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  1. I have client with a solo-DB (husband and wife) that is overfunded by about $500k. They contributed the maximum deductible against recommendations and investments were aggressive (again, against advice) and returned about 15% a year. They also have a solo-401(k) plan - the plan I administer. Both are in their mid-40's so nowhere near retirement but they are at a point where they finally understand they can no longer make contributions to the DB. Can they: 1) Rollover their DB benefits to their 401(k) and transfer the excess in the DB plan to an escrow account in the 401(k) (without excise tax) to fund employer contributions until they are exhausted? 2) Then, in a couple of years, can they start-up a new DB plan?
  2. Here’s the situation, and I apologize for the length and if I am not getting all the terminology correct as I am not a professional. Mother and Father (from now referred to as M & F) are nearing end of divorce that started years ago. For reasons I’d rather not get into on this forum, I’m helping M. F, age 70, is 100 percent owner of company (4 plan participants including himself) with a defined benefit pension plan that is significantly overfunded. He has the vast majority of pension vested benefits. His vested benefits are 10 times that of employee #2 (longtime 30 year employee), employee #3 (family member), employee #4 (new employee). Despite M working for free for years for the company, she was never an official employee that had any interest in the pension plan. The pension overfunding is so large that it almost equals the amount of F’s current vested benefits. To soak up overfunding, F shifted a couple hundred thousand dollars into employee #3’s plan , which didn’t make much of a dent in overfunding, and since he is only 30 years old, maxed him out on his future expected benefits. F is trying to soak up the rest of the overfunding by having the plan buy term life insurance for employees, and pay the yearly premium. The plan has more than enough overfunding to pay the upfront premiums and pay the yearly premiums for the 30 year duration of the policies. As per law, the death benefit on the policy can be 100 times the monthly salary of the plan participant…so figure that as long as F doesn’t live till 100, his designated beneficiaries get a hefty life insurance payout. If he lives till 100, all the premiums went down the toilet, but hey he won anyways, he lived till 100! As part of divorce settlement, F has agreed to give M half of his vested benefits of pension plan in a QDRO. However there is significant value in the overfunding that F is extracting via life insurance purchases for his choice of beneficiary, and possibly other ways to monetize overfunding in future (such as selling the company or a part of it, and the overfunding)… at bare minimum, overfunding reverts to company at 10 cents on the dollar after excise/income tax. F refuses to make M or her choice of heirs a ½ beneficiary of this life insurance he is purchasing, and refuses to compensate M not even 1 dollar for the value of the overfunding. M is upset because it was through F’s own foolishness that he built up overfunding with their money and effort over the years and now he is getting value out of it and he is refusing to give her anything. Questions are as follows 1) Is there a way to transfer any portion of this Overfunding into M’s QDRO, whether through cash or pension assets? If so what are the legal ways to do it? 2) Can a judge order the pension plan trustee to transfer Overfunding cash or assets into a Wife’s QDRO? 3) Does anyone know of any instances in which Overfunding has been valued in a courtroom setting, and more specifically in marital law? For instance, at the very minimum that overfunding is worth 10 cents on the dollar if all the money reverts to the company and excise/income tax is paid…but F is purchasing life insurance with the overfunding to avoid the excise tax., and there is an expected value to that death benefit his choice of beneficiary is receiving. There also other creative options for monetizing overfunding. .Does anyone have any experience with convincing a judge or negotiating a settlement based on pegging a value to an employee’s interest in his pension plan’s overfunding? 4) Any other suggestions that would help M get value from pension overfunding that F is getting benefits from and may monetize in the future, but refuses to share with M? I have talked to a lawyer in pension funding, who has helped me get this far, but as you can see this is a very niche issue and any fresh perspectives or experience would be much appreciated. Thank you! -Rich
