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Overfunded and Terminated Money Purchase Plan


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We have a Money Purchase plan that has terminated. Plan document required 25% contribution but had a last day requirement and client was making contribution deposits periodically throughout the year.  Upon working through the plan valuation, it was determined that the client deposited excess contributions due to the last day requirement of terminated employees. The plan has now terminated.  How do we handle the excess contributions?  Do they revert back to the employer and if so, what is the reversion penalty or a citation for where I can research such topics?  I am having trouble finding guidance related to MPP operational defects since this type of plan is not as frequently found any longer. 

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I can't really answer your question directly, but I'm adding this to my portfolio of "reasons one should not pre-fund plan contributions."....

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Reversion? 

See plan document provisions.  Also see IRC section 4980.

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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Would it be cheaper and easier to just amend the plan to allow those few terms to get the contribution?  I am assuming you are still early enough in the termination process there are still people who need to be paid benefits so creating account balances or increasing account balances isn't going to create a new round of distributions. 

My guess the reason you can't find any guidance on it is because most people's reactions was like mine when I read just the "headline" of your question- you can't have an over-funded MPP.  I guess someone found a way. 

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One would hope that a reasonable IRS agent wouldn't make a fuss if ESOP Guy's approach is followed, but the employer may not be so lucky.  You are at risk for plan disqualification and excise taxes for non-deductible contributions.  (Not sure about the reversion excise tax is contributions were never deductible in the first place.)  

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  • 2 weeks later...

The conditional on deductibility is only available for the first year the plan is established, if at all. Has to be a plan provision and most plans no longer have that language.  Either amend or it is a reversion, plain and simple.

MoJo, how long is your list?

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