Funding deficiency consequences

[richard]

A near-bankrupt plan sponsor of a PBGC-covered pension plan has decided to not make its required minimum contribuiton. As a result, they have a funding deficiency, with a resulting 10% excise tax on the deficiency.

They file a timely Form 5330 (as of the due date of the contribution) without paying the 10% excise tax. (They either don't have available cash or more likely have more pressing needs for the available cash.) What are the consequences of this? Will the consequences of this change if the plan sponsor declares bankruptcy?

Also, they have to notify plan participants of the funding deficiency. Does the inclusion in the SAR that "an actuary's statement indicate that they have not made the contribution requirement; the deficiency is $X," or words to that effect, meet that requirement. (I think the answer is yes.)

Finally, they will be notifying the PBGC of the funding deficiency; clearly it is a reportable event. Do they have to notify the PBGC that they have not paid the IRS' excise tax? (I think the answer is no.)

Some additional background. There are no controlled group issues. The plan does not have a variable premium liability (since it is based on vested benefits), but if it terminates shortly (which it will), it will not have sufficient assets to cover accrued benefits --- however, the owner is willing to reduce his benefit to cover the diffence.

(This is gonna be fun!)

[david rigby]

I am dealing with a similar situation. I think that trying to use the SAR for the notice to participants will not be sufficient.

See PBGC reportable events: http://www.pbgc.gov/forms/REPEVENA.htm

There are circumstances where the reporting of a missed quarterly contribution is waived (waived for reporting to the PBGC, but I'm not sure about notice to participants). However, it appears to my reading that this waiver does not extend to contributions due 8-1/2 months after a plan year end.

PBGC Technical Update 97-6 is here: http://www.pbgc.gov/legal_info/tech_update...es/TECH97-6.HTM

To the best of my knowledge, later PBGC Technical Updates have modified slightly the Model Participant Notice, but have not changed any requirements with respect to what and when reporting is required. Anyone have additional information?

[MGB]

We have been having an internal debate for nearly a year as to when the report to the participants must be made that a missed quarterly has occurred. I say it should be as soon as practical. Others want to wait until the SAR (note that this is for a quarterly, not just the after-the-year-end contribution). No one can find a reference.

I did find a reference in an EA meeting transcript from quite a few years ago that indicated the SAR was OK. I've contacted the presenter and he cannot recall why he said that and probably wouldn't concur with that now.

PAX, you included a link to the reportable events forms at the PBGC after your statement that the SAR would be too late. However, I did not see any reference in there about the participant notice. Did I miss something?

For richard: If you are already after the end of the year (not a missed quarterly issue), and it just so happens that the SAR issuance is a reasonable time period after missing the minimum requirement, I see no reason why you could not include it with the SAR.

[david rigby]

I think that the notice to participants is covered in Technical Update 97-6 and 97-4. The former establishes a waiver under certain circumstances. The fact that it can be waived does not eliminate its existence. Thus, I conclude the SAR is not sufficient.

But even better is DOL Reg. 4011.9 Manner of issuance of notice

"The Participant Notice shall be issued by using measures reasonably calculated to ensure actual receipt by the persons entitled to receive it. It may be issued together with another document, such as the summary annual report required under section 104(B)(3) of ERISA for the prior plan year, but must be a separate document."

[Guest sdolce]

I have the same situation as Richard,except my client(a controlled group of three corporations,each with its own plan) is already in bankruptcy.Each plan has a funding deficiency.Two of the plans qualify as distress terminations. The third plan is sufficient,but just barely.Is there any relief for the deficiencies other than requesting a waiver of minimum funding,which I don't think will be granted?Where does the IRS stand in the order of creditors?

[david rigby]

I'm no expert, but my guess is that the IRS stands first in the order of creditors. However, that should be a different issue when it comes to plan termination. Then the question becomes, "where does the PBGC stand in the order of creditors?" Sorry, I don't know.

A waiver of minimum funding must be requested no later than 2-1/2 months after the end of the plan year (ex., by March 15, 2001 for the CY 2000 plan year). A waiver is not likely to be granted unless there is reason to believe that the "hardship" is temporary.