Death of Sole Owner & Trustee of Underfunded 412(e)(3) Plan

[TPASue]

A doctor, who recently passes, adopted a 412(e)(3) Plan in 2014, funded the first year, but not the three years following, as such he froze the plan in 2018.  Note: we urged him to freeze the plan, in 2016 when he didn't fund the 2015 benefits.  He didn't want to, he stated he wanted to fund the plan, after three years of not funding, he finally allowed us to freeze the plan in 2018.  After that he was ill and could no longer fund the plan.  We were going to terminate our services if we could convince him to fund the plan, but he since passed away on May 30, 2019.

The brother of the deceased owner, is trying to keep the business open and ownership transferred to his name, but he refuses to fund the plan.

Has anyone dealt with a plan that is not covered by PBGC, not fully funded and the sole owner/trustee has passed? 

Can we force the business to fund the plan?

Can we go to his estate get the plan funded?

Can we just pay out the NHCEs with the funded assets?

Any help would be greatly appreciated.

Thank you.

[StephenD]

Most people don't understand 412i/412 e3 plans.  They are DB Plans that are exempt from an actuarial val and a 5500 while they are a e3 plan, if they are set up properly to begin with.  Assuming yours was set up properly in 2014 (maybe?), then it stopped being a e3 Plan the day that the premium payment is missed.  So right then, you needed a val. If the val said you missed your minimum funding for the Plan Year, then you pay the excise tax and put the deficiency on the Schedule SB that you will submit for a regular old DB plan, which it has now become.  So you didn't freeze your regular old DB Plan until 2018.  You should be looking at preparing all those past 5500s and 5330s and get a fidelity bond.  If you bring this case to EPCRS, you can propose ways to fund the NHCEs so you can terminate the Plan.  You might want to consider asking for disqualification instead, it may be cheaper given the fees and the back contributions.  Please have a good actuary take a look and give you a recommendation.

[david rigby]

Um, who is "we"?

[Luke Bailey]

 When you terminate a PBGC-covered plan in a standard termination, the PBGC will let a 50% or greater owner waive his or her benefits if the plan isn’t fully funded,  so that the rank-and-file can be paid 100% of their benefits .  There’s actually a “majority owner waiver form“ that you use.  That will probably also work for a surviving spouse, if she is a 50% or greater owner of the business  following the death of the participant .  My recollection is that where the participant is still alive as the majority owner and you use the majority owner waiver, the spouse must consent, so that would imply that it would work for a  surviving spouse  as well. 

 The IRS (probably correctly)  takes the position that the minimum funding excise tax is statutory, and therefore  it has no authority to waive it.  If you file the  delinquent  5500s under DFVCP,  with the schedule B’s  showing that minimum funding has not been met  for several years, the IRS will likely assess the excise tax for at least  the last three years.  It could be a lot of money. Terminating the plan on an underfunded basis  using a majority owner waiver will not erase the minimum funding violations for purposes of the excise tax.  so make sure you have calculated the minimum funding excise tax exposure on a pro forma basis for the client before you recommend that they file the back 5500s. Of course, you’re between a rock and a hard place because there are very large potential penalties also for for failure to file the 5500s. All I’m saying is that you should make sure that your client understands the risk.

 As with any tax, especially  a punitive excise tax like the minimum funding deficiency excise tax,  if the IRS assesses it, you may be able to compromise the payment based on  inability to pay,  depending on the facts, of course. I don’t think you mentioned this in your question, but if the plan sponsor was a corporation, the minimum funding excise tax liability will be on that corporation, and at this point it may not have a lot of assets.  If the business was the sole proprietorship, then  you’re in a weaker position regarding any assessed liability. 

[shERPA]

On 6/24/2019 at 11:33 AM, TPASue said:

he finally allowed us to freeze the plan in 2018. 

Can we force the business to fund the plan?

Can we go to his estate get the plan funded?

Can we just pay out the NHCEs with the funded assets?

First, change your terminology.  As a TPA you can't "do", "make" or "force" anything.  The plan sponsor either amends the plan to freeze benefits, or he does not.  He either funds the plan, or does not.  You don't collect contributions from the estate, you don't pay out NHCEs, the plan fiduciary does.  The TPA has no authority over the plan and your language should not imply that you do.  You can advise, your client is free to follow or disregard your advice, and you are free to either continue or discontinue your services on this basis. 

As pointed out by StephenD, once he quit paying premiums the plan failed to meet the 412(e)(3) requirement of benefits guaranteed by the contracts.  That was the time to act, the client either continues the plan as designed, the plan (and corresponding TPA and actuarial services) is changed, or you resign.

Now it's a mess.  The one saving grace, assuming the successor plan fiduciary (not the TPA) can find a way to pay out the NHCEs their proper benefits, the IRS under examination is unlikely to beat up a dead person's estate over compliance matters.   But someone has to figure out what the NHCEs are due.  412(e)(3) documents typically provide that the accrued benefit is the accumulated value in the policies, but since the premiums weren't paid, the accumulated values don't reflect the benefits as promised by the plan formula.   I recommend the successor plan fiduciary engage ERISA counsel and these things get worked out under attorney-client privilege.   If the brother is "taking over" the business, he may or may not be a successor plan fiduciary with personal liability.  That's probably the first thing he should determine with the help of legal counsel.  If he won't take this step, you're pretty much done and can't do anything but resign. 

[TPASue]

Thank you all for your information.  It's much appreciated.  I should not have used the word "we" you are correct. My apologies.