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Terminating DB Plan & Opening A New One


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We have a client who terminated their DB Plan as of 12/31/22.  The owners were not maxed out and capable of contributing more, if they had the Funds.  They simply didn't anticipate the income to continue funding the Plan (it was just the husband & wife).

Things have now changed, and they are looking to start a new Plan to begin contributing once again.  Is there an issue with starting a new Plan for 2023?  I know in total they can't fund more than the maximum between the two Plans.  Someone else is telling them that they can't start a new Plan, so I wanted to check as I didn't see the issue as long as it's not over-funded for the lifetime between them.

Thanks in advance!

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There is no prohibition on doing another DBP like the 401(k) successor plan restrictions, but make sure all the relevant circumstances concerning the termination of the first plan are legitimate and well documented, especially if the owners were under age 59 1/2 and the plan was in existence less than 10 years. Otherwise, IRS could possibly challenge the permanency of the first plan and view the termination and subsequent re-establishment as a circumvention of the in-service distribution rules.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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2 hours ago, metsfan026 said:

I know in total they can't fund more than the maximum between the two Plans. 

Most plan sponsors think about their plan(s) in terms of funding.  However, for DB plans, the limitation (ie, IRC 415) is based on a maximum benefit.  The enrolled actuary can provide details and calculate any limitation applicable to the second plan.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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