Overfunded one man DB Plan

[k man]

we have a client with an overfunded DB Plan that is terminating. he is the only participant and has reached the 415 limit. he is no longer in business. does anyone have any ideas as to how to reduce the 50% excise tax on the reversion? someone suggested the amount of the reversion is based upon the assets as of the date of the plan termination and does not include earnings since that date. can anyone comment on this point or offer suggestions?

[Guest RSNOW]

Obviously the fact the employer is out of business takes away the obvious choice of a qualified replacement plan (DC) sponsored by the same employer to reduce excise tax to 20%. It also takes away some other options like tryinging to bring in close friends or family members into the plan by employing them on a limited basis. If the employer is a corporation and the corp still exists, even if just a shell, there are some entities that buy the entities that own over funded DB plans and later merge the plan into their own, but you'd have to have substantial excess assets to interest them and I thought the IRS frowned on this although I know of no definite prohibition against it. I believe the present value of the 415 limit has to be as of the date of distribution, although plans that are PBGC covered are instructed on IRS plan term submissions to value benefits as of plan term date, but I don't believe that applies to the ultimate distribution amount and date.

[david rigby]

Perhaps this is all just too silly:

Just to be cautious, has the plan taken advantage of the retoractive application of the $200K comp limit?

Has there been a distribution? Can the benefit be defined using a normal form of a J&S, then pay monthly or annual benefits instead of a lump sum? If the plan can continue to exist, make sure it takes advantage of future increases in 415 limit.

[k man]

Pax, we have done all of your suggestions and are still left with the large excess. the sponsor was never a corp. he is just a sole proprietor and there are no plans to stay in business going forward.

[FAPInJax]

There was an option presented several years ago (maybe it was by Mike Preston / Larry Deutsch or they remember it??). Does anyone think the following will actually work???

The plan must permit the participant to change his payout method. The participant chooses annual payments and receives his first payment. He then decides that he would rather receive a lump sum several months later. However, the age has not changed and therefore the lump sum is basically what he would have received earlier. This was touted as getting an extra annual payment out of the trust.

[david rigby]

I also heard the discussion to which Frank alludes. It was presented something like:

- participant retires on December 1 and receives annual distribution (plan permits annual payment). The amount is the 415 limit.

- participant changes his mind about form of payment on February 1 and receives a lump sum (as permitted by plan),

- since the age is the same (using the plan's rounding procedures), the lump sum is the present value of a 415 benefit.

[mbozek]

The only other possibility wold be to add LI as an option to the plan. The proceeds would be 100 x the monthly benefit. I dont know if this is available on a SE person plan or whether the SE is insurable. The surplus could be used to pay the LI premium and upon termination of the plan the LI policy could be transferred to the participant and only the cash value (if any) would be taxed as income. The downside is that the SE would have to pay the future premiums out of pocket and transfer it to a trust to get it out of his estate.

[Larry M]

how old is the sole proprietor?

If under 65, and disabled (as defined by the plan - which can be much less severe than social security defn of disability), a disability benefit does not get reduced for retirement prior to age 65.

So, if participant is age 55 and disabled, he can get the pv of a life annuity of 160,000/yr commencing at 55.

[Mike Preston]

The "one extra payment" method was recommended only in conjunction with a letter of determination application. Yes, I've done several like this and they have all been approved. That doesn't mean that they should have been, but those clients are happy.

Sole props don't go out of business, as far as the IRS is concerned. So you can still operate the plan as if it sponsored by an ongoing concern. No cite, just the way it has always worked.

Is there an old DC or IRA sitting around somewhere? If so, consider amending the DB plan to accept rollovers of DC (and/or IRA) monies to "purchase" DB benefits. I know the DC stuff works if sponsored by the same empoloyer, I'm not sure about the IRA rollover. A plan can promise to pay an annuity based on assumptions that are more generous than the assumptions used to calculate the promise, hence creating a more valuable benefit for the participant. I don't have the cite handy, but it is in the 415 regs.