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Separate accounts after merging pension plan into profit sharing


Guest Charles Griffin
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Guest Charles Griffin

Hello,

We have several clients who have decided to merge their pension plan into their profit sharing plan as a result of EGTRRA. The pension plans has QJSA provisions and the profit sharing plans do not.

Since the QJSA rules apply to the pension money and not the profit sharing money, it is my understanding that the pension money should be accounted for separately from the profit sharing money. If so, how are folks handling the separate accounting in terms of valuation, distributions etc.? Any comments or thoughts would be very appreciated.

Thanks,

Charles

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Answer depends on how merger was accomplished. It used to be IRS policy that a DB plan could not be merged into a DC plan without a termination of the DB plan. This required the purchase of annuities for the DB benefit. The question is whether the DB accrued benefits were carried over to the CD plan in some distinct form; e.g,. as the present value of the accrued benefits or as an annuity contract purchased for the employees which is part of the accrued benefit under the DC plan. If accrued beneft for each participant was transferred in a $ value form for each participant then that amount should be segregated for the purpose of the J & S annuity which must be purchased. But what happens to the earnings on the amount allocated to the J & S annuity? Is it credited to the participant's account under the MP plan? If an annuity was purchased from an insurace co then the annuity benefit will be paid from the contract The terms should have been spelled out in the plan documents effective after the merger.

mjb

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Guest Charles Griffin

Yes, I did not make that clear. I am speaking of a money purchase pension plan, not a DB plan, merging into a profit sharing plan.

Thanks.

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You have to keep separate accounts which, as you accurately represent is a headache. I think that the other option is simply to prospectively draft your Plan to apply the QJSA/QPSA rules to the whole kit and kaboodle. I have heard Wickersham at the IRS say that adding a QJSA requrement will not be viewed as eliminating an optional form of benefit (although in theory "forcing" an annuity distribution absent spousal consent when a participant could previoly lump sum out without spousal consent would appear to be a problem).

If you take this route I would think that you should get all new beneficiary designations. What do other people think?

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Guest Charles Griffin

I have now been informed that since we need to be able to determine what portion of the assets are attributable to the money purchase plan (including post-merger earnings), the funds must be accounted for separately in a bookkeeping sense but that the funds don't need to be physically segregated into separate accounts.

Is anyone adopting a different approach or does this seem to be on track?

Thanks again for all your thoughts and suggestions.

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You can avoid separate accounting by making the annuity option available to the entire account balance under the PS plan. Other than requiring spousal consent for plan loans on PS accounts, there will be no other admin issues since spousal consent would be required for a non annuity distribution from the merged plan. The distribution forms could utilizie the language from the MP plan. Simplest form would permit only two optoins: Annuity and lump sum. The only other option would be to purchase the annuity contract for the participants now and make it part of the participant's account but this would be a very poor way of investing plan assets.

mjb

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Chip's point is a good one. If you have in-service distributions you are really going to have to keep separate accounts even if you apply the joint and survivor provisions prospectively to the entire plan

You cannot have in-service of the money purchas amount and you cannot eliminate the in-service because of 411(d)(6) issues.

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