Plan Term; allocations between HCE and Former HCE

[JAY21]

I have a small professional employer with about 10 participants who is not PBGC covered (due to small size).

Previously there were 2 owners but one owner sold out to the other owner about 1 year ago.

Initially the ongoing owner (now 100% owner) thought he would maintain the under funded DB plan but now he is thinking about terminating it. He would like the under funding to be applied to both he and the former owner (Former HCE) benefits which are still in the plan. They want the employees to get their full benefits.

401(a)(4)-5(b)(2) seems to include Former HCEs in the same boat as HCEs in its brief paragraph that states the benefits must be limited to a benefit that is non discriminatory. Rev. Ruling 80-229 regarding a non-discriminatory allocation of assets doesn't specifically mention Former HCEs but stresses non-discrimination that protects the "rank and file employees".

Does anyone see any problems with the former owner (Former HCE) limiting his benefit to the same proportion of available assets as the current owner. Both former and current owners seem to be ok with this shared under funding approach, but IF the former owner were to change his mind and challenge it would he have much of a case ? Opinions.

[David MacLennan]

I see no problem with your proposed approach. Former HCE's are restricted employees under the regs. Although the regs may not be explicit on this specific allocation, you can get to your allocation with the thought-experiment (or reality) of paying out the NHCE's first. If you submit a 5310, the IRS would normally require such an allocation. Incidentally, this could help in handling the former owner. But you should have no worries since 411d3 says the benefits are vested only to the extent funded, and most docs have this provision, so he would have no case IMO.