Overfunded DB

[k man]

I have a client with an overfunded DB plan. he is the only participant. he reached retirement age several years ago and did not take any money. he wants to know what his options are with respect to the overfunded money if he takes a lump sum distribution. someone suggested that he take distributions retroative to when he could have taken them. is this a viable option? if so what would the authority be for this position?

[mbozek]

what do u mean by overfunded money? Are u referring to the surplus assets which remain after the participant receives the LSD equal to his interest in the benefits? Is the employer maintaining the plan a corporation? Is it a PC or other type of professional business? I dont know what you mean by retroactive distributions.

[mwyatt]

I'm assuming by the reference to "retroactive" that your client's accrued benefit under the Plan is running into the 100% of High 3 Year 415 Limit but not the 415 dollar limitation due to lower salary. Otherwise, benefit could be increased for late retirement. Is this the situation?

[Mike Preston]

The authority would be the latest IRS rules on 415 calculations. They indicated that 415 is not subserviant to the rules on actuarial increases required after NRD. Hence, in the absence of appropriate notice to a participant dealing with the suspension of benefit rules, the plan ends up being disqualified if it limits the participant's benefit to the 415 limit. Of course, it ends up being disqualified if it doesn't limit the participant's benefit to the 415 limit, too. There are only two rational responses to the way the IRS has interpreted the rules. One is that one is free to pay the benefit as it was required to be paid under the terms of the plan. The other is that you have an operational failure that can only be corrected through the EPCRS program. The IRS hasn't indicated that the first approach will not work. It is clear that the second approach will work, IMO.

[k man]

Forgive me if i misuse some of the DB terminology as i don't work with them much but the question pertains to the surplus assets. essentially the sponsor wants to see if there is a way he can increase his benefit or pay himself money he did not take in previous years in order to avoid the excise tax on reversions.

with respect to a previous post, the client is retired so i don't think the benefit formula can be adjusted at this point in time.

[mbozek]

Plan benefit could be increased to provide 100% J & S annuity to spouse. Plan may also increase benefits in certain situations but an actuary must be consulted. Any additional surplus would be asset of plan sponsor and subject to 50% excise tax upon reversion. However, if sponsor is incorporated owner can sell interest in company which consists of suplus plan assets to a financial intermediary for a specific price based upon discounted value of surplus assets. Owner could also sell suplus assets to an underfunded DB plan on his own or merge plan with another plan sponsored by another employer to avoid reversionary tax. This a grey area and owner needs advice of expert counsel.

One Q- is DB plan funded with LI?

[k man]

No life insurance although i am aware that the plan sponsor can purchase life insurance with the surplus.

[Guest b2kates]

One way to utilize the surplus is to purchase life insurance. There are some very sophisticated policies that have springing cash value and can absorb large surpluses.

Being a DB plan if it never had insurance it likely has a large cushion to purchase.

I do not sell any products, but in the past issued a legal opinion regarding spring cash value policy which caused a 500,000 surplus to be consumed.

[MGB]

k man,

The benefit formula can be changed at any time. It doesn't make any difference that he is retired.

A bigger question though: If he is retired, who is the plan sponsor? Shouldn't there be an underlying business?

[k man]

MGB, good question. i need to check the facts.

[Mike Preston]

Doesn't Notice 89-25 kill the springing cash value angle?

[Mike Preston]

with respect to a previous post, the client is retired so i don't think the benefit formula can be adjusted at this point in time.

The benefit formula can be adjusted at any time. However, in order to take advantage of the authority you sought regarding the distributions of past benefits in a manner that helps reduce excess assets, the formula needed to already be at a level which would ave paid the 415 limit (or very close thereto) to the participant.

So, as was asked earlier, what is the nature of the excess? Is it merely dollars in excess of benefits promised under the terms of the plan? Or is it dollars in excess of the current 415 limit? If the latter, and the individual was entitled to a distribution in the past (whether retired or not), then there may be argument for paying the "missed" payments, with an interest adjustment, too.

The client needs to have somebody review this who has more familiarity with the concepts.

[k man]

I am not the only one reviewing the matter. i am merely trying to elecit ideas, and i certainly appreciate all of the suggestions. i will be going back to gather more facts.

[Blinky the 3-eyed Fish]

Mike, I understand what you are saying about the late retirement issue for someone at a High-3 415 limit. But in a one-man plan where the sponsor could terminate the plan at any time, do you think the IRS would be concerned with him not receiving a suspension of benefits notice?

I would think they would be greatly concerned with him receiving payments in excess of the 415 limitation and would certainly recommend against that course of action.

[Mike Preston]

I undersstand. But if there was no language in the plan that supported the suspension of benefit, then it is hard to argue that it was possible to give a notice. Seems ripe for an LOD filing to ferret out the maximum.