Pre-Termination Restrictions on Distributions to HCEs

[Andy the Actuary]

May I presume that a DB plan that covers only HCEs is not subject to the restrictions on pre-termination distributions to HCEs? I.e., these rules are to prevent discrimination against NHCEs, not against HCEs.

Even though the plan document contains the boiler plate language (the IRS will likely not approve without). may I presume it does not apply? That is if an HCE were to die, we could pay the benefit even though the plan is not funded 110%? Obviously, it's undesirable to have the plan that provides the maximum statutory benefit funded 110% owing to the excise tax implications on plan termination.

Any thoughts about going against my standard bromide of "you must follow the plan document?" Has anyone walked down this road?

[Mike Preston]

You may not. Strange as it may seem, the IRS has stated that they intend to apply that provision even in a 100% HCE plan, due to the fact that there is a possibility that someday, an NHCE might enter the plan. [Don't shoot me, I'm just the messenger.]

[Guest Sieve]

I don't have a cite, but I presume that your presumption is presumptuous. You cannot be sure that NHCEs will not participate in the plan at some time in the future, and the purpose of the pre-termination restrictions (Treas. Reg. Section 1.401(a)(4)-5(b)) are to protect distributions to NHCEs, even, presumably (!), future NHCEs.

But, you might be able to request special dispensation: "This paragrah . . . does not apply if the Commissioner determines that such provisions are not necessary to prevent the prohibited discrimination that may occur in the event of early termination of the plan." (Treas. Reg. Section 1.401(a)(4)-5(b)(1).)

You don't have to fund to 110%. The HCE can simply roll to an IRA, add extra $$ from another IRA or from a rollover from another plan, and use the IRA as security (reducing on an annual basis) for the appropriate period of time. It's a royal pain, but I don't see an exception.

[Andy the Actuary]

Thank you for your comments.

However, I derive great pleasure from shooting the messenger. Especially, since I make my living by flag-pole sitting and there just ain't room at the top for an NHCE.