Lump Sums depleting plan assets

[ConnieStorer]

I have a Defined Benefit Plan where the Plan Sponsor will be starting significant layoffs. We completed an AFTAP for the 2013 Plan Year and the funded percentage was over 80%. This plan allows for lump sum payments. The assets in the Plan are not sufficient to pay out all benefits and the Plan Sponsor does not have the dollars available to fully fund the plan for termination.

As employees are terminated they will have the right to request a single lump sum payment of their benefits. Since we know that eventually everyone will be laid off, the assets in the plan will run out before all payments can be made.

Does anyone have any suggestions!

[Lou S.]

don't be the last participant to return a withdrawal form?

don't forget the 25 HCE restricted distributions.

recertify?

Is this a PBGC plan?

candidate for distress termination?

[Andy the Actuary]

Make sure you're the first to get your lump sum.

[ConnieStorer]

This Plan is covered by the PBGC. I forgot to mention that this Plan is a union negotiated plan where none of the participants are highly paid.

Is there a "legal" basis that would allow us to recertify the Plan mid-year?

[Effen]

I don't know about recertification. The AFTAP is based on BOY numbers. However, you may have some flexibility in the assumptions since you "know" there are immanent layoffs. I think you have some room to value lump sums more directly in the AFTAP if you are going to pay out immediately. Also, look to see if this is an "unpredictable contingent event" and if that allows you to re-certify the AFTAP?

If they really don't have enough money to fund the plan, they should contact the PBGC ASAP. The PBGC will want them to prove they really don't have the money, so you should let them know that up front, in case they are just bluffing. Ultimately they are going to have to put the money into the plan or demonstrate that doing so will bankrupt them.

[david rigby]

Don't forget vesting under partial termination.

Don't forget about PBGC reportable events.

[ConnieStorer]

_{Thanks everyone!}

[Rball4]

Liquidity Shortfall?

[Andy the Actuary]

Presumably, you mean single-employer and not multi-employer?

How much is the anticipated short-fall?

How many participants?

Is the employer in bankruptcy?

[ConnieStorer]

It is a single Employer Plan.

The Plan Sponsor maintains other Plans for other locations. There is a single Plant being closed and the Plan covers only the union employees in this particular Plant.

The Employer is not in bankruptcy.

There are approximately 134 participants and about $1,750,000 short.

[Andy the Actuary]

So, now the employer must tell the union that sorry, no money to fund your guys plans, but we have money to fund our other plans. Sounds like it's time to pony up. At least, that's likely to be the PBGC's position.

Perhaps, one of these other Plans is overfunded, provides for excess assets to revert to the employer, and could be merged with the union plan. Very tricky, replete with other issues, but doable.

[Calavera]

Also need to check if 4062(e) reporting is applicable.

[My 2 cents]

Based on my understanding of the rules, the expected value of any lump sums available under the plan for funding or AFTAP purposes must be based on the discount rates applicable for funding purposes and that actual 417(e) discount rates cannot be taken into account. So it is not possible to assume that all will take a lump sum and beef up the funding target to produce a lower AFTAP by using actual lump sum amounts. The lump sums will essentially equal what the funding target had been. Also, don't forget that unless one is using a full yield curve, that means MAP-21 rates for any 2013 calculations! I am not sure if the annuity substitution rule would call for determining expected lump sums based on the full yield curve, but if does, feel free to change (permanently!) to the use of the full yield curve.

The layoff will be a reportable event (as would the occurence of the plan not having enough money to pay benefits when due). The PBGC may have opinions concerning the actions to be taken (especially if the sponsor is funding other plans). Don't forget that if the PBGC chooses to trustee the plan, no more lump sums!

Are there retirees covered by the plan? Terminated vested participants with deferred benefits? Perhaps not having enough money to cover a full plan termination would not necessarily mean that there would not be enough assets to cover the immediate demand for lump sum payments.

There are circumstances under which a recertification would be in order, but I don't think a "run on the bank" is one of them. Perhaps a plan amendment increasing benefits, but even then, it would probably not be possible to time it to hit after enough actual lump sums had been taken to adversely affect the funded status. The AFTAP is only likely to fall below 80% after a number of lump sums had actually been paid.

[AndyH]

As Calavera mentioned, this is a 4062(e) issue.

Once notified, PBGC will smell blood in the water and have a 4062(e) field day. You should educate yourself, then the client, about 4062(e). It's a big ouch.