Plan Conversion

[Randy Watson]

A very small DB plan is well overfunded. There are a handful of owners in the plan and no other employees. The plan is so overfunded that there will be a surplus in the plan even if maximum benefits permitted by 415 are provided. How can we get surplus to the participants? Termination and the payment of excise tax would be a last resort. Can this plan be converted to a profit sharing plan and, if so, would that get us around the DB 415 benefit limits and payout the surplus?

[Belgarath]

You can't convert a DB plan to a PS. However, you may want to investigate the possibility of terminating the DB plan and setting up a "qualified replacement plan." See Revenue Ruling 2003-85, and IRC 4980(d). Depending upon the situation and the amount of excess assets, this might do the trick.

[Randy Watson]

Thank you, Belgarath. Can you please tell me what authority prevents us from converting to a PS?

Also, assume that we terminate and set up the replacement plan under 2003-85 and contribute 100% of the excess from the DB to that plan. What happens if that amount exceeds the 415 limits for all the participants in the replacement plan...can we still make that contribution to the plan? I understand that there will be no deduction for that contribution, but is there something preventing us from making it to that plan? What issues should I be worried about? Thank you.

[Belgarath]

For the authority as to why you can't convert a DB to a PS, see ERISA 4041(e).

As to your other question - I don't have time to look it up at the moment, but I believe you have up to 7 years to amortize it. So if you transfer over 300,000, and your 25% limit only allows, say, 50,000 each year, you would be ok, assuming the business remains open and people are still employed with sufficient payroll, etc...

I'd caution you to read the applicable IRC code section (4980(d)) yourself, as my "7 year" answer is purely from memory. As I grow older, this source becomes less and less reliable.

[Randy Watson]

Good information. Thanks.

[mbozek]

If the plan sponsor is incorporated and the owners want to wind up operations the corporate shell can be sold with the pension surplus to a financial intermediary, e.g., investment bank, who will pay a discounted % of the pension plan surplus to the owners e.g. 70%. Sale proceeds are usually considered capital gain. IRS dislikes such sales but PBGC favors them because the intermediary sells the corporate shell with pension plan surplus to a NP employer with an underfunded DB plan at a higher discounted value, e,g, 80% of fmv of assets. Plan then books assets at 100% of FMV for liability purposes to reduce underfunding. This technique is not for risk adverse clients.

[Guest BDZ]

On a related note, is it agreed that a 5310-A filing would be required for each of the transferor and transferee plans?

[JanetM]

Isn't there also a way to use surplus assets to fund health care?

[wmyer]

Belgarath, I assume you mean 100% limit, not 25% limit?

BDZ, I agree that Form 5310-A needs to be filed for both plans.

[Belgarath]

Wmyer - yes, you assume correctly! 100% limit, not 25%.