Plan covered by PBGC, wants to terminate, and is underfunded. As I understand the rules, we can do a standard termination and pay 'to the extent funded'.

Are there any traps or problems we should be aware of before proceeding? As a note the company is no longer in business so there will be no more contributions.

Thank you.

This does not sound ok to me, by any means. Please explain the facts a bit more. The fact that the company "is no longer in business" does not necessarily equate to "there will be no more contributions".

Did the company comply with PBGC reportable event requirements? I don't see how the company owner(s) can abandon this plan and walk away under ordinary conditions.

And I don't see how this could be considered a standard termination, anyways. I would think that the distress termination rules apply here.

I am no termination expert, so I'd like to hear from others.

Under ERISA 4041 a DB plan can be terminated only as a standard termination or distress termination. A standard termination requires that the plan assets are sufficient to pay benefit liabilities. If the plan does not have sufficient assets to pay accrued benefits then it must continue to be funded under ERISA unless it can be terminated as a distress termination because of bankruptcy of the sponsor.

yeah (just a bit more eloquent I'd say).

rcline, your comments sound more pertinent to the question of the need to provide full vesting in a partial termination of an underfunded plan.

More information needed. A standard termination may be possible if the majority owner(s) waive receipt of sufficient benefit to make it fully funded. For example, see this thread:
http://benefitslink.com/boards/index.php?showtopic=16104

The plan has met minimum funding requirements and is much more than 10 years old. The company (LLC) has lost its contracts and is closing. All employees have been terminated.

Unfortunately the plan is underfunded (about 59% funded) and the owner's benefit is not sufficient to cover the underfunding for the employees. Most of the employees would be considered HCEs by compensation. The company does not have the funds to fully fund the plan. There have been no changes to the benefit formula in at least 5 years, maybe more.

We are exploring every alternative for the termination.

Well, your last comments about being underfunded even after the owner waives all benefits is the crux of the issue.

I believe you will have a problem terminating the plan for that very reason.

The plan will have to go through the entire PBGC termination rules and hopefully some of the liabilities are not PBGC liability (using the 30 year phase in, etc.). The owner can then waive all his monies. A shortage means the PBGC will come after the company for monies to take over the plan (at least that is my understanding).

.....and look for the notices.....

If the company shuts down (goes out of business, not just loses the contract), then the plan will be automatically be deemed terminated (unless a successor sponsor exists).

So what happens under a "deemed" termination ? Does the money just sit there until the PBGC takes it over at some point ? Presumably they still can't pay out just on the extent funded unless all PBGC guaranteed benefits are funded (net of any majority owners' waivers) but with a notice to the PBGC of inability to pay benefits I guess the PBGC steps in and the plan sponsor just leaves plan intact until then?

I think the answer is the last sentence in Frank's response above.

Your facts describe a situation where a distress termination is required.

Since you would not be able to satisfy the benefits of all participants who are not substantial owners, there is no way to do a standard termination.

Start reading the instructions of PBGC form 600, and plan to take some time getting this resolved. Above all else, plan to get paid for a substantial amount of work.

Also, you should have the substantial owner prepare an audited financial position of all his available assets, because the PBGC has the option to look beyond the corporate assets to any other controlled group assets, such as a wife's business or a sole proprietor practice of the owner.

Alternatively, turn it over to a specialist who does these. If you are not comfortable doing a distress termination, you should excuse yourself from the assignment now.

The plan sponsor needs to talk to counsel. Under ERISA 4062(a) the sponsor, not the shareholders is liable for any underfunding. If the employer rolls up its operations and goes out of busienss the PBGC can terminate the plan but will have no one other than the sponsor to recover the contributions. (My recollection for research I did several yrs ago is that shareholders of a corporation were not liable for any underfunding of the corporation's plan). I dont know what happens if the sponsor ceases operation without terminating the plan. There may be special liability issues with an LLC under state law. Presumably the plan becomes an orphan.

mbozek - you may be right, but consider the issue of controlled groups. Does one exist? Are the other members (if any) responsible for the liabilities? Did they obtain income or buy assets of the closing corp? Did they raid the plan sponsor's assets to avoid liability? This situation does not sound like it, but the possibility is there.

I had a distress termination about 12 years ago in which the PBGC tried to find the other assets of the business owner to recover their deficit.