Small underfunded plan--No PBGC Insurance

[benniegirl]

A client medical office sponsors a small and very underfunded DB plan. For various reasons termination is on the table. Does anyone have any helpful resources for how this would work when the plan has no PBGC insurance?

[Lou S.]

The plan document should spell out how the assets are allocated when insufficient to cover all benefit liabilities.

Section 7.12.1.20 of the IRS internal manual may be helpful http://www.irs.gov/irm/part7/irm_07-012-001.html- though after looking at it probably not.

See Rev. Rul. 80-229 - I think this is the one that spells it out pretty clearly and I don't think it has been superceeded.

I think there was discussion of similar situation in this thread http://benefitslink.com/boards/index.php/topic/12131-distributions-from-terminated-small-db-plan/

[Effen]

As Lou said, the document holds the answer, but basically they have 3 options:

1) Fund the shortfall

2) Reduce the benefits for a select few owners/hces - what ever they feel is equitable

3) Reduce the benefit for everyone in accordance with plan doc.

1 or 2 are the best options as far as the IRS is concerned, but legally, there is nothing wrong with 3.

Also, if it was PBGC covered, they would force the owners to reduce their benefits and make sure any non-owners received full value. Don't kid yourself into thinking the PBGC would have provide any realistic benefit in this situation.

[benniegirl]

Thank you both, and Effen, I agree. I think PBGC coverage would actually be a detriment in this particular situation.

[FAPInJax]

Generally, pay the employees off and the owners take the shortage. They now have the option to further fund the plan termination and any dollars contributed go to themselves.

[david rigby]

Don't overlook the other option: keep the plan.

Further cash funding will likely be covering the shortfall, which just happens to the owners.

I recommend some frank discussion between the owners and the actuary.