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DB termination - overfunded


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Hi

I was approached to do a termination for an overfunded db plan (non PBGC)..

Unfortunately, the provisions require that the excess to be distributed to the participants (always a bad choice, at least in my opinion).

To confirm my understanding, this is a protected provision and cannot be amended to "revert to company" prior to termination date. The idea is to transfer the excess to a QRP.

Also, there are 2 terminated participants. If the excess distributed to the participants, do the terminees get additional allocation?

Assume no 415 issues.

Thank you for your comments.

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You can change the allocation language, but I think there is a 5 year delayed effective date.  IOW, you can change it today, it it will be effective in 5 years.  

DVs don't necessarily need to share in the excess.  It depends on how long they have been gone and what the document says.  If they have been gone 5+ years, it wouldn't worry.  If less than 5 breaks, you might want to consider sharing with them.  Need to check the document and let the plan attorney make the call.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Follow up question regarding the allocation of the excess to the plan participants. As all my plans have QRP provisions, this is kind of a bit new to me without having a complete set of information. i am asking the following for my own curiosity as I will most likely not take over the plan.

Just found out that the plan was frozen back in 2009 with very small AB's. No back up is available. it was a hard freeze, from what I see.

I do not have the proper salary history to determine the average compensation history. But given current salaries for the employees, it is not an unattainable scenario to achieve these very small benefits. So let's assume they are correct.

As the salary history is not available to generate an average compensation schedule, can any of the following techniques can be used to increase the benefits using current salaries?

1- Create a 1% formula based on 2020 salaries and allocate according to the benefits created on a pro-rata basis?

2- Create the PVAB's based on the know AB's and allocate accordingly on a pro-rata basis? If doable, should the PVAB's be determined based on plan AE or 417(e)?

Any other suggestions?

Thank you

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You can do whatever you want, as long as it is non-discriminatory.  The allocation of the excess assets is the same as an amendment to increase the benefit.  You can use any mechanism you want, assuming it complies with the applicable non-discrimination regulations.   

If the plan has been frozen for a long time, you could have unintended consequences when trying to allocate the excess.  For example, you might need to benefit current employees/participants who have no accrued benefit in order to comply with 401(a)(26), 401(a)(4), and/or 410(b).   In other words, you can't just ignore all the current employees with $0 benefit because the plan was frozen before they were hired. 

If the plan has been overfunded for several years, you may already have a 401(a)(26) problem because the exemption for frozen plans only applies to underfunded frozen plans.  (Oops - you said this was a non-PBGC plan, so that exemption doesn't apply anyway.)

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Effen, I am aware of the 401a26 issues, do not even know if ever tested. It fails all 3 conditions but my understanding is that there were no paid out participants so kind of ok with the prior benefit structure test.

Thank you for your other points but still not sure how to test without some salary history unless the amendment/allocation method is some kind non salary related benefit, like a dollar amount per YOS that would be a safe harbor (no more than 5 past YOS) method that would not require testing.

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Follow up

I just received some additional census information going back to 2015 and there are quite a few active employees without any benefits.

I do not know if any 401a26 testing was done.

As a reminder, non-PBGC, overfunded and top heavy so it has to be tested each year.

I have no information for at least 5 to 6 years of the plan but 100% certain that they needed to be tested not a census information.

I am doubtful that any termination calculation is going to be correct.

Any suggestions on what to do here other than do not take over? i just cannot ignore the 401a26 issue which may need to be tested for the past 10 years.

Thank you

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Personally, with the revelation of more and more issues as you peel back the layers, I'd send the client to ERISA counsel.  If they need document/admin/termination support, have the attorney engage you on behalf of the client. This is for the client's protection since there are multiple IRC, ERISA and fiduciary issue in play, best that the client is communicating under attorney-client privilege. Don't forget there are potential claims from employees, not just the agencies. 

It's also for your protection.  IME it's almost impossible for a TPA to get properly compensated for the work/risk/complexity involved here.  People expect to pay 5 and 6 figures to lawyers, they expect to pay 3 figures to TPAs. 

I carry stuff uphill for others who get all the glory.

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All good advice.  As to the question of whether you can simply allocate excess based on AB's and PVAB's the answer is no if you don't know the basis.    If the plan was integrated, for example, back in the day the concept of (prohibited) double integration would apply.    As Effen said the allocations must be non-discriminatory so that must be demonstrable.

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