Single Life DB Plan and Estate Planning

[DanyelN]

We have a single life DB plan that is at the 415 limit and is over-funded by roughly $500,000.  She is nearing retirement (in a year or maybe 2) and is trying to sort out her estate planning. 

The plan is currently set up with her husband as the beneficiary of her plan.  We are trying to determine what happens if they both pass before the assets in the plan have all been paid out. 

Also in question is if lump sum is taken how are surplus assets taxed? Plan provision pays only plan participants. Would this be a deemed “employer reversion” subject to 20% to 50% excise tax?

[Lou S.]

If the participant dies before and election of payment, see the Plan document for payment to the beneficiary.

If the beneficiary dies before the election of payment to the participant, the Participant's contingent beneficiary would be entitled to the death benefit.

Assuming the participant and beneficiary are going to waive the annuity benefit and roll to IRA than assets in excess of the 415 limit will revert to the Plan Sponsor and be subject to any excise tax on reversion.

If you are looking for ways to reduce the excess tax and the participant and/or beneficiary are in good health they could consider purchasing and annuity which might eat up some or all of the excess but that won't leave assets for other heirs if that's a consideration.  Or they could look into merging with a company with an underfunded DB Plan and negotiate the excess assets as part of the transaction, not my area of expertise but I do know it can be done and there are some companies who specialize in that field.

[david rigby]

Or they could consider terminating the plan now and creating a Qualified Replacement Plan.  It might not eat up all of the excess, but it could shelter some of it from the 50% reversion tax. The enrolled actuary can make the calculations to determine if this is worthwhile, which includes a reasonable estimate of how the 415 limit might increase.

[Luke Bailey]

On 5/15/2024 at 1:27 PM, DanyelN said:

The plan is currently set up with her husband as the beneficiary of her plan.  We are trying to determine what happens if they both pass before the assets in the plan have all been paid out. 

Make sure that you are not simply referring to the J&S, but rather that the plan permits designating nonspouse beneficiaries for a benefit.

[DanyelN]

On 5/16/2024 at 9:09 PM, Luke Bailey said:

Make sure that you are not simply referring to the J&S, but rather that the plan permits designating nonspouse beneficiaries for a benefit.

It does and she completed a beneficiary form when the plan was initially set up.  Since it is just the two of them that is why they are wondering what happens under the plan rules if they both pass before the plan assets have been exhausted.