Effen Posted June 19, 2003 Share Posted June 19, 2003 I have a question that I was a little hesitant to post, but I would really like to hear your opinion. I have been an actuary for close to 20 years and during that time the issue of suspension notices and actuarial increases continues to bother me. Assume the Plan document is silent (I know it can't be silent, but somehow they get approval letters) or that it requires a Suspension Notice to be issued at NRA. I believe, as do most ERISA attorneys, that if you fail to provide the suspension notice at NRA, you must provide the greater of the age/service benefit or the actuarially increased value of the normal retirement benefit when the participant ultimately retires. (Proposed Reg. 1.411(b)). Now, this is where my question comes in. If you come across a client who has "never" given suspension notices and has "never" granted the actuarial increase, and has lots of actives and term vested older than NRA, what are the chances that this ever becomes a "problem" for them. In other words, is this something the IRS is checking on audit? Is this something the Plan or Company auditor should have caught? How do you inform the client that they potentially owe lots of people lots of money? This comment usually generates a blank stare that ends in "your insane if you think we are paying these people those benefits". This can be a bigger problem in the multi-employer world where the plan may have hundreds of terminated vested participants that never came in to collect their benefit and the Trustees have no intention of trying to find them. We are in the position of telling them that they have to find them and not only that, they have to pay them 2 times their original benefit. Has anyone ever had someone outside of the actuary raise this issue? Is this a "real" issue or is it something the IRS doesn't really care about? What would you advise your client? The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice. Link to comment Share on other sites More sharing options...
mal Posted June 19, 2003 Share Posted June 19, 2003 I never knew about this until our actuary/consultant brought it to the attention of our Boards. I would say it is a real problem for multi-employers since most have seen the NRA drop from age 65 down to the 60-62 range. Our plans now send the suspension notice, but refuse to take action on those who are already in pay status, but who may be owed more. Link to comment Share on other sites More sharing options...
Everett Moreland Posted June 19, 2003 Share Posted June 19, 2003 I'm an attorney, not an actuary, and have a client in this situation. I think this is a real issue that requires correction under Revenue Procedure 2003-44. Link to comment Share on other sites More sharing options...
KJohnson Posted June 19, 2003 Share Posted June 19, 2003 Here is a link to an article. It is a little dated, but has a good discussion. http://benefitslink.com/ppib/industrynews/...orrection.shtml Link to comment Share on other sites More sharing options...
Gary Posted June 20, 2003 Share Posted June 20, 2003 i don't have specifics at this moment, but the courts have not been so generous on this issue as of late. i.e. they sometimes are not requiring that any damages be paid due to this error and in other cases they are ruling in favor of the class rep who had the claim but not certifying an entire class. in other words it's every man for themself and each individual has to file their own claim to collect any damages. with that said i believe it is a good idea to clean this matter prospectively for sure. Link to comment Share on other sites More sharing options...
Guest padmin Posted June 20, 2003 Share Posted June 20, 2003 Does anyone have any idea as to how this would affect a one man plan filing an EZ? Would the notice still be required ?(if only for file purposes) Link to comment Share on other sites More sharing options...
MGB Posted June 20, 2003 Share Posted June 20, 2003 A notice is only required if the plan does not provide for actuarial increases. I would expect a one-person plan to have actuarial increases (why would they want to forfeit value?). If they don't have actuarial increases, they must provide a notice, no matter what sized plan (EZ has nothing to do with it). Link to comment Share on other sites More sharing options...
Blinky the 3-eyed Fish Posted June 20, 2003 Share Posted June 20, 2003 Just to be clear padmin the notice is given to the participant, not filed with any governmental agency. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs." Link to comment Share on other sites More sharing options...
AndyH Posted June 20, 2003 Share Posted June 20, 2003 I suspect his question was whether or not he has to give himself a notice. It kind of reminds me of a Meeting of a 1 man Board of Directors Resolution. Quite eventful. And our lawyers like to add to the beginning, "a meeting at which there was considerable discussion about .....". I love to find those resolutions in the file for one person operations that have meetings with themselves at which there is considerable discussion. That way I know I'm not the only one who talks to himself. Link to comment Share on other sites More sharing options...
Effen Posted June 23, 2003 Author Share Posted June 23, 2003 Thank you for your responses. I found the article very helpful. I guess this is an issue that we must continue to "bang the drum" even though no one may be listening. The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice. Link to comment Share on other sites More sharing options...
Guest dsyrett Posted June 23, 2003 Share Posted June 23, 2003 One related situation that can arise in this area is one where the participant has accrued a benefit equal to his high 3 pay and now is continuing to work past Normal Retirement. Seems to me that a Suspension of Benefits provision and notice is required unless there is to be an in service distribution. Otherwise yo have a conflict between 415b and 411d6. Link to comment Share on other sites More sharing options...
Blinky the 3-eyed Fish Posted June 23, 2003 Share Posted June 23, 2003 I have a related question. I have a plan with multiple terminated restricted HCE's. The most recent restricted HCE is a former 50% owner of the business. Based on the calculations the plan meets the 110% funding status with the recent upswing in the market after a distribution to him, but would not if multiple distributions take place. (The payout amount exceeds what the current liability is for a participant.) What to do here? Since they are all HCE's, what prevents the owner from getting paid now while the other restricted HCE's continue to have to wait? I am not aware of a pecking order requirement. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs." Link to comment Share on other sites More sharing options...
