Plan Termination (non-PBGC)

[emmetttrudy]

Small Cash Balance Plan is considering terminating. One of the owners retired in 2011 and has not been able to take her lump sum because the plan is restricted by the 110% test. If the Plan were to terminate and the assets are not sufficient to cover the payouts, the 2 remaining owners are willing to forgo benefits. However, the question is, does the one retired prior owner, who is no longer an owner, fall into the rank and file employee group in terms of who gets paid out how much? Typically how we handle underfunded terminations is the rank and file are paid out their benefits in full, and then the owners are paid out with the remaining assets (pro-rata if there is more than one).

[Andy the Actuary]

What does the plan provide? Likely, it does not provide for the underfunded plan situation.

Was this plan covered by the PBGC? They have some thoughts about how many owner employees can take a hit if the Plan terminates underfunded.

I would offer that IME generally parties must agree to waive benefits and spousal consent must be obtained if the participant is married. Without this written agreement, it would not seem you could force the prior owner to accept a reduction.

[emmetttrudy]

The Plan Document doesn't seem to comment on a termination where assets are not sufficient. It is not a PBGC Plan so there is no majority owner issue.

[SoCalActuary]

If the plan is underfunded, then the owners are responsible for that condition. Either they make the contributions to achieve sufficient status, or they fore-go benefits.

Yes, I know you can force a proration of the total benefits to pay only "to the extent funded", but my real concern is this: it is a decision of the owners how and if they will fund the benefit.

If a former partner is entitled to benefits, then I would presume that his equity in the company has already been liquidated at some agreed rate. Subsequent gains or losses on the pension fund are not his problem.

Maybe that presumption is wrong, and there is still some issue about the equity of the retiree. That would leave it open for discussion, including renegoiating his payout price.