Combined Deduction Limit in Year PBGC Coverage Ceases

[SFlannery-Nova]

A Plan Sponsor sponsors both a DC and CB plan and as of 1/1/2021 the CB Plan is PBGC-covered. As of 1/1/2021 there are two participants, the business owner and one other participant. The other participant is paid out during 2021 and a PBGC coverage determination filing is made. The PBGC determines that as of 10/1/2021 the CB Plan is no longer covered. As a result, does the combined deduction limit (the 31% limit is not really practical for this plan, so it would be the CB contribution + 6% on the DC side) apply for 2021?

[C. B. Zeller]

I'm not aware of any clear guidance on this issues, but I would be reasonably comfortable taking the position that if the plan was covered by PBGC at any point during the year, then they are still exempt from 404(a)(7). After all, you are still required to pay the full premium even if coverage ceases mid-year.

[SFlannery-Nova]

If coverage ceases mid-year can't you request a refund of a pro-rated portion o the premium for the part of the year during which the Plan was not covered?

[C. B. Zeller]

No. From the premium filing instructions:

Quote

Short Coverage Years

Premiums are prorated for Newly Covered Plans if the first day of coverage begins more than a month after the plan year begins. For example, if a calendar year plan becomes covered by PBGC in March of 2021, the premium is prorated (i.e., 10/12 of the un-prorated premium would be owed).

Premiums are not prorated to reflect a period of non-coverage that occurs during the plan year. For example, if a calendar year plan that’s covered on January 1, 2010 ceases to be covered on July 15, 2021, the full 2021 premium is owed.

 

[SFlannery-Nova]

Interesting, thanks for the cite. We recently received a coverage determination letter and the PBGC indicated the client could request a refund for a portion of the premiums. This would contradict the information from the instructions.

[Draper55]

I would be concerned absent guidance that since the deduction is with respect to the plan year, an agent might take the position that coverage under ERISA 4021 is required for the entire plan year.

[C. B. Zeller]

Like I said, it's not entirely clear. If the employer wants to take the safest option, they will limit their contribution on the PS plan to 6% of comp.

I think either position is reasonably defensible.

SFlannery-Nova didn't go into detail on the circumstances that caused the plan to cease to be covered, but I am going to assume that it's something like the last non-owner participant terminated employment and was paid out during the current year. As a result, the plan is now a substantial owner plan and is exempt from coverage.

In that case, I would probably say that if the terminated non-owner participant is still getting a contribution in the PS plan, then you are on a lot safer ground than if the owner is trying to take that whole 25% deduction for themselves.

[SFlannery-Nova]

Thanks Draper and CB - Yes, there was one non-owner participant who terminated (with a vested benefit) in a prior year (before 2021) and was paid out in 2021. So once this participant was paid out, the plan only covered the 100% owner. The non-owner terminated vested participant will not receive an employer allocation in the 401k PS for 2021.

Agree, absent clear guidance to the contrary, the "safest" approach seems to be limit the ER contribution to 6% on the DC side for the 2021 plan year.