415 Limit

[emmetttrudy]

Sole propr maintains a db and 401k plan. he wants to temrinae the db plan. due to some asset gains the amount of asssets in the db is higher than his 415 maximum lump sum. can he roll the difference into his 401k plan, which is not terminating, and take a distribution of the 415 max, without any penalty?

[emmetttrudy]

From the EOB...

5.g.2) Tax treatment for transfers exceeding 25% of the surplus. Rev. Rul. 2003-85 discusses the tax consequences of transferring more than 25% of the surplus to the qualified replacement plan, as well as the application of IRC §4980 to any portion of the surplus that is not transferred.

(1) The transferred amount, including the portion that exceeds 25% of the total surplus, is not treated as a reversion to the employer for tax purposes. That means that none of the transferred amount is includible in income under IRC §61, none of it is deductible under IRC §404 (or any other tax code section), and no reversion excise tax applies under IRC §4980 with respect to the entire transferred amount.

So does this mean if there is $100,000 surplus, and all of it is transferred to a replacement plan then none of the $100,000 would be subject to excise taxes?

[Andy the Actuary]

From the EOB...

5.g.2) Tax treatment for transfers exceeding 25% of the surplus. Rev. Rul. 2003-85 discusses the tax consequences of transferring more than 25% of the surplus to the qualified replacement plan, as well as the application of IRC §4980 to any portion of the surplus that is not transferred.

(1) The transferred amount, including the portion that exceeds 25% of the total surplus, is not treated as a reversion to the employer for tax purposes. That means that none of the transferred amount is includible in income under IRC §61, none of it is deductible under IRC §404 (or any other tax code section), and no reversion excise tax applies under IRC §4980 with respect to the entire transferred amount.

So does this mean if there is $100,000 surplus, and all of it is transferred to a replacement plan then none of the $100,000 would be subject to excise taxes?

Great question. The IRS has vacillated on whether the 25% means exactly 25% or at least 25%. You may want to look to the attached IRS Rev. Rule 2003-85 and then get a legal opinion.

IRS_Rev._Rule_2003_85____Excise_Tax_on_Reversions.pdf

[chc93]

Great question. The IRS has vacillated on whether the 25% means exactly 25% or at least 25%. You may want to look to the attached IRS Rev. Rule 2003-85 and then get a legal opinion.

I also heard of the IRS uncertainty in these cases. However, we recently terminated a large DB plan with excess assets. 100% of the excess was transferred to their existing PS plan. The ERISA attorney for the plans was clear that transferring "at least" 25% of the excess reduced the excise tax to 20%, and further, transferring 100% (the "amount transferred" is not subject to excise taxes), resulted in $0 reversion to the employer resulted in $0 excise tax.

[frizzyguy]

Great question. The IRS has vacillated on whether the 25% means exactly 25% or at least 25%. You may want to look to the attached IRS Rev. Rule 2003-85 and then get a legal opinion.

I also heard of the IRS uncertainty in these cases. However, we recently terminated a large DB plan with excess assets. 100% of the excess was transferred to their existing PS plan. The ERISA attorney for the plans was clear that transferring "at least" 25% of the excess reduced the excise tax to 20%, and further, transferring 100% (the "amount transferred" is not subject to excise taxes), resulted in $0 reversion to the employer resulted in $0 excise tax.

I think that a large plan not at the 415 limit is pretty cut and dry and doesn't address a plan for a sole participant at the 415 limit. I think that transferring money over the 415 limit, or money that a sponsor isn't allowed to take seems like an exceeded 415 benefit limit and transferring it to a profit sharing plan still wouldn't remedy the situation. You can try it, but you are definitely playing audit roulette.

That being said, this happens from time to time and is a mess. Is the sponsor married? Does their spouse want to pick up some part-time work with a great retirement plan? Is the sponsor under 62 and can they delay payment a couple years? If they need the money, they can pay themselves an annuity and allow the plan to change forms of payment down the road. Is the amount of overfunding even worth the headache of administering a DB plan and should they just pay the excise tax?

