Application of Code Section 402(b)(4) and Disqualified PLans

[Guest EMM118]

I am looking at a situation where the IRS is considering disqualifying a client's defined benefit pension plan for the plan's failure to meet Code Section 401(a)(26) and 410(b) requirements. In effect, the plasn covered only the two owner-employees.

Due to relatively high compensation amounts and plan contributions in the first few plan years, the client's accrued benefit exceeds the amount of plan assets.

I am very familiar with Code Section 402(b)(4). In this situation, the client will have to take into income approximately $1,000,000, even though the client only contributed $500,000 to the plan.

Does anyone have any experience in dealing with the IRS on this issue. Are there any creative arguments that can be made that would lessen the impact of the application of Code Section 402(B)(4).

Thanks in advance for your comments.

Ed