Fund Terminated DB after benefits paid

[Dougsbpc]

Administer a DB Plan for a small law firm with 5 participants. Non-PBGC.

Plan terminated 9/15/2022 and all benefits were paid by 10/15/2022. There remains about $5,000 which they will use to pay our fees for the termination and administration. 

The 100% shareholder took a $70,000 haircut to his benefits when distributions were paid.

The 100% shareholder now wants to fund $65,000 from the company for 2022 only to himself in the terminated defined benefit plan and then take a distribution of the $65,000. This to make up for the haircut he took.

Does anyone think there would be a problem with this?

Thanks.

 

[Bird]

Without PBGC being involved, I think it is doable. You'd need to amend the plan for any changes effective in 2023.

[Paul I]

Out of curiosity, did the plan declare there was a short plan year ending before 12/31/2022 (assuming that the plan was a calendar year plan)?  Has the plan already filed a final 5500 for the 2022 plan year?  Was the haircut formalized in writing by a plan amendment or agreement between the shareholder and the plan?  The answers to these questions could complicate things.

Sometimes it helps to understand what is the motivation for trying to do this now.  Is the shareholder's goal to fund $65,000 and then rollover the distribution?  If the shareholder is not rolling it over, then does the shareholder live in a state where retirement plan distributions are not taxed or taxed at a lower rate?  Is the shareholder looking to create a 2023 deduction?  These types of questions can help answer whether the total time and expense of attempting this transaction is worth the net value of the result.

Keep in mind that any special transaction that solely benefits a 100% shareholder almost always draws attention.

[CuseFan]

If 2022 reporting is still fully open (corp taxes, 5500/SB, etc.) and the haircut was agreed to by a generic "to the extent unfunded" then if economically advisable (Paul's questions) I think you're OK. The employer has the discretion to fund and make the "extent unfunded" less or zero. If there was a 2022 amendment and a hard-coded agreement for the haircut, then as previously noted, an HCE-only amendment could be problematic.

[Bird]

3 hours ago, Paul I said:

Out of curiosity, did the plan declare there was a short plan year ending before 12/31/2022 (assuming that the plan was a calendar year plan)?  Has the plan already filed a final 5500 for the 2022 plan year?

OP said $5000 remained so I assumed the answer to both was "no."

I agree with concerns that a hard-coded document formalizing the haircut as final could be problematic.