Small Plan Excess Assets

[Dougsbpc]

A small DB plan covers husband and wife. They also have 3 long term employees that are covered under a profit sharing plan. They always pass 401(a)4 because they always make a 12% profit sharing contribution and there is adequate age difference.

The DB plan now has excess assets of about $100k over 415 maximums.

The document is a volume submitter with one of the actuarial equivalent selections as 417(e) assumptions. The plan has operated under more conservative assumptions. If the actuarial equivalent is amended to the 417(e) assumptions and then terminated and distributed next year, it is likely they will not have excess assets, especially if they take an in-service distribution of the bulk of the assets now.

I know this would likely be seen as discriminatory. However, they would be willing to make a 25% profit sharing contribution to employees this year. If the 401(a)4 test were then run on an accrued-to-date method they would easily pass. In running the test, we would convert the monthly benefits to the actuarial equivalent based on prior assumptions.

Any thoughts?

Thanks.

[Calavera]

Not sure how amending the actuarial equivalent in the plan document will modify 415 maximum. Usually this is not a case. More information needed about benefits, ages of the owners, and the current asset value.

[Mike Preston]

Calavera, if the participants are younger than age 62 and the early retirement factors (lump sum actuarial equivalence factors) use less generous than 5% adjustments (think 8% prepost) then by changing the actuarial equivalence factors (think 5% prepost) the 415 lump sum "magically" increases.  This is a clear violation of 1.401(a)(4)-1(c)(2) because the plan has been operated for however long under the less generous actuarial equivalence factors and unless you go back and find those who were paid out less than what they would have been it is very difficult to cure the 1(c)(2) problem.  I suppose another view of it would be that it is a violation of 1.401(a)(4)-5 (timing of amendment rules).

I would have thought this silliness was eliminated when 417(e) rates rendered actuarial equivalence factors moot for lump sums but I guess old habits die hard.

Unless fully explained as to what a client is potentially giving up it is unlikely that anything other than 5% should be used in the document.

[Calavera]

Got it. Thanks Mike.