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Guest Doug Johnston

Planning for over-funded DB plan

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Guest Doug Johnston

We are consulting with a Doctor who recently closed his practice and retired. His DB plan paid out benefits to all but one participant (not the Doc) following their separation from service. The Doc would like to terminate the plan, but does not want to lose the excess assets to income and excise taxes. He has been told by a colleague that there are hospitals and other organizations that will buy the practice for as much as 60% of the plan assets and merge the pension into their own under-funded DB plan. However, we have not been able to obtain any names to contact or any other leads.

We have our doubts about this strategy, but feel we should investigate it. Has anyone ever heard of any organizations offering to purchase excess pension assets? Also, is there any pending legislation that may affect the planning for the reversion, or any other strategies that we might be missing?

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I'm not sure, but this scheme may raise issues regarding the "exclusive benefit" requirement. Depending on the number of participants and former participants, it could make sense to amend the plan to increase benefits rather than having a reversion. Doctors generally have the lion's share (or more) of the benefits under their retirement plans.

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This issue has been discussed at various conferences and meetings, generally in the context of a small plan (often 1 participant) in which the principal is at this 415 limit so excess assets are not reallocable, but must be reverted with all the applicable excise and income tax consequences.

There are organizations which arrange, as I understand it, the sale of the business (including the plan). The sale price takes into account in some fashion the assets in the plan so the original owner realizes more than he would have under the reversion scenario.

I have not reseached this in any way, but I have heard several reputable practitioners state that this has worked for their clients. I do not recommend or not recommend this option, I just point it out for your reference.

If you do consider an option like this, I agree with Wessex that all aspects need to be considered.

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How old is the doctor?

If he is under age 65 and the reason for "retiring" is disability, you can increase his benefits above the normal 415 values (in effect, ignoring the reduction for retirement before age 65). This can increase the value of his benefits significantly and wipe out a large portion of the reversion.

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