Unique Plan Freeze

[Gary]

A husband and wife company with a pension plan froze their pensions at the end of 2002.

They are terminating their plan and have a surplus of about 200k.

The husband is already at the 415 limit, but the wife only had three years of service and participation at the time of plan freeze.

At the time of plan freeze the wife had an accrued benefit of $60,000 (60% of 3 yr avg comp), but the 415 limit was $30,000 (3 years of service or 30% of avg comp of 100k).

In order to absorb the surplus, if the wife could receive a lump sum based on an accrued benefit of $50,000, instead of $30,000, the surplus could be absorbed.

The goal would be to keep her accrued benefit, exclusive of 415 at 60,000, but to add two years of plan participation and plan credited service to increase her 415 limit to 50k. This could be accomplished by providing that service and participation accrue for 2003 and 2004, with no additional monetary accruals.

This seems like a feasible and allowable amendment, even if the formula is reduced (but includes service through 2004), and preserves the prior accrued benefit.

Any opinion on the above approach or accomplishing such an objective?

[Effen]

I'm confused... you can't "accrue" a benefit greater than the 415 limit. If her 415 limit is $30,000, then her accrued benefit is $30,000.

If it hasn't already been terminated, maybe you could un-freeze it so that she can be credited with another year of two of participantion and terminate it after the accrued benefit has increased enough to use up the excess assets. This may take a few years, but it would save them about $100K in excise taxes.

Also, look to see if she had additional service that you didn't know about. Many times they are working in the business long before they incorporate and this prior service can sometimes be counted.

[Gary]

If the plan were unfrozen for service credit and participation retroactively than her 415 limitgoes from 30% of 3 yr avg to 50% of 3 yr avg thus increasing the 415 limit from 30k to 50k, thus enabling her to receive 50k (still less than plan accd ben of 60k).

Thanks

[david rigby]

Other than Effen's suggestion to unfreeze, the other way to use up surplus is to cover someone else.

(I'm available.)

[Gary]

Good one pax. I'm available too. I wish it were that simple.

[Effen]

Sorry to be a stickler, but you keep saying the "accd ben of 60K". The accd ben is NOT 60K because you can not accrue a benefit > 415 limit. Maybe her formula benefit is 60K, but it can not be "accrued".

[Mike Preston]

{sniff}{sniff}

Something doesn't smell right.

Are there now, or have there ever been, participants in the plan other than the husband and wife? If not, then there is no need for an amendment. Just allocate the excess assets on plan termination to the wife and confirm that the amount being provided doesn't violate 415. Submit. Be happy.

If so, then you still don't need an amendment to the formula or accrual years, per se, just an allocation of the excess assets that is not discriminatory. Submit. Be happy.

Why go through the effort of amending the plan to hit a target you can't precisely hit anyway? Unless you are going to have them invest all of the money in a fixed income alternative with a specific maturity? My head hurts at the thought.

[AndyH]

Why not convert it to a 412(i)?. Safe secure conservative. No more surplus to worry about. And the client might even be invited for a free yacht ride now and then.