Over funded DB

[Guest charcoal89]

I have a client who has an overfunded DB plan. Client is 73 years old. Benefit is limited by 3 year average compensation limit so benefit can not increase. There is about half a million excess assets in plan. How can we get rid of excess to lessen posssible excise tax?

[david rigby]

There may be some help in prior discussions. Try using the search feature.

One such example is

http://www.benefitslink.com/boards/index.php?showtopic=19833

[Guest RSNOW]

Bring into the plan his long lost cousin RSNOW who is feeling a lot of love for this guy right now ! Really though most options are not quick fixes but consider (1) Is there a spouse who could justifiably be paid a wage to start earning benefits uner the plan, same scenario for any children too, (2) there is a Qualified Replacement Plan option where 25% of excess assets goes to new/existing DC plan upon plan termination, which reduces the excise tax to 20% (plus income taxes), but need to make sure you can allocate the 25% moved to the DC plan within 7 years, similar option if you terminate the plan and allocate 20% excess assets to remaining participants (some restrictions) (3) if client has a corporation sponsoring the plan where he could sell the corporation and accompanying plan there are some entities who will buy the corporation and the over funded plan and pay a bit more than what he'd net via paying the excise taxes (I think some practioneers don't like this option though). (4) does he have the ability to take a higher salary even if he had to loan the company the money to pay the salary (not a tax efficient approach but maybe better than 50% reversion tax). There are probably some other approaches that will likely be mentioned but those come to mind first and the ones mentioned have some parameters that you'll need to look into.

[Guest charcoal89]

Is there a problem for replacement DC plan if this is a sole proprietor?

[Guest RSNOW]

No, the entity type doesn't matter. See IRC 4980(d) for requirements. I think in practice making sure 95% of same active participants benefit under the replacement plan (required) AND making sure you can allocate the excess assets within the 7-year period without exceeding the 415 limits, are a couple of the main requirements to watch out for. The Sole Prop owner will need to be showing sufficient compensation (earned income) in order receive allocations from the DC suspense account (i.e., the excess assets transferred to the DC plan).