forego receipt of benefits and affect on Schedule SB

[John Feldt ERPA CPC QPA]

Suppose a small employer wants to terminate their DB plan ($750,000 in the plan). The current plan year began July 1, 2009. They will freeze now and terminate the plan before June 30. The plan is not subject to PBGC.

The July 1, 2009 minimum contribution is $100,000, but no contribution has been made yet for this plan year. The 100% owner has 90% of all the plan benefits and wants to sign a "waiver" to forego receipt of any of their own benefits that do not get fully funded. They want to put in $50,000 into the plan and waive the rest.

According to one enrolled actuary, the affects of the plan termination and any signed "waiver" of benefits by a majority owner, if done by the end of the plan year, can be reflected on the schedule B and thus a new actuarial valuation can be done to show a July 1, 2009 minimum of $0, even though benefits accrued for the year (the waiver undoes the accrual).

If that's true, wouldn't that also affect the maximum deduction as well? The EA hesitated on this but thought the plan could always deduct up to an amount needed to fund lump sums, even if the owner's benefits were waived.

1. Can the July 1, 2009 truly be modified as described to now show a minimum of zero?

2. If so, would the employer be able to contribute and deduct an amount to partly fund the final benefits?

[SoCalActuary]

If you are amending a formula retroactively to 7-1-09 under a 412(d) election, then you can consider it for funding.

There may be some room for applying the reduction to the majority stockholder who has dual legal roles as a business owner and an employee, but I have never seen a good legal analysis of the issue. I don't see any way to reduce benefits retroactively for the participants who are not "makers" of the contract.

If the owner is married and you contemplate a retroactive reduction in his benefit by this amendment, then you might have an issue of spousal rights as well.

[John Feldt ERPA CPC QPA]

Well, that's the issue. We both agree the amendment can be considered for funding. The amendment freezes and terminates the plan. However, the agreement to sign a 'forego receipt of benefits' waiver is not an amendment. Suppose it is signed by the participant and their spouse by June 20, 2010. How does that waiver become considered as includable in the July 1, 2009 valuation?

[Blinky the 3-eyed Fish]

How does that waiver become considered as includable in the July 1, 2009 valuation?

Only by completely going against what the IRS has consistenly said on this subject.

[John Feldt ERPA CPC QPA]

Yes - and now to convince the EA . . .

[Blinky the 3-eyed Fish]

Do you really need to though? It's his/her signature after all certifying to the results. One thinks that if the client is harmed by his mistake, they have recourse against him/her to recover damages.

[John Feldt ERPA CPC QPA]

Well, okay, "need to" = no, but "want to" = yes.

The actuary's firm does no DC administration. So, when a plan sponsor has both DB and DC, our firm is heavily involved due to additional hand-holding for the DC plan - such that the sponsor sees us as the overall guide (quarterback) for retirement plan issues both DB and DC (regardless of the written service agreements that we have). Yes, we are safe due to these agreements, but no one wants the appearance of having egg on their face especially when you had the opportunity to stop the egg in the first place.

In this case, this particular EA had a plan termination concept that was outside the known envelope of our comfort based on other DB plan termination cases we've dealt with in the past. So, we will engage them to support their position asking that they supply some guidance or at least give us some informal comment that we can reseach further ...

[My 2 cents]

Does the IRS still have the authority to impose a 100% excise tax on unpaid funding deficiencies? At least under the old rules, if a plan terminated, the funding requirements had not been met in full, and a majority owner waived benefits that would have been paid had the minimum funding requirements had been properly met, the IRS considered the deficiency to be permanent and imposed the second tier (100%) excise tax. I saw it happen once. I doubt the IRS (which only grudgingly accepts waivers of benefits) would look favorably on minimum funding calculations that took a termination waiver into account. The waiver only takes effect when the plan's assets are distributed (i.e., after the plan had terminated). So be careful!

[Andy the Actuary]

Do you really need to though? It's his/her signature after all certifying to the results. One thinks that if the client is harmed by his mistake, they have recourse against him/her to recover damages.

I have no money. So, if you come after me you won't get enough to buy a big salad.

Mr. Preston once said in a moment of lucidity, "Sometimes the "correct" course of action isn't the one that is legally defensible at a cost. Instead, it is the action that ensures one needn't defend anything - legally defensible or not."