Excess Assets on Plan Termination

[Dougsbpc]

Suppose a small defined benefit plan terminates with excess assets. Also, the same employer maintains a defined contribution plan. Each year the plans are general tested and have had no problems passing 401(a)(4).

Our understanding is that excess assets in the DB plan could be allocated in any manner the document allows as long as that allocation is non-discriminatory and passes 401(a)(4).

If the DB plan terminates now (prior to any benefit accruals for the year) and ends up allocating excess assets during the year, are those allocations general tested along with DC plan allocations made for the year?

Thanks much.

[AndyH]

Interesting question. If the excess asset allocation formula is not a safe harbor, then I would think it would need to be general tested, but what if there was no comp for example or you were allocating excess assets to former employees?. That would get weird.

Keep in mind you never need to combine a DB general test with a PS general test as long as each plan passes 410(b) and 401(a)(4) separately, at least for the NCT part of the test.

[Dougsbpc]

Thanks Andy

There will not be any former employee receiving an allocation, but I would think that if the allocation is not based on salary it should not matter. A participants compensation base for a4 purposes would be his/her average salary.

In this case, the employer would want to include the DC plan in the test if possible. The employer always makes a generous DC contribution and the employees appreciate and understand the DC plan more.

[AndyH]

I'm not sure you can permissively aggregate an active and a terminated plan. I guess that is what your question boils down to. I don't know any prohibition but sometimes you don't know what you don't know so other opinions would be welcome.

[Mike Preston]

A plan which provides for an allocation is not a terminated plan, in the accrual sense and can be aggregated with another plan that provides for an accrual/allocation. A terminated plan, however, can not be aggregated according to one James Holland. Jim is pretty firm in his conviction. I'm not so sure, but haven't chosen to press the issue.

[Dougsbpc]

Mike,

Thanks for your insight.

Do you recall if Jim gave a reason?

1.401(a)(4)-5(a)(2) talks about the factors the IRS considers in determining whether the amendment / allocation discriminates in favor of HCE's. They look at "the relative accrued benefits of current and former HCE's and NHCE's before and after the plan amendment and any additional benefits provided to CURRENT and former HCE's and NHCE's under OTHER plans".