DB to Profit sharing

[ombskid]

Can a DB plan be merged/transferred into a new profit sharing plan if all the spousal consents are done?

[Belgarath]

No. The plan can be terminated then assets rolled to new plan (if participants so elect) but can't simply be amended and restated to a DC plan. See ERISA 4041(e).

[Andy the Actuary]

Agreed, considered a Plan termination and if applicable, would have to satisfy PBGC timing, notification, and reporting requirements, plus as commented, lump sum elections would have to be voluntary and are subject to spousal consent.

[ombskid]

But assets can be transferred directly to the new plan if participants choose? Husband and wife terminate their DB plan and start a profit sharing plan. They can transfer directly to the new plan. I shoulda asked the question this way in the first place

[SoCalActuary]

That's called a ROLLOVER.

[david rigby]

ERISA sec. 4041(e) is part of Title IV-Plan Termination Insurance.

See section 4021 for plans which are exempt from the entire title.

If your plan is exempt, see IRC 414, and search these Message Boards for similar discusions (there are several).

[Mike Preston]

Actually, IIRC, it is a "voluntary transfer". Which, for almost all purposes (other than some arcane 401(a)(4) issues) is identical in treatment to "rollover."

A bit of history might make sense here. A voluntary transfer made much more sense in the days when folks were concerned about constructive receipt. Now, with constructive receipt issues pretty much gone the way of the dodo, the concepts of voluntary transfer and rollover have pretty much merged.

But not completely.

[Effen]

I work with an attorney who has merged DB's into a PS several times and the IRS has never questioned them. I'm not sure it is 100% kosher, but they do it and no one seems to say boo.

They use 1.411(d)-4 Q&A-3 as the basis & file a 5310-A reporting the merger to the IRS. These are generally very small plans (1 life, or husband/wife). I'm not sure if they would do it with anything bigger.

[jpod]

Effen: Does this attorney also take the position that any surplus in the DB plan escapes income and excise taxes?

[Effen]

I don't think so, but it has never been an issue.

The few we have done with them the assets = liabilities.

[jpod]

Effen: The reason I asked the question is if assets do not exceed liabilities, then what is being accomplished by doing the "merger" (which technically is questionable but probably no harm-no foul in a non-Title IV plan as long as you preserve J&S) vs. an overt termination followed by a rollover into a new PSP?

I have heard that people do this transaction with surpluses in non-Title IV plans and think that it escapes income and excise taxes, but I have never seen any sensible explanation for why it works under the law.

[SoCalActuary]

The transfer with excess assets works if the PS plan is the qualified replacement plan

and the excess assets can be used up in 7 years as contributions. Detailed 415 analysis

is required and the 1099 for the participants would only show the lump sums they are entitled

to receive. All remaining assets would go to the replacement plan as future contributions.

[jpod]

SoCalActuary: Understood! But if your surplus is small enough to accomodate the 7-year rule and 415 limits, why bother with the so-called "merger," rather than an overt termination with a replacement plan transfer, followed by a rollover of the db plan benefits?

[SoCalActuary]

Great question. Are the assets difficult to trade?

Also, what was the reasoning given by those doing this method?

[Belgarath]

I'm probably reading it wrong, but how are they applying 1.411(d)-4, Q&A-3 to arrive at this result? I seems to me that A-3(3) prohibits this, rather than permitting it. I'm missing something...

As to the question of why, I'm guessing it is a question of fees. Many (most, perhaps?) charge more to formally terminate a plan than to simply merge two plans.

[AndyH]

The transfer with excess assets works if the PS plan is the qualified replacement plan

and the excess assets can be used up in 7 years as contributions. Detailed 415 analysis

is required and the 1099 for the participants would only show the lump sums they are entitled

to receive. All remaining assets would go to the replacement plan as future contributions.

I know this is only academic, but I would add that the qualifed replacement plan option is available only in connection with the termination of a qualifed plan, not a "rollover" or "transfer". Only the surplus assets are transferred. The terminating plan benefits are distributed in accordance with the termination.