terminated defined benefit plan with asset loss on an investment-what

[thepensionmaven]

I am in the process of winding down a DB plan. There was one investment in the plan that apparently the client, and others bought with plan funds for a third pary to invest. The funds were apparently absconded with. My client and others have sued to regain the funds.

The accountant has shown a $300,000 investment loss on the books and this is reflected in the final numbers, on the 5500s as well as what was filed with PBGC for the termination.

The 60 days have elapsed and all mothe funds are liquid at this point ready to be distributed. The group is comprised of 8 participants, 7 of which are family. The company has no active payroll but still exists.

The employer wants to know what happens if we rollover all available assets now, and close out the plan ASPA WHAT happens if the clients win the lawsuit and recoup the funds?

How can you distribute funds from a terminated DB when the plan has technically been closed out, everyone has received a 1099R and final 5500s have been filed.

OR should we leave the plan open until that time??

OR, should the asset be renamed as a Corporate asset and earmarked for the participants IF and WHEN anything transpires?

Lorraine, what would you do??

Thanks,

Steve

[Guest]

I agree with Lorraine. If there is a chance of recovering assets, I think the plan should not terminate although it could be frozen. This is a settlor function, though, not a fiduciary function. If however the cost of maintaining the plan would outweigh any potential likely recovery, I see no problem with closing it down. I also agree that if the plan is terminated, there is no one to distribute assets to as part of a qualifed plan. I don't see a problem however with the plan transferring its right to sue to the corporation or another party for appropriate consideration. If the other party wins, it could do whatever it wants with the money because the plan is terminated. Aren't there companies that buy potential lawsuits from people?

[Lorraine Dorsa]

There are several issues here--the plan termination and distribution of assets, the suit to recover assets and the ownership of the assets.

Legally, the most important issues are the ownership of the assets and the suit to recover. Practically, termination/distribution is the issue, but I think it must take back seat to the legal issues.

I'm not an attorney, but it would seem to me that for the plan to bring suit to recover assets, the plan must exist. Therefore, I think the plan must continue to exist until the suit is settled.

Transferring/assigning the asset to the employer would solve the problem of the existence of the owner of the asset, but wouldn't this be a reversion of assets to the employer (which raised issues of plan disqualification/prohibited transctions/excise taxes and all sort of other nasty stuff)?

In similar situations in which the plan terminated, paid out all benefits and filed final 5500's, PBGC 501, 1099's and then later found a forgottten asset, I've been told by practitioners that they have reopened the plan, distributed the asset in accordance with plan terms and then filed another final 5500.

If the plan was not going to file a lawsuit to recover assets, but rather attempt an informal recovery (e.g. employer or trustee attempts to put pressure on investment provider, short of filing a lawsuit), I'd suggest the method in the paragraph above, but this is not consistent with the ongoing existence of the plan.

This a a real mess. What does the attorney handling the lawsuit say? Has he consulted with an ERISA attorney?

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[thepensionmaven]

Thanks for the input.

I spoke to Nancy Martin at the PBGC who advised of two scenarios:

One would be to pull the termination.

The other would be to pay out the rank and file and have the principal waive benefits. I prepared a waiver when I did the Notice of Plan Benefits and it is signed.

I guess if they do settle, the principal will get his portion through the court system, although he obviously can not roll it over.

[Guest ptpnthr]

There may be a couple of ways to handle this if you want to "terminate" the plan but keep it open for standing. Technically, you can't terminate a plan until all its assets have been distributed. The plan's fiduciary claim is an asset of the plan. You could distribute that claim (but this would be a mess and I wouldn't go there)or argue the plan still exists b/c all its assets have not been distributed. This may cause problems with the IRS b/c they may say you need to file a 5500 under 89-87 but I think that could be easily handled.

[Dowist]

You also have the IRS letter rulings that allow a plan to transfer assets to a trust (not an exempt trust), to terminate, and then to distribute interests in the trust to the participants, in addition to the other assets. The idea is that all assets are distributed to pts, who get in addition to regular assets, an interest in the trust. Would require setting up a trust (which would have to have special provisions) and hiring a trustee.