Unreduced early at termination to avoid over-funding

[dan.jock]

I have an owner that has a 12,000 AB at age 55 which is about near what the 415 dollar limit would be reduced to age 55. Plan wants to terminate and if I value the 12,000 as deferred to NRA (62), the plan is over-funded. What's to stop us form amending the plan to provide for an unreduced early at age 55? Applicable to all participants.

[Calavera]

Is it owner only plan?

[Lou S.]

I think there are 2 things to be concerned with -

1 is the payout still under the 415 limit.

2 would this be a discriminatory amendment in practice

There may be some other issues I'm not thinking of at this time.

Is there a problem with simply allocating the excess assets to participants in a nondiscriminatory manner up to the 415 limit, assuming the document so provides?

[david rigby]

Just so we understand the orginal post, what exactly is meant by "...a 12,000 AB at age 55..."?

Specifically, is it an early retirement benefit payable assuming actual DOR = 55?

Benefit earned thru age 55, but payable at a later NRA?

Something else?

[dan.jock]

It is an owners-only plan. AB at age 55 currently payable at age 62. No early retirement in the plan. I figure 12,000 monthly is within the 415 dollar limit reduced 7 years. If we can amend to provide for unreduced early, the payout will be 12,000 * imm factor at age 55 which is more than def-to-62 obviously. If the AB was 17,500, the issue would be moot, but in this case, using an unreduced early makes the full 415 benefit at age 55 payable.

It's kind of like taking a back door into an age 55 NRA. Since the NRA-62 rule is primarily pointed at in-service distributions, I don't see anything theoretically wrong with this approach. The only thing I can think of is since I want the 12,000 AB to be within the 415 dollar limit, I would have to make sure ppt has 10 YOP for the full limit to apply before the 7-yr reduction.

[Calavera]

1. Need to be sure that plan is over 80% funded after amendment and before the owner's retirement assuming everybody retiring at age 55 with unreduced benefit.
2. Need to be sure that plan is over 110% funded after the owner's retirement.
3. Language of the amendment should mention that benefit are unreduced at early retirement, but still limited by 415.
4. When plan is terminated, remember to pay everybody out by giving present value of benefits deferred to 55.

5. Need to be sure that accrued benefit and lump sum payment are under 415

Alternatively, you can amend the lump sum definition to be greater of 417(e) rates and arbitrary low rate that is enough for your purposes and still keep lump sum payment under 415. Everything above will still apply.

[Effen]

Dan confirmed it was an "owner only" plan, therefore I don't think the first two points are really applicable if the plan is terminating.

[Calavera]

Dan said "applicable to all participants" and also "owners only". So I assume there are multiple owners and plan continue to exist for some time. It wasn't clear if plan termination will be somewhere in the future after the owner's retirement, or if all actions occur at the same time as part of the plan termination. So if owner plans to "retire" first, then 110% rule would still apply.

[dan.jock]

Thx all. We actually have a number of plans that are overfunded when looking at deferred-to-62 factors but a straight reduction of the 415 dollar limit to the owners current age would render the plan distributable. (if that's a word) So it looked shifty in my replies above because I am thinking through the various scenarios; some with EE's, some without, and some with multiple owners where only one will retire. Lou and Calavaera's numbered responses are very helpful. Overall, I think I am giving a yellow light to the unreduced early approach. It's doable for the owners-only plan. With EE's, careful on non-discrimination. In all cases, watch for 80% and 110% as appropriate. And also pay close attention to plan language to ensure it is saying exactly what we are doing.

[Effen]

Sorry about that Calavera - looks like you read it correctly. I wasn't thinking he could be talking about multiple plans or multiple owners.

Sounds like Dan has a better understanding of the situation.

[Calavera]

No problem Effen. I wasn't thinking about multiple plans either, just tried to cover all the bases. Looks like it worked.