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Reversion timing issue


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An overfunded DB Plan was terminated 10/31/2016.

Not everyone has been paid out as of today (2/17/2017) but there is clearly enough money to pay all benefits and then some.

I want to use the excess in the PS Plan.

Do you think I can use some for 12/31/2016 Profit Sharing or do i have to pay all liabilities first?  (So I would have to wait until 12/31/2017 to start using the reversion.)

Thank you

 

CBW

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The following is my understanding of how this would work:

It would surprise me greatly for it to be acceptable to use the excess assets in way with respect to the PS plan until all of the DB plan benefits had been paid out in full.  What if you put DB assets into the profit sharing plan and then the DB assets lost 30% and became insufficient?  Seems like a bad idea to me.

Incidentally, you may need to allocate a chunk of the excess assets as EXTRA benefits under a replacement plan to avoid having to pay a 50% excise tax on the reversion.  Money from the DB plan into the PS plan to cover normal PS contribution obligations there  is a reversion to the employer which is then used by the employer to fulfill pre-existing obligations.  Before you can use it to pay for normal PS contributions,  the excess assets must first have reverted to your control, and would be subject to excise tax as such unless used to provide extra benefits under the PS plan.

For it to count as contributions to the replacement plan,  you may also have to make the contributions within a limited time period (which could mean that it could not be held until as late as 12/31/17).  Not sure what those parameters are, though.

Always check with your actuary first!

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Isn't there an explicit rule in 401(a)(2) that prohibits reversions until all plan liabilities have been satisfied?  If you are worried about bumping up against a March 15 tax deduction deadline how would that be relevant if you are going to use the DB surplus via the replacement plan exception? 

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Yes, you have to pay out all benefits first (satisfy liabilities), then the excess (or a portion thereof) may be reverted/transferred to the PSP and placed in an escrow account. To avoid income tax and reversion excise tax, it must be used for the current year and future years' allocations, but you must allocate somewhat equally over a period not longer than 7 years and at least 90% (if I remember correctly) of the active employees of the terminated DB plan must be participants in the PSP. Can 2016 be the first/current year? Maybe, because the DB terminated in 2016 - i don't think IRS would take issue with that - but you would certainly have to start using the excess no later than 2017.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Yes, yes, yes. 

Think of it this way: there is no excess until all the benefit liabilities have been satisfied.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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