PBGC termination non-compliant floor-offset

[Dalai Pookah]

If a DB plan is non-compliant (either a discriminatory benefit formula or failed 401(a)(4)) may it still terminate under PBGC if the assets are sufficient? We understand that a plan may potentially be disqualified, but does the PBGC care or is it only concerned with sufficiency?

Case in point floor/offset  plan, but the sponsor did not correctly fund the DC plan to meet aggregated testing. They want to terminate the DB plan. We are reluctant until they get the combo compliant. They dispute the need for additional contributions to the DC plan in order to terminate the otherwise sufficient DB plan. If we warn the sponsor of consequences, will the PBGC allow the termination without regard to testing?

[CuseFan]

Yes, it appears that PBGC is concerned with sufficiency, although they are concerned that benefits are calculated properly as well. If your offset was calculated properly but the DC not funded correctly (not sure how that goes) maybe this flies past PBGC and the client only needs to hold their breath on IRS audit for three years. If selected for PBGC audit, then they might scrutinize the situation more closely, but as it pertains to if the benefits were calculated in accordance with plan terms, not if those benefits were or were not discriminatory. BUT, that's not to say that the PBGC can't or won't contact IRS and tell them they should investigate. Maybe all those chances are slim, and if  everyone can sleep at night for the next 3-5 years, go for it.

[Tom Veal]

A PBGC case officer isn't likely to know much about the nondiscrimination standards for floor-offset plans.  As CuseFan says, the PBGC audit will concentrate on whether participants received the benefits to which they were entitled under the terms of the plan.

On the other hand, distributions by a disqualified plan are ineligible for rollover, so that closing out the DB plan before the qualification problem is resolved could result in nasty tax surprises for participants.  Note, too, that since the plans were aggregated for testing, both are at risk of disqualification.

[Luke Bailey]

42 minutes ago, Tom Veal said:

Note, too, that since the plans were aggregated for testing, both are at risk of disqualification.

The DC probably didn't need the DB to pass 410(b) and (a)(4), however, so it's probably OK.

The post-distribution certification does ask for date of IRS DL. Don't know what happens if you put "none."

In theory, the PBGC, if it new all of the facts, could take the position that the plan had a liability equal to trust taxes if IRS found out disqualified.

[CuseFan]

19 hours ago, Luke Bailey said:

The post-distribution certification does ask for date of IRS DL. Don't know what happens if you put "none."

The reason they ask for date of DL is that distributions are required to be completed by the later of 180 days after expiration of PBGC's 60 day review period or 120 days after date of IRS DL (if submitted to IRS before submitted to PBGC). The PBGC Form 500 shows the date of IRS submission, if I recall, so they already know if plan was or was not submitted to IRS before PBGC. They don't care one way or the other, just need to know for enforcing their requirements on timing - to which they are very stringent unless you ask in advance for and get extensions.