Options for funds transferred to a QRP following overfunded DB plan termination?

Plan sponsor terminated a previously frozen DB plan last year. All benefits were settled by the purchase of annuity contracts at that time. There were no active employees in the plan at the time of termination. 

The DB plan was overfunded and there is $180,000 excess amount left in the plan. Plan sponsor wants to transfer the excess amount to the Company's current 401(k) plan. My understanding is there is no clear guidance on whether the 401(k) plan would qualify as a Qualified Replacement Plan (QRP) when there were 0 active participants in the terminated DB plan at the time of termination. I'm interested in whether others agree or have different opinions on this?  

Interesting, have not seen that before, but it's entirely predictable.  Here is the IRS-provided link to IRC 4980:  https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section4980&num=0&edition=prelim

I did not find a corresponding regulation, although there may be some other type of guidance that addresses your situation.   There is no discussion on point in the Gray Book, but some other Q&A (e.g., ABA) might include this topic.  Maybe @Luke Bailey or @Peter Gulia has a relevant reference?

IMHO, the ability to transfer to a QRP, and thereby reflect a reduced excise tax, would NOT be available in your situation.  My reasoning is based on the purpose of 4980: to allow the DB plan participants some participation in the "surplus".  As you describe it, the QRP appears to be unavailable, but Sec. 4980 also includes another option: applying a portion of the surplus to increase the DB-provided benefit.  Thus, the second option is still available; if the sponsor wants the reduced excise tax, then they should use that option.  But I might be misinformed.

I agree with David.  We had a similar situation several years ago (no active participants in terminated DB plan) and the ERISA attorney concluded that any transfer would NOT lower the excise tax.   

I found this in a Mercer article:https://www.mercer.com/en-us/insights/law-and-policy/using-qualified-replacement-plans-to-reduce-excise-tax-on-db-plan-surplus/

Terminating DB plan has no active-employee participants. The rules do not specifically address how the 95% requirement works when none of the terminating DB plan’s participants is actively employed within the controlled group. Consider the following example.

Example — “old and cold” plan. Employer Z sponsors plan E, a DB plan. All of plan E’s participants are either retirees in pay status or terminated vested participants. Employer Z terminates plan E and transfers the surplus assets to plan F, a DC plan. None of the retirees or terminated vested participants from plan E benefit under plan F.

A literal reading of the statute would suggest that no participants of terminating plan E would have to be covered by the QRP (because 95% of zero is zero). However, some people have raised concerns about this interpretation. IRS seems unlikely to challenge this transaction because it presents little potential for abuse. But IRS might find other situations objectionable.

Example — spinoff and subsequent termination. Employer Q sponsors DB plan J. Q spins off plan J’s benefits and liabilities for active employees to new DB plan K. After the spinoff, only retirees and terminated vested participants remain in plan J. Q later terminates plan J and transfers the surplus assets to a DC plan that doesn’t cover any of the active participants in K.

Here, IRS might view the spinoff to plan K and the termination of plan J as a single transaction and count the active participants in plan K in determining whether the 95% requirement is satisfied. If so, the transaction would fail to meet that requirement since none of the participants in plan K benefit under the replacement DC plan. IRS, the Pension Benefit Guaranty Corp. and the Labor Department took a similar approach to spinoff-termination transactions in the 1984 Joint Implementation Guidelines on Asset Reversions in Plan Terminations. Under those guidelines, if an employer recovers surplus from a spunoff plan, the remaining ongoing plan has to meet the plan termination requirements (such as full vesting and annuitization). Employers considering this type of transaction should consult with counsel.