It isn't fun when it happens but many solo db plans want to fund the maximum and invest aggressively and I'm sure most of you agree, we do not give investment advice.

[JAY21]

I guess I must disagree with the posts that transferring the excess above the 415 limit is aggressive. Where do you find that ? I've used Revenue Ruling 2003-85 several times in these situations. There is nothing in the Revenue Ruling or in the Code itself (IRC 4980(d)) that limits the availability of this option. Even the IRS is bound by the tax code and its own Revenue Rulings and I don't think you read into it more issues than it espouses.

I think this exact situation described works even under the spirit of the law since the excess that is transferred to a Qualified Replacement Plan (e.g., the 401k plan) and put into a suspsense account is then released and counts AGAINST the DC plan's 415© limitation under that plan so you are NOT able to receive both a maximum (49k) allocation of new contributions plus a maximum allocation (49k) from the suspense account since you have only 1 415 limit and the excess asset release counts against 415.

It's almost akin to pre-funding the DC plan since due to the 415 limits a small plan employer will likely now contribute less (or none) until it has used up most or all of the excess in the suspense account thereby limiting its tax deductions to the DC plan for a few to several years until the excess asset suspense account is exhausted (limited to 7 years generally).

You could argue that in the aggregate the government has lost less revenue due to fewer new DC plan contributions from this scenario than if the client had invested the DB plan in assets earning exactly 5.5% so the 415 limit was perfectly funded but no more. To me it's a win-win scenario as the client avoids excise taxes on over funding and the governement gives away less tax deductions due to new DC contributions until the excess assets (suspense account) is exhausted.

[chc93]

It's almost akin to pre-funding the DC plan since due to the 415 limits a small plan employer will likely now contribute less (or none) until it has used up most or all of the excess in the suspense account thereby limiting its tax deductions to the DC plan for a few to several years until the excess asset suspense account is exhausted (limited to 7 years generally).

I was discussing this in the office, and this "pre-funding" of the DC plan is what the IRS didn't like in the past. So, while everything "allows" it, it's still "pre-funding" the DC. Also as mentioned, if the excess transfer is large enough, there will not be any additional contributions to the DC plan until the excess is used up, for which a tax deduction has already been taken. So there is no real "abuse", except for the "pre-funding" ("earlier" tax deduction) issue... which may be viewed as "abuse"?

[SoCalActuary]

It's almost akin to pre-funding the DC plan since due to the 415 limits a small plan employer will likely now contribute less (or none) until it has used up most or all of the excess in the suspense account thereby limiting its tax deductions to the DC plan for a few to several years until the excess asset suspense account is exhausted (limited to 7 years generally).

I was discussing this in the office, and this "pre-funding" of the DC plan is what the IRS didn't like in the past. So, while everything "allows" it, it's still "pre-funding" the DC. Also as mentioned, if the excess transfer is large enough, there will not be any additional contributions to the DC plan until the excess is used up, for which a tax deduction has already been taken. So there is no real "abuse", except for the "pre-funding" ("earlier" tax deduction) issue... which may be viewed as "abuse"?

Jay has it right here. There is no abuse, except in the minds of those who do not understand it.

Sort of like the kid who says "No fair! They got an A on their test because they studied it."

[frizzyguy]

It's almost akin to pre-funding the DC plan since due to the 415 limits a small plan employer will likely now contribute less (or none) until it has used up most or all of the excess in the suspense account thereby limiting its tax deductions to the DC plan for a few to several years until the excess asset suspense account is exhausted (limited to 7 years generally).

I was discussing this in the office, and this "pre-funding" of the DC plan is what the IRS didn't like in the past. So, while everything "allows" it, it's still "pre-funding" the DC. Also as mentioned, if the excess transfer is large enough, there will not be any additional contributions to the DC plan until the excess is used up, for which a tax deduction has already been taken. So there is no real "abuse", except for the "pre-funding" ("earlier" tax deduction) issue... which may be viewed as "abuse"?

Jay has it right here. There is no abuse, except in the minds of those who do not understand it.

Sort of like the kid who says "No fair! They got an A on their test because they studied it."

