Tax on reversions per Section 4980 -- Handling unallocated amounts until termination of a replacement plan

[Draper55]

Does Internal Revenue Code section 4980(d)(2)(C)(iv) ("Unallocated amounts at termination" of a replacement plan into which assets have been transferred) imply that if the amount of the transfer is not allocated by the end of the 7-year period referred to in 4980(d)(2)(C)(i) that it can continue to be allocated, until the termination of the replacement plan?

For example, in an owner-and-spouse-only scenario, if you need more than 7 years to allocate due to the 415(c) limitations, you could continue this for additional years as necessary as long as the plan is open and there is participant compensation to allocate it against?

[Effen]

I think that is what is says.  You need to allocate within 7 years.  If you can't allocate within 7 years due to 415 limits, then you bring in all other participants.  If you still can't allocate it, then you allocate the 415 max until the plan terminates, then it becomes a reversion.  I have never really thought about this before, but I think that is what is says.  It would have been helpful if they would have added the phrase, "even if beyond the initial 7-yr period" to (d)(2)(C)(ii)(II), but not sure how else you can interpret it.

 

Quote

(ii) Coordination with section 415 limitation

If, by reason of any limitation under section 415, any amount credited to a suspense account under clause (i)(II) may not be allocated to a participant before the close of the 7-year period under such clause—

(I) such amount shall be allocated to the accounts of other participants, and

 

(II) if any portion of such amount may not be allocated to other participants by reason of any such limitation, shall be allocated to the participant as provided in section 415.

Keep in mind these are not deductible contributions so you can allocate 100% of comp (or the $ limit) in every year.  If any other participants come into the plan, I think they would also need to receive the 415 max.  

[Draper55]

Thanks Effen for your comments...I had not thought about this before either. It would seem a possible strategy in some circumstances where maybe you only have a small number of  employees for a short period after db termination and a relatively young owner(62-65) who wants/needs to allocate away the 415(c) $ annual max beyond seven years assuming the sponsor entity and the owner comp exists to facilitate the allocation.

[Dave Baker]

@Effen -- "If you can't allocate within 5 years due to 415 limits" should read "If you can't allocate within 7 years due to 415 limits" ?

[Effen]

Thanks Dave - I made the correction. 

P.S. Hope the PC Police don't attack you over that emoji.   I have my own Chief Wahoo jacket that I will need to move to the back of my closet.  I just hope at some point the English don't start protesting or I will need to move my Pirates jacket there as well.   

[Dave Baker]

Hadn't thought about it! A "collector's emoji" -- might be able to sell it at the flea market ?

Thanks for everything you add to the message boards, which is a great deal!