Majority Owner Waiver

[Randy Watson]

The PBGC Regulations permit "majority owners" to forgo receipt of their benefits in connection with a distress termination. The regulations generally define a majority owner as an individual who owns 50% or more of the entity, taking into account the constructive ownership rules of 414(b) and © of the Code. Assume 5 family members collectively own 50% of an entity and their ownership interest can be attributed to each other under 414 of the Code. Does that mean that they are all considered "majority owners" and each can forgo receipt of their benefit?

[Mike Preston]

If you replace "can be" with "must be" the answer is yes.

[Randy Watson]

Can you "re-offer" a lump sum to those in pay status?

[Mike Preston]

Context please.

[Guest Sieve]

Beware: under IRC Section 414, there is no attribution of adult children to parent, or vice versa, unless one of them actually owns more than 50%. So, there may not be multiple (or any) majority owners here.

For what it's worth, though, I've had unrelated partners, each owning 14% (rounded), waive, and neither the PBGC nor IRS contested it. So, they do not always (in my experience) hold true to the 50% rule.

[Randy Watson]

Beware: under IRC Section 414, there is no attribution of adult children to parent, or vice versa, unless one of them actually owns more than 50%. So, there may not be multiple (or any) majority owners here.

For what it's worth, though, I've had unrelated partners, each owning 14% (rounded), waive, and neither the PBGC nor IRS contested it. So, they do not always (in my experience) hold true to the 50% rule.

When you say that niether the PBGC or IRS contested it, does that mean they were well aware of the fact there were no majority owners?

[Guest Sieve]

Well, we included 7 waivers of different individuals in the PBGC and IRS filings, and highlighted in the cover letter that we were including them.

[Randy Watson]

LOL. I guess they were aware. Do you know of any authority or informal commentary approving that?

Has anyone else done the same as Sieve with regard to multiple majority owners waiving benefits?

[Guest Sieve]

I know of no authority, but my guess is they would prefer that to a distress termiantion attempt.

[Guest Dressageho]

The IRS has no equivalent to the DOL's allowance of a waiver, but we've never had a problem doing this either. I think the DOL and the IRS are more concerned with ensuring that the company owners do not benefit to the detriment of the NHCEs and/or non-owners, and that the government is not hurt (i.e., distress termination). As long as all non-owners get their full benefits first and the government is not on the hook for any payments, who will complain if the owners take the hit?

[401 Chaos]

Anyone have any recent experience with this and/or experience to the contrary with respect to the IRS not objecting. I have heard reference to situations where at least one IRS agent may have taken the position that the majority owner constructively received his full benefit and was deemed to have contributed the waiver portion back to the corporation as a contribution to capital. The corporation was presumably allowed a deduction up to applicable limits for a constructive contribution to the plan but was an overall mess due to the phantom income, etc. Not aware of any widespread application of that approach but seems to have possibly surfaced in some situations. My general sense is the IRS knows this is done and generally allows / looks the other way but does not expressly approve. Would welcome any insight or advice from those with experience with this.

On a related note, current plan has significant funding obligation for the 2011 plan year and plan sponsor is considering terminating long-term. Majority of the plan benefits are for majority owner who would be willing to waive significant portion of benefits to be able to terminate the plan with minimal additional contribution (if any--still trying to figure that out). In the interim, there is need to satisfy the funding obligation for the prior year (due Sept 15th). Can a majority owner waiver be used to reduce / eliminate funding obligation for the prior year or is that only possible in a termination context. In short, majority owner would likely be willing to waive as much as is necessary to avoid both pending funding obligation and any termination funding if that were possible.

Thanks

[Mike Preston]

Only possible in a termination context.

I've never seen what you describe in the first paragraph. The IRS will take that position if the owner attempts to forgo benefits and a reversion is then created.

