Terminating Cash Balance Plan - Contribution Obligation

[metsfan026]

If a client opts to terminate their Cash Balance Plan prior to the end of '22, due to selling the business, is their a contribution obligation for '22?  Just want to confirm so the client knows what to expect prior to termination.

Thanks in advance!

[Hojo]

Depends on the funded status of the plan, but generally yes.

[Bri]

I'm thinking lots of people may have hit 1000 hours already....

[metsfan026]

That's what I thought.  Would there be an issue amending the plan, eliminating the benefit for the two owners but maintaining the contribution for the rank & file?

[Hojo]

The issue would be if the owners already worked 1,000 hours (which is likely as Bri mentioned) you cannot amend to reduce their benefits at this point.

[Bri]

Well, as long as the owners won't hit the 1000-hour mark in the next 15 days after you deliver their 204(h) notice.

(Of course I'm assuming that's their plan's accrual requirement for a year.)

 

[CuseFan]

Even if owners accrue, as 50/50 partners I believe they can elect (with spousal consent if married) to forego the portions of their benefits necessary to fully pay all other participants upon plan termination.

[Lou S.]

A lot to consider. Is the Plan PBGC?

The Minimum Required Contribution is not the same as the contribution credit under the Plan document.

As others have noted the Contribution credit will depend on whether or not participants have meet the accrual requirements in the document before the freeze and/or termination date, with 204(h) notice of course.

The Minimum Required Contribution for the year will be dependent on the funded status of the Plan and would be prorated if the termination creates a short plan year.

[Hojo]

2 hours ago, CuseFan said:

Even if owners accrue, as 50/50 partners I believe they can elect (with spousal consent if married) to forego the portions of their benefits necessary to fully pay all other participants upon plan termination.

But that doesn't mean they are exempt from the minimum funding requirement.

[Jakyasar]

In addition to the minimum required funding (MRC), the contract between the buyer and the seller may require the plan to be fully funded i.e. even if there is no MRC, still would need to make the plan whole. You need to check this.

If you need to make the plan whole, the amount will depend on the distribution year, 2022 or 2023 i.e. how you accumulate interest credit (could be partial). Thankfully no 417e issues (hopefully)

Just my 2 cents in addition to the points made above.

Also have to watch for 401a26 as at the time of freeze, some may have accrued a benefit and some may not. Other testing issues as well.

I guess, 3 cents.

[CuseFan]

On 7/22/2022 at 3:34 PM, Hojo said:

doesn't mean they are exempt from the minimum funding requirement

yes, good point

[Nate S]

Beginning of year valuation?  If not, can it be switched readily enough?  Then you can value the Plan and develop the minimum funding on a projected basis for pretty much every piece. 

The other question to ask is do the owners actually have 1000 hours of service to the employer?  There have been threads before about retired partners who have monitored recievables and transitional relationships when they leave the firm; they continue to recieve a K-1, but aren't considered to have service since they're not acting as an employee.  Does the owners activities count as operational service?  If I own a TPA, but I spend 39 hours meeting with the DOL/IRS advisory committees, except for one hour a week when I review the company checkbook with the CFO, how much service do I have to the TPA itself?  If I own a dairy farm, but spend my time lobbying mad cow issues, and don't do anything that produces a single drop of milk, am I farming?