Qualified Replacement Plan

DB plan terminated and excess asset will be transferred to the 401k PS Plan (QRP).  Questions:

- Must the excess asset be allocated in the QRP based on 1/7th of the excess each year or can the allocation be an amount based on desired allocation by Plan Sponsor even if less in each year?

- Can the allocation be based on new comp 401(a)(4) method with the Owners at 415 max and employees at minimum to pass testing?  Or must employees receive allocation at 415 max as well.

- If there is excess asset at the end of the 7th year, must all participants receive an allocation up to 415 limit before refund of remaining excess at 20% excise tax? Continue to allocate until all excess funds depleted or QRP terminates?  In 7th year, allocate based on new comp max for owners / min for others and refund remaining excess?

- Can excess assets in the QRP be used to pay plan expenses.

On 11/19/2021 at 3:34 PM, DDB BN said:

Must the excess asset be allocated in the QRP based on 1/7th of the excess each year or can the allocation be an amount based on desired allocation by Plan Sponsor even if less in each year?

The transferred assets have to be allocated no less rapidly than ratably over 7 years. So you have to do at least 1/7th in the first year, then 1/6th of what remains in the second year, and so on. 415 limits permitting.

On 11/19/2021 at 3:34 PM, DDB BN said:

Can the allocation be based on new comp 401(a)(4) method with the Owners at 415 max and employees at minimum to pass testing?  Or must employees receive allocation at 415 max as well.

You can use a non-safe harbor method to allocate, as long as it is permitted by the plan document and satisfies all applicable testing.

On 11/19/2021 at 3:34 PM, DDB BN said:

If there is excess asset at the end of the 7th year, must all participants receive an allocation up to 415 limit before refund of remaining excess at 20% excise tax? Continue to allocate until all excess funds depleted or QRP terminates?  In 7th year, allocate based on new comp max for owners / min for others and refund remaining excess?

I don't know that the IRS has ever actually come out and said that the 20% excise tax applies on any amounts that remain unallocated after 7 years. However, to be on the safe side, I would suggest not leaving any unallocated assets if at all possible, meaning get everyone to their 415 limit rather than leave unallocated assets.

On 11/19/2021 at 3:34 PM, DDB BN said:

Can excess assets in the QRP be used to pay plan expenses.

No. It's not a forfeiture account. However if the plan generally pays certain expenses, I don't see any reason why those expenses couldn't be charged against the QRP account the same as any other account.

Thank you.

On 11/22/2021 at 9:16 AM, C. B. Zeller said:

No. It's not a forfeiture account.

 

However if the plan generally pays certain expenses, I don't see any reason why those expenses couldn't be charged against the QRP account the same as any other account.

(quote edited for clarity)

Your response here seems contradictory (to me).  You first say expenses can't be paid.  Then you seem to say, well, why not; go ahead.

11 minutes ago, BG5150 said:

(quote edited for clarity)

Your response here seems contradictory (to me).  You first say expenses can't be paid.  Then you seem to say, well, why not; go ahead.

I took it to mean that if the Plan is allowed to pay expenses, a pro-rata share could be charged to the suspense account, but the suspense account could not annually pay 100% of the plan expenses like a forfeiture account might. That is each year it would pay a declining share as it is allocated to participant accounts.