Can a qualified 401(k) replacement plan apply the surplus assets obtai

[Guest meggie]

A 401(k) replacement plan will be set up coincident with the termination date of the DB plan. The 401(k) plan is a qualified replacement plan and at least 25% of the DB surplus assets will be placed in a suspense account from which the employer will draw for purposes of the employer match over no more than a 7 year period.

I understand that the 7 year period starts with the date assets are transferred; however, given the timing constraints, surplus assets will not be available for transfer for perhaps up to one year.

Question: If the employer makes monthly matches to the 401(k)plan during the 1st year and surplus assets are determined and available for transfer 11 months into the 401(k) plan year, can the employer reimburse himself out of the surplus for the matched contributions made thus far?

I believe the answer is no- because the contributions made are the property of the pension trust and there was no "mistake of fact" to warrant reimbursing the employer. Can anyone substantiate or dispute this conclusion?

I believe that if the employer was able to wait on the match until the end of the initial 401(k) plan year, then he could use up one of the 7 years of the surplus starting with the first plan year of the 401(k) plan. If the distribution of surplus assets should occur after the 1st plan year, then the 7 years would have to start in the year of transfer.

Thanks

[david rigby]

I would not try or even go near your suggested "reimbursement". To the best of my knowledge, there are no IRS regs under section 4980, which probably means that common sense applies.

IRC 4980(d)(2)©(i)(II) states "...over the 7-plan-year period beginning with the year of the transfer." My interpretation is that refers to the plan year of the replacement plan in which the transfer date occurs. The plan year may differ from the plan which is being terminatied. It may be that the plan sponsor's may use its judgement as to whether that date is the physical asset transfer date, or the plan termination date, or some other. My own view is that the first date on which you know how much the surplus is (and hence can then find 25%) is the point in time that makes the most sense. It might also be prudent to get a written opinion from ERISA counsel.

BTW, note that 4980(d)(2)(B)(i) uses the word "equal" in its definition of the 25% cushion. It does not use "at least". Therefore, it appears that only the 25% is eligible to be subtracted from the surplus for purposes of determining the excise tax. In other words, if you have $100 surplus, you must transfer $25 to the replacement plan, and pay a 20% excise tax on $75. It does seem reasonable, but not documented anywhere, that you could transfer more than $25, but you would still owe excise tax on the full $75.