Bequest to qualified defined benefit plan

[Guest sonyasingla]

Company acquires another company and establishes a qualified replacement plan under Code Section 4980. Owner of the acquired company has provision in will that provides upon his/her death, all of his/her stock in the company is to be held for his/her spouse’s lifetime, and then after the spouse’s death the shares go to the company’s qualified defined benefit plan. Are there any prohibitions on a qualified defined benefit plan receiving a bequest of stock?

[david rigby]

Company acquires another company ... Owner of the acquired company....

If the company was acquired, how does the "owner" still have any stock?

[Andy the Actuary]

Perhaps a more general question. Is it kosher for my pension plan to credit a gift (check) from Sonyasingla with whom I have no affiliation nor does the checkwriter have any interest in the plan as participant, beneficiary, or alternate payee?

[QDROphile]

Would the gift be treated as discharging an obligation of the emplopyer? Would it be treated as an employer contribution with respect to funding and funding limits? If the stock is stock of the plan sponsor, what are the consequences if the amount of stock causes the employer securities held by the plan to exceed the limit?

[Guest sonyasingla]

Clarification - "owner" cashed out his stock in the acquisition - it is a cash bequest to the plan

[Belgarath]

Let me see if I've got this right. Probably I don't.

Let's say I have a bunch of money in my bank account - which came from Corporation A purchasing my stock in Corporation B. Under the terms of my will, if I die, this money is transferred to a defined benefit plan.

1. Is this approximately the situation in question? If not, what is the actual situation? Maybe there's a lot more to this than what you've posted?

2. Assuming that this is the situation, then no, the plan can't accept the bequest. Qualified plans may only accept certain contributions/rollovers as provided for under the IRC, and this ain't one of them.

[Guest sonyasingla]

These are all of the facts that are available to me at this time: Corporation A acquires Corporation B. Corporation B’s defined benefit plan terminates with an excess of $1M after satisfying all liabilities. $250K (the amount required to be transferred under the asset transfer requirement) is transferred to a defined contribution plan that meets all of the requirements to be a qualified replacement plan under Code Section 4980, and the plan is a 401(k) with a match – the match for the next 7 years is funded through the $250K. The $250K transferred is not included in the employer’s income, is not subject to the Code Section 4980 reversion excise tax, and is not deductible by the employer. The employer includes $750K in income ($1M minus $250K) and pays a reversion excise tax of $150K (20% of $750K). Founder of Corporation B has provision in will that upon Founder’s spouse’s death, money (which came from Corporation A purchasing Founder’s stock in Corporation B) is transferred to the qualified plan.

[david rigby]

Founder of Corporation B has provision in will that upon Founder’s spouse’s death, money (which came from Corporation A purchasing Founder’s stock in Corporation B) is transferred to the qualified plan.

No. As Belgarath states, a plan accepts contributions from its sponsor, which is (probably) deductible by the sponsor. Transfers to a qualified plan can only come from another qualified plan. If the (now former) owner wants to use any portion of his assets to benefit his former employees, he can do so thru his will but not thru the plan.

[jpod]

The estate planning is a bit weird, maybe terrible, but aside from that, is there really something in the IRC that prevents a 401(a) plan from accepting a gift/bequest such that it would adversely affect the plan's tax-qualified status? Assuming the answer is "no," why wouldn't it be "other income" rather than some sort of disquised or constructive contribution?

[Guest sonyasingla]

Founder of Corporation B has provision in will that upon Founder’s spouse’s death, money (which came from Corporation A purchasing Founder’s stock in Corporation B) is transferred to the qualified plan.

No. As Belgarath states, a plan accepts contributions from its sponsor, which is (probably) deductible by the sponsor. Transfers to a qualified plan can only come from another qualified plan. If the (now former) owner wants to use any portion of his assets to benefit his former employees, he can do so thru his will but not thru the plan.

Do you have a legal citation? No deduction will be taken in this case.

[masteff]

If he's really serious about doing this, I'd suggest he file for a private letter ruling. Considering the potential worst case scenarios (e.g., plan disqualification and excise taxes), it's worth the price to know if it's going to work or not.

Or for the price of filing a PLR he could set up a special trust just to benefit his former employees. That way the money won't also go to benefit other plan participants who weren't his employees. Maybe give the trust a 20 year life and disburse to the employees at the earlier of 20 years or the employee attaining age X. He could contact a "community foundation" in his area and they might agree to administer it if he wanted to put some additional $ in and set it up as a charitable remainder trust (still funded by a bequest).

[Guest sonyasingla]

Or for the price of filing a PLR he could set up a special trust just to benefit his former employees. That way the money won't also go to benefit other plan participants who weren't his employees. Maybe give the trust a 20 year life and disburse to the employees at the earlier of 20 years or the employee attaining age X. He could contact a "community foundation" in his area and they might agree to administer it if he wanted to put some additional $ in and set it up as a charitable remainder trust (still funded by a bequest).

We are past the planning stages. We represent the plan and want to know if there is anything prohibiting us from taking this bequest.

[masteff]

So are you saying the person is deceased and the executor has contacted you to make delivery of the bequest? If you're at that stage, then you should spend the money to consult w/ an ERISA attorney.

[GMK]

Agreed. Ask your ERISA attorney what, if any, prohibitions may apply.

And is the spouse in post #1 also deceased? (not that it matters, really)

[Bird]

I've been following this with some bemusement - I mean, what was he thinking, and what screwball lawyer wrote this up? (or is this a hoax, but how is this any fun?!) I suppose the proverbial ERISA attorney route is the way to go, but I can see why you posted it here.

I think it's worth noting that the original post says the money goes the company's defined benefit plan, which no longer exists. IMO, it's more than a stretch to say that it should go to the qualified replacement plan - the word "replacement" does not mean it is a continuation of the same plan. Original intent (misguided as it may have been) may have been to assure adequate funding of the DB plan; this is a whole 'nother result.

There's a very strange mix of precision and vagueness in all of this...

[david rigby]

Re-reading this was bizarre.

In Post # 7, the writer suggests that $$ in a trust/bank account could be "transferred" to a qualified plan. All the commentary overlooked the horrible result: changing after-tax money into pre-tax money.

Perhaps the original writer can tell us what actually happened. Inquiring minds want to know.