Overfunded Frozen DB Plan

[Doghouse]

We (TPA) have a client with a DB plan that has been around for 2 years. While originally, the only employees/participants were the two shareholders and their spouses, things suddenly took off and they found themselves with a couple hundred employees. While it was active, the plan provided benefits at the 415 limit level. The plan was frozen before any of these new employees satisfied the eligibility requirements (which would have been 1/1/10).

My problem is that for 2009, the client made the maximum deductible DB contribution, which included a signfiicant cushion amount. So now, this frozen plan, which will likely never be resuscitated, is signficantly overfunded.

If the client reallocates these excess assets to plan participants pursuant to some future plan termination, the 415 limits will have grown enough (through additional years of participation) to accommodate it, but will that allocation constitute an accrual in that future year, that would have to be subjected to 401(a)(26), 410(b), and 401(a)(4)? If so, considering the other employees, I don't see how it can possibly pass muster. Am I wrong?

[My 2 cents]

Presuming that the plan is intended to be a qualified plan, and the permanence requirement is not an issue, I would say that any allocation of excess assets when a plan terminates must be made on a non-discriminatory basis. It is not my understanding of that requirement that such an allocation is limited to employees who were participating in the plan, but would be measured on a basis taking into account the sponsor's employee population. Not necessarily across the board, but something that would be considered acceptable under Code Sections 401(a)(4) and 410. Increasing benefits only for people who had been limited by Section 415 is probably not going to fly.

Please be aware that the IRS probably considers recognizing increases in 415 limits as establishing that the affected employees benefit under the plan, which could do all sorts of things (for example, subjecting the plan to coverage and participation and top-heavy accruals etc.).

At the risk of being overly naive, if the enterprise is doing that well, is there nothing that can be spared for the rank and file?

[JAY21]

I don't have a great solution to accomplish what you want to accomplish, but maybe the next best thing.....

I wonder if the IRC 4980(d)-Qualified Replacement Plan option might be a good Plan B option in this situation (though you'd still have to allocate some of the excess assets transferred to a group of employees that pass discrimination testing). One of the requirements of the QRP option is you have to cover 95% of the same participants that were in the prior DB plan, which in this case I think you would only count the people in the DB plan before the freeze for the 95% qualifier, but then you have 7 years to allocate the excess assets to the eligible employees in the PS plan which would cover an expanded group due to the size of the employee group. Revenue Ruling 2003-85 expands the QRP option so that up to 100% of the excess assets could be transferred to a QRP (where as 4980(d) itself initially was limited to 25% of the excess).

Now this doesn't accomplish what you want it to, it doesn't allow you to give all the excess assets to the original plan participants, but I think you can use a cross-testing/job classification for your PS allocations and it might go further for employee relations to give a modest amount under the PS plan over several years to a larger group of employees than simply amending the DB plan to use up the excess assets in a 1-year accrual for an expanded group of employees. Just a Plan B option to consider that at least might buy the owners some good will with the employees over a longer period of time than a 1 year shot.

I don't see any way to get it all to the original plan participants due to coverage/discrimination rules that will kick in.