I'm well aware of the rules involving excess assets after termination. I just, as I stated earlier, don't think they apply to assets in excess of the 415 limit. I still don't agree but we are all allowed to have our opinions. Have you ever seen this in an audit situation?

I'll throw a situation your way and you can tell me how you would handle it. A plan has an owner at the 415 limit and 25 staff members have all been getting .5% accruals and are therefore well below the 415 limit. The plan is overfunded at termination. Does the owner get any of the excess assets?

[Effen]

What does the document say about the allocation of excess assets upon termination?

[frizzyguy]

What does the document say about the allocation of excess assets upon termination?

You can pick in your response, it's just a hypothetical discussion.

[SoCalActuary]

It's almost akin to pre-funding the DC plan since due to the 415 limits a small plan employer will likely now contribute less (or none) until it has used up most or all of the excess in the suspense account thereby limiting its tax deductions to the DC plan for a few to several years until the excess asset suspense account is exhausted (limited to 7 years generally).

I was discussing this in the office, and this "pre-funding" of the DC plan is what the IRS didn't like in the past. So, while everything "allows" it, it's still "pre-funding" the DC. Also as mentioned, if the excess transfer is large enough, there will not be any additional contributions to the DC plan until the excess is used up, for which a tax deduction has already been taken. So there is no real "abuse", except for the "pre-funding" ("earlier" tax deduction) issue... which may be viewed as "abuse"?

Jay has it right here. There is no abuse, except in the minds of those who do not understand it.

Sort of like the kid who says "No fair! They got an A on their test because they studied it."

I'm well aware of the rules involving excess assets after termination. I just, as I stated earlier, don't think they apply to assets in excess of the 415 limit. I still don't agree but we are all allowed to have our opinions. Have you ever seen this in an audit situation?

I'll throw a situation your way and you can tell me how you would handle it. A plan has an owner at the 415 limit and 25 staff members have all been getting .5% accruals and are therefore well below the 415 limit. The plan is overfunded at termination. Does the owner get any of the excess assets?

Your scenario is different - allocation of excess DB asset on termination vs transfer of excess asset to replacement plan.

In no event do you allocate a dB benefit over the 415 limit. What does that have to do with this transfer?

[frizzyguy]

It's almost akin to pre-funding the DC plan since due to the 415 limits a small plan employer will likely now contribute less (or none) until it has used up most or all of the excess in the suspense account thereby limiting its tax deductions to the DC plan for a few to several years until the excess asset suspense account is exhausted (limited to 7 years generally).

I was discussing this in the office, and this "pre-funding" of the DC plan is what the IRS didn't like in the past. So, while everything "allows" it, it's still "pre-funding" the DC. Also as mentioned, if the excess transfer is large enough, there will not be any additional contributions to the DC plan until the excess is used up, for which a tax deduction has already been taken. So there is no real "abuse", except for the "pre-funding" ("earlier" tax deduction) issue... which may be viewed as "abuse"?

Jay has it right here. There is no abuse, except in the minds of those who do not understand it.

Sort of like the kid who says "No fair! They got an A on their test because they studied it."

I'm well aware of the rules involving excess assets after termination. I just, as I stated earlier, don't think they apply to assets in excess of the 415 limit. I still don't agree but we are all allowed to have our opinions. Have you ever seen this in an audit situation?

I'll throw a situation your way and you can tell me how you would handle it. A plan has an owner at the 415 limit and 25 staff members have all been getting .5% accruals and are therefore well below the 415 limit. The plan is overfunded at termination. Does the owner get any of the excess assets?

Your scenario is different - allocation of excess DB asset on termination vs transfer of excess asset to replacement plan.

In no event do you allocate a dB benefit over the 415 limit. What does that have to do with this transfer?

I don't think my scenario is different. Both involve excess assets left at termination that need to go somewhere. One scenario is a solo DB plan at the 415 limit and one is a plan with multiple employees and only one is at the 415 limit.

[SoCalActuary]

I don't think my scenario is different. Both involve excess assets left at termination that need to go somewhere. One scenario is a solo DB plan at the 415 limit and one is a plan with multiple employees and only one is at the 415 limit.

