Closing a DB Plan

[Hoard1]

An Employer want to shut down their DB Plan. It is currently underfunded by 75,000. Current 412 deductible limit is 40,000. Can the Employer fund the plan with 75,000 take deduction for 40,000 and close the plan? Is there any carryforward deduction of the additional 35,000? Any other thoughts.

[Guest Keith N]

I assume you mean 404 deductible limit. I've heard mixed opinions from accountants on this issue. SOme feel that the amount of the final contribution in excess of the deductible limit can be amortized over 10 years and deducted as a ordinary business expense. Others feel that it's just not deductible.

Ive always felt that as an actuary all I can do is calc. the 412 min and the 404 max. The ultimate decision of the deduction in the final year of a DB plan lies with the accountant.

[david rigby]

Not sure about the details but I think there is a provision in at least one of the current proposed "pension reform bills" in Congress that addresses this issue.

[mwyatt]

This one is a real "kick in the pants" from the IRS under current law. Essentially, anything that the employer puts in over and above what you can justify on the Schedule B for the year in which the plan terminates is deducted over a 10 year period. Unfortunately, the amount is subject to the 10% excise tax on nondeductible contributions during that time (this was confirmed by both Holland and Wickersham at the 1998 EA meeting). So if an employer puts in 100,000 over the amount able to be deducted on the last year Schedule B, in year 1 they get a $10,000 deduction and a $9,000 excise tax bill. As you can see the math is not too good. For this reason the "Substantial Owner Waiver" approach (if available) is a far better way to go.

[Hoard1]

Is there a cite for the "Substantial Owner Waiver"?

[Lorraine Dorsa]

See the PBGC regulations re waivers by owners. Under current PBGC regs, only waivers by "majority owners" (=owners of 50% or more of business) are recognized by the PBGC for purposes of determining if the plan is sufficent to terminate under a standard termination.

For plans not covered by the PBGC, I don't know of any cites re owner waivers. At various ASPA and EA meetings over the years, IRS representatives have said that there is no such thing as a waiver of benefits, just a waiver of RECEIPT of benefits. On a practical level, I've submitted a number of plans to the IRS in which owners have waived benefits and have gotten approvals on all of them.

------------------

[M R Bernardin]

It seems to me there were some plr's that held waiving the benefit might allow you to voluntarily terminate under PBGC rules, but that the IRS' opinion was that it did not satisfy minimum funding obligations.

[Hoard1]

Unfortunately, client would like to fund the plan and deduct the contribution. Looks like they will have to do it over two years. Thanks for the help.