PBGC Covered small plan wants to term without IRS determination letter

[CharlesLeggette]

This Cash Balance Plan missed its 9/15/2013 funding of its plan. Froze benefits in 3/13. Paid a $40k excise tax on 9/15/2013 for missed 2012 contribution.

Is terminating today with 204h NOIT, so a 3/1/2014 term date.

Owners have 95% of all balances, and will waive benefits to be sufficient.

They will not pay 2012 funding 2013 funding, and will be a sufficient termination and do not want to fill w/IRS for a termination LOD.

If the Plan goes away on 6/1/2014 and is distributed, there will be no plan to make funding for the missed 2012 and 2013 funding.....I'm nervous about the excise tax issues here for 2012 and 2013...any thoughts????????????

[Rball4]

5500's will show funding deficiency, so excise taxes are due even if the plan terminates. I don't think there is any way around that. Also, you may have a PBGC reportable event.

[AndyH]

From an IRS training manual found online:

If contributions are not made timely within these guidelines, the plan will fail

to meet the minimum funding standards of IRC § 412 and there will be an

accumulated funding deficiency.

IRC § 4971(a) imposes a 10% excise tax on any accumulated funding

deficiency as of the end of any plan year ending with or within the taxable

year. This means that if there is an accumulated funding deficiency as of the

last day of the plan year in which the plan terminated, the 10% excise tax

penalty will apply. No additional tax under IRC § 4971 will be imposed on

subsequent years.

The termination however, does not relieve the employer of the obligation to

fund the accumulated funding deficiency as of the end of the year in which

the plan is terminated. If the deficiency is not reduced to zero, the 100%

excise tax penalty of IRC § 4971(b) will apply. Rev. Rul. 79-237.

[My 2 cents]

1. The only time I saw a client hit with the 100% excise tax was when the plan terminated with a deficiency that could not be cured by a suitable contribution since the plan was gone.

2. That plan had involved a majority owner waiving a portion of her benefit, a larger portion than would have been necessary had the minimum funding standards been satisfied (so the waiver of benefits did not cure the deficiency). Sounds like your situation, except that you talk about "owners" waiving benefits. Neither the IRS nor the PBGC will permit anyone who is not a majority owner to waive anything, since coercion could be involved otherwise.

3. Not applying for an IRS letter looks a bit risky. Count on being audited by the IRS, especially if the plan had not met the minimum required contribution and then terminated. Better to do what the IRS demands to avoid disqualification than to let the IRS raise its objections when it is too late to do anything about them.

You are nervous about the excise taxes? Be afraid. Be very afraid.

[Effen]

"so a 3/1/2014 term date"

You would also have a 2014 short year funding requirement, that may also become a deficiency if unpaid.

It also wouldn't surprise me if the PBGC asks a lot of questions about the deficiencies and possibly gets the IRS/DOL involved.

[My 2 cents]

I just remembered - I think that in addition to the 100% excise tax for the deficiency, the IRS wanted to treat the portion of the owner's benefit that was waived that would have been paid to her (had the minimum required contribution been made) as taxable income to her.

I hope that the owners involved give this some serious thought. Presumably, they don't want to face possibly getting stuck with 100% excise taxes on the unpaid minimum plus a personal income tax liability for some of the benefits being waived. Borrowing or putting in personal funds sufficient to cure the deficiency (deductible, assuming the company is in a tax-paying situation) and getting that money back by not having to waive as much (possibly eligible for rollover to an IRA) might be a better deal. Not saying things would go that way, but still...

Did you say they paid a $40K excise tax for the deficiency? By my calculations, that would make the 100% excise tax for the uncured 2012 deficiency $400,000. And 2013 also? And a short 2014 plan year? Ouch.