Majority Owner Waiver

[dan.jock]

In a PBGC plan termination, to qualify for standard termination, benefits needs to be fully funded.  To accomplish this, under 4041.21(b)(2), an owner of 50% or more can make an election to forego benefits.  Is anyone aware of the definition of majority owner being reconsidered?  It seems like if a partner of say 10% should be allowed to make a similar election; no staff is harmed and the IRS gets an extra tax dollar assuming the deduction is not taken on fully funding the benefit.

Second question: If the plan is not covered by the PBGC, what then?

[Lou S.]

For what it if worth we have had PBGC approve waivers for non majority owners (with spousal consent) on plan termination that allowed a standard termination to proceed but it's been quite some time. From what I recall the PBGC is pretty receptive to working with you particularly if the alternative is distress termination.

 

As for not PBGC plan the benefits are typical reduced to the level of funding based on the terms of the plan in a nondiscriminatory manner. The two most common methods I've seen in plan documents is pro-rata on PVAB (though this can be problematic if integration is involved) or pro-rata on PBGC priority categories though this can sometimes be problematic from a nondiscrimination standpoint in small plans as the owners typically seem to have the most benefits in the higher PBGC priority categories.

 

[My 2 cents]

I always thought that the waivers were only supposed to be used for majority owners.

How else can you prevent all of the other owners from coercing that 10% owner into giving his benefit away?  If you own 50% or more, nobody else can make you waive the benefits unless you really are willing to do so.

[david rigby]

FWIW, I've seen a non-PBGC plan use an owner waiver as if it was subject to PBGC rules.

[Effen]

FWIW, I have asked the PBGC about possible non-majority owners and they were adamant that only majority owners can waive benefits.  That said, they are open to creative ownership arrangements to get this done.  Your best bet is to just call them and ask.  They are usually helpful when you call.

[Luke Bailey]

In my experience, PBGC permits only for 50% or greater owner, and IRS position is that it does not follow PBGC on allowing waiver and any waiver of benefit, even by 100% owner, is 411(d)(6) violation and/or assignment of benefit. Where we have needed to use the PBGC majority owner waiver we have not submitted the termination for a DL. Would be interested in knowing whether others have experience with IRS permitting where part of facts in DL submission.

[Mike Preston]

Majority owner only when it comes to PBGC.  Period.  Full stop. IRS doesn't recognize majority owner waiver for funding purposes. Period.  Full stop. IRS will consider allocation of assets on plan termination based on majority owner waiver as non-discriminatory and LOD is no probem. I like to amend plan terms before plan term to make sure allocation of assets on plan term based on majority owner waiver doesn't conflict with plan document language (which is typically ratio to PVAB if non-integrated or 4044 if it is).

[CuseFan]

Ownership, if I'm not mistaken, is also determined by options as well, so if you have 3 equal (1/3) partners, each of which has the option (via partnership agreement) to buy 50% of an exiting partner's share then you actually have three majority owners. I've seen this done.

[Mike Preston]

Are you sure about the "exiting" part of that?  Seems to me the option has to be free to exercise even in the absence of the deck  being re-shuffled.

[Luke Bailey]

So your experience, Mike, is that IRS will issue a favorable LOD on termination, even though it does not recognize the waiver? What is the effect of nonrecognition of waiver by IRS, then, if they don't raise the cutback and assignment issues? I mean, I'm not saying they should from a policy perspective, just want to make sure I'm understanding you that even though IRS does not recognize the waiver, it's safe to submit the plan with the amendment as you describe for a DL.

Thanks. 

[Mike Preston]

I said it doesn't recognize the waiver for funding purposes.

[Luke Bailey]

Thanks. So you're saying that getting an LOD is no problem, but they may hit you with minimum funding excise tax, is that it?

[Mike Preston]

Correct.

[dan.jock]

A 1/3 partner is retiring and retaining his ownership. (for now)  Benefits won't be 110% after the distribution and the plan is less than 100% funded actually so he just wants to forego his benefit to the extent funded.  I don't really have a good option for him except to defer receipt of his benefit until the plan is 110%+ or get them to terminate the plan.  Termination is not what's best for the other partners though.  So I think they wait and decide how to contribute profits to the plan until this fella can distribute.  Plan consists of only partners so it seems legalistic and not what the spirit of anti-cutback is about.  However, it is what it is.

 

[My 2 cents]

Not sure - do the 25-high limits apply to HCE-only plans?  If they do, the fact that the plan would be less than 110% funded after virtually ANY distribution to the 1/3 partner would prevent unrestricted payment of greater than 12 times the monthly straight life annuity benefit otherwise payable.  Set up escrow or parcel out the payment of the lump sum in single life annuity size bits or have the person elect a non-restricted distribution option.  As long as it would be below IRC 415 limits, payment of the full benefit as a QJSA is always going to be permitted irrespective of funded status for an ongoing plan.