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mwyatt

Pension Protection Act of 2006

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Appears this will be signed.

Here is a link to the Committee Explanation of the provisions:

http://www.house.gov/jct/x-38-06.pdf

Does appear, looking at page 181 of the Committee, that the high 3 year issue for 415 purposes is resolved in our favor (goes back to all service, rather than participation service).

Funding rules for 412 apply to 2008 plan years.

Any other observations at short notice?

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Guest KoreAmBear

re: Max interest rate assumptions for lump sum distributions effective 1/1/2006.

I have a Datair Mass-Submitter Prototype DB Plan Basic Doc #2.

This guy (owner) in a one-person DB plan is of retirement age, has formally terminated the plan and wants to take a lump sum distribution now. I was about to send in the IRS 5310 application before the PPA was passed by the Senate.

Do I need to amend the plan before sending it to the IRS? Just the adoption agreement or also the basic plan document as well - and which parts (assuming I just amend the max lump sum distribution assumptions)? Any help would be appreciated. Thank you.

Will

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Guest lerieleech

The ASPPA summary says that quarterly contribution requirements will apply only to plans with at least 100 participants. However, I was unable to find that. Any clarifications/opinions would be helpful.

Also, if anyone has any insight on what the new three-tiered funding interest rate requirements will do (e.g. an example showing what rates would be used if a calendar year 2006 val were subject to the new rules), I would be very interested in that.

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I know it's a tougher slug at 386 pages (but not quite as bad as all 1,010 pages of the actual bill), but the Committee report I first linked to is pretty helpful and organized pretty well. The ASPPA link serves as highlights.

Also came across this html version of the bill from the Pension & Benefits Blog which is pretty handy:

http://fuguerre.googlepages.com/PPA.htm

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Guest Steve C
The ASPPA summary says that quarterly contribution requirements will apply only to plans with at least 100 participants. However, I was unable to find that. Any clarifications/opinions would be helpful.

The ASPPA summary may be wrong on that point. I see a <100 exemption under sec. 102(j)(4)(B) (page 70 of 907), but it seems to apply only to the liquidity shortfall component rather than the more general quarterly requirement.

Don't take my word for it at this point - this is just from a quick search.

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Guest DFerrare

Regarding the PBGC variable premium cap for 25 or fewer lives, the per participant cap is $5 multiplied by the number of particpants at the end of the preceeding year. So the cap for the plan is more like $5 multiplied by the number of participants squared.

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So the cap for the plan is more like $5 multiplied by the number of participants squared.

I am confused by this statement. Could you please elaborate?

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Guest DFerrare

Here is the technical explanation from the Joint Committee on Taxation:

"In the case of a plan of a small employer, the per participant variable-rate premium is no more than $5 multiplied by the number of plan participants in the plan at the end of the preceding plan year. For purposes of the provision, a small employer is a contributing sponsor that, on the first day of the plan year, has 25 or fewer employees. For this purpose, all employees of the members of the controlled group of the contributing sponsor are to be taken into account. In the case of a plan to which more than one unrelated contributing sponsor contributed, employees of all contributing sponsors (and their controlled group members) are to be taken into account in determining whether the plan was a plan of a small employer. For example, under the provision, in the case of a plan with 20 participants, the total variable rate premium is not more than $2,000, that is, (20 x $5) x 20."

Some of the summaries I've read seemed to imply that the cap is $5 per participant. From the example in the technical explanation and the language in H.R.4, that is not the case.

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Guest Steve C

The "per participant" cap is defined in terms of the number of participants. Using that language, the cap on total variable premium for a 5-participant plan would be ($5 times 5) times 5 = $125. For a 6-participant plan, it would be ($5 times 6) times 6 = $180, and so on.

At first blush this sounds like a typo, but the JCT Technical Explanation makes it clear that it was intentional.

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Yes, but I read the "participants squared" clause as only applying if you have unrelated contributing sponsors. In other words, if you have a plan vanilla single employer plan, or a controlled group where everyone is covered anyway, then the $5.00 per participant cap does apply. At least, that's what I get out of the JCT explanation.

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[PPA] SEC. 405. PBGC PREMIUMS FOR SMALL PLANS.

[PPA §405] (a) Small Plans- Paragraph (3) of section 4006(a) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1306(a)) is amended--

(1) by striking `The additional' in subparagraph (E)(i) and inserting `Except as provided in subparagraph (H), the additional', and

(2) by inserting after subparagraph (G) the following new subparagraph:

`(H)(i) In the case of an employer who has 25 or fewer employees on the first day of the plan year, the additional premium determined under subparagraph (E) for each participant shall not exceed $5 multiplied by the number of participants in the plan as of the close of the preceding plan year.

