Merge Qual Replacement plan into new DB

[shERPA]

An employer had a substantially overfunded DB plan that was terminated, with the excess transferred to a new DC QRP. Unfortunately it appears that the excess assets will not be used up over 7 years due to anticipated low ongoing compensation and application of the 415 limits.

However due to historical high-3 compensation averages, it does appear there is room under 415 to use up most or all of the excess assets over the next few years in a DB plan. So we are looking at recommending the employer establish a new DB plan and merge the DC plan into it, along with the QRP suspense account, and then provide maximum DB 415 accruals for a few years to use up the excess.

Does this work?

IRC 414(l)-1(l) clearly allows the merger of DB and DC plans, but doesn't provide a lot of detail, certainly nothing that addresses the treatment of the QRP suspense account. There are some small DC account balances in the QRP due to the first year allocation of the suspense account. Seems to me we could probably treat these as 414(k) accounts in the DB plan.

All participants are already 100% vested in everything so no issues there.

Yes, this should have been looked at before the first DB plan was terminated, but that's a different issue. Thanks.

[Belgarath]

I don't know the answer, but I find the language somewhat puzzling. It appears to say that it is ok to "merge" a DB into a DC, by "converting" the DB to a DC. How does this square with ERISA 4041(e)? I realize you are proposing the opposite, but it makes me wonder...

[david rigby]

IMHO, that subsection 1(l) exists only because someone at the IRS was trying be generic, with no understanding of the practicalities. In 35+ years, I've never met an actuary or ERISA attorney who would recommend this "merger".

But let's ask a different Q: Is the QRP finalized or still pending? Could the QRP be a DB plan?

[shERPA]

The QRP is a done deal.

Not really sure why the merger couldn't be done. Absent the QRP suspense account, the practicalities don't seem that tough. However absent the QRP suspense account, I don't see that there is much reason to do it, simply terminate the DC and set up a DB.

The only sticky wicket I see is the 1.414(l)-1(d) requirement that "account balances" equal plan assets. How does this work with the QRP suspense account? It is an account balance, specifically created pursuant to the requirements of 4980 and the 414 regs don't say "participant account balances". So if we consider the suspense account then that requirement of 414 is met. Unless the purpose of that requirement is specifically to preclude something like this, but I don't think that's the case since these 1979 regs pre-date the QRP concept.