Distributions in a terminating plan

[emmetttrudy]

Plan is undergoing a PBGC termination. Possibility the majority owner will forego some benefits. A couple of the NHCEs have inquired about taking a distribution. It is past the 60 day review period for the PBGC. Are there rules against paying an NHCE or two out before everyone else? I know there are several issues why this is not a good idea. But I'm more looking for the answer to is it allowed?

[SoCalActuary]

My take is that you are free to start distributions to terminated employees, even while waiting PBGC review. But you cannot ignore top-25 or 436 restrictions.

Once past the PBGC deadline, you should start paying out.

If this is a standard termination, you can distribute benefits to NHCE's now.

If this is waiting an IRS determination, there is some debate about paying non-majority-owner HCEs to protect against discrimination.

Recent IRS discussion indicates that they still want the full distribution to occur within the time PBGC expects the payment to occur, even if you have not received an FDL.

If you are comfortable that no discrimination issue is waiting, then payout the remaining non-majority participants.

Once all others are paid out, then you can distribute or fund/distribute the owner benefits.

[emmetttrudy]

They previously communicated that they wanted to wait for the DL to be issued before doing any distributions. But now are inquiring about just paying out two NHCEs and no one else. It seems like if they're going to pay out one or more NHCEs they should just pay them all, no? There might not be any discrimination issues since it is an NHCE, but if I were one of the NHCEs who did not get paid, I'd start questioning.

[SoCalActuary]

With the IRS encouraging the payout, why wait?

Any remedial changes needed in the DL process can be made after the IRS response.

If that includes a future distribution for the NHCEs, you just have to plan for the potential that a second payment might occur.

[chc93]

Regarding 436 restrictions... if the AFTAP is under 80%, 436 restrictions are still applicable, but on plan termination, accelerated payments (full lump sums) can be paid. But, I thought I heard or read somewhere that for a plan termination under a 436 restriction, the 436 exception for plan termination requires that all distributions be paid at the same time. Otherwise, I don't see any problem paying some or all NHCE's after the PBGC 60-day period. If not all NHCE's are paid before the IRS DL, I think I would not pay any HCE's until all NHCE's are paid.

[Effen]

436 restrictions are still applicable for a terminated plan until the instant that the final distributions are paid. If the plan is subject to 436 restrictions, they still apply until you are ready to make the final distributions.

[david rigby]

Practicalities may also help. If you have any under $5K distributions, those may be the simplest part of your paperwork; getting them "out of the way" should not be a problem, as long as you are not creating any significant delay for other participants.

[AndyH]

Where, how, and when is the IRS suggesting that participants be paid out before the issuance of an FDL?

I agree that the non-issuance of an FDL does not allow the employer to avoid regularly scheduled/permitted distributions, but distributions on account of plan termination, especially if the termination is subject to IRS approval??

And what does HCE/NHCE status have to do with the timing of the payments?

[SoCalActuary]

Where, how, and when is the IRS suggesting that participants be paid out before the issuance of an FDL?

I agree that the non-issuance of an FDL does not allow the employer to avoid regularly scheduled/permitted distributions, but distributions on account of plan termination, especially if the termination is subject to IRS approval??

And what does HCE/NHCE status have to do with the timing of the payments?

At LA Benefits Conference, the IRS actuaries stated strongly that it was OK to distribute and then get the FDL or other remedial corrections within a few months after a request for change.

HCE/NHCE issues: if the plan has discrimination issues, and you distribute too much money to HCE's, it is hard to get it back.

[AndyH]

Thanks for the info.

I guess it is all a matter of wording and context.

I did recently hear a major terminal funding rep state that "most" firms encouraged payment of distributions and annuitization prior to issuance of an FDL. If that is true, times have changed (but all changes start in California anyways, don't they).

[Andy the Actuary]

Where, how, and when is the IRS suggesting that participants be paid out before the issuance of an FDL?

At LA Benefits Conference, the IRS actuaries stated strongly that it was OK to distribute and then get the FDL or other remedial corrections within a few months after a request for change.

This is an incredibly critical statement because it would mean you could terminate a plan now and with comfort make distributions in 2012. I.e., the amount to terminate could be reasonably estimated.

To your knowledge, has this opinion been written or quoted in writing? The client, and in particular, the client's legal counsel would need some teeth that the IRS would not disqualify the tax-favored status of the rollover distributions if the IRS determined that the Plan did not qualify upon termination.