Guest merlin Posted June 25, 2003 Share Posted June 25, 2003 Blinky, Can you stretch 1.401(a)(4)-5(b)(v) to say that the determination of current liabilities on a sequential basis is not reasonable, and that you have to calc the 110% rule only after taking into account all potential payouts to the restricteds? You said that the most recent restricted is a former 50% owner. Who are the current owners? Aren't they the Plan Administrator? Isn't it their decision to pay or not to pay? What is the plan's actual funded status on a plan termination basis? It's probably worse than on a CL basis. If the current PA chooses to pay their former partner ( or any other combination of restricteds) based on passing the 110% test they're actually putting the plan in a more precarious position than it was before. I think you have to look to the spirit of the regs rather than the letter to convince your client not to pay anyone. Link to comment Share on other sites More sharing options...
Blinky the 3-eyed Fish Posted June 25, 2003 Share Posted June 25, 2003 Merlin, I am not exactly sure of your first question. I am trying to determine if it's acceptable to payout the 50% owner first, even though he wasn't the first to terminate. The other restricted HCE's would continue to count in the liabilities. I have to confess I am not sure of the relevence of some of the additional questions, but here are the answers and you can enlighten me. Current owner will be the other 50% owner, now 100%. The employer is the plan administrator. I don't know the funded status on a PT basis, except that it's more underfunded than on a CL basis. I am not trying to convince them to not pay anyone. The now have to pay people, but can't pay everyone since the assets would then dip below 110%. The question is who can be paid. I doubt the client, who I work for no less, would be happy if I told him he had to pay the others and not himself "just because I said so." If he can be paid legitimately before the other restricted, then by all means he should. The plan assets will still equal > 110% of the CL after the distribution, whatever that combination may be, so it's not a question of the plan being in worse shape, since it's still in the same shape according to IRC criteria of this area. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs." Link to comment Share on other sites More sharing options...
Guest merlin Posted June 26, 2003 Share Posted June 26, 2003 Blinky, Let's start over. I think that the pure regulatory answer to your question is that Mr. Former Owner can be paid. I don't know of any pecking order either. It's the PA's call to make. But my concern is that the pure regulatory answer may be insufficient. What is the plan's actual funded status on a plan termination, i.e., 417e or annuity purchase, basis? If Mr. F O (or any other combination of restricteds that will pass the 110% CL test) is paid out, will the funded status improve or degrade? If the latter, what are the implications for the current owners in the event of a plan termination? Will they have accept reduced benefits? Or will the company have to come up with a large amount of cash on short notice to fund the shortfall? You may have already asked these questions, and the answer may be "No problem". But I went through a similar situation with a takeover plan 8-9 years ago. Under the prior actuary two of the three owners had previously retired and gotten paid out because the plan passed the 110% test. When I got the case Partner 3 wanted to retire and terminate the plan. I told him the plan was short and that he would have to make up the difference. Most of his anger was directed at the prior actuary - "He never told us this would happen" - but I was the messenger, so I got scorched a liitle bit too. In reviewing the prior actuary's work I found that he had done everything right, he just hadn't done enough of it. Please don't misunderstand. You're obviously a very bright guy who knows what he's doing, and I would never presume to tell someone else how to do his job. All I'm saying is that it's very easy for us to get so wrapped up in the number crunching that we become technicians rather than consultants. The technical answer to a question may be a simple "yes" or "no". The consulting answer may be " yes you can, but maybe you shouldn't", or "yes you can, and here are the implications if you do". Good luck. Link to comment Share on other sites More sharing options...
Blinky the 3-eyed Fish Posted June 26, 2003 Share Posted June 26, 2003 Good point, Merlin. However, in this case the situation has been discussed, but again I appreciate the insight. "What's in the big salad?" "Big lettuce, big carrots, tomatoes like volleyballs." Link to comment Share on other sites More sharing options...
Effen Posted September 4, 2003 Author Share Posted September 4, 2003 Gary mentioned early on in this thread that "the courts have not been so generous on this issue as of late" referring to the suspension of benefits notice issue. Does anyone know of any recent court cases that specifically deal with this issue? The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice. Link to comment Share on other sites More sharing options...
KJohnson Posted September 4, 2003 Share Posted September 4, 2003 The only one I know is on Monks v. Keystone Powdered Metal Co., 78 F. Supp.2d 647 (E.D. Mich. 2000) that is discussed in a link that I pasted into an earlier post in this thread. Link to comment Share on other sites More sharing options...
Guest Harry O Posted September 5, 2003 Share Posted September 5, 2003 We won an unreported case in the NJ District Court where the judge relied on Monks. Link to comment Share on other sites More sharing options...
Effen Posted September 5, 2003 Author Share Posted September 5, 2003 What do you mean "we won". Could you give some specifics? The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice. Link to comment Share on other sites More sharing options...
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now