IRC Sec 4980(d)(3) hurdle

[Guest dsyrett]

I am involved in terminating an overfunded 30 life DB plan, all NHCEs. The plan sponsor would like to use IRC Sec 4980(d)(3) to provide a pro-rata benefit increase of 20%. He would then revert the balance of the excess and owe only a 20% excise tax on that amount.

The problem: There are no active participants among the 30 and 4980(d)(3) requires that only 40% of the 20% or 8% of the excess may be used to provide the prorata benefit increase to the non actives. 12% must be used to provide a prorata increase to the actives, of which there are none.

At face value it would appear that the prorata benefit increase is not an option for this plan if the sponsor wants a 20% excise tax. (The sponsor is not interested in doing the other option, a 25% transfer to a succesor plan.)

Questions:

1. Is anyone aware of the policy reason for this 8% rule?

2. I have been unable to locate the Committee Reports related to the legislation than enacted this code section, I believe OBRA 90, PL 101-508, Oct 1990. It someone has access to the Committe Report for just 4980(d)(3), could you fax it to me at 757 877-1311? Much appreciated.

3. Anything that I'm missing that would allow me to proceed?

[Guest Keith N]

All I can offer is that I have a plan with an identical problem. The attorney reviewed everything very thoroughly and came to the conclusion that the benefit increase was not an option. We contemplated requesting a letter ruling from the IRS, but the client chose not to and so the whole thing has just been sitting for years. Even the market drop didn't help since the client timed the market correctly and got out early.

Have you looked into Financial Frontiers or other companies who will "buy" the excess assets?

[MGB]

Note that if there was ONE active participant, 4980(d)(5)© provides for a reallocation to the active participant of the amounts that you cannot give to the retirees.

A similar situation and reallocation can occur due to 415 limits. In the 1996 Enrolled Actuaries Meeting Gray Book, Q&A 41, a similar issue was posed in the context of having only one participant already subject to 415. In this case, the IRS said the reversion is subject to the 50% because there is no one else to allocate the 20% to.

I think you are stuck with the 50% excise tax. (Unless they amend the plan to add one or more active participants.)

[mbozek]

Your only other option is for the owner to sell the equity interest in the plan sponsor, including the plan surplus, to a financial intermediary. There really arent too many options for a plan sponsor who is terminating an overfunded DB plan other than to merge it with another plan or pay the excise tax.