Excess assets problem & solution

[flosfur]

In one-person plan, the owner is up against the 100% Hi 3 limit and the plan has excess assets of $100k based on the pre new final 415 regs Hi3 limit. After 12/31/07, the excess will increase to over $300k.

The owner is past NRA and his Hi 3 is unlikely to increase in the future.

To reduce further increase in excess assets, a proposed solution is for the owner to take in-service distribution and rollover his money. Owner’s wife will start taking wages and will enter the plan to use up the assets remaining in the plan.

Anyone see any problem with this solution?

[David MacLennan]

Question: why does the excess increase to 300k after 12/31/07?

[mming]

The owner's wife entering the plan will help. But him taking any kind of distribution wouldn't minimize the overfunding. His benefit in the plan would be reduced by the equivalent of what was withdrawn. The plan would have less assets but his remaining benefit would be smaller - essentially a wash. If he's at least 70 1/2 and can take a required minimum distribution, though, that would help since his benefit wouldn't be reduced.

[Blinky the 3-eyed Fish]

If he's at least 70 1/2 and can take a required minimum distribution, though, that would help since his benefit wouldn't be reduced.

Why do you think an RMD won't reduce the 415 limit?

[Belgarath]

If the business will continue, and if their incomes are sufficient to support the subsequent DC plan allocations, what about terminating the DB and transferring the excess assets to a qualified replacement plan? Or at the least, transferring as much as could be absorbed under this option? This negates the reversion tax on the amount transferred, and reduces the reversion tax on the rest. I don't know if this option fits your specific situation, but worth looking at if you haven't already.

Where's Ned Ryerson? If the above doesn't work, he can suggest a solution.

[mming]

I agree that a replacement plan could also work well. I vaguely recall that there's also some relief available under certain circumstances if excess assets are used for health benefits (?)

Paying out what the plan calls for, i.e., 12 times the monthly benefit, as an RMD, would reduce the assets while the owner's benefit stays the same. Hopefully the overfunding can at least be reduced somewhat if the payout is greater than both the return on investment and the annual APR decrease.

[AndyH]

I agree with all the prior comments. Another possibility: Amend the plan to provide a normal form equal to subsidized J&100 annuity. Then call Ned.

[Guest Ned Ryerson]

You rang?

The solution is an easy one. The plan should purchase million dollar life insurance policies (from me of course) on each participant. There is a new secret IRC section that the government doesn't want you to know about that eliminates any death benefit restrictions, so there are no problems there.

If that doesn't help, then the plan should invest in my pyramid scheme, err, great investment opportunity I am privy to.

Now who wants insurance!!!

[SoCalActuary]

The health benefits option is essentially the same as the replacement DC plan option, just a different trust.

The health premiums face the same DC plan 415© limitation issues.

[flosfur]

....

Paying out what the plan calls for, i.e., 12 times the monthly benefit, as an RMD, would reduce the assets while the owner's benefit stays the same. Hopefully the overfunding can at least be reduced somewhat if the payout is greater than both the return on investment and the annual APR decrease.

I don't think this is a viable solution in a one person plan - sooner or later the plan will be terminated and excess problem will remain. I don't think many people are willing to keep the plan going and pay admin fees when they are not putting any money in the plan. And who invests with expectation of meagre return on assets?

[flosfur]

I agree with all the prior comments. Another possibility: Amend the plan to provide a normal form equal to subsidized J&100 annuity. Then call Ned.

I guess you are suggesting buying a J&S annuity from Ned Insurance Co? If so isn't that tantamount to giving excess assets to the insurance co? Also, the participant may not want to receive an annuity payment and pay taxes.

[AndyH]

I agree with all the prior comments. Another possibility: Amend the plan to provide a normal form equal to subsidized J&100 annuity. Then call Ned.

I guess you are suggesting buying a J&S annuity from Ned Insurance Co? If so isn't that tantamount to giving excess assets to the insurance co? Also, the participant may not want to receive an annuity payment and pay taxes.

No, the 415 lump sum is actuarially equivalent to a life annuity, right? Obviously a subsidized J&100 to a spouse is more valuable than a life annuity. Maybe for example the spouse is much younger than the participant. Then the subsidized j&100 is much more valuable than a lump sum.

So, yes both Ned and the insurance company get something. But arguably so does the retiree and/or his spouse. And, yes they probably would prefer a lump sum. But this is an option.

[flosfur]

Question: why does the excess increase to 300k after 12/31/07?

Because under the new regs, the S415 100% Hi3 = Hi 3 using the S401(a)(17) comp limit where as hitherto, S415 Hi 3 was permitted to be based on actual comps.

In this case the (a)(17) restricted Hi 3 is $8k but Hi 3 of actual comps is $10.3k.

[ak2ary]

Actuarial fees can be paid from the trust

[david rigby]

I'm available to provide some actuarial services. Better me than Ned.

[Guest Ned Ryerson]

Bite your tongue actuary boy! Be careful or I will get my life insurace actuarial posse to bring on the pain! Now that's a reason to buy some insurance! It's simple, if you don't buy insurance at maximum levels, you don't care about your family!

[david rigby]

It's simple, if you don't buy insurance at maximum levels, you don't care about your Ned's family!