[david rigby]

After all there's a 30-year phase in for substantial owner benefits.

10 years? PPA sec. 407.

[SoCalActuary]

I agree it's based on plan participation. How many small plans last 30 years though?

We processed a distress termination this year that was started in 1954. Under 100 life plan, and the owners worked for the family business for over 30 years. Not a common event, but that does not mean impossible.