NewBieHere

Thank you for your inputs. I have one more question. If my friend wants to terminate the existing 401(k) (thus pay the surrender charges) and start a new 401(k) plan which allows each participant to make his/her own investment decision, would the answer to Question 1 change if my friend decides to increase this year's contributions to make up for the loss? The plan has been around for 3-4 years, and he has financial means to do so.

A dentist friend has his and his employees' money all invested in group annuity contracts. Although he and his employees get annual statements from the TPA, he is not able to check the balances more frequently. He would like to have a more typical 401(k)/profit-sharing plan where he could invest money in mutual funds. Here are some questions I have: 1. Because there are surrender charges, if he were to surrender those policies and move the funds to a new recordkeeper, would that be considered violating the ERISA fiduciary rules because the participants would take large losses? 2. Assuming that the answer to Q1 is "No", meaning that he is allowed to surrender his policies and does not violate ERISA, how does the new TPA calculate the funds allocated to the owner vs. the rest of his employees? Given that the employees have been receiving the annual statements, there must be a way or a method that the TPA follows to allocate these funds on a participant-level. There has to be many more questions I should be asking. Unfortunately, I do not know enough to ask the right questions.

I remember from EA exams a while back that, when you have a formula like ($100 for the first 10 years and $Y for the years thereafter), Y could not be greater than $133.33. to satisfy 133 1/3 Rule. I was trying to determine how what I was asking about is any different from the example here. Thanks.

Now that I have all the information, here are all the facts: In 2019, the plan was established as a traditional DB plan. In 2023, the plan was converted to a cash balance plan with the cash balance credit set at $90K for the owner and $55K for the spouse. Now, the prospective client wants to increase his cash balance credit from $90K to $200K (in essence, he wants to increase so that his retirement benefit will be close to the 415 lump sum). Is it even possible to do this, assuming that it will pass the nondiscrimination testing? I feel like this would certainly violate one of the accrual rules, but I am no cash balance plan expert. Would it be easier to terminate the plan and start a new plan?

It's unclear what happened in 2023 other than the statutory Cycle 3 restatement since the most current adoption agreement was provided. But the section that deals with Fresh Start (it uses the DATAIR product) is filled out, which led me to assume that different benefit provisions existed before 2023. I am under the assumption that the current cash balance formula is the result of 2023 fresh start (perhaps, it was originally set up as a traditional DB and got switched to a cash balance plan). The plan has been around for less than 5 years. Now, the owner wants to increase the amount of annual credit to the cash balance. There are NHCEs in the plan. If we need to make changes via an amendment, how does the accrual rule come into play? What are the some of the issues we should watch out for?

A cash balance plan had a fresh start effective 01/01/2023 when it had the Cycle 3 restatement. The owner (a physician) wants to know if s/he could do another fresh start to increase the benefit formula in order to increase the tax-deductible limit. Can this be done right away or should s/he wait/? if s/he needs to wait, how long?

It appears that, in order to file 5558 electronically, it is simply to fill out blanks and submit. As a TPA, can I submit the form on behalf of my client without getting the e-authorization? The instructions do not appear to address this question. My client is hard to get a hold of - he is a scientist working for DoD as a contractor. Most of the time, he is at an underground bunker somewhere in U.S. with no access to outside emails/phone calls. So, I am not sure when I will be able to get a hold of him. I do not want to wait until the middle of July to request an extension.

Lou S. and truphao, So, if a traditional DB plan currently has 7.5% of High-3, after the conversion, does the pay credit has to be no more than 10% (4/3 of 7.5%) when converted to an annuity at NRA?

Hi Lou S. and Jakyasar, Yes. I understand about the Fresh Start. My question is that, with the fresh start, can you set the pay credit as high as possible as long as the pay credit passes the nondiscrimination testing? I suppose Fresh Start means that you are literally starting over from the beginning. I need to know, in the event of converting to a cash balance plan, that the A.E. of pay credit is limited by 133 1/3% of the accrual under the DB plan. Larry Starr says that a cash balance plan is a type of formula. So, I would think it needs to abide by one of the accrual rules, namely 133 1/3.

I am in the same situation but have a different question. How does one determine the pay credit when we switch from a traditional DB plan to a cash balance plan? I am asking the question in the context of accrual rules. For example, in a traditional DB plan, the accrual has to satisfy one of the three: 133 1/3, fractional, and 3%. Since the pay credit is the benefit accrual for the year, does it have to follow one of these rules when the A.E. of the pay credit is compared to the accrual rate that existed in the traditional DB plan? Or, we simply convert the froze accrued benefit as of the fresh start date into an opening balance and set the pay credit based on the nondiscrimination testing results like we do when we first design the plan? Thanks!

A prospective client wants to adopt 401K/PS/Cash Balance combo for the 2024 plan year. However, they already made the SEP contributions for the 2024 plan year. Is it possible for them to adopt the combo strategy? If so, how does the NDT work with the SEP contributions? Where can I find more information on this? TIA

Thanks, everyone! You guys rock!

From the eligibility question, I don't think there is a way to "officially" exclude them. My question was whether the client could give NHCEs $0 benefit under the DB plan. Yes, the current proposal provides very generous benefits to one of the NHCEs whose pay is really low and the minimum amount necessary for the other NHCE to satisfy nondiscrimination and Top-Heavy requirements.

I have a client with 2 owners and 2 employees. Under the 40% rule, I can provide meaningful benefits to the 2 owners only. Can I set up a cash balance plan with 2 owners only? Adoption Agreement says that we cannot exclude anyone in favor of HCEs. So, the only other way around is to offer eligibility to everyone but give $0 benefits to the 2 non-owner employees. Is this how it is normally done? It appears counterintuitive that you tell them they are eligible to become participants in the plan but with $0 benefits. Also, how does it affect other administrative compliance requirements such as SPDs, SARs, etc.? Thanks!