Removal of DB contribution after SB filed for terminated plan

[VeryOldMan]

I can't think of a better title to this issue, but here's the situation. DB Plan is terminated early in 2020 and the SB is filed along with the F5310 showing a contribution of $170000 made in Jan 2020. Approval letter received in June. The SB shows the $170,000 contribution. This is sole prop employer and the actuarial report is not filed with the F5500. The plan is quite overfunded and it is intended to set up a QRP Plan for the excess assets.

But  the client subsequently elects on his own to remove $170,000 from the Plan and as Employer he amends the business return and pays taxes on it. The question is what would you  do with the 2020 SB, which is the last SB for the Plan?  1. do nothing. 2. amend the SB  and file it with IRS Agent who approved the DT? The MRC is zero in either case and the plan remains overfunded in either case. What would happen if the plan was audited?

[Lou S.]

It sounds to me like a distribution from the plan.

From your standpoint I would think the best solution would be for him to file an amended tax return, treat the amount as a distribution from the plan, get spousal consent if applicable. Count the distribution against his 415 limit. Adjust any rollover to the successor plan for 415 limit and increase suspense account accordingly. Allocate the suspense account in QRP over 7 years as originally planned.

I mean he probably never should have made the contribution it sounds like but since he did I don't see how you unwind it just because he decided he didn't want to put it it. It doesn't sound like a mistake of fact.

[C. B. Zeller]

If he included it in the business return, it sounds like a reversion. 50% or 20% excise tax applies.

[VeryOldMan]

Both your comments are a concern. Let me state that client did amend his tax return, filed 1040-X and picked up the returned amount as a reduction to the Sch C pension deduction.

The question of whether this could be  construed as a pension distribution is key. But based on the facts and circumstances, he didn't request a lump sum distribution, didn't notify the spouse about a benefit distribution, no pension actuarial calculations were made and he didn't authorize us to complete the notice and election docs, etc that would be needed for this to be treated as a pension distribution. So it is a question of substance over form.  It is not a reversion since that could only occur after all benefits were cashed out. It doesn't seem to fit cleanly under the mistake in fact provision in the plan but maybe there is some room there for further research.

So bottom line neither of you see amending the SB with a written attachment to explain the error as a solution. Appreciate the feedback.

I am thinking now to take this to the VCP.

[Mike Preston]

I still think Lou had it right. It wasn't the first time and it won't be the last time that a pension distribution is the quote unquote solution when a distribution is made from the plan on a whim.

[VeryOldMan]

After thinking it over, I can see that IRS could treat it as a distribution and bust the Plan for a 415 violation. By fixing it now, the funds wind up in the QRP.  A much better solution. Thanks all for the feedback.