436 Restrictions on Plan Amendments

[IRA]

Our DB plan is less than 80% funded. We want to amend it to increase benefits. But we can't because of 436.

Can we just adopt a new plan to provide the additional benefits we want to provide? Or would the adoption of the new plan be combined with the old plan for purposes of 436?

[Andy the Actuary]

My understanding is the 436 limits apply on a plan by plan basis. Thus, if a Plan sponsor maintains two DB plans -- one that is 55% funded and the other 98% funded, there should be no problem distributing lump sums to NHCEs under the 98% funded plan. Interesting that 401(a)(4) and 415, among other code sections do aggregate. Thus, it would seem that your proposition smells okay so long as you're careful about grants of past service in the new plan and apart from the expense of maintaining two plans.

However, what you would be proposing is clearly a subterfuge and the IRS might not take kindly to your action. As always, check with legal counsel.

[My 2 cents]

You can adopt the benefit in the existing plan if you make the special Section 436 contribution (which would have to be paid over and above the minimum required contribution). I believe that the special contribution would be based on the amount by which the Funding Target would increase as a result of the amendment (the plan already being less than 80% funded). Doing it that way is much more straightforward. If your plan is already under 80%, you really would need to plan to get the new benefits funded right away. Having the funding being below 80% is not a healthy situation, and adopting an increase in benefits without taking action to keep the increase from making things worse is the best way to go.

[Effen]

Ultimately you aren't saving any money by adopting a new plan, you are just doubling your admin expense and PBGC premiums.

You still need to fund the increase in the new plan. In 7 years you will be in the same place, except under your solution, you will have twice the expenses.

If you can't afford to pay it all at once, borrow the money on a 7 year loan. With interest rates where they are, it may actually be cheaper than the funding requirements.

If you can't afford the loan, you probably shouldn't be increasing the benefit.