[401 Chaos]

Mike,

Many thanks for your response. In our case, the plan is not subject to the PBGC rules so we don't have to file with them. Any reason to think that would weaken the ability of the majority owner's waiver since not technically part of a PBGC termination? Should we just prepare and execute the waiver per the PBGC rule as if they applied and then note the waiver in the cover letter to the IRS with the determination letter submission? On a related topic, plan sponsor is curious whether they really need to go through the determination letter process in this case. I've seen some other posts where people indicate they have routinely noted the use of such waivers in their cover letters to the IRS without much if any comment or inquiry by the IRS. Do you feel their is greater security in going through the determination letter process where the use of the waiver is noted in the cover letter or do others feel the use of such waivers is sufficiently common place that the owner could sign and hold in the file even if there is no PBGC or IRS DL filing? Many thanks for any thoughts or suggestions.

[Mike Preston]

First of all, drop the word "waiver". There is no such thing. The IRS insists that the language of the document in question "agrees to forgo benefits not funded".

Whether the PBGC is involved or not doesn't matter to the IRS.

Many, many threads exist on the advisability or non-advisability of filing for an LOD. I always suggest it. Penny wise and pound foolish clients frequently decline the option.

[401 Chaos]

Mike,

Thanks very much for the additional information. I've been reviewing a number of prior posts from you and others on these issues and have a follow up question. Given that the Plan is not subject to PBGC rules, does the majority owner actually need to execute an "agreement to forgo benefits not funded" or whatever we are going to call the "waiver" document if the plan provides for the non-discriminatory allocation of funds upon termination. Plan apparently is sufficiently funded to cover all other participants' benefits if a significant portion of the majority owner's benefits are forgone. I see nothing wrong with (and likely some valuable benefits to) preparing such an agreement and having the plan file for a LOD noting the execution of the agreement but have been asked specifically if such an agreement really needs to be executed by the majority owner here. Seems if PBGC rules are not applicable and IRS does not generally care about / recognize such "waivers" and/or the agreement is not required to be filed with anyone then there is arguably no need for preparing and having the majority owner execute such an agreement / waiver? Welcome any further thoughts on this.

Thanks.

[Eric Taylor]

Chapter 9, XI D of Sal Tripodi's ERISA Outline book notes the following:

"Normally a voluntary waiver of benefits by an HCE is a violation of the anti-cutback rule of IRC 411(d)(6). See TAM 9146005. However, IRS will permit a majority owner to elect to forego receipt of benefits from an underfunded plan. See IRS Announcement 94-101 (audit guidelines for plan termination). In IRS' mind the "foregoing" of receipt is not the same thing as waiving the benefit. When the majority owner foregoes receipt of the benefit, he is still acknowledging that he is entitled to the greater amount, but is agreeing to have the other participants' benefits satisfied first out of the available plan assets."

The section goes on to note that this coordinates with PBGC's rules for standard terminations under which a plan may be permitted to use a standard termination if a majority owner agrees to forego receipt or basically waive benefits to the extent necessary to make the plan sufficient per PBGC Reg. 4041.21(b)(2).

I think all of that is consistent with the prior discussions here and Mike's good advice. I am still wondering, however, if a majority owner must execute an actual election to forego benefits to the extent needed to ensure distributions to others and, if so, whether that must get filed with the IRS in any fashion or otherwise provided to anyone when the Plan is not covered by the PBGC? Ideally seems that such an election / agreement should be signed and maybe included with (or at least referenced in) a determination letter request to the IRS but plan here wants to know minimal requirement if they do not file for a determination letter. Seems that should include ensuring the plan clearly provides for nondiscriminatory allocation of benefits to NHCs first and having the majority owner execute a formal election to forego receipt of benefits to the extent necessary then simply holding that executed election in the file?

Any thoughts or other tips for best practices welcome.

[Calavera]

I vote for must execute with the notarized spousal signature

[Eric Taylor]

Thanks, Calavera.

Anybody have suggested language for such an agreement for a non-PBGC plan they care to share?