Waiver of Benefits

[Madison71]

Plan sponsor considering terminating an underfunded DB Plan subject to PBGC. Owners are interested in waiving part of their benefits so they can file standard termination. The issue is that each of the 4 owners owns less than 50% even through attribution. What about providing an option to one of the owners. For example, say one 25% owner has the option to purchase an additional X shares where if purchased would give that owner an additional 30% share for a total of 55%. Is the "right" to buy the shares (without restriction) enough to deem majority ownership? Would that "majority" owner then be able to waive part of their benefit?

Thank you!!

[Effen]

My experience is it needs to be a majority owner (at least 50%), not just the right to own. That said, it might be worth a phone call to bounce your idea of the PBGC and see what they say.

If one or two owners waived their benefit would it be enough? What if two owners agreed to sell their shares to the other two so that they would each be 50/50 owners. Then they could waive their benefits, terminate the plan, and sell the shares back. Obviously the buy/sell agreements would need to specify lots of issues, but maybe the four of them could some how work out an equitable solution.

I have had situations where the ownership was changed right before the plan was terminated. In small plans, the PBGC generally doesn't care about history, they just care about who owns what at the time of termination.

[david rigby]

FYI, there have been two Q&A's on this topic in the BlueBook over the last few years. Not exactly on point, but you can use them to understand the PBGC reasoning, and support the answer from Effen above:

PBGC Blue Book 2007-8

QUESTION 8

Standard Terminations: Determination of Majority Owner Status

PBGC’s standard termination regulations provide that a majority owner (based on a 50% or more ownership interest taking into account the constructive ownership rules) may elect to forgo receipt of his or her plan benefits to the extent necessary to enable the plan to satisfy all other plan benefits (29 CFR §§ 4041.2, .21(b)(2)). Assume that two or more participants are each substantial owners, but not majority owners, and together have a 50% or greater ownership interest. Assume further that they agree among themselves that they will each elect such an alternative treatment under the majority owner rules. May they elect the alternative treatment?

RESPONSE:

No. To be eligible to elect an alternative treatment under the majority owner rules, a participant must be a majority owner (taking into account the constructive ownership rules). There is no aggregation of ownership interests among participants (except to the extent provided under the constructive ownership rules).

PBGC Blue Book 2013-5

QUESTION 5

Standard Terminations: New Definition of Majority Owner

PPA amended ERISA section 4022(b)(5) to change the limitations on guaranteed benefits for “substantial” owners. In doing so it substituted a new definition of “majority” owner. Such an owner is defined using a 60 month look-back - i.e. a person that had the requisite ownership in the preceding 60 months is considered a majority owner and subject to the phase-in.

Section 4041.21(b)(2) of PBGC’s regulations on Termination of Single-Employer Plans (29 CFR Part 4041) provides that a majority owner may waive a portion of his benefit to the extent needed to allow an underfunded plan to terminate in a standard termination. Regulation §4041.2 defines majority owner, and in doing so makes no mention of a look-back. Indeed, in the 2004 Blue book, Q5, the PBGC made it clear that a participant has to be a majority owner at the time of the waiver for the waiver to be valid.

Did the PPA change to ERISA section 4022(b)(5) change the definition of majority owner for purposes of a majority owner waiver on plan termination to now include a 60-month look-back?

RESPONSE

No. The preamble to the existing regulation explained that the majority owner definition in the regulation had been developed using the substantial owner definition and specifically did not incorporate the 60 month look-back. The changes in PPA were aimed at other purposes and create no compelling reason to modify the regulation to change the individuals who are permitted to waive benefits.

[Madison71]

Thank you both! Very helpful

[Doghouse]

There may be some room to use the constructive ownership rules of 1563 to result in substantial ownership. It's been done. See 1563(e)(1).