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HKSUN

Ways to digest DB/CB plan overfunding after NRA

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Husband and wife DB plan, both passed NRA of 62, are looking to terminate the plan, but plan asset value has exceeded 415 lump sum by 1 million. What are the ways to solve the overfunding issue so they can terminate the plan? 

One way an actuary suggested to me is having both participants start taking in-service distribution, which can be treated as eligible rollover distribution and rolled over to IRA without tax implications. But it seems to violate one of the exclusions of an eligible rollover distribution: "a series of substantially equal periodic payments over a period specified in section 402(c)(4)(A)". Is this really workable? 

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You'd still need to satisfy 415 and multiple annuity starting date rules.

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38 minutes ago, Lou S. said:

You'd still need to satisfy 415 and multiple annuity starting date rules.

Yeah I mean the in-service distribution will be limited to maximum 415 benefit amount for that year. So you think this is an okay way to deal with overfunding? Can it be rolled over to IRA with tax-deferred? 

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If you talking about going into pay status and taking annuity payments from the plan then no those payments can not be rolled over.

 

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44 minutes ago, Lou S. said:

If you talking about going into pay status and taking annuity payments from the plan then no those payments can not be rolled over.

 

So these annuity payments are not considered as eligible rollover distribution and have to be taxed? 

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14 hours ago, HKSUN said:

So these annuity payments are not considered as eligible rollover distribution and have to be taxed? 

Yes.

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I recently saw a DB plan that was overfunded because the owner died suddenly. The son inherited the business (with the attached retirement plan). The business wasn't worth much in an of itself, but the tax attorney that the son hired found a buyer. The buyer happened to have an underfunded DB plan. The buyer merged the two plans, solving his underfunding issue. 

The son got cash from the sale of the business (and the plan), the buyer got their plan well funded for a cheaper amount than an outright contribution would have cost. Seemed like a win all around.

Maybe the H/W can take their benefits and figure out something similar to do with the excess left in the plan? Not sure it will work, just sharing an idea. 

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8 hours ago, justanotheradmin said:

I recently saw a DB plan that was overfunded because the owner died suddenly. The son inherited the business (with the attached retirement plan). The business wasn't worth much in an of itself, but the tax attorney that the son hired found a buyer. The buyer happened to have an underfunded DB plan. The buyer merged the two plans, solving his underfunding issue. 

The son got cash from the sale of the business (and the plan), the buyer got their plan well funded for a cheaper amount than an outright contribution would have cost. Seemed like a win all around.

Maybe the H/W can take their benefits and figure out something similar to do with the excess left in the plan? Not sure it will work, just sharing an idea. 

This has been the leading solution ever since the excise tax was put in the Code in the 80's.

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2 hours ago, Effen said:

yes, but dancing partners are very difficult to find.

Not dancing, but I would be willing to be a participant in the plan, just to be helpful in using up the surplus.  😉

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In the day there were firms that bought over-funded plans after participants had been paid out; maybe there still are. But I assume if a plan can be sold it can also be contributed to a CRUT (although as I understand it there may be unwanted tax consequences if the plan represents more than 80% or so of the business assets), in this case after H&W transfer out their respective LSE to IRAs. In due course (a year?) there is an early termination of the CRUT along actuarial lines (income interest and remainder, respectively). Not perfect, but probably better than a penalized reversion, particularly if the charitable deduction associated with the contribution is utilizable. A more aggressive, but also more tax favorable, wrinkle is for H&W to contribute their ownership interest to a so-called Malta Pension Plan (MPP) prior to the early termination, and following the transfer the business is liquidated. Subject to rather liberal rules, distributions from the MPP will be free of Maltese tax, and by tax treaty free of US income tax as well. I know of the strategy, although not specific to the contribution of an over-funded pension plan, but the tax free liquidation of a private corporation.

 

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I would  be willing to help find dancing partners. Please send me a private message.

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