GA Terminal Funding Vehicles

[Tinman]

DB illiterate here - so be kind!

If a fully-funded DB plan is terminating and uses a group annuity contract as a terminal funding vehicle, does the distribution of those assets into said vehicle then allow for plan termination? In other words, do those assets being held in the GA still constitute plan assets, thus a continuation of the plan? Who would be responsible for instigating payouts as participants separate from service - the (former) plan administrator? The GA vendor? The participant?

Any cites you may have on this would be appreciated!

[My 2 cents]

The first thing is to assess what you mean by "a fully-funded DB plan". A fully-funded DB plan (measured using the funding relief rates of HATFA) may not have enough assets to cover the vested accrued benefits based on PBGC premium rates and owe a variable rate premium.

A plan that terminates under the PBGC's standard termination rules must have enough money (or know where to find enough money) to either buy annuities from a strong insurance company or pay lump sums. It will usually take a lot more money than the funding liabilities as measured for minimum funding purposes.

There is no longer such a thing as a "terminal funding vehicle". If the assets are not spent, as soon as practicable (which can still involve more than a year from start of the process to the end), for annuities and/or lump sum payments covering all plan benefits, the plan is not really terminated. After a plan has terminated, there are no unallocated assets, no ongoing group annuity contracts (other than a group annuity contract under which there are only purchased annuities for the individual participants).

After a plan has terminated, the onus for administering any annuities belongs entirely to the insurance company that sold them. The insurance company may (if the sponsor remains in existence) be able to obtain some help from the sponsor, but the overall responsibility belongs to the insurance company.

For more details, you may wish to discuss this with the plan's enrolled actuary (who should be quite familiar with the rules governing plan terminations). One presumes that as a self-described "DB illiterate", you are not the enrolled actuary for the plan!

[Tinman]

Thanks for the reply.

You are correct, not the enrolled actuary for the plan - actually work for the insurance company holding these assets which have been with us since the early '90s. These assets came to us for purchase of annuities upon termination of the plan. Trying to determine if they are still considered plan assets subject to ERISA or if the purchase of these annuities constituted distribution from the plan, allowing the plan to terminate. And I think from what you said above, the answer to that question would be the latter - distribution/termination of plan - am I interpreting that correctly?

[david rigby]

That might be the correct interpretation. Only the document(s) can tell you for sure.

[My 2 cents]

That might be the correct interpretation. Only the document(s) can tell you for sure.

That said, if it was handled properly, the assets belong entirely to the insurance company (as part of its general investments, with no separate accounting at all), which has sole responsibility to administer the payment of the contracted-for benefits (the value of which should be included in the insurance company's statutory annuity reserves to be compared, for solvency purposes, to the value of the general investments of the insurance company). If handled properly back then, the assets are insurance company assets and the benefits for which annuities were purchased are liabilities of the insurance company, with no direct correlation between the two other than for purposes of measuring the entire insurance company's solvency.

There should be no separate accounting or reporting for the assets that had been paid to the insurance company lo those many years ago. The sponsor is entirely out of the picture (except to the extent that the sponsor helps to keep administration of the purchased benefits running as smoothly as possible), and the plan does not exist (again, assuming that it was handled properly) and has not existed since the purchase took place.

Also, for what it is worth, if things were handled properly, there is no longer an enrolled actuary involved either.