415 Max Lump Sum for Deceased Participant

[Guest pm01]

A small plan has no active participants. Two of the participants terminated many years ago and have not been paid out. The third participant, the owner, died about a year and a half ago. The estate of the owner would like to terminate the plan and pay everyone. Plan assets exceed the PVAB. We would like to revert excess assets to participants pro-rata based on PVAB. The deceased owner will be limited by the 415 Max Lump Sum.

Do I calculate the 415 Max LS as if distribution would have occurred on the date of death one and a half years ago? If so, can I add interest (and at what rate) to the actual date of distribution? Or, do I base the calculation on what his age would have been at the time of actual distribution if he had been alive? Does the beneficiary's age come into play at all?

Assuming I figure out how to caluclate the 415 max properly, what if there are left over assets after the owner's beneficiary is paid the max lump sum? Do we need to make an additional allocation to the other two participants? Or, does the rest of the excess revert to the employer?

[David MacLennan]

First, what does the plan document say the death benefit shall be? Your post suggest that you may be assuming it is just the PVAB. Pay particular attention to the distinction between pre and post retirement death benefits in your document, and how pre and post retirement is defined. In small DB plans, post-retirement death benefits are normally only what the elected annuity form provides, but special "ancillary" death benefits can also be provided.

Your client probably would prefer that the owner's beneficiaries be given as much of the plan assets as possible. Have you considered amending the plan to allow for a (larger) uninsured death benefit? Your post also suggests that you may not be aware that death benefits are not limited by 415 - they are only limited by the incidental death benefit rules. Although it is unusual to add a death benefit post-death, it is not unheard of. You could submit it as part of your plan termination 5310. Since this is not a routine plan termination and you would be navigating some gray areas with the death benefit amendment, the client should get ERISA legal counsel.