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DB Plan termination - big drop in distribution amount from 2022 to 2023


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Hi

Plan terminated as of 12/31/2022 (PBGC).

PVAB as of 12/31/2022 was 710k (based on 417e rates), just calculated as just got the census. Based on this the plan was 200k underfunded due to aggressive investing.

Ran the termination numbers as of 6/30/2023 and now PVAB dropped to 450k, a 36% drop. Believe it or not 5% GAR94 yielded higher PVAB than 417e.

Initial estimated calculations done in 2022 showed approximately 25-28% drop.

Now I have plan that is suddenly over funded by possibly 75-100k.

I did the 1% safe harbor allocation method for the excess but the results were terrible (owner got only 35%)

Current plan document states reversion to company for any excess.

I believe one of the following can be done rather than reverting to company:

  • Generate a spreadsheet with using 1% of average compensation and allocate the excess pro-rata based on PVAB's as of 6/30/2023. This can be done now with an amendment.
  • Make an amendment now (after termination date) and allow the excess to be transferred to a qualified replacement plan.
  • Undo the freeze, create a new benefit structure (possibly discriminatory allocation and test it). Restart the termination sometime in August and distribute the assets prior to 12/31/2023.
  • Amend the plan to have a higher mortality table where everyone will get a higher PVAB
  • Amend the plan to change the look back month - August 2022 would yield much higher results

Anything else?

Any comments/suggestions are appreciated.

Thank you

 

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What would the client like to do?

If they want a QRP I don't think you need an amendment, you just need to send the excess assets (or some percentage of them) that would would have reverted to Employer to a QRP to reduce or eliminate the excise tax on reversion.

Your other options all seem reasonable if they want to amend the excess from reversion to allocate to participants or amend the Plan to increase benefits such that there isn't an excess.

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On 3/10/2023 at 3:31 PM, Lou S. said:

If they want a QRP I don't think you need an amendment, you just need to send the excess assets (or some percentage of them) that would would have reverted to Employer to a QRP to reduce or eliminate the excise tax on reversion.

Agreed, no amendment but excess (or desired portion thereof) needs to be transferred directly to the QRP.

Jakyasar, you can amend to allocate all or a portion of excess to participants as you noted. Allocating on PVABs is only safe/nondiscriminatory if underlying PVABs were based on a uniform formula. I didn't think you could amend for those other discretionary options after your PPTD, you may have to push that back. You have a number of viable options, assuming you don't have an owner 415 issue to deal with.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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I still think that a resolution should be in place for QRP purposes i.e. stating any excess will go to XYZ DC plan, something like that. I bleive it can be adopted now as it will be available 95%+ of all current participants.

Having a meeting with the client and see what they want to do.

Owner is nowhere close to 415.

Thank you all for your comments/input.

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  • 5 weeks later...

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