But it is different. Sorry, but you do not understand that one scenario delivers benefits in only the DB plan subject to a single 415 rule, while the other delivers benefits in two separate plans.

[FAPInJax]

OK. This is what I have gleaned so far:

1 Solo DB plan has PVAB in excess of 415 lump sum

Pay owner maximum lump sum and transfer excess assets to DC plan for subsequent allocation (within a 7 year period if I recollect)

2 Regular DB with owner at 415 lump sum and employees

Pay everyone out without amending the plan (since all excess monies would be allocated to the employees). Transfer excess assets to DC plan for subsequent allocation to all employees (within the above referenced 7 year period).

[frizzyguy]

I don't think my scenario is different. Both involve excess assets left at termination that need to go somewhere. One scenario is a solo DB plan at the 415 limit and one is a plan with multiple employees and only one is at the 415 limit.

But it is different. Sorry, but you do not understand that one scenario delivers benefits in only the DB plan subject to a single 415 rule, while the other delivers benefits in two separate plans.

I think I do get it, I never said anywhere that the benefits have to be given in the DB plan. In the situation I described, roll the money into a new plan. How would you divide the assets? That's all I'm asking. I am saying what I am saying because I think that in an audit situation, I think an auditor might see rolling excess assets to someone who already recieved their maximum DB benefit as a violation of 415 penalty.

If I were advising a client and we had explored every single option to the plan, I would tell them they could try and roll them into another plan but they should consult an ERISA attorney to cover my liability. I think that there is a lot of gray in the pension world and that this one fits into that category.

[SoCalActuary]

Good that you clarified your understanding of this issue.

The excess assets do not have to be reallocated in the DB plan if it met all the proper non-discrimination requirements, so you do not have to raise other participants up to their 415 limit. Each participant in the terminating DB got the benefit provided.

I see no moral ambiguity here.

[Effen]

The excess assets do not have to be reallocated in the DB plan if it met all the proper non-discrimination requirements, so you do not have to raise other participants up to their 415 limit.

Assuming the plan document calls for excess assets to revert the the employer.

[frizzyguy]

Good that you clarified your understanding of this issue.

The excess assets do not have to be reallocated in the DB plan if it met all the proper non-discrimination requirements, so you do not have to raise other participants up to their 415 limit. Each participant in the terminating DB got the benefit provided.

I see no moral ambiguity here.

I am accusing no one of immorality and I deeply apologize if that's how it came across. We advise clients of the option, the only issue isn't immorality, it's that the IRS might not like it.

When we have a plan that does this, I tell them some of their options such as, increasing benefits for a spouse, waiting a year or so depending on age and seeing what happens, paying fees out of assets, paying the 50% excise tax or rolling it into a qualified replacement plan. We always caveat the final option that they should get an outside opinion. Because the majority of our excess assets are small (we warn them in years upcoming about overfunding), it generally makes sense for them to pay their final fees with it and then just pay the 50% excise tax and be done with it.

[david rigby]

You know, if you leave those plan assets invested in the market, maybe the excess will take care of itself soon.

[frizzyguy]

You know, if you leave those plan assets invested in the market, maybe the excess will take care of itself soon.

I have seen accountants who can't see the forrest through the trees make that an honest suggestion.

[ScottR]

OK. This is what I have gleaned so far:

1 Solo DB plan has PVAB in excess of 415 lump sum

Pay owner maximum lump sum and transfer excess assets to DC plan for subsequent allocation (within a 7 year period if I recollect)

2 Regular DB with owner at 415 lump sum and employees

Pay everyone out without amending the plan (since all excess monies would be allocated to the employees). Transfer excess assets to DC plan for subsequent allocation to all employees (within the above referenced 7 year period).

I have no problem with #1.

IMO, #2 works only if the plan provides that surplus assets revert to the employer.

If the DB document says surplus goes to participants, then the employees would get all the surplus. (Ugh!) And any amendment of that provision may not take effect for 5 years.

This is precisely why I draft all DB plans to revert surplus to employer. It can be amended just prior to plan termination to give surplus to participants, if desired.

