Qualified Replacement Plan for 1 Participant?

[Dougsbpc]

A 1 participant DB will have excess assets of $50,000 (above his 415 limit).

Can:

1. A 1 participant corporation establish a qualified replacement plan (QRP)? The allocation(s) would only be made to the 1 participant of the DB who remains an employee of the corporation.

2. If #1 is possible, is there any time frame in establishing and transferring assets to the QRP? Would like to have him take an in-service distribution now (he is age 62) and leave the excess $50,000 in the DB for a few months until a QRP can be established.

Our understanding is that at least 25% and up to 100% of the excess can be transferred to the QRP. Then it must be either allocated in the same year transferred or over up to 7 years.

If #1 is possible, he may be able to take a $50,000 salary and allocate $50,000 in a profit sharing plan to himself and be done. No deductible problem as it is not deductible anyway and no 415 problem as up to 100% of salary can be allocated.

Thanks.

[John Feldt ERPA CPC QPA]

"he may be able to take a $50,000 salary and allocate $50,000 in a profit sharing plan to himself and be done. No deductible problem as it is not deductible anyway and no 415 problem as up to 100% of salary can be allocated."

Agree. Compensation must be reasonable, of course.

[Dougsbpc]

Thanks John

I did not find any timeframe when researching this. Does anyone think there would be a problem to first make an in-service distribution to the participant now, leave the excess in the DB plan for a few months and then have them adopt the QRP in a few months?

[John Feldt ERPA CPC QPA]

If the participant has met the plan's requirements to be eligible for an in-service distribution (e.g. is age 62 and the plan allows in-service at 62), then it may be very wise to pay it now before the participant gets older (the lump sum value of the 415 limit can and does decrease from age 62 to age 65).

Any remaining assets can be handled through the usual plan termination steps. You may want to include language with the plan's resolution to terminate that explains the plan sponsor's intent with regard to the handling of plan assets and make sure any existing plan language is amended to allow that to happen (many DB plans state that any excess asstes revert to the employer).

If the excess assets are transferred as soon as administratively feasible after the date of plan termination, then you should be okay. Don't move the money out until the official date of plan termination has occurred!

edit: typo

[david rigby]

Have you considered paying the accrued benefit (apparently, at or near the 415 limit) as an annuity benefit?

As pointed out, the LS can go down between 62 and 65, so why not just take the annuity now, and take a lump sum later?