Is it possible for a plan to have been funded yet be insolvent?

[Peter Gulia]

Is it ever possible that an employer met all of its ERISA and Internal Revenue Code funding obligations to a single-employer defined-benefit pension plan (including as of the most recent required contribution date), and yet the plan lacks sufficient assets to pay currently due benefits?

If it is possible, what circumstances would cause this?

[david rigby]

Sure. Likely, related to some (very) bad asset experience. For example,

- A large portion of the assets took a sudden (unanticipated) nose-dive.

- The liquid assets went down but the illiquid assets could not be converted to cash easily enough (or soon enough) to meet the payment date.

[My 2 cents]

Is it ever possible that an employer met all of its ERISA and Internal Revenue Code funding obligations to a single-employer defined-benefit pension plan (including as of the most recent required contribution date), and yet the plan lacks sufficient assets to pay currently due benefits?

If it is possible, what circumstances would cause this?

1. Investment losses

2. Heavy initial unfunded liability (funding obligation based on 7-year amortization) combined with high current cash flow.

3. Significant lump sums/annuity purchases when the IRC Section 436 restrictions and the 25-high restrictions were not applicable

[Peter Gulia]

Thanks!

[tymesup]

Note there is a liquidity requirement for certain underfunded large plans under IRC 430(j)(4).

[My 2 cents]

Note there is a liquidity requirement for certain underfunded large plans under IRC 430(j)(4).

Which will seldom translate into an actual inability to pay benefits when due. If anything, that would require additional contributions, making that problem less likely to occur.

[Effen]

I actually had a plan once that continued for several years with $0 assets. It was frozen pre-PPA, had a large credit balance and no assets. They only had "required" contributions when someone hit retirement age. At that time they would make a contribution to cover the lump sum and wait for the next one.

Eventually everyone was paid, and the plan just ceased to exist.

[My 2 cents]

I actually had a plan once that continued for several years with $0 assets. It was frozen pre-PPA, had a large credit balance and no assets. They only had "required" contributions when someone hit retirement age. At that time they would make a contribution to cover the lump sum and wait for the next one.

Eventually everyone was paid, and the plan just ceased to exist.

The following assumes that we are not talking here about a governmental plan or non-electing church plan.

If the plan had $0 assets and people with accrued benefits nearing retirement age, once the plan became subject to PPA, there would have been an unfunded Funding Target (required to be amortized through the minimum required contribution over a 7-year period) and an AFTAP of 0%. The unfunded Funding Target would not be calculated by ADDING the credit balance to the $0 assets. If the assets don't equal or exceed the Funding Target, the amount to be amortized would reflect the assets MINUS the credit balance. Yes, even if that exceeds the Funding Target, as it would here.

1. If the plan was frozen by 9/1/05, Section 436 would not interfere with the payment of lump sums, so an AFTAP of 0% would not get in the way. Then it becomes a matter of cash flow. A lump sum of $100,000 is now payable? You need to put at least that much into the fund or the check would bounce.

2. Once PPA became effective for the plan, assets of $0 and non-zero benefit accruals would bar the use of any of their credit balance for purposes of satisfying their non-$0 minimum required contributions. They would also have become subject to the quarterly contribution requirements.

How did they get away with running the plan on a terminal funding basis?

[Effen]

Ooops, I guess I mis-remembered. I had to go back and look. The plan was frozen pre-PPA and the credit balance was not relevant.

They did have MRCs due each year, but it was significantly less than the amount needed to cover the lump sum when paid. I looked at the valuation for one year and the assets were $0 at the beginning of the year because they had paid a lump sum in the previous year. The MRC for the next year was $15,000. Another person terminated with a lump sum of $50,000, so they had to put in the $35,000 more to cover the lump sum and assets were again $0 at the start of the next year.

Sorry for potentially misleading mis-remembering, but the core of the story was correct. The plan had $0 of assets and had to make contributions when lump sums were due. The piece I forgot was they also had MRCs due each year.