Excess Assets and Employee Mandatory Contributions

[AndyH]

Maybe this belongs in the termination thread, but it's so obscure that I think there is a better chance of somebody here having an informed opinion.

DB plan with excess assets terminates. Plan had mandatory employee contributions years ago and many of those with employee contributions remain as participants.

Employer wishes to transfer 100% of excess assets to a qualified replacement plan.

Must part of the excess assets be allocated to employees with mandatory employee contributions or may all of the excess be transferred? There will be no asset reversion to the employer.

ERISA 4044(d) seems to require a prorate excess allocation based on employee contributions in the case of a reversion to the employer, not a transfer to a replacement plan. Is this required under some other provision of the law? Is a transfer to a qualified replacement plan a reversion to the employer for this purpose?

[My 2 cents]

I don't see how a transfer to a qualified replacement plan could be seen as an employer reversion. They get nothing back, right?

Equity pretty much demands that those who had made employee contributions, which helped foster the surplus, should get a share of the surplus over and above reallocations.

ERISA 4044(d) is law. Why would there have to be other provisions in the law addressing this? If 4044 says a proportionate share goes to those with accumulated employee contributions, do it. The remainder can be transferred to a qualified replacement plan.

[david rigby]

That's how I remember it.

Don't forget: the mandatory EE contributions were after-tax, so they come out non-taxable, but any allocation of excess assets will not be after-tax.

[AndyH]

4044 says employees get a share of excess if there is a reversion to the employer. There is no reversion here IMO.

[My 2 cents]

This is what I see in Section 4044 concerning mandatory employee contributions and excess assets (paragraph (1) being the paragraph about when excess assets may be distributed to the employer):

"Before any distribution from a plan pursuant to paragraph (1), if any assets of the plan attributable to employee contributions remain after satisfaction of all liabilities described in subsection (a) of this section, such remaining assets shall be equitably distributed to the participants who made such contributions or their beneficiaries (including alternate payees, within the meaning of section 1056(d)(3)(K) of this title)."

As I see it, first you determine if any assets attributable to employee contributions remain after satisfaction of liabilities, then you distribute them in an equitable fashion to those who made such contributions, THEN you can look at distributing what remains to the employer. So before you deal with the excess attributable to employer contributions, you deal with the excess attributable to employee contributions. Having an actual employer reversion is not the first step in allocating assets to the contributing employees.

[AndyH]

Thanks for the comments.