Terminating Qualified Replacement Plan

[Monica Barnard]

Mr. Smith had a one-participant DB Plan which was over funded.  The DB Plan was terminated in 2014; all assets were transferred into a 401(k) Plan as a qualified replacement plan.  The over-funded amount was credited to a suspense account.  In 2015, a portion of the suspense account was allocated to Mr. Smith with the intent of allocating all of the suspense account within 7 plan years.  

Mr. Smith only paid himself each year on 12/31.  Contributions and suspense account allocations were based on that single pay date. 

Mr. Smith dies in 2016.  He had not taken any pay, therefore no allocation from the suspense account could be made.  Therefore any remaining amounts in the suspense account will now be subject to the 50% Reversion Tax.  

Is this correct? 

Thanks for your help.

[Lou S.]

I would agree with your assessment

If the plan allows for administrative fees to be paid from the trust and specifically first from the suspense account, it might behoove the sponsor to pay as many remaining administrative fees as legally possible from the suspense account to reduce the amount of the reversion subject to excise tax.

[Earl]

Unless Mrs. Smith can be hired to wind things down.

[Monica Barnard]

That's what I thought...thank you both

[david rigby]

Don't overlook the possibility that there is some special death benefit in the plan, which may automatically create an allocation/account balance on his behalf.

I'm just guessing here, but it's worth a look.