`(ii) For purposes of clause (i), whether an employer has 25 or fewer employees on the first day of the plan year is determined by taking into consideration all of the employees of all members of the contributing sponsor's controlled group. In the case of a plan maintained by two or more contributing sponsors, the employees of all contributing sponsors and their controlled groups shall be aggregated for purposes of determining whether the 25-or-fewer-employees limitation has been satisfied.'

[PPA §405] (b) Effective Dates- The amendment made by this section shall apply to plan years beginning after December 31, 2006.

Now this isn't quite the relief initially indicated in the ASPPA summary, but still will help out. I have a 2 person plan that we calculated (on 3.95%) a variable rate premium over $1,000. So a cap of 2x5x2=$20 sounds pretty good to me, considering that there is exactly a 0% chance of PBGC ever having any exposure at all in this case. Too bad that this won't take effect until 2007.

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Any thoughts how they might retro-actively apply the 5.5% minimum LS rate for 415 purposes? In other words, what if a plan paid a 415 lump sum in February using 4.68%. Do you think the Regs will forgive this? I think it would be difficult for them to argue the Plan did anything wrong. The distribution was legal when paid.

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I'd like to go back to the variable premium cap if I may. After reading and re-reading the statutory language, and the JCT explanation excerpt below, I simply don't see how the two can be reconciled absent additional guidance. I mean, if you look at the first and last sentence of the JCT expanation, how do you possibly get from point A to point B?

While the last sentence may well have been congressional intent, I guess I'll wait for additional clarification. Is there some simple explanation I'm missing?

"In the case of a plan of a small employer, the per participant variable-rate premium is no more than $5 multiplied by the number of plan participants in the plan at the end of the preceding plan year. For purposes of the provision, a small employer is a contributing sponsor that, on the first day of the plan year, has 25 or fewer employees. For this purpose, all employees of the members of the controlled group of the contributing sponsor are to be taken into account. In the case of a plan to which more than one unrelated contributing sponsor contributed, employees of all contributing sponsors (and their controlled group members) are to be taken into account in determining whether the plan was a plan of a small employer. For example, under the provision, in the case of a plan with 20 participants, the total variable rate premium is not more than $2,000, that is, (20 x $5) x 20."

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I read the first sentence and the last sentence as the main point. The intermediate sentences are only to clarify which participants are counted for the eligibility to receive the cap (limit 25) and the amount of the cap.

The 415 limit will be discussed in more detail once the IRS has a chance to comment. My personal bet is that the lump sum payments already made will not be overturned, but we may have to put up a fight for them.

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Effen,

One of my clients is in the exact same situation. I agree with you that it seems hard to argue they did anything wrong because the distribution complied with the laws in effect at the time. Let's hope that relief is issued for this type of situation.

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Guest Ira Hayes

Is there a schematic of what the 2008 Schedule B (Form 5500) will look like?

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This is a different subject than what's been discussed. I've been asked if the new 417(e) rules will still include the "lookback" and "stability" periods. I have read about the interest rate, but have not seen anything else. Thanks in advance for any help

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Guest Steve C

I imagine that lookback and stability periods will survive. Both current law and the new (soon-to-be) law identify the "applicable interest rate" as "for the month before the date of distribution or such other time as the Secretary may by regulations prescribe."

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Back to the variable rate premium. I finally got this through my thick head - it has been bugging the heck out of me how the variable rate premium example in the JCT explanation could come up so high. But it is right - I was just not looking at the statutory wording correctly. Looked at it again today after reading one of the summaries, and like most of these things, once you "get it" it becomes very simple. My emphasis below. So for a 10 person plan, you have 5 dollars x 10 = 50 as the variable rate premium for EACH participant. Somehow I just kept glossing over that word "each." Then times 10 = 500.

Duh. Sometimes, when you start down the wrong path on a first reading, you just can't get back.

[PPA §405] (a) Small Plans- Paragraph (3) of section 4006(a) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1306(a)) is amended--

(1) by striking `The additional' in subparagraph (E)(i) and inserting `Except as provided in subparagraph (H), the additional', and

(2) by inserting after subparagraph (G) the following new subparagraph:

`(H)(i) In the case of an employer who has 25 or fewer employees on the first day of the plan year, the additional premium determined under subparagraph (E) for each participant shall not exceed $5 multiplied by the number of participants in the plan as of the close of the preceding plan year.

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Guest Jeff Hartmann
The "per participant" cap is defined in terms of the number of participants. Using that language, the cap on total variable premium for a 5-participant plan would be ($5 times 5) times 5 = $125. For a 6-participant plan, it would be ($5 times 6) times 6 = $180, and so on.

At first blush this sounds like a typo, but the JCT Technical Explanation makes it clear that it was intentional.

I agree with this analysis.

I had read several published summaries that only described the cap as "$5 per participant" (and had thought that myself on my first reading), but the total premium reflects multiplying TWICE by the number of participants.

I sent in a note to BenefitsLink last Friday about this, and they created a "Guest Article" from me about it:

http://benefitslink.com/articles/20060814_premium_cap.html

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