415 offset due to a prior db plan

Hi

The answer is most likely yes but I want to double check (brain is fried)

Joe and Mary are 50/50 owners of a partnership, both attorneys. They sponsor a DB plan

They are splitting and each will have their own new firms in 2024, again law firms and each will own 100% of their new companies.

They are also terminating the existing DB plan and will take their distributions.

Due to state legislation, they need to keep the old partnership open due to some shared client issues (let's leave it at that)

Mary wants to start a new DB under her new company.

I think the old DB plan distribution will offset the 415 limits under the new company, agree?

I agree.

The good news is they also get credit for years of participation in the old plan for 415.

They could also possibly spin off one of the plans to avoid the termination and offset.

agreed, I agree with Corey as well regarding the spin-off, it might be the most practical approach.

Unfortunately, it is being terminated by another firm/actuary and was done without me knowing about it. I am going to be taking care of Mary's new plan.

Thank you both for your input and confirmation. 415 offset it is.

Assuming Joe and Mary are not related, I don't think the offset would apply. Companies are not in a controlled group.

Joe and Mary are not related but Mary is terminating a DB plan with an AB as a lawyer (where she is 50% owner) and starting another company and another DB plan where she is 100% owner, again as a lawyer. Possibly taking some clients with her too.

IRC section 415(h) provides that for purposes of applying IRC sections 414(b) and (c), the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" each place it appears in IRC section 1563(a)(1).

I was thinking the rule was "50", but it is actually "more than 50 percent" rule.  I don't know the answer, but maybe it isn't a cut and dry as previously assumed.  

After reading Calavera's comment, I realized I had earlier replied under the assumption that Joe and Mary were (or at some point had been) married. I re-read the original question and that was not part of the facts. So, my mistake.

Anyhow, whether or not Mary's company has to be aggregated with the partnership for purposes of 415 depends on whether or not the partnership is a "predecessor employer" with respect to Mary's company under 1.415(f)-1(c). This is a facts-and-circumstances determination, but I would lean towards yes since she is continuing to do the same business with the same clients. Maybe she knows an ERISA lawyer who can give her an opinion.

Effen, I am not 100% sure if this is a CG issue. I am leaning more to Corey's approach as predecessor employer. Need to look into more. In the past I always dealt with 100% owners so never was an issue.

I agree, an ERISA attorney may need to be involved.

Thank you all for your comments, always appreciated.

"With respect to an employer of a participant, a former entity that antedates the employer is a predecessor employer with respect to the participant if, under the facts and circumstances, the employer constitutes a continuation of all or a portion of the trade or business of the former entity. This will occur, for example, where formation of the employer constitutes a mere formal or technical change in the employment relationship and continuity otherwise exists in the substance and administration of the business operations of the former entity and the employer."

This is an interesting question.  I generally looked at these from as controlled group issue, but if she is really owned 50% and they both "ate what they killed", and didn't combine revenue, if she is keeping her clients and just dropping his name from the firm name, it would be hard to argue that she isn't employed by the same employer.  However, if she is leaving and starting fresh, or just taking a few, you could argue she gets to reset her 415 limit.

Good point about predecessor employer.

Another thought, as the old partnership is remaining open, is there possibly an ASG for a brief period and, if so, does that link prior and new/current plans together for 415 purposes in perpetuity?

It looks like much more of the gray area is leading to connecting the plans and a 415 offset.