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Excise tax on Qualified Replacement Plan after 7 years


Renee H

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I have a 1 participant 401k/PS (sole prop.) plan that received 100% of excess assets from a terminated DB plan in 2017. Plan was amended as a QRP. The QRP has been funding the ERPS contribution beginning in 2017.   The owner/TEE opted to invest these assets as opposed to keeping them in a non-interest bearing account.  Year 7 will be 2024 and based on the MV as of today, it looks like there will still be assets remaining in the QRP.  Can someone advise me on what the excise tax will be for any remaining assets that revert back to the ER.  Is there anything else I should be advising my client on with respect to this situation?  Thank you.

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Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Zero-coupon bonds?  Movie theater stock?  Brick and mortar retailer stockers?  Yes, the excise tax is only 20%, but the reversion amount is also booked as income, so the end tax cost is usually 60-70%.

I assume everything was allocated to the 415 max each year?  Did that include the ratable earnings each year?  Was the suspense monies held in the same account/investments as the participant's, and are you sure about the earnings allocation methodology if so?  

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  • 3 weeks later...

In answer to Bri's questions:  The suspense account is a separate stock account.  The amounts transferred to the sole participant each year met the 415 limit.   I'm not sure what is meant by ratable earnings or how they should be applied.  The investments in the suspense account have gained over $43,000 as of 12/31/21.  It is less now due to market losses.

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This is good news, isn’t it? If 2022 income is already known and established, transfer the 415 limit now and convert the balance into cash.

A follow up question. In which year the taxes will need to be paid?
 

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