Allocation of Excess Assets in Floor-Offset CB plan termination

[Dalai Pookah]

We have a CB plan terminating with excess assets. The CB benefits are offset by a DC plan. Upon plan termination, excess assets will be allocated in a non=discriminatory manner. The question is how we properly account for DC balances in computing the allocation of the excess assets.

I would think, that so long as the allocation of the excess could be reflected in a formula that would still pass 401(a)(4), taking into account the offset, it should pass. The alternative would be to allocate assets to all participants, even those who never had a positive benefit in the CB plan due to the offset.

Guidance on this seems sparse or non-existent. Thoughts?

[Nate S]

I would normally take the more conservative approach of making the excess asset allocation be non-discriminatory, when tested as a stand-alone component.  Consider the two following alternatives:

1) As a transfer to a DC Plan, the allocation would be to ALL participants benefitting under the DC formula, pro-rata, integrated, or class-based(and subject to minimum gateway!)

2) As a pre-termination increased benefit under the existing CB plan, would the DC offset still completely eliminate the new higher benefit amount?  If you could argue that it did and therefore the increased benefit goes only to the HCE's, don't you then run into the same limit issues that created the excess in the first place?

 

[TheBoxMan]

The plan document requires excess assets to be allocated in a non-discriminatory manner? I see plan terminations where reversion of excess assets was allowed, but as part of the termination the plan is amended to allocate excess assets. This is a bad idea. The plan administrator can always give the excess assets to participants on a non-discriminatory basis, without amending the plan document. 

[Bri]

On 8/11/2023 at 8:18 AM, TheBoxMan said:

The plan document requires excess assets to be allocated in a non-discriminatory manner? I see plan terminations where reversion of excess assets was allowed, but as part of the termination the plan is amended to allocate excess assets. This is a bad idea. The plan administrator can always give the excess assets to participants on a non-discriminatory basis, without amending the plan document. 

So, what counts a non-discriminatory basis?  I've got a CB plan terminating at year end (owner retiring, so no QRP possibility) and have to think it through as well.  The document allows for reallocation of excess if nondiscriminatory, and it looks like there will be some.

Pro rata to CB account balances? 

Pro rata to accrued monthly benefits as of plan termination?  How about as of the plan's NRA?

And what if the plan only passes 401a4 when combined with a DC plan?  Include "some version" of the value of the benefits from the DC plan when prorating?

 

Someone's gotta have done this before, curious what they did....thanks!

[TheBoxMan]

I think that pro rata to CB account balances or pro rata to accrued monthly benefits would both be non-discriminatory. The point I was trying to make is...don't amend the plan document to state that the plan will reallocate excess assets. You stated, "The document allows for reallocation...". Does it allow it or require it? That is a huge difference. 

[Bri]

It was "may" in the text, and it did just occur to me, as long as it's not allocated as a new accrual, then the excess can go in proportion to the summation of benefits which I suppose were already deemed nondiscriminatory in past years.

Ha, actually the BPD for the Cycle 3 differs from our BPD for the PPA document.  The C3 "may" allow the reversion, but it's not been adopted yet - the PPA (original) version still is set to reversion but that WILL be amended.

 

[Lou S.]

5 hours ago, TheBoxMan said:

I think that pro rata to CB account balances or pro rata to accrued monthly benefits would both be non-discriminatory. The point I was trying to make is...don't amend the plan document to state that the plan will reallocate excess assets. You stated, "The document allows for reallocation...". Does it allow it or require it? That is a huge difference. 

What if the CB was giving a pay credit of say 75% of what it would take to fund the 415 limit, but giving the employees a contribution such that that enough employees got a 0.5% pay credit to pass 401(a)(26) and than they made an annual 7.5% gateway contribution to a DC plan to pass annual nondiscrimination testing.

Let's say you now have owner with a $2M cash balance and a $2.6M 415 limit while you have 5 other employees who have a total of $100K in cash balance accounts.  Let's assume there are $300K in excess assets. You are comfortable without testing allocating ~95% of the excess assets to the owner and 5% to the employees without testing that? I mean I'm not saying it won't pass, I'm just saying that I don't think it its obvious that a pro-rata allocation is clearly non-discriminatory.

[Bri]

I know what you mean - as an allocation, owner might get 96%.  As excess assets pro rata, she might get 98%.

I am getting the suspicion there aren't "established guidelines," huh?