Problem with surplus assets

[ScottR]

Hi all,

We have an overfunded, terminated DB plan with surplus assets, and we're looking for creative ways to avoid a reversion to the employer. A qualified replacement plan isn't viable, because the employer is now dormant and doesn't expect to have any payroll in the future. Allocating some of the surplus among the participants also won't work, because both participants (H/W) are already at 415 limits. Both are at the 100% of pay limits, and the plan's normal annuity form is J&S. The effective date of plan termination was 12/6/05, believe it or not.

I think we're going to buy a J&S annuity for the husband, because the premium will be much higher than his max permissible lump sum under IRC415. That works well because his wife is much younger than he is. But even after the purchase, there will be about $75k of surplus left. The wife doesn't want to annuitize any of her own benefit.

Here are a few random thoughts and questions. Any ideas that you might have would be most welcome.

- Am I correct that the 50% tax (vs. 20%) would apply to any reversion, since we're not able to allocate any of the surplus among the participants (already at 415 limits) and there can be no qualified replacement plan? These seems like a harsh result, but I don't see any relief provisions in the Code.

- Is it possible to use up more surplus by including a COLA in the annuity purchased for the husband? If so, are insurance companies issuing such animals? And how does the COLA typically work? A flat % per year? Must it be limited forever to increases in the 415 dollar limit?

- If we can demonstrate that husband and/or wife terminated employment with the Employer (a corp) prior to 2009, may we increase their percentage-of-pay limits for the period between year of termination and 2009? For example, if they terminated employment in 2006, may we increase their 415 limits to 100% x 195/175 of high 3 average comp? (they both had 10+ YOS)

TIA for your help and ideas.

Best!

Scott

[carrots]

Assuming that the business has been paying the investment, consulting, and admin fees, can the plan reimburse the business for those fees - perhaps going back many years?

[david rigby]

Paid up annuity merely helps the insurance company; does not help the ER.

Can you get a higher 415 limit by "unterminating" the plan? (Significant comp after 2005?)

Cover other EEs / family members?

Cover me?

[Blinky the 3-eyed Fish]

Paying out 4 years after the termination date to me equals a plan that is not terminated. But moving on from that...

- Am I correct that the 50% tax (vs. 20%) would apply to any reversion, since we're not able to allocate any of the surplus among the participants (already at 415 limits) and there can be no qualified replacement plan? These seems like a harsh result, but I don't see any relief provisions in the Code.

Correct.

- Is it possible to use up more surplus by including a COLA in the annuity purchased for the husband? If so, are insurance companies issuing such animals? And how does the COLA typically work? A flat % per year? Must it be limited forever to increases in the 415 dollar limit?

I am not expert enough to know exactly how the COLA increases work other than I know they can't exceed the adjusted limits. I believe too that one needs to be terminated to receive the increases, so for an owner-participant, that would mean the corporation would have to go bye bye.

- If we can demonstrate that husband and/or wife terminated employment with the Employer (a corp) prior to 2009, may we increase their percentage-of-pay limits for the period between year of termination and 2009? For example, if they terminated employment in 2006, may we increase their 415 limits to 100% x 195/175 of high 3 average comp? (they both had 10+ YOS)

Arguing that an owner-participant is terminated from his own corporation is not an argument I would make.

When it's all said and done and if you have excess, consider a mathematical exercise if they paid themselves some compensation and adopted a replacement plan. If they have no cash, maybe they need to take some of the pension money as a taxable distribution. They only need to take enough compensation so the DC allocation is under the 415 limit since you aren't taking a deduction for the allocation. It might be better than paying the excise taxes. Consult with their CPA too though to make sure the compensation payment won't violate any reasonable compensation rules.