... Scott

[Earl]

I can't find any back up but someone suggested the transfer amount is reallocated and offsets the deduction amount rather then just applies to the allocation limit.

So if there is $100,000 transferred to a PS only plan and the person made $100,000.

Can he contribute $25,000 and then allocate $28,000 of the $100k to himself so he gets a 25% deduction and a $53,000 account addition?

Or does he get no deduction until used up and he can only allocate $25,000 to himself for the year?

Thanks!

[Effen]

I think that would be ok. The deduction limit and the 415 limit are two different things. As long as he doesn't exceed either, I think you are ok.

He could allocate $53 of the 100K transferred and take no deduction, or he could put in and deduct 25K and also allocate 28K, or probably anything in between as long as the transferred money is allocated within 7 years.

[AndyH]

One question I have always wondered about. What does "ratably" mean within the context of II below?

© Allocation requirements

(i) In general In the case of any defined contribution plan, the portion of the amount transferred to the replacement plan under subparagraph (B)(i) is—

(I) allocated under the plan to the accounts of participants in the plan year in which the transfer occurs, or

(II) credited to a suspense account and allocated from such account to accounts of participants no less rapidly than ratably over the 7-plan-year period beginning with the year of the transfer.

[Earl]

me, too.

In the 3 or 4 events I have had to do this I have ignored that issue.

[chc93]

One question I have always wondered about. What does "ratably" mean within the context of II below?

© Allocation requirements

(i) In general In the case of any defined contribution plan, the portion of the amount transferred to the replacement plan under subparagraph (B)(i) is—

(I) allocated under the plan to the accounts of participants in the plan year in which the transfer occurs, or

(II) credited to a suspense account and allocated from such account to accounts of participants no less rapidly than ratably over the 7-plan-year period beginning with the year of the transfer.

I think the key is "no less rapidly". So if $70,000 transfer, "ratably" over 7 years is $10,000 per year. So *at least* $10,000 has to be allocated each year. Just my thoughts...

[Belgarath]

I'm still trying to get a handle on one specific issue here.

So, you have one-person DB plan. Plan is overfunded, participant at 415 limit and past NRA. Also sponsors 401(k) plan. Client proposes to terminate DB plan and transfer excess assets to 401(k) plan as replacement plan under IRC 4980. So far, so good.

Question is: DB plan (pre-approved VS plan) currently provides for excess asserts to be reallocated to participants.

Can the assets be transferred under current language, or must it be amended to the other available standard option, which is to be returned to the employer? There's no "election" to transfer to a replacement plan available under the document.

It seems to me that either option available in the document is perhaps a little "off." The money isn't being returned to the employer, as it is being transferred to a replacement plan - although it COULD eventually revert, in part, to the employer from the replacement plan. On the other hand, the money isn't technically being reallocated to the participant under the DB plan (although it couldn't anyway, due to 415) but it will eventually wind up in the participants hands.

I'm leaning toward "it doesn't matter" and the transfer just takes place either way, but I wondered what anyone might have for specific experience or thoughts? Thanks.

[AndyH]

One question I have always wondered about. What does "ratably" mean within the context of II below?

© Allocation requirements

(i) In general In the case of any defined contribution plan, the portion of the amount transferred to the replacement plan under subparagraph (B)(i) is—

(I) allocated under the plan to the accounts of participants in the plan year in which the transfer occurs, or

(II) credited to a suspense account and allocated from such account to accounts of participants no less rapidly than ratably over the 7-plan-year period beginning with the year of the transfer.

I think the key is "no less rapidly". So if $70,000 transfer, "ratably" over 7 years is $10,000 per year. So *at least* $10,000 has to be allocated each year. Just my thoughts...

Makes sense. If literally true, it would be an additional condition beyond those in Effen's last comment.

[My 2 cents]

If it is a one person plan with more than enough money to pay for the 415 limit, is there a mandatory taxable reversion to the employer of the excess?

[Belgarath]

In the absence of a direct transfer to the replacement plan, I'd say yes. But it isn't going to the employer. Hence my question.