surplus issues

[Draper55]

basic db/dc combo..er has used cushion to advance fund db..now

would like to get out of the arrangement sooner than later..two questions.

1.)currently only lump sum ae is 417(e)..if plan is amended to use greater of 417(e) and some other rate(e.g. 3.5%)..how does one test for nondiscrimination...seems difficult to me...

2.)if the excess funding is transferred to 401(k) replacement plan and allocated over 7 years can this excess be used for any type er money(qnec,matching,prshar etc.)?

any thoughts are appreciated...

[My 2 cents]

It's a defined benefit plan. Are you sure you have excess assets? Even if it is a cash balance plan, it is easy to imagine the cost of paying the plan's benefits out being much more than the account balances. If it is not a cash balance plan, that is even more clearly true.

Remember - every participant in a terminating defined benefit plan (except a participant with a benefit worth under $5,000) has absolute authority to demand that an annuity be purchased from an insurance company (and it's of no concern to the participant how much more than the lump sum it will cost). The 417(e) value has little to do with the cost of the annuity. The sponsor has no control over the choices to be made by the plan participants and dare not take any actions intended to discourage the election of an annuity. If the participant and the participant's spouse do not both want a lump sum, it's off to the annuity marketplace you go, where you will have to pay whatever rates the insurance companies want to charge (with expense and risk margins etc.).

[AndyH]

1. For Nondiscrimination testing, a lump sum is not supposed to be reflected in testing, the QJSA is. Part of the reason is that the QJSA is supposed to be the most valuable benefit. But if you have a 3% (fixed) lump sum factor and a 7% (fixed) actuarial equivalence factor, I think you'd have a problem with the most valuable requirement. But if both sets of factors were 5% I don't think you would have an issue.

2. Apparently the IRS' interpretation is that the surplus may not be used for a match. You could use transferred surplus for profit sharing. Not sure about QNEC but I don't know any prohibition. You should research this issue.