I’ve heard that 10% of all small plan Pension Benefit Guaranty Corporation (PBGC) terminations are audited and at other times I’ve heard that the number is 33%. I’ve heard the PBGC audits are random. 
What I believe is most audits are random, but some are due to red flags that come up during the standard termination process. I’m sharing a few things you may want to pay attention to while terminating a PBGC plan, along with some newer rules on what has to be submitted to the PBGC.
Form 500
For the Form 500, the only tip is to fill it out properly and get the participant count right as best you can. The PBGC is pretty forgiving with minor errors and will often let you correct them without losing the original submission date.
Form EA-S
I’ve found that different actuaries have different ways of putting together the Form EA-S. While the proposed distribution date (PDD) needs to satisfy the PBGC timing requirements, there is no need to actually distribute on that date. The only meaning is to determine the “as of” date for comparing liabilities and assets. If the plan is expected to be over-funded, then you have what you need to certify the EA-S. If projected assets are less than PDD benefit values then something needs to happen, either a signed majority owner waiver, a signed commitment to fund, or both.
Under the newest 2023 instructions, the commitment to fund needs to be sent with the Form 500. The signed waiver should be sent with the Form 500 if that’s the basis for your EA-S certification, or with the Form 501 if the need for the waiver comes up after the Form 500 filed.
Form 501
The most important step in the process is completing the Form 501. The form itself is straightforward; just make sure you follow the instructions. If the participant count is different on the 501 compared to what was filed on the 500, do an attachment and explain why.
One example of this is if the plan had to correct a Section 401(a)(26) failure and bring a new participant in. The second required attachment is to explain if the total distributed amount reported on the 501 is less than what was certified on the EA-S. If the Form 501 is showing a total distribution that is significantly higher than what I reported on the EA-S I will still explain it, although the PBGC doesn’t say that’s a requirement. The last required attachment to the 501 is to explain any participants who received 0 distributions, such as participants who entered the plan after it was frozen and have no accrued benefit.
I still think of the requirement to attach all plan documents and proof of distributions to the 501 filing as new, but the PBGC has required that we attach that information since 2015—can you believe how time flies!
Proof of distribution can be bank statements, cancelled check copies or individual transaction pages. If it’s a bank statement that only shows dollar amounts (not names) I’ve handwritten the names in and so far, the PBGC has accepted this.
Distribution Tip
And that leads me to my last tip.
I always include something I call ‘PBGC Distribution Reconciliation” in excel and send with the 501. The excel sheet has columns with Name, Lump Sum Due, Rollover, Cash, Withholding, Latest Distribution Date in an effort to organize the data provided as the proof of distribution.
For example, I just did one in which a single participant had three different pages of distribution proof, so the excel sheet helps reconcile that discrepancy of how many distributions amounts compared to how many participants received distributions. If the plan sponsor is using PenChecks, the PBGC will accept a PenChecks report as proof of distribution provided you include a bank statement or wire transfer showing the funds being transferred to them. Because PenChecks assets are still part of the trust, I make sure the PenChecks report includes the date the funds cleared. The report should also indicate that any fees were paid by the sponsor and did not reduce the participant’s lump sum.
The Bottom Line
The bottom line is that I do whatever possible to make the distributions as clear as possible all in the name of avoiding any red flags.
Do I know if any of what I’ve said matters in avoiding a PBGC audit? No, I do not. All audits could be totally random. But I do know that the few audits I’ve had were time-consuming and stressful enough that I’ll dot every i and cross every t in the hopes it will have an impact.
Mary Ann Rocco, EA, MSPA, served as ACOPA President in the 2010 and is currently a member of ASPPA ASEA Government Affairs Committee.
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