Termination of a Frozen Defined Benefit Pension Plan with Excess Asets

[Guest David B]

A defined benefit pension plan is currently frozen. The plan covers the owner & his wife and two nhces. Even though the plan has been frozen for a few years the sponsor is still making contributions as allowed under 404.

The two nhces are eventually paid out their present value of accrued benefits. At the time of their distribution the plan had excess assets. In a subsequent year (i.e the 2 nhces had been paid out in some prior year) the plan, which is still over funded, is terminated and the excess assets are allocated to the owner & his wife and distributed. The amounts distributed are under the 415 limits.

Is there an issue with 401(a)(4) in particular or any other qualification issue?

[My 2 cents]

Possible 401(a)(4) issue concerning timing of plan termination, since appearance is that ownership may have deferred the termination of the plan until after the nhces had terminated and were paid out, in order to avoid allocating any of the excess assets to them. Timing of amendments is a facts and circumstances determination.

[AndyH]

Plus the excess allocation itself must pass 410(b) and 401(a)(4)

You have not stated whether the NHCES

terminated or whether there are other non excludable employees

[My 2 cents]

I was presuming that the NHCEs had terminated (else how could they have been paid out?) and that there remained only the owner and the owner's spouse.

[jpod]

Perhaps AndyH was thinking what I am thinking. Are there currently employed NHCEs who aren't in the plan (yet) because they were hired after the freeze? When you allocate surplus assets i believe you have to take them into account for 401a26 and 410b purposes. Maybe top-heavy issues too.

If this is not the case, factors against the timing of the termination being discriminatory would be: the two NHCE participants resigned, or were let go long ago; employer is now getting ready to be sold or go out of business.

[Guest David B]

Thanks to

Possible 401(a)(4) issue concerning timing of plan termination, since appearance is that ownership may have deferred the termination of the plan until after the nhces had terminated and were paid out, in order to avoid allocating any of the excess assets to them. Timing of amendments is a facts and circumstances determination.

Plus the excess allocation itself must pass 410(b) and 401(a)(4)

You have not stated whether the NHCES
terminated or whether there are other non excludable employees

I was presuming that the NHCEs had terminated (else how could they have been paid out?) and that there remained only the owner and the owner's spouse.

Perhaps AndyH was thinking what I am thinking. Are there currently employed NHCEs who aren't in the plan (yet) because they were hired after the freeze? When you allocate surplus assets i believe you have to take them into account for 401a26 and 410b purposes. Maybe top-heavy issues too.

If this is not the case, factors against the timing of the termination being discriminatory would be: the two NHCE participants resigned, or were let go long ago; employer is now getting ready to be sold or go out of business.

Thanks to everyone for your input. To make things clearer: 1) The 2 NHCEs are paid out as a result of separation from service. 2) During the period that the plan has been frozen no other employees would have entered the plan if the plan was not frozen. 3) As for top heavy, the one NHCE accrued more than 20% before the plan froze, the other nhce did not. I thought that under EGTRRA if no Key is accruing a benefit then the non keys wouldn't accrue a TH minimum either. 4) As far as timing of the plan termination, the assumption is that either the plan will terminate the year following the last NHCE distribution or it might terminate several years later. It sounds like that the further out the plan is terminated relative to the last distribution the better.