Forgive me here, we have not had any non-pbgc DB plans terminate with insufficient assets.

Suppose this non-pbgc covered DB plan terminates with insufficient assets.

One of the options is to provide for an ERISA 4044 allocation of assets. This plan had no participant contributions and no annuities in pay status. Does this mean that HCE AND NHCE benefits are reduced on a pro-rata basis?

Somehow it does not seem right that NHCE benefits are reduced.

It is allowable and is done with small non-PBGC plans quite often. A lot things are done that don't seem right but the IRS allows them. Just follow the rules of the plan doc and make sure that it is nondicriminatory.

In most cases we've dealt with the owner waived a portion of their benefit to make the plan whole but they didn't have to be that nice.

The participants won't have a claim under ERISA title IV, but perhaps they might be able to sue under state laws for lost benefits.

For a small plan the owner phase-in over 30 years often reduces their benefits over and above the shortfall that exists. Most documents reference PBGC guaranteed benefits, so I would be surprised if you truly had a pro rata reduction.

Blinky,

I think you are right if the plan specifically references PBGC guaranteed benefits in defining the value of benefits to be distributed upon plan termination. However, if the document does not and you have a non-pbgc plan, then I think you would have to follow the six step allocation procedure under ERISA 4044. It is interesting that priority catagory 4 in which assets are allocated up to PBGC guaranteed benefits specifically indicates that the phase-in limitation applicable to substantial owners does not apply for purposes of priority catagory 4.

Perhaps you've taken care of this in your shorthand phrasing, but don't forget the 3-year look back under category 3.

Out of curiosity, suppose the HCE participant died and had already started taking RMD's. Would his benefits be considered to be an annuity in pay status?