Distribution Form for Lump Sum that is Lower than Plan Assets

[Pension RC]

A one-man plan is terminating. The 417(e) lump sum (which exceeds the lump sum based upon plan assumptions) is less than the assets, which are less than the 415 limit. The plan document states that excess assets are returned to the employer (who is the participant). When preparing the distribution election form, should the amount of the lump sum be the 417(e) lump sum? The current value of assets? If it should be the 417(e) lump sum, are the remaining assets simply transferred to the employer's business account? His personal account?

Thanks for any responses!

[Lou S.]

Why not amend to have excess assets go to the participant? Seems silly to pay a confiscatory reversion tax given the facts you lay out.

[My 2 cents]

Please note that I don't work on individual or business tax calculations. This is my understanding of how things would work.

If I understand your A is less than B is less than C discussion, is there any reason not to amend the plan to increase benefits enough to make the 417(e) value equal the assets? The amendment would not result in the plan benefit exceeding the 415 limit. Watch out for the 10 years of participation rule in particular, however.

If the benefit is not changed, it should be clear that the payment in excess of the plan benefit is not a benefit payment, it is a reversion to the sponsor. That piece cannot be rolled over to an IRA because it is not part of the benefit distribution. It would have to be reportable on the employer's taxes, and a reversion excise tax might be due, as well as the reversion being treated as taxable income to the employer. Whether to put it into the personal account or the business account would have to be decided on the practices being followed. I would suspect that putting it into the business account would be the sounder choice.

[BG5150]

Is the business closing? Could you open up a qualified replacement plan with the excess assets?

[My 2 cents]

Is the business closing? Could you open up a qualified replacement plan with the excess assets?

Even if you did, there would still be some excise tax, just not as much. Is there any reason to not amend the plan to soak up all the excess so it becomes part of the benefit distribution?

[david rigby]

Agree. As long as the 415 limit is not violated, the simplest action is to amend the plan to increase benefits, thus "using up" the excess.

[Calavera]

If plan is already frozen, the easiest way would be to amend the plan lump sum rates.

[My 2 cents]

If plan is already frozen, the easiest way would be to amend the plan lump sum rates.

To what extent would it matter if a frozen one-person plan was unfrozen to use up overfunding?

[Calavera]

It is just harder to unfreeze the plan and balance the benefit accrual with the current asset to get rid of overfunding. It is easier and more precise to solve for the lump sum rate right before the distribution. So instead of using 417(e) rates it will say 417(e) or #.##% whichever produce higher lump sum.