Overfunded plan and excise tax

[retbenser]

Given an overfunded plan - due to contribution = 150% of FT

The owner dies and the assets is rolled over to an inherited IRA of a child.

Is there an excise tax in this situation? Is there a "reversion of asset"?

Thanks for all responses.

[ETA Consulting LLC]

Yes. There is typically an excise tax (10%) to non-deductible contributions made to qualified plans. There is also a 6% excise tax for overdeposits made to an IRA (excess amounts rolled over and not promptly removed). We also know that excise taxes are not abated under VCP. Not sure what the appropriate remedy might be, but there always is one depending on the details.

Good Luck!

[mwyatt]

You are referencing "over funded plan", by which I assume you are talking about comparing the present value of the maximum benefit allowed under IRC 415 v. plan assets. FT isn't relevant in this situation. Presumably in your situation death benefit is PVAB and excess assets are reallocated to participants. If you had assets in excess of the PV of 415 max benefit, then these were not allowed to be reallocated to participants (or beneficiaries) and were required to revert to the Employer. Excess tax in this situation could range from 20% to 50%, dependent on facts and circumstances. More information is needed.

[retbenser]

Yes. There is typically an excise tax (10%) to non-deductible contributions made to qualified plans. There is also a 6% excise tax for overdeposits made to an IRA (excess amounts rolled over and not promptly removed). We also know that excise taxes are not abated under VCP. Not sure what the appropriate remedy might be, but there always is one depending on the details.

Good Luck!

I am talking about the 50% excise tax on reversion on assets.

When there is a reversion of excess assets to the employer, there is an excise tax of 50% on the excess assets.

In the situation above (where the owner died and the assets rolled directly over to the child's IRA), is there an excise tax (50%)? Is there a "reversion" of asset?

Thanks.

[retbenser]

You are referencing "over funded plan", by which I assume you are talking about comparing the present value of the maximum benefit allowed under IRC 415 v. plan assets. FT isn't relevant in this situation. Presumably in your situation death benefit is PVAB and excess assets are reallocated to participants. If you had assets in excess of the PV of 415 max benefit, then these were not allowed to be reallocated to participants (or beneficiaries) and were required to revert to the Employer. Excess tax in this situation could range from 20% to 50%, dependent on facts and circumstances. More information is needed.

Yes -- I am comparing the assets to the PV of 415 limits.

In the situation I described, the owner (employer) died and the asset is rolled directly to the child's inherited IRA.

My question is: is there a "reversion" of asset to the "employer"? If not, do we conclude there is no 50% excise tax?

Thanks.

[SoCalActuary]

You have an additional problem:

The distribution was limited to the 415 lump sum, under the terms of the plan. The excess assets above 415 are not distributable.

Further, there is an additional tax for excess distributions to HCE's. See reg 1.72-17(e).

If the excess assets were transferred to a qualified replacement plan instead of the IRA, you would have time to fix this.

[ETA Consulting LLC]

Yes. There is typically an excise tax (10%) to non-deductible contributions made to qualified plans. There is also a 6% excise tax for overdeposits made to an IRA (excess amounts rolled over and not promptly removed). We also know that excise taxes are not abated under VCP. Not sure what the appropriate remedy might be, but there always is one depending on the details.

Good Luck!

I am talking about the 50% excise tax on reversion on assets.

When there is a reversion of excess assets to the employer, there is an excise tax of 50% on the excess assets.

In the situation above (where the owner died and the assets rolled directly over to the child's IRA), is there an excise tax (50%)? Is there a "reversion" of asset?

Thanks.

I had gathered that after mwyatt posted. My apologies for misreading the question.