  3. Moderator - My multi-part story/question got deleted from the forum, I guess because I posted it in 3 different forums as it has multiple topics to it....I will keep this question limited to the QDRO issue, so hopefully you can keep this post active in this forum Situation - Pending Divorce, and QDRO has not been filed yet. Husband owns 100 percent of company with 4 employees in pension plan. Husband (age 70) owns about 90 percent of pension plan's total vested benefits. Employee #2 has about 10% of vested benefits. Employee 3&4's shares are nominal. A dollar amount about equal to Husband vested benefits is owned by the pension plan that is not applied towards anyone's share, which is the "overfunding" (this number is substantial, in the 7 figures). Question - Does anyone know if any portion of this "overfunding", whether in cash or pension plan assets can be transferred to the wife via her QDRO? Can it be done either voluntarily by the Pension Plan trustee or by court order? Any help or thoughts are much appreciated -Rich
  4. I recently received a letter from the actuaries for my DBP not to make a contribution for 2012 since the plan is overfunded. I am wondering if I should ignore their advice and still make a 2012 contribution since I know in the coming years my income will be falling? The actuaries gave a 2012 contribution range of 0 - $343,250 which is a big range, but said it is best not to contribute anything. I have a DBP which is a qualified plan, that I started at age 40 with a RA of 55. I am presently 48 years old and every year since I started the DBP my compensation has been over $500K allowing me to make the maximum contribution to the DBP . The plan assumes a rate of return for both pre & post retirement at 5% Current trust assets as of 12/31/2012 were $1,040,000 and exceed the maximum distributable amount as of 12/31/2013 which is $1,025,000. So that means the trust is presently and will be at the end of this year 12/31/2013 overfunded providing the assets don't decrease in value due to market fluctuation. So my question is what is the most I can contribute for 2012 and a strategy to work out the overfunding issue? My business is setup as a sole proprietor (entire business is just me - no employees) I believe with DBP the overfunding tax penalties is something like 93% (50% Excise Tax, 39.6% Income Tax, 0.9% ObamaCare surtax, and say 3% SE Tax). I don't understand when or how these penalties kick in. When a DBP is overfunded one has several years to allow the trust assets to return to the maximum distributable amount by typically not making a contribution for a year like the actuaries are recommending. Since 2013 brings many higher federal taxes (35 > 39.6%) plus the new Medicare taxes (0.9% for income above $200K & 3.8% on unearned income) I had accelerated income from my business in 2012. Not making a contribution to my DBP for year 2012 results in me having a much much higher income tax bill for 2012. My business does not have a great deal of expenses since I am in the wholesale business where I just buy and sell and work on the margin. My biggest expense on my Schedule C is the DBP and Solo 401K contribution. What needs to be factored in for future contributions to my DBP is the direction of my business which is going downhill. My business has done well over the years but I the business slowing down dramatically, almost free falling. I would guess in 2013 the business gross profits would be in the range of $350K - $500K. Then in 2014 gross profits in the $200K range. Again these are gross profits and just guesses and the could be lower. It would be a true miracle if they are higher and extremely doubtful since I want to work a lot less. In 2015 thru 2020 (retirement age for my DBP is 55 which is year 2020) I want to work very little and I could keep the business running even if this means selling items on ebay (whatever it takes to qualify that the business is still in existence). So if I do make a contribution for 2012 to my already overfunded DBP I think I could have several years ahead to adjust for overfunding issues. Also any contribution to the DBP is limited to my compensation - 1/2 SE Tax so how would this effect the overfunding issue if my compensation from my business is $50K in years 2015-2020? For 2013 the contribution the actuaries gave me were even broader with $595K and this time a minimum of $100K. I definitely want to make a contribution in 2013 because of the higher taxes. So if this means zero contribution for 2012 I guess I need to do this. I would rather pay taxes in 2012 verses a 93% overfunding tax penalties. Hopefully people on this forum can reply back with a strategy for me to follow to maximize my contributions for 2012 and 2013 which will be my higher earning years and then in 2014 and beyond a true drop in business income. I really would like to stop operating my business and retire in 2017 but I think with this overfunding I'll need to have the business start open until 2020. I know about the strategies of Adding Plan Participants, Transfer Assets to Replacement Plan, Increase Plan Benefits and Merger of Plans but none of these will work for me. My strategy if allowable under IRS and ERISA regulations is to make contributions in 2012 thru 2014 and the DBP will be grossly overfunded and then make no contribution from 2016 - 2020 since I'll let the business run part time and will generate very little income, but during this time the trust assets to return to the maximum distributable amount.
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