short plan year

[Gary]

Say a calendar year plan sets the termination date as 6/30/2010 and distributes assets 12/15/2010 to the three participants.

For minimum funding for 2010:

The plan was frozen in 2005 so there is only an amortization base and installment.

Would this be considered a short plan year (i.e. 1/1/10 to 6/30/10) thus resulting in a pro rated amortization payment or is it still a full plan year from 1/1 to 12/31?

The only bit of information seems to indicate per rev rul 79-237 that the plan year goes until the end of the year of plan termination. I suppose a case could be made that the plan year could end at the time assets are distributed (not much of a difference in this case). It seems a short plan year generally just occurs when there is a change in plan year.

It would seem reasonable to reduce the accd benefits of the two onwers to avoid shortfall and funding if desired by employer, but tpa firm administering plan does not use this approach for min funding (but does so for the distribution). Any views?

Thanks.

[Effen]

The plan ends at the termination date (6/30). I vote for prorated amort payment, but there is little/no guidance post PPA.

It is never reasonable to reduce accrued benefits, in fact it is generally illegal. Benefits can never be reduced to avoid funding deficiencies. They can only be reduced at the instant of distribution if the assets are not sufficient. They can never be reduced to impact any funding related numbers.

[John Feldt ERPA CPC QPA]

I have heard actuaries respond differently to the "waiver" issue.

1. Some say that amendments can be taken into account for funding purposes, but a majority owner signing a piece of paper to forego receipt of benefits is not an amendment and thus cannot affect the plan's minimum funding requirement.

2. Another EA stated that the execution of the "forego receipt of benefits" papers have changed the accrued benefits and thus can affect minimum funding, especially if the papers were signed before the plan's valuation date.

I would lean heavily into #1 above and stay away from #2. However, the actuary has to sign the B, so if they say a minimum contribution is required, you'll need to address that with the client. If they accept the waiver as affecting the plan's minimum, it's their signature on the B.

[Gary]

I think Effen's comment re: accrued benefits is logical and reasonable.

I suppose for an underfunded plan the reality is that the min funding would be a lower contribution then the total shortfall, but the min funding s/b based on FT and TNC on the basis of an immediate decrement (since plan terminating), which requires plan act equiv lump sum assumptions which is a higher cost than on going plan using segment rates.

So in conclusion the minimum can still be steep even though not as much as full shortfall.

Of course if plan does not make minimum funding the excise tax is as I recall only through the year of termination, so it may be better to pay excise tax if cash is an issue and distribute benefits as funded.

thanks

[Effen]

The IRS has been very clear that an election to forgo benefits cannot be recognized for funding purposes. This stand is based on the fact that 411(d)(6) states that you can never reduce accrued benefits, therefore why would they allow you to recognize an illegal reduction for funding purposes? The only exception is after the plan's termination when you are allocating assets.

In fact, if the assets are short, you really don't need a waiver if you are going to allocate the remaining assets using the priority categories. Waivers are used if/when the owner agrees to accept less and pays everyone else what they are entitled to. Also, sometimes the PBGC requires waivers, but they are used so an underfunded plan can terminate under a standard termination.

Either way, they do not impact the funding requirements. The EA in your example 2 was definitely wrong.