Excise Tax on Termination of Cash Balance Plan

[dmwe]

I have a client with a Cash Balance plan that is only one year old. He's been given a range of contributions for 2009 and I've told him that anything over the minimum contribution would basically go toward investment gains in future years, thereby possibly decreasing the contribution range in the future as well.

If he consistently funds the plan over the minimum amount and an excess of dollars accumulates in the plan and he decides to retire and terminate the plan, what is the excise tax for the excess funding?

Thanks

[david rigby]

...toward investment gains in future years...

Losses?

...what is the excise tax for the excess funding?

Can't be determined yet (other than the percent in IRC 4980). There may not be any excess, especially if the plan is amended to increase the benefit to "use up" the excess.

[dmwe]

That thought did cross my mind that an amendment could be used to allocate any excess. Otherwise, would it be a 50% excise tax?

[david rigby]

Might be 50%, but not necessarily. Could be 20%. See IRC 4980(d)(1) and (d)(3).

Is this a one-person plan (or possibly owner plus spouse)? If so, then no discrimination issues, just 415 limits.

[ScottR]

The surplus could also be transferred directly to a qualified replacement DC plan, where it would be allocated like employer contributions over a period of 7 years or less. There would be no excise tax or ordinary income tax on the transfer.

.. Scott