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Unit Benefit Formula - DB plan


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Potential client has had a DB plan for approximately 20 years. 

The adoption agreement states the following under Unit Benefit Formula 

 "(1) Uniform formula.   10 % of Average Compensation multiplied by Years of Credited Service.

(i) Years of Credited Service above 25 will not be taken into account.

 (this box checked) (ii) Years of Credited Service above 10 will not be taken into account. "

 

Does this mean on an annual basis any eligible employees are not entitled to a contribution past year 10?

Or Is this merely part of the actuarial equation the TPA uses for annual valuation purposes? 

Client was informed that a non-owner employee/100% vested participant is due $315k if terminated plan as of 12/31/22.

I'm told there is approx $2.mm in various stocks/bonds/some annuities at this time. 

Only two participants. Owner (age 72) and one rank and file employee (age 47) who's worked there for 20 years 

He's just trying to get a handle on whether or not the TPA is accurate is the $315k amount. As he doesn't believe that's the true amount and that any distribution should be lower than. 

Thoughts and comments appreciated. Or other guidance and resources are appreciated. 

I note I may not have provided all facts and am awaiting on information. 

Thank you 

 

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2 hours ago, Tax Cowboy said:

Does this mean on an annual basis any eligible employees are not entitled to a contribution past year 10?

Under this formula, a participant no longer is credited with additional service after 10 years of service. At 10% per year that means their accrued benefit is equal to 100% of their average compensation after 10 years of service. They will most likely still have increases in their accrued benefit after year 10, not due to additional service, but due to increases in average compensation.

2 hours ago, Tax Cowboy said:

Client was informed that a non-owner employee/100% vested participant is due $315k if terminated plan as of 12/31/22.

Lump sums in DB plans are subject to the 417(e) minimum. If the employee's average pay was $75,000/year, that's $6,250/month, which would be equal to their accrued benefit if they have 10 years of service. My software tells me that the present value factor using the 2022 applicable mortality table and the October 2022 segment rates, for a participant currently age 47 with normal retirement age 65, is 52.571. $6,250 x 52.571 = $328,569.

The actuary should be able to explain how they came up with the $315,000 number.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Interest rates for minimum DBP lump sums will increase substantially for annuity starting (distribution) dates in 2023 which will dramatically reduce lump sum payouts. I thought I read someone's article within the last month or so that said such reduction is in the 15% range, which would take $315k down to $270k. This impacts the owner as well.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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