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Guest Brickbat

Termination of a 412(i) plan

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Guest Brickbat

There is a client in hurricane ravaged Mississippi who has a 412(i) plan that has several NHCE's along with a couple of owners. They need to terminate the plan but have been told that for the owners to be able to waive any part of their benefit they must first convert the plan to a traditional defined benefit plan. They were told that after the conversion the owners can waive but not while it is a 412(i) plan.

Not being a 412(i) expert I have not been able to advise whether this is true or not. Does anyone know one way or another and if so, is there a cite?

Any help is appreciated. Thanks.

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Guest Carol the Writer

I wouldn't be so bold as to declare myself a 412(i) expert, but I am in a like situation. My client simply does NOT want to make the 2005 (the final plan's year's) contribution. Therefore, the plan is not necessarily eligible for the 412(i) exception on PBGC standard 412(i) termination filing. I don't think that's carved in stone by the PBGC, but one way to get the plan into sufficiency/super-sufficiency is to amend the plan to make it a "traditional" defined benefit plan and then do the standard termination.

Of course, if they can make the final 412(i) contribution and be eligible for the 412(i) standard termination exception. I don't know if this is your case, but you might want to think about it. (Aside, Are they Katrina victims and can they get any relief there?)

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Guest Brickbat

Carol,

Thanks for the response. Again, I must show my 412(i) ignorance. What exactly is the 412(i) standard termination exception? Your response makes me think you cannot waive any benefit in a 412(i) plan, otherwise, wouldn't your client take a reduced benefit and be sufficient?

If they amend the plan to a traditional DB plan, then I assume there will be a first and final Schedule B filing for the plan. If it remained a 412(i) plan, there would be no Schedules B filed for this plan.

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Guest Carol the Writer

The 412(i) exception is that the definition of accrued benefit in a 412(i) plan is that the AB is the cash value of the life insurance and annuity contracts held by the plan on the participant's behalf. Therefore, if there are no participant loans and all premiums have been paid, the obligations that the plan has incurred on behalf of the participant have been met. As a further aside, my guess is that the cash values would also be greater than, say, the PVAB under the fractional rule in a traditional defined benefit plan. You should confirm this, however, particularly if top heavy is involved.

The PBGC standard termination procedure allows for a simplified termination procedure for such a 412(i) plan, one that does not require the enrolled actuary's certification. An actuary would probably be involved, of course, but the PBGC form only requires the plan administrator's OR enrolled actuary's signature.

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"...my guess is that the cash values would also be greater than, say, the PVAB under the fractional rule in a traditional defined benefit plan"

Why might this be? I would have guessed the opposite.

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Guest Brickbat

Thanks Carol, but I agree with Andy. I would think the cash value would have to be less than the PVAB under a traditional plan.

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Guest Carol the Writer

If you are observing the incidental death benefit rules for the life insurance - and I hope that everyone is by now - then there is a significant amount going into the annuity and, therefore, a significant annuity cash value build-up, even after the first year. The annuity deposits in a 412(i) plan are computed according to a level-premium funding method, the cash values of which in general should produce higher benefit entitlements than a unit credit-like PVAB under the fractional rule.

There might be some exceptions, possibly depending on the age and years of participation of the participant. But my guess is that this is the exception rather than the rule. And, I am surmising that this is the reason that the PBGC does not require an enrolled actuary's signature to terminate a 412(i) plan. I am not privvy to the PBGC's behind-the-scene deliberations.

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I could be completely wrong, but while I agree that the level ILP method contribution might be higher, the growth of prior deposits might be lower than the growth on non-annuity investments. Combine that with the insurance and "costs" and top heavy requirements and then add the requirements of 417(e) and I don't intuitively get it. But, just a curiosity anyways.

Isn't that the gimmick to 412(i), that you can jack up the deduction by assuming a lower asset return? So I guess it depends upon how mature the program is, but these hurricane victims certainly don't sound like they're able to play out the scheme optimally.

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Guest Carol the Writer

I haven't tried it under every scenario, and I have only been working on plans that are two or three years old presently. However, the projected lump sum at retirement funding targets are so high that is hard to believe that the ILP funding method would not generate deposits (and "reserves" if you'll pardon the insurance expression) than would the PVAB under the fractional rule. That's all that I have to say at present.

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