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DB Plan termination with insufficient assets and waiver of benefits


rodin111

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  • Plan will be terminated .
  • Plan subject to PBGC
  • Plan valuation AFTAP is greater then 100%.
  • Plan assets less than total termination benefits
  • Owner want to waive part of his benefits rather than make additional contribution.

Does this plan qualifies for a standard termination filing?

Thank you for your help.

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Probably. Search the PBGC instructions for "owner".
http://www.pbgc.gov/documents/500-instructions.pdf

BTW, you will not find the word "waive". They use "forego".

Be sure to have this discussion with the plan's actuary.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I forgot to state in my original post that the sponsor wants to request the IRS determination Letter upon termination by filing Form 5310.

I know that the PBGC has no problems with the waiver of owner's benefit. It seems though that the IRS has a different opinion when the reported assets are less than plan liabilities upon termination. Form 5310 asks for total assets and form 6088 asks for total accrued benefits "unadjusted for for an election of a majority owner to forego receipt of a distribution under PBGC regulations "

It seems that the IRS really does not like that and I heard some plans had a tough time to convince tem.

Does anybody have experience with such situations? Any pertinent citations?

Thanks for help.

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Be certain not to have any unpaid minimum contributions! The only time I saw a 100% excise tax was a plan with a deficiency where the owner waived benefits (some of which would have been paid had the minimum been met).

Always check with your actuary first!

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Probably, the 5310 will show assets including whatever contribution is necessary for Standard Termination. See the line for "Receivable Employer contribution". Then, at a later date, the owner will document his/her action to forego a portion of his/her benefit. On its face, this will reduce the amount of receivable contribution.

BTW, there might be legitimate reasons why an owner may want to "fund it up", even though such funding might affect only the owner's benefit.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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To "My 2 cents": As of last val (before the plan was frozen) the AFTAP was in excess of 100%. And it was so each and every year. They always contributed much more than the minimum required

To David: Actually, the termination amendment resolution includes a paragraph that addresses the owners foregoing part of their benefits.

"RESOLVED FURTHER: That to the extent that assets are insufficient to cover the lump sums of any owners covered under the terms of the plan, the remaining assets, after full distribution to all non owner participants, shall be allocated proportionally to the owners based on their calculated lump sum termination benefit amounts"

Does the IRS require a separate document? And if yes, should this specify the $ amount of the individual and total forgone contribution for owners.?

And at what point during the process should this document (if required on top of the termination amendment) has to be submitted to the IRS. Can it be submitted at same time with 5310 (with an explanation?), should we wait for some requests from the IRS?

I can not find any pertinent citations, instructions, etc., and I am a little in the dark.

Thanks for your help

"

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To "My 2 cents": As of last val (before the plan was frozen) the AFTAP was in excess of 100%. And it was so each and every year. They always contributed much more than the minimum required

To David: Actually, the termination amendment resolution includes a paragraph that addresses the owners foregoing part of their benefits.

"RESOLVED FURTHER: That to the extent that assets are insufficient to cover the lump sums of any owners covered under the terms of the plan, the remaining assets, after full distribution to all non owner participants, shall be allocated proportionally to the owners based on their calculated lump sum termination benefit amounts"

Does the IRS require a separate document? And if yes, should this specify the $ amount of the individual and total forgone contribution for owners.?

And at what point during the process should this document (if required on top of the termination amendment) has to be submitted to the IRS. Can it be submitted at same time with 5310 (with an explanation?), should we wait for some requests from the IRS?

I can not find any pertinent citations, instructions, etc., and I am a little in the dark.

Thanks for your help

"

The problem with that is that I don't think even the PBGC will allow anyone who is not a majority owner to opt to forego any of his or her benefits (given the fact that coercion could be involved). Plus, of course, there it is in broad daylight, evident to all. Further, spousal consent is probably mandatory for any benefits to be foregone, and the resolution does not address that.

Always check with your actuary first!

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To "My 2 cents": As of last val (before the plan was frozen) the AFTAP was in excess of 100%. And it was so each and every year. They always contributed much more than the minimum required

To David: Actually, the termination amendment resolution includes a paragraph that addresses the owners foregoing part of their benefits.

"RESOLVED FURTHER: That to the extent that assets are insufficient to cover the lump sums of any owners covered under the terms of the plan, the remaining assets, after full distribution to all non owner participants, shall be allocated proportionally to the owners based on their calculated lump sum termination benefit amounts"

Does the IRS require a separate document? And if yes, should this specify the $ amount of the individual and total forgone contribution for owners.?

And at what point during the process should this document (if required on top of the termination amendment) has to be submitted to the IRS. Can it be submitted at same time with 5310 (with an explanation?), should we wait for some requests from the IRS?

I can not find any pertinent citations, instructions, etc., and I am a little in the dark.

Thanks for your help

"

To "My 2 cents": As of last val (before the plan was frozen) the AFTAP was in excess of 100%. And it was so each and every year. They always contributed much more than the minimum required

To David: Actually, the termination amendment resolution includes a paragraph that addresses the owners foregoing part of their benefits.

"RESOLVED FURTHER: That to the extent that assets are insufficient to cover the lump sums of any owners covered under the terms of the plan, the remaining assets, after full distribution to all non owner participants, shall be allocated proportionally to the owners based on their calculated lump sum termination benefit amounts"

Does the IRS require a separate document? And if yes, should this specify the $ amount of the individual and total forgone contribution for owners.?

And at what point during the process should this document (if required on top of the termination amendment) has to be submitted to the IRS. Can it be submitted at same time with 5310 (with an explanation?), should we wait for some requests from the IRS?

I can not find any pertinent citations, instructions, etc., and I am a little in the dark.

Thanks for your help

"

The problem with that is that I don't think even the PBGC will allow anyone who is not a majority owner to opt to forego any of his or her benefits (given the fact that coercion could be involved). Plus, of course, there it is in broad daylight, evident to all. Further, spousal consent is probably mandatory for any benefits to be foregone, and the resolution does not address that.

In this particular case the two owners have 50% ownership each.

You are right about the spousal consent: they will probably modify the termination amendment- which was not yet adopted and signed- to include this requirement,

such as

"RESOLVED FURTHER: That - subject to the required spousal consent-to the extent that assets are insufficient to cover the lump sums of any majority owners covered under the terms of the plan, the remaining assets, after full distribution to all non owner participants shall be allocated proportionally to the owners based on their calculated lump sum termination benefit amounts."

And the distribution package will include the spousal consent.

Is there a way to bring this intent of foregoing part of the owner's benefit at the attention of the IRS at the time the 5310 is filed, or should we wait for the IRS to "ask" why listed assets are lower than the total benefits payable?

Thanks again.

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