Allocation of Surplus Assets

[Pension RC]

We have a DB plan that terminated in February 2017. After all of the participants were paid, there were still surplus assets. The plan sponsor would like to reallocate 20% of the surplus to the participants so that the excise tax on the remaining surplus is reduced to 20%. A couple of questions:

1) A participant terminated employment in May 2015 and was paid in November 2016. Must she be included in the allocation?

2) The plan benefits were paid to participants on various dates, as the distribution forms were returned. As such, the PVAB's were adjusted to the dates of the payouts. Now that we are allocating 20% of the surplus (and assuming that allocating based upon PVAB's isn't discriminatory) the PVAB's for the allocation would all be as of a single date - correct?

Any responses would be appreciated!

[My 2 cents]

Rule number 1:  Do not discriminate in favor of the highly compensated.

There may be good reasons for allocating the portion of the surplus proportional to compensation and not to the size of the plan termination distributions.

Not sure if the person paid in November 2016 (not part of the plan termination?) must be included.  Are there others who were similarly situated?  Certainly, distributions only a couple of months before the plan termination ought to be thought about, even if they don't have to be included.

[CuseFan]

if it was a distribution in conjunction with the termination then the participant should be included. If February was the termination date (and not distribution timing for earlier plan termination date) then this precluded the termination and the person need not share in excess allocation. 

HOWEVER, allocating on PVAB is not automatically nondiscriminatory. If formula was integrated then such an allocation could violate 401(l). If the plan was a CBP that greatly favored owners by leveraging a PSP with combined testing, allocating excess CB assets on account balances will likely need to be general tested and not likely to pass w/o combining with PSP - which may not be possible because they no longer have the same PY. If you had a safe harbor non-integrated design then allocating on PVABs should be nondiscriminatory.

[david rigby]

11 minutes ago, CuseFan said:

HOWEVER, allocating on PVAB is not automatically nondiscriminatory. If formula was integrated then such an allocation could violate 401(l).

I've followed this pattern before: allocate the excess pro-rata on PVAB of the "base" portion of the benefit.  Other allocations may also be valid.

[CuseFan]

yes, that works