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I’m looking for some thoughts/assistance on a somewhat unusual situation I’ve come across:

Situation: Small Medical Practice Non-PBGC Plan Term with Asset Surplus. As of DOPT just the owner/participant had an accrued benefit. They also have 7 non-excludable employees that have been excluded from benefiting in the plan. Not as familiar with Non-PBGC Plan Terms and I’m trying to re-allocate the excess in a non-discriminatory manner.

Benefits and Participation frozen on 4/30/12; Amended excess assets to be re-allocated to participants eff 8/30/17; Non-PBGC Plan Termination eff 8/31/17. The document is a prototype with standard language on excess assets if a plan is not covered by the PBGC. States “…if elected in the Adoption Agreement, excess assets shall be reallocated to the Participants on the basis of their Present Value of Accrued Benefit…”

To allocate the excess, I used a safe harbor formula covering the owner and three other employees. (Three of the non-excludable, excluded employees) I came up with .62% x HI3 Comp resulting in accruals that produce a large enough total in PVABs for all four participants to cover the Excess Assets. (Still have four excluded employees) Note that 415 is not an issue for the owner. So, the excess ends up being allocated on a pro-rata on the PV of that .62% x Hi3.

Thoughts on this excess allocation method?

This formula satisfies 401(a)(26) and is a safe harbor formula satisfying 401(a)(4)/410(b).  The plan was frozen and met top-heavy requirements before and after the freeze.  Granted this accrual can be considered anew allocation. Thoughts on T-H requirements?

On a side note, Rev. Rul. 80-229, Paragraph 2 of SEC. 3. ASSETS NOT LESS THAN PRESENT VALUE OF ACCRUED BENEFIT states:

“If the assets as of the date of termination exceed the present value of the accrued
benefits (whether or not nonforfeitable) as of such date, the plan will not be considered
discriminatory if such excess reverts to the employer or is applied to increase benefits in
a nondiscriminatory manner. One method of applying the assets to increase benefits in
a non-discriminatory manner is to amend the plan to provide a new benefit structure
such that (1) the benefit structure would not be discriminatory if the plan were not
terminated and (2) the present value of the revised accrued benefits (whether or not
nonforfeitable) as of the date of termination equals the value of plan assets, and to
distribute assets equal to the present value of the revised accrued benefits
. The new
benefit structure must satisfy other requirements of the law such as sections 411(d)(6)
and 415 of the Code.”

I would think an amendment explaining how the excess is allocated, along with the formula, and included participants would work in this situation. Thoughts? 

Thanks in advance for reading through this whole thing.

--Jeff

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