Excess assets used for termination expenses?

[david rigby]

 

DB plan expected to terminate in 2024.  All remaining participants are VTs and all payments/lump sums are expected in 2024.  Excess assets are anticipated.  There is no possible Qualified Replacement Plan since there are no "overlapping participants".  Plan sponsor want to maintain the plan's trust into 2025 so that such assets can be applied to anticipated 2025 audit expenses (PBGC audit or other agency).  Review of DOL Advisory Opinion 97-03A indicates that reasonable such expenses can be covered by plan assets (at least that is my read of the AO).

Since 12/31/24 assets are not zero, a 5500 will be required for 2025 plan year, but little or no other administrative tasks.

If, after such audits, any remaining excess assets will be taken as a sponsor reversion, per the plan document. 

1. Is it reasonable for the sponsor to maintain the trust in anticipation of expenses?
2. What if (for example), there is no 2025 audit, but the sponsor anticipates a PBGC audit will eventually occur in 2026; is there a time limit over which maintenance of the trust becomes unreasonable or in violation of some other rule?
3. What other concerns have I overlooked?

[Jakyasar]

As an initial response, PBGC requires assets to be distributed within a prescribed period of time and final 501 to be filed.

IRS also states all assets to be distributed within 1 year of termination, assuming no pending determination letter for plan termination.

So, how do you plan to get extensions on these?

Just thinking out loud.

[Nate S]

Agreed, the maintenance of the Plan for that length of time would endanger the tax-qualification of the termination, especially as there are no participant benefits left to be paid.  Also, isn't the reversion deemed to have occurred once the participant benefits are fully satisfied?  I read that AO as allowing for the treatment of settlor expenses, in conjunction with the plan termination, as fiduciary expenses.  If the thought here is that the PBGC always audits plan terminations, the the service provider should be able to anticipate that cost and the charge of a retainer upon termination would be a reasonable fiduciary expense.  The trust should be taken to $0 in an administratively expedient timeframe immediately following the final benefit payment.

[CuseFan]

PBGC requirements and filings generally deal with satisfaction of benefit liabilities so I don't see that as an issue. I agree with opinions that IRS would take issue with keeping the trust open for an extended period to pay potential or anticipated expenses and defer the payment of taxes.

PBGC audits are automatic for plans with 1050+ participants, a threshold that was dramatically increased a few years ago. Smaller plans could be audited but keeping a trust open for that possibility is unreasonable in my opinion.

The timing of the termination, whether a determination letter is applied for, and when distributions ultimately occur could certainly push this out to 2025 and result in more eligible expenses, but if this is a small plan without a 5500 audit then those probably do not amount to much.

Has the plan paid administrative expenses in the past or did the employer pay? If the employer paid these, maybe explore (with legal counsel consultation) the possibility of having the plan reimburse the employer for eligible expenses.

[Paul I]

We relatively recently took a 60-participant DB plan through a plan termination.  All benefits were paid out by 9/30/2022 and excess assets remained in the plan.  This was anticipated and expenses payable from the trust were then paid.  That still left the trust with some excess assets.  The company decided to take the reversion and pay the taxes.  The excess assets sent to the company on 12/1/2022.

The PBGC selected the plan for an audit and sent a information collection list in January.  They commented in the cover letter that they audit about 35% of all terminating plans.  The cover letter also noted that the agency was backlogged and the audit likely would begin until several months later - but they still wanted the information sent in within a few weeks of the letter.  The audit has not yet started.

The information requested included the date and the amount of the asset reversion, along with proof of who was paid, and a copy of the financial statement from the trust showing the reversion and documenting a zero balance in the trust.  This would have been a Catch-22 if the trust held assets to pay for the work on the PBGC audit, and the audit wanted evidence the assets went to zero.

Also FYI, the PBGC requested bank statements proving all of the benefit checks were cashed, and copies of participant benefit election forms for a sampling of participants.

Hope this sheds some light for you on what may be ahead.

 

[david rigby]

All good thoughts above.  Now, please allow a modification of the conditions:

• During 2024, all the VTs will be paid out, not as a plan termination, but as permitted by the plan.  Assume all payments completed before December.
• The plan termination amendment will be effective 12/31/24.  The PBGC form 500 will follow soon after, and then the form 501.
• A form 5500 will be due for the 2024 and 2025 plan years.  No Schedule SB needed after 2024.
• This should(?) permit the trust to remain open until at least 12/31/25 (ie, one year after termination date), hoping audit expenses will be during 2025.

Does this help?

[Jakyasar]

Pay everyone out now (417e rates are very high i.e. payouts will be much lower than if were done in 2022 -  assuming that you have stability of plan year and look back pointing to a month prior to 1/1/2023). Then apply to PBGC for exemption from further coverage.

Once (and if) you get the exemption, terminate the plan - I would push it closer to the end of the year. Given the facts you provided, unfortunately reversion is unavoidable unless the plan sponsor would want to allocate the excess to the VTs in a non-discriminatory manner (you have to check the plan document for this).

All termination related expenses (except for a few exemptions) can be paid from the plan assets e.g. cycle 3 restatement, actuarial valuation, consulting etc.

Hopefully by then, the reversion will be minimized.

Just thinking out loud and waiting to see what others will say.

[CuseFan]

22 hours ago, Paul I said:

The information requested included the date and the amount of the asset reversion, along with proof of who was paid, and a copy of the financial statement from the trust showing the reversion and documenting a zero balance in the trust.  This would have been a Catch-22 if the trust held assets to pay for the work on the PBGC audit, and the audit wanted evidence the assets went to zero.

Also FYI, the PBGC requested bank statements proving all of the benefit checks were cashed, and copies of participant benefit election forms for a sampling of participants.

Good to know - didn't think PBGC cared as much about the reversion, thanks for setting me straight.

And yeah, it's a pain, but they want to see that everyone got paid and all payments cleared.

[Nate S]

On 4/26/2023 at 3:30 PM, Paul I said:

The information requested included the date and the amount of the asset reversion, along with proof of who was paid, and a copy of the financial statement from the trust showing the reversion and documenting a zero balance in the trust.  This would have been a Catch-22 if the trust held assets to pay for the work on the PBGC audit, and the audit wanted evidence the assets went to zero.

Yeah, that's where I tell them to go take a long walk, they're not the regulatory authority on taxation.  As long as ALL the participants were shown to have been paid their proper benefit it is 0% the business of the PBGC, especially in a standard termination.

[TheBoxMan]

FYI...PBGC only cares about seeing trust statements with $0 balance if reversion is not allowed. If reversion is allowed and there is a remaining balance in the trust that will cover admin fees later on, PBGC is OK with that.