Thinking with my typing fingers here....  

CB plan expected to terminate with an asset sale pending.  With PBGC timeline, probably early 2024 we get everyone (about 35-40 folks) paid out.

IF there are any excess assets (and we're thinking at worst case, 50-100K), was thinking about a QRP transfer to their profit sharing plan.

1)  Gotta cover 95% of active employees.   If everyone's terminating employment with the seller, then do I need to cover 95% of zero employees?  There are 3 partners selling, so they could certainly still be potentially "active" in their hollowed-out shell.

Is that an appropriate interpretation?  95% of either just the 3 former owners, or 95% of just totally zero active participants? 

Anyway, the extra 50-100K would be allocated completely for the final 2023 profit sharing plan year, since although I only gotta worry about the DB shutting down, there will still be allocations due (it's a DB/DC combo) for the PS plan.  Eliminates the need to come up with a higher PS amount for its short year.  And could use it all up for 2023, since I wouldn't expect there to be six more years to release it from suspense.

Thanks...

--bri

What will be the plan(s) termination date and when will employees terminate? If you transfer and use for PS that ultimately benefits 95% of those 35-40 (or however many were employed in 2023) then I think you should be fine. If the thought is to benefit three remaining partners, even if they were only actives left, that seems problematic to me and doesn't pass the smell test - doing what the rules are guarding against. Remember to coordinate your CB and DC plan terminations/PYEs if you're aggregating for testing. 

This also brings up the question - can a terminating plan be used as a QRP? I do not recall reading any prohibition against this, just that there are requirements when the QRP is terminated, so you should be OK as it sounds like you'd easily be compliant.

Of course, this is just my non legal opinion. It doesn't hurt to get a legal opinion from qualified ERISA counsel.

I'm hearing 6/1 as the sale date (so the DOT for staff).  Freeze can go through in May.

After a little more thinking, I realized they likely would not want to keep the DC plan around long enough to find out if the CB plan will have any excess assets.  Participation is mostly identical between the plans (a couple of HCEs might have no CB balance) so the same folks would benefit, alluding to your 95% consideration.  But I also have no idea yet if the selling company is going to have a short final tax year, either (or anything that would push "profit sharing considerations" too far into 2024).

thanks!

Caution.  Be sure you understand the "95% rule".  The exact language is:

Quote

At least 95 percent of the active participants in the terminated plan who remain as employees of the employer after the termination are active participants in the replacement plan.

IRC Section 4980(d)(2)(A).  It's not a bad idea to reread the entire text of 4980. 

https://www.law.cornell.edu/uscode/text/26/4980

Going back to the original question, do you have to cover 95% of zero or the 3 former owners, my understanding is the answer is neither is enough.  If there are 40 active employees when the plan is terminated the QRP would have to benefit at least 95% of 40. 

If you

• terminated the CB plan before the date of the sale and
• kept the PS plan open up to the date of the sale and
• terminated the PS plan as of the day before the date of the sale and
• amended the allocation conditions so everyone active on the day before sale received an allocation
• and that did not blow up 415 limits

you may have choreographed enough steps to dance to.

thanks folks.  Sometimes the situation sounds more intellectually stimulating/intriguing than it actually ends up being.

You would still need earned income to base the allocation of excess assets.  I would be hesitant if the only survivors of the initial company were HCEs, and you then allocated the excess assets only to them.  But again, they would need to generate earned income or you wouldn't be able to allocate the excess.

From what you described, I don't think a QRP is a viable option.  If it is only $50k-$100K, just allocate the XS to the existing participants.  You can use any non-discriminatory method you choose, so you can be creative.

Paul, I think your scenario creates different plan years for DC and CB which prevents them from being aggregated to satisfy nondiscrimination. 

David brings up an excellent point - if the current actives are no longer employees after the termination can they be considered active in replacement plan? If they get 2023 allocation, and all the excess is used, I think that can be argued. 

I know complying with the spirit of the rule is not the same as the "letter of the law" but the result of allocating the excess pension assets to current pension participants in the (intended) QRP for the year of plan termination seems to be exactly the desired legislative/regulatory result - subject to all the other issues noted (same PY, 415 limits, etc.).

Agreed.  In scenarios like this, the phrase "just because we can does not mean we should" comes to mind.

19 hours ago, CuseFan said:

Paul, I think your scenario creates different plan years for DC and CB which prevents them from being aggregated to satisfy nondiscrimination. 

I no longer have the right reference guide book for 401(a)(4) to cite this, but isn't the guidance, "unless you have to"?  It been a few years but I know we setup a fiscal DB with a calendar DC that cross-tested together (same calendar year compensation definition BTW).

7 hours ago, Nate S said:

we setup a fiscal DB with a calendar DC that cross-tested together

I think that is a problem. I think you need same plan year to permissively aggregate for coverage and nondiscrimination testing. The only time you consider plans with different years is when you have to calculate an average benefits percentage.

14 hours ago, CuseFan said:

I think that is a problem. I think you need same plan year to permissively aggregate for coverage and nondiscrimination testing. The only time you consider plans with different years is when you have to calculate an average benefits percentage.

I'd have to get my hands on the reference guide to be able to find the cite to 401(a)(4) that allows it.  The fiscal year DB design and install was handled by people (Reed Cline and our ERISA attorney) much smarter and intimately more familiar with the regs than I could ever be.

From the Coverage and Nondiscrimination Testing Answer Book. You cannot permissively aggregate for just one of coverage or nondiscrimination, so the requirement for coverage noted below applies to nondiscrimination as well.

Q 16:5,What conditions apply to the aggregation of plans for purposes of coverage testing?

The following conditions apply when plans are aggregated for coverage purposes:

Yep, so #'s 3 & 4.  It really makes corrections difficult because once that calendar year plan closes you may have a very short window, or none, in which to make discretionary corrections.  Usually get stuck with the failsafe priorities and/or giving too much non-elective to whoever's already benefitting.  Messy, messy, messy.  The client loved his first year tax deduction, but not so much the extra profit sharing cost that snuck in by year 3.