401 (h) plans funded by defined benefit plan excess assets

[Pooh]

I have a defined benefit plan which has become over-funded due to stock market gains. I plan to retire and close the plan next year at 62 years of age.

I would like to roll the excess assets into another qualified plan.  Profit sharing plan can only absorb $54,000 per year max.

401 (h) plan can be funded with up 25% of amount that goes into the defined benefit per year. Question is, can I back-date the formation/establishment

of the 401 (h) plan and how far?

[The White Coat Investor]

I don't think so, but there are so few people doing 401(h)s that they're pretty much the only people that could answer your question.

[Pooh]

Do you have the name of anyone that works with a 401H ?

[litovskyassetmanagement]

Pooh wrote:

Do you have the name of anyone that works with a 401H ?

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You can't have a 401h plan with a closed CB plan.  That's not possible despite what anyone will tell you.  I would consult with your actuary to find out what your options are.  This can get pretty complex, so without professional advice I wouldn't recommend doing anything:

https://www.slideshare.net/HarveyKatz/overfunded-defined-benefit-plans

https://www.asppa.org/Portals/2/PDFs/Conferences/LAPC/2016%20Outlines/WS23%20-%20Overfunded%20plans.pdf

The excise taxes and penalties (and really, lack of good options if you haven't planned for this earlier) is exactly the reason why CB plan investments should be managed very conservatively with a liability-driven investing model.

[litovskyassetmanagement]

Rex wrote:

Even with the taxes and penalties he will come out ahead unless he was just silly about the over funding.

If he got awesome returns then he paid less for the same defined benefit.

I’d love to find myself overfunded bc of awesome returns even at closing of plan. Of course I’d actually be smart about it and not contribute in the last few years and easily avoid the issue.

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The 50% penalty on excess contributions is the very reason OP is trying to jump through all these hoops - anything to get that penalty down.  There is really no way to avoid this if you are closing shop, and that's why over-funding is such a bad idea.

[litovskyassetmanagement]

Rex wrote:

As usual you take every opportunity to promote your own agenda…..

 

Yes the OP needs to pay on the excess.  STILL he very easily could have PAID less for the same defined benefit then with a conservative approach.  DOESNT MATTER if they take 100% of the excess from him.  He STILL PAID less for the same defined benefit and thats what counts.  The real way this is a problem is IF the OP knew he was super overfunded and for some silly reason just kept contributing.  No reason to do that but if the OP actually got awesome returns then he must of paid a ton less for the same defined benefit then any plan with conservative investments and even with taxes and penalties on the excess he is still ahead.  He or she never said they over contributed.

 

So ill be very glad to pay more on the excess if i hit a home run.  Ill be super happy with paying less for the same RETIREMENT BENEFIT.  Now that isnt that likely for me since i buy broad index funds.

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While I agree that having a higher return is better, this is not something that anyone can guarantee.  And it makes zero sense to take the risk just to end up with a huge haircut, which also includes income tax, so you are pretty much taxed at 100% of the excess. The same risk can be taken in your solo 401k plan without any possibility of losing a good portion of your gains, so why would one want to do this inside a CB plan?

Also, there is no guarantee that just because you take the risk that your actual return will be better than that with a more conservative allocation.  Over 10 years this is just not possible to make that claim, and you can end up significantly under-performing, especially if the markets crash in the last year or two, so again it makes no sense to put significant volatility into the CB plan portfolio. I'm not interested in gambling with other people's money, just like I wouldn't want to gamble with my own, so instead of playing the volatility game inside a Cash Balance plan, I would prefer to do so elsewhere, such as the 401k plan, IRAs, after-tax, etc., since your CB plan is around for at most 10 years.  Also, presumably those plans are set up prior to retirement, so increasing fixed income allocation can be safely done by investing in a CB plan without having to sell stocks at any point, so this strategy will work very well for most docs who are near retirement. And when you involve partners, the math becomes more complex, so for that reason I prefer to stick to low volatility approaches inside Cash Balance plans.

 

[litovskyassetmanagement]

Rex wrote:

No return is guaranateed by your approach either.  It actually makes a lot of sense.  You just dont want to see it.  You keep posting about how they MUST be conservative.  They dont.  Ive shown time after time that just isnt true.  You can keep trying that if you want but it is a false statement and frankly i believe it turns some folks off to your approach.  The reason it makes sense is i am very very likely to pay less for the same defined benefit.  I think you would do a lot better if you toned down your false statements and simple said you recommend a conservative approach.  When you make blatantly false statements about how it must be conservative, it likely doesnt help you.  There is a difference between gambling and investing.  The difference can be subtle at times but its there.  Taking a higher stock % just isnt gambling even though you wish to name call it as such.  Investing all your money in a few stocks, sure thats gambling.  When one takes a very conservative approach one can lose just as much money if not more than if the stock market has a few down years in the end.  Now i wouldnt recommend a high % stocks at the tail end.  You dont want to see that because its against your approach but its still true.  What one does within a DC plan is up to that individual.  There is also a definite advantage to some (if they want the risk) to investing aggressively within the DB plan instead of the DC plan.  IF the DB plan goes belly up then the govt allows you to increase your contribution so you still wind up with a decent retirement.  That costs you of course if that situation plays out.  With the DC plan there is NO WAY to increase your contributions to catch up.  So in the above example, even with the taxes and penalties, assuming the person didnt over fund in the last few years then this person has paid less for the same defined benefit.  Nothing terrible has happened to them.  They still have more money in their pocket at the end of the day.  They did so at greater risk but not gambling.

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Of course it is not guaranteed.  It is simply a lower risk approach. A false statement would be saying that having more risk in your CB plan is somehow going to be better (despite the fact that it might not).  I'm stating my opinion that a lower volatility approach will work just fine given a number of goals that need to be hit by most docs.  My goal is not to have the highest possible return, but rather to have an acceptable return for the lowest possible risk.  Many docs with combo plans do NOT have to take high risk especially if they will accumulate significant money in their accounts.

 

 

 

[litovskyassetmanagement]

Pooh wrote:

I have a defined benefit plan which has become over-funded due to stock market gains. I plan to retire and close the plan next year at 62 years of age.

I would like to roll the excess assets into another qualified plan.  Profit sharing plan can only absorb $54,000 per year max.

401 (h) plan can be funded with up 25% of amount that goes into the defined benefit per year. Question is, can I back-date the formation/establishment

of the 401 (h) plan and how far?

Click to expand...

Pretty much the only thing you can do to avoid paying nearly 100% tax on your gains is to stay in business for a number of years and to transfer the excess to a 401k plan.  Any money reverted to the practice would be taxed at 20%, and hopefully you'll move substantial portion of that into your 401k plan.

The money transferred to the 401k would have the same 415 limits as the 401h allocations. It's definitely cheaper to run a 401k plan than a 401h plan, so the 401k would be preferable to a 401h.