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Firm Seeks Exception Under Proposed Benefit Restriction Regs

JUN. 2, 2009

Firm Seeks Exception Under Proposed Benefit Restriction Regs

DATED JUN. 2, 2009
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Hurst Richard A

 

 

From: Marshall Linda S

 

Sent: Tuesday, June 02, 2009 3:23 PM

 

To: Hurst Richard A

 

Cc: Marshall Linda S; Green Lauson C; Brewer Michael P

 

Subject: FW: Affiliated Foods Southwest, Inc. ("AFS")

 

 

The following is a public comment on REG-113891-07.

From: Bill Bishop [mailto:wbishop@ddh-ar.com]

 

Sent: Tuesday, June 02, 2009 2:27 PM

 

To: Marshall Linda S

 

Cc: 'stephen_lehrman@pryor.senate.gov'

 

Subject: FW: Affiliated Foods Southwest, Inc. ("AFS")

 

 

Linda (and Steve): please find below my explanation of the AFS pension plan issue which I understand you will submit as a "comment" to the proposed regulation under Code Section 436(d)(2).

William E. Bishop

 

Dover Dixon Home PLLC

 

425 W. Capitol Avenue, Ste. 3700

 

Little Rock, Arkansas 72201

 

Phone: (501) 375-9151

 

Fax: (501) 372-7142

 

 

Original Message

 

 

From: Bill Bishop

Subject: Affiliated Foods Southwest, Inc. ("AFS")

AFS is in bankruptcy and is being liquidated. It sponsors a defined benefit plan which also will be terminated. There are approximately 400 participants in the plan. On May 5, 2009, AFS filed for bankruptcy, and on that date its board of directors adopted a resolution terminating the plan effective July 31, 2009.

The value of the assets in the plan are short of the total value of the benefits that will be due on plan termination. Thus, the termination will be what the PBGC refers to as a "distress" termination, and they likely will take over soon to become the trustee of the plan. Assuming the value of the assets does not skyrocket and the PBGC cannot squeeze out some more contributions from the bankrupt sponsor's assets, the PBGC will have to pick up the shortfall for guaranteed benefits. The really peculiar aspect in this situation is that the plan had a mandatory employee contribution requirement -- ie, the participants had to contribute AFTER TAX contributions to the plan to be eligible. Because the plan's retirement benefit structure was fairly "cheap", the bulk of the accrued benefits under the plan is attributable to the employee contributions and interest thereon. Although the plan is a defined benefit plan, the employee contribution aspect is somewhat like a defined contribution -- "thrift" plan in that after tax employee contributions are made. As it turns out, the remaining value of the assets in the plan approximate the value of the accrued benefits attributable to employee contributions.

The plan permits participants to elect to receive their benefits in a lump sum distribution ("LSD") in certain situations, including being involuntarily terminated from employment, which is what will happen to everyone. The PBGC's regulations typically prohibit LSD's from a plan going through a distress termination that exceed $5,000, EXCEPT for benefits derived from mandatory employee contributions, in which case LSD's can be made to that extent. This was confirmed by three different people at the PBGC in separate conversations. This is a huge matter for these former employees of AFS in light of the current economy and job market. Although we would hope they could take their LSD's and reinvest them in some form of retirement oriented investment, the reality of the situation is that most will need some or all of their employee contributions to survive until they can recover.

The problem is that the Pension Protection Act of 2006 added Internal Revenue Code section 436(d)(2) which essentially says that if a DB plan's sponsor is in bankruptcy, the plan cannot pay out ANY of its assets in a LSD. The PBGC legal folks researched the legislative history of this Code provision, as well as proposed regulations ( see REG -- 113891-07 promulgated August 31, 2007) and concluded that 436(d)(2) also covers employee contributions. We have looked at this as well and believe that is the apparent status of the law on this point. The 436(d)(2) language is required to be added to the plan and will be effective retroactively to 2007. Thus, it would potentially "disqualify" the plan to ignore this law.

We believe that when the former employees/participants are told they only will be able to get a life annuity from the PBGC which will include their after tax contributions and earnings thereon, they will be very upset. We also believe ( and I think the PBGC folks with whom we spoke agree ) that the AFS facts are very unusual and thus were overlooked when this statute was drafted and the proposed regulations were proposed. Again, we believe the reason for this is that it is very unusual for employee contributions to make up such a large portion of a defined benefit plan's accrued benefits, and therefore the draftsmen of the statutory language and the proposed regulations didn't give it enough thought. It appears that some thought was given to employee contributions in the "comments" to the proposed reg's, but it's likely no one imagined our facts and the consequences of this law on those facts.

If the IRS cannot be convinced to carve out an exception for employee contribution derived accrued benefits in its regulations, then I would think we would need an amendment to section 436(d)(2) to limit its application to "employer" contribution derived accrued benefits. This is exactly how it is handled in ERISA section 4041(c)(3)(D)(ii)(ll) which covers distress termination procedures, as well as in the PBGC's regulations -- ie, they only refer to benefits attributable to "employer" contributions.

Thank you again for agreeing to review our request for assistance on this issue. We appreciate your help. Please let me know if I can assist further.

Bill Bishop

 

Dover Dixon Home PLLC

 

425 W. Capitol Avenue, Ste. 3700

 

Little Rock, Arkansas 72201

 

Phone: (501) 375-9151

 

Fax: (501) 372-7142
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