Allocation of excess assets in QRP

[Bri]

Had an actuary ask me about Code 4980's text of:

(I)  allocated under the plan to the accounts of participants in the plan year in which the transfer occurs, or

(II)  credited to a suspense account and allocated from such account to accounts of participants no less rapidly than ratably over the 7-plan-year period beginning with the year of the transfer.

and whether or not that means if the final transfer of excess assets occurs today in mid December, that at least one-seventh of the money has to be posted to accounts by 12/31.  I suggested that the allocation date is going to be 12/31 even if that means waiting until the 2024 census is ready and the PS allocations determined some time over the winter.  As opposed to actually being posted to accounts for participants in the DC plan by 12/31. 

I think (II) covers the issue, even if (I) didn't.

But "allocation" includes as a receivable, no?  (Whether or not (I) would be enough argument....)

--bri

[CuseFan]

Yes, you're good either way. It's a 2024 allocation/annual addition based on 2024 compensation/census, and whether you allocate all or 1/7 or something in between because they want to exhaust in less than 7 years, your 2024 starting point is correct.

[Bri]

Thanks - I was thinking along those lines, too - favoring an interpretation of "in the year" to mean "for the year" 2024 in this case since DC plan will allocate as of 12/31. 

There's probably enough coming over to do their whole 2024 PS allocation, but the actuary thought they might be required to start folks out at least towards their 3% THM (or eventual DC gateway) as a partial allocation before the calendar flips over now that those remaining funds have been transferred over from the DB.  (And do the rest of the allocations based on full census after year-end.)

[Jakyasar]

Follow up questions, say after year 7 is allocated, there are still monies left that cannot be allocated due to 415 limits. Let's say 100k is left.

Q1. When is the 100k to be reverted back to the corporation? assume first year was 2020 and the 7th year is 2026. The way I see, revert to the corporation in 2027 after 2026 allocation is completed thus taxable in 2027?

Q2. Taxation, 100k is added to the corporate income for 2027 (assuming above is correct). Corporation pays the 20% reversion as well, in addition to the income tax. What form is used for the reversion taxation?

Bonus question:

Q3. Let's say 500k (100% of the excess) was transferred to QRP and 100k was allocated every year and the return on investments were 100k every year so after 7 years still 500k is left in the QRP account (almost a true story). Any issues other than the taxation?

Thanks

 

[Artie M]

Q1.  I have no experience with this as I have only worked on QRPs that allocated all amounts (including earnings on those amounts, see Q3) by the end of the 7th year.  I could see that the taxation on any remaining amounts would be in the 7th year since it was not allocated.  No authority for that.

Q2.  Form 5330.

Q3.  I believe the earnings should be allocated ratably over the 7-year period just like the principal amount originally transferred.  I think there is a PLR out there that shows the allocation.  The facts include a proposal that there will be an allocation of the earnings prorated just like the original amounts transferred and the IRS ruled it as meeting 4980.  It doesn't state you have to allocate those earnings but we looked at it conservatively and allocated a prorated portion of the earnings annually.  If a pro-rata amount of the earnings are not allocated annually, there could be a chance that at least 1/7th was not allocated in one or more of the 7 years as required under 4980.

Just my thoughts so DO NOT take my ramblings as advice.