Keogh DB Plan Termination

[Mister Met]

I have a 1-person Keogh (sole proprietor) plan, not covered by the PBGC. This is a Fidelity Prototype plan. Normally, for a DB plan termination, we amend the plan document and submit to the IRS for a determination. I am assuming that Fidelity handles thousands of this type of plan and is equipped to do this.

1) I am planning on instructing our client to tell Fidelity to terminate this plan (since that is his wish) - I am assuming that this is all that I need to do for the termination (except for (2) below)? Anyone have any experience with this?

2) The owner is looking to roll the money into an IRA. What happens if the present value of the accrued benefit is 1) overfunded, or 2) underfunded? If underfunded, it would seem silly for him to contribute money in order to fund the plan just to get it right back. If overfunded, are there any problems?

Thanks for any input.

[Blinky the 3-eyed Fish]

I would doubt that Fidelity could do anything actuarial. Submitting a DB plan for plan termination would require actuarial calculations.

If the plan assets are less that the PVAB, the partcipant could take just the assets in the plan by waiving benefits. If the plan assets are greater than the PVAB, then the participant can receive the excess amounts provided the document says (or is amended to say) that excess monies go to participants and are not reverted to the employer. Of course all payouts must be within the 415 limits.

[Lame Duck]

If the plan is underfunded, it might be to tyhe participant's benefit to fund the balance. He will receive a current tax deduction for the contribution and the amount contributed would also be rolled into the IRA where it would continue to enjoy tax advantaged status.

[Blinky the 3-eyed Fish]

You can't fund the balance necessarily. It's not PBGC covered.

[Lame Duck]

What affect does 404(a)(1)(D)(iv) have on the funding?

[Blinky the 3-eyed Fish]

None.

[mbozek]

Prototype sponsors do not give legal or tax advice so the employer must retain counsel and/or an actuary to prepare a submission on termination. The ptype sponsor will provide an amendment to bring the plan into compliance for all tax changes as of the date of termination but the employer must submit the plan to the IRS.

If the plan is overfunded the excess assets are subject to the 50% excise tax penalty as well as state and federal income taxes.