Insufficient termination -- how to make sufficient

[richard]

For a small company that is terminating a PBGC-covered DB plan that is underfunded on a termination basis:

If I understand the rules correctly, a standard termination (as opposed to a distress termination) can be used if either (1) the plan sponsor (a corporation) agrees to contribute the amount necessary to make the plan sufficient, or (2) the majority owner agrees to take a benefit cutback. Is this correct?

I also feel that item 2 is superior to item 1, since the plan sponsor probably cannot use the tax deduction. Does this make sense.

Finally, if there are two 50% owners (exactly 50%), does that mean that both must agree to a cutback, either can, or neither can (since neither is a majority owner). [in this case, one of the two owners died about a year ago, which contributed to the demise of the business, etc.]

Thanks

[thepensionmaven]

You are correct.

The principals can waive.

Don't call it a waiver, because IRS does not like waivers; it is called "a non-discriminatory reallocation of assets".

We have a form for this purpose. Must be signed by owner-participant and spouse as well as trustees of the plan.

Both principals should waive if they are 50-50 owners.

Assume you are not filing with IRS, although you did not say?

If you are DO NOT file the reallocation papers with IRS.

steve

[Guest Cynthia g]

Does anyone have experience in a distress termination negotiating the interest rate with the PBGC?

[MGB]

There was a court case in December 2000 (CSC Industries, Inc. (2000,CA6) 2000 WL 1715180) where the 6th Circuit upheld a bankruptcy judge ruling the PBGC's interest rates were out of line with other creditors of the bankrupt firm. The court required them to recalculate liabilities using a "prudent investor rate" of 10%. This dropped the unfunded liability from $50 million to $2 million.