PBGC and post-termination PPA amendment

[Guest Steve C]

Good morning, all. A colleague asked that I post the following:

"We have become aware of an odd fact/guidance situation involving the PBGC and terminating defined benefit plans. The situation is as follows:

"A DB plan was amended to terminate in 2008. In 2009 the plan was amended timely for PPA, including for PPA interest rates which were consistently in use from 2008 on. Subsequently the plan received a favorable IRS determination letter and, as the PBGC did not object to the submitted Standard Termination, benefits were distributed. Recently on audit the PBGC has asserted the plan benefits needed to be based on the pre PPA interest rates since the PPA amendment was adopted after the plan termination date. (PBGC cites the 2007 Blue Book (Q-9) as guidance.) Using pre PPA rates would require a sizable additional contribution.

"If you have encountered this situation, we would appreciate hearing how you responded and what the resolution was."

Thanks in advance for any and all responses.

[Andy the Actuary]

The attached may be of interest to you.

ASAP_07_32_PBGC_Lump_Sums_Basis.pdf

[chc93]

The attachment above describes PBGC Technical Update 07-03. Note that the PBGC has since issued Technical Update 08-4.

[Andy the Actuary]

The attachment above describes PBGC Technical Update 07-03. Note that the PBGC has since issued Technical Update 08-4.

TU08-04 expands upon TU07-03 and applies when Plan is terminated after after being amended for PPA minimum lump sum actuarial basis. It provides that blending percentages of treasuries and bonds continue to phase-in rather than be determined at the plan termination date. Steve C's facts do not fit TU08-04 because the plan had not been amended by its termination date to adopt the PPA minimum lump sum actuarial basis.

[John Feldt ERPA CPC QPA]

We saw a case where the employer adopted PPA before the plan termination date, but since the official plan termination date was a few months before the start of the 2008 plan year, the PBGC (on audit) required the plan sponsor to ignore the language in that amendment even though the plan had a D letter. Since the employer had really messed up the plan in a much worse way than just that, they contributed the amount needed and they hope the IRS won't audit them as well.

[AndyH]

Good morning, all. A colleague asked that I post the following:

"We have become aware of an odd fact/guidance situation involving the PBGC and terminating defined benefit plans. The situation is as follows:

"A DB plan was amended to terminate in 2008. In 2009 the plan was amended timely for PPA, including for PPA interest rates which were consistently in use from 2008 on. Subsequently the plan received a favorable IRS determination letter and, as the PBGC did not object to the submitted Standard Termination, benefits were distributed. Recently on audit the PBGC has asserted the plan benefits needed to be based on the pre PPA interest rates since the PPA amendment was adopted after the plan termination date. (PBGC cites the 2007 Blue Book (Q-9) as guidance.) Using pre PPA rates would require a sizable additional contribution.

"If you have encountered this situation, we would appreciate hearing how you responded and what the resolution was."

Thanks in advance for any and all responses.

Just heard of an incident of this myself. Anybody else willing to chime in on this issue?. It was subtly addressed in 2011 Blue Book Q&A 5, but isn't this unreasonable?

[SheilaD]

[Just heard of an incident of this myself. Anybody else willing to chime in on this issue?. It was subtly addressed in 2011 Blue Book Q&A 5, but isn't this unreasonable?

I think it's unreasonable.

In my case the plan timely adopted PPA in which it states that an applicable interest rate (...within the regulations) will be used. The plan terminated in 2009 and adopted an pre-termination amendment to select the 3rd month preceding the previous plan year end for the applicable interest rate. The assets were distributed 11.5 months after the amendment. The PBGC, on audit, states that because we distributed earlier then 1 year after the change in the look-back period we must use the greater of the lump sums determined under the prior look-back period and the "new". Our original amendment does not clearly define the look back - referring to not yet published regulations.

This is a case in which the owner waived to the extent necessary. I'm still arguing about the lump sums but should they prevail - do you think I remove money out of the owners rollover IRA to give additional funds to the other participants or does the owner have to contribute the amount due?

As a side comment - 100% of our PBGC plan terminations in the last year have been audited. Has anyone else had that experience?

Thanks

[david rigby]

"A DB plan was amended to terminate in 2008. In 2009 the plan was amended timely for PPA, including for PPA interest rates which were consistently in use from 2008 on.

Perhaps I'm missing something:

what is the relationship between the plan year and the timing of the amendment to terminate?

[AndyH]

"A DB plan was amended to terminate in 2008. In 2009 the plan was amended timely for PPA, including for PPA interest rates which were consistently in use from 2008 on.

Perhaps I'm missing something:

what is the relationship between the plan year and the timing of the amendment to terminate?

PBGC says the minimum benefits are those based on provisions in effect on the DOT. A retroactive PPA amendment does nothing but add a second calculation. Participants get the greater of pre-PPA or PPA. IRS did not require a PPA amendment until the end of 2009 (at least for active plans), and had not issued model language in early 2008. The plans at issue had DOT's before the actual amendment.

[david rigby]

Yes, but....

DOT is in 2008, but the original post did not say if that is before, or after, PPA effective date.