Defined Benefit Plan Termination

[Doghouse]

We administer a DB plan that is terminating due to sale of the company and retirement of the sole prop owner. The plan has been frozen for the last several years - however when it was active it had a pretty robust formula, and a Joint and 100% Survivor normal form. There are only five individuals with accrued benefits. It's PBGC covered.

There is a former participant who, in the middle of the plan termination, just reached normal retirement age, and has selected the annuity form of payment over the lump sum. Now here is what gets a little strange and disturbing.

Under the terms of the plan, his $4,000 monthly benefit equates to a $561,000 lump sum (he's at 415(b) limit, so what's kicking in is 5.5% and life only form). However, when the sponsor goes to shop the immediate annuity, no insurer out there is going to assume 5.5%, and they have to price it based on the 100% J&S. Because of these two factors, the premium is MUCH higher than the $561,000 lump sum - like around $900,000.

Of course the plan is underfunded to begin with, and the owner was going to waive benefits in order to go through a standard termination with the PBGC. But with this additional outlay to buy the annuity, the owner's benefit will be completely wiped out, and then some.

It's like the "perfect storm" of plan terminations. Short of rescinding the plan termination, does anyone have any "outside-the-box" thoughts?

[frizzyguy]

The 415 limit doesn't limit the price of the annuity they are owed. They would get the annuity amount under 415. The 5.5% only limits the benefit payable as a single sum payment to the participant.

Since the plan part of a sale, this will probably end up adjusting the sale price of the company to offset the new liability the new company is going to take on to pay for the annuity purchase. The are either going to have to try and go through a distressed termination or rescind and fork over more cash.

I know the situation is no fun but I can't think of any out of the box situations that would help here.

[david rigby]

When you review the definition of "distress termination", you will see prominent use of "bankruptcy".