Intentional New Plan Disqualification

[John Feldt ERPA CPC QPA]

Suppose a new individually drafted defined benefit plan was established mid-2013 with a January 1, 2013 plan effective date. Suppose the plan was signed and executed and the plan document was submitted to the IRS with Form 5300 last summer. No contributions made yet, but liabilities for 2013 have accrued.

Now suppose the client calls today and says business has turned so bad that they aren't sure they will even be in business a few months from now and they don't see any possibility for making any plan contributions.

Also suppose the DB document says something like "...if, pursuant to an application for qualification, the IRS should determine that the Plan does not initially qualify as a tax-exempt plan under Code Sections 401..., then if the Plan is a new plan, it shall be void from its inception..."

Since the IRS is still in the review process for this plan's determination letter application, would the IRS accept and even consider a request to them asking that they issue an unfavorable letter on this supposed plan? Has anyone done this? What do you recommend?

[Lou S.]

Does this new plan have any hypothetical participants that might be covered by the PBGC?

[John Feldt ERPA CPC QPA]

Yes, suppose they are.

[KJohnson]

I did it once a number of years ago where an owner did not understand the controlled group rules, set up a one person DB but we were still in the remedial amendment period. The request set forth the coverage failure and asked for an unfavorable letter. Originally got a favorable letter (even though asking for an unfavorable one) but went back and got a lengthy determination allowing return of the contributions and including a ruling that it did not constitute a taxable reversion under 4980©(2)(B).

[Lou S.]

Yes, suppose they are.

I was afraid you were going to say that. Not sure how you get an unfavorable letter in this case. Can you send a supplemental amendment in to IRS terminating the plan and claiming not qualified on non-permanence issues?

Not sure how you get around the PBGC though as they are probably going to want premiums for 03 & 04 and a distress termination. No?

At a minimum I'm sure you want to freeze before anyone gets 1000 hours in 04 but you've probably already thought of that.

[shERPA]

Beyond the three and four letter agencies, the participants likely have a claim to their plan benefits under ERISA. Yes if the plan failed to qualify the contingent language could invalidate the plan retroactively.

But if it failed to qualify because the ER specifically asked for the DSQ (or even a more mundane reason like not sending in a proposed amendment to change some minor language per IRS request in the DL process), perhaps the participants could allege that such ER action constituted a fiduciary breach.

[My 2 cents]

Not a lawyer, but seems to me it would more likely be a breach of contract, deliberately trying to invalidate a contractual obligation after it was entered into.