Overfunded 1-part DB, Maybe

[Lou S.]

We have a 1 participant DB Plan that may be over funded by about $100K.

The plan was underfunded so he delayed terminating but then had some good investment results along with getting older than age 65 and now the assets exceed the maximum lump sum limit.

His 3 year high comp limit is only about $140K so unfortunately we are running into that cap on the lump sum.

The question I have is can he payout 1-year worth of anuity benefits as taxable income and then roll out the rest to an IRA or does this violate the §415 limits?

If he can't avoid the reversion, can he roll the excess to a qualified replacement plan and allocate to himself and avoid excise tax? He has never had any employees other than himself.

[Gary]

The paying of one year of annuity payments and the rest as a lump sum in the same year doesn't seem to cut it, as you would need to measure the sum of the two amounts and ensure that it does not exceed 415.

I suppose if he took annuity payments for a few years and then terminated the plan in a few years and received a lump sum he may be able to avoid the surplus. Of course he would need to keep the money in cash (i.e. no investment return).

A replacement DC plan may enable 46k to be deducted. Don't think a replacement DB plan would work, since Db 415 limit already reached.

[Andy the Actuary]

There's always the find-another-single-employer-with-an-underfunded-plan-and-merge to consider.

[Effen]

Aslo, the "qualified replacement plan" doesn't avoid the excise tax, it just reduces it.

[AndyH]

Effen, why would you say that?. He could transfer 100% of the excess into a DC replacement plan and allocate it over 2+years and avoid the excise tax. I think that is the way to go here.

[John Feldt ERPA CPC QPA]

AndyH is correct. It's okay to transfer the entire excess. Many years back, that was questionable because the rules stated it must be a transfer of 25%, which a literal interpretation meant exactly 25%. Now that's changed and 25% or more can be transferred and only the reverted amount gets taxed to the company/(or shareholders, partners, sole prop) and that reversion is also subject to the excise tax on top.

If the transferred amount does not get allocated in the DC replacement plan by the end of the seventh year, then perhaps the excise tax may apply then, but we've not run into that problem yet.

[Lou S.]

Thanks, that's pretty much what I thought, just was hoping I missed something.

We'll probably suggest to qualified replacement plan which should eat up the excess in 2 years.

[Effen]

I agree