Effen

Zoraster - "cash balance" or "traditional" are simply methods of determining the amount of benefit payable at some event. They have nothing to do with the benefit delivery. Cash balance plans don't have to pay lump sums, and traditional plans can offer forms of payment other than annuities. The big advantage of cash balance plans in the small plan market is the ability to control the cost of the benefit and to allocate the same "value" of benefits to people of different ages/compensation levels.

They are based on the plan's actuarial equivalence factors (limited by 415 regulations), but never to exceed the maximum compensation limit. Therefore, the highest the limit can be in 2015 is $265,000 regardless of the age, which you will probably be hit around age 69. Just like the factors for retirement ages below 62, no one can really tell you what the maximum is, because it is different for every plan.

So, was the prior actuary just determining the value of his current year's accrual and telling him to contribute that. Then he takes it out as a distribution equal to the PVAB? Were you just rounding when you said he puts in 100K, and takes out 100K? I guess IF the plan had an in-service distribution option, and if the PVAB of the current year's accrual fell within the min/max for the plan year, you could contribute the PVAB, then turn around and immediately take it out as a lump sum distribution. I am not a tax pro, but seems to me you are not accomplishing any different than taking it as compensation. Corp gets same deduction whether it pays the pension contribution or payroll, participant takes it right out and pays the income tax...so what have you saved? Except, by doing it this way, the money is never taxed for social security or medicare? Interesting....I guess if your comp was high enough, it might justify the cost of the plan.

More information is needed. How does he justify taking all of the assets out at the end of the year? Is he over NRA? What is the distributable event? Is this a cash balance or a traditional db? Can you give some idea of the benefit formulas. Can you provide more specifics around the entry age, attained age, and retirement age of the participant.

Also, don't forget to consider if any of the terminated vested participants are former HCEs, you cannot pay an unrestricted lump sum unless the plan is 110% funded after the payout.

100% of pay IS the 415 limit and therefore you need to consider the 415 rates to determine the maximum lump sum.

I think what David meant was that your questions are not the type that you can be adequately address on a message board. Although you may not want to, you should ask your questions to the actuaries in your firm who are best qualified to understand the context of your question.

David - I agree, but I believe it must be a "full" distribution. I don't think they can elect to receive just 50% of their monthly annuity. I think Zorro was asking about "partial" distributions.

No Congress has been considering various concepts around phased retirement for years, but so far, nothing of substance has come from their considerations.

ok, I will jump in even though I haven't looked any of this up. In IRS Announcement 2004-58, I.R.B. 2004-29 the IRS gave an automatic pass on the QJSA being most valuable against the lump sum if the lump sum is based on 417(e) rates. If you are not using 417(e) rates, you may have a problem if the lump sum turns out to be more valuable than the QJSA. Under the relative value rules you would compare the value of the lump sum to the value of the immediate QJSA based on 417(e) rates, therefore early retirement reductions can also impact the results. Lets say the AB is 1,000 for life. The partic is 65 and spouse 62. Plan using 6.5% for optional forms and 417e for lump sums. LO = 1000, J&100 = 850, LS = 162,000, value of J&100 on 417(e) - 166,000 LS is 97.6% of QJSA. No problem - QJSA is more valuable. Now, lets say you are using 2% to determine the value of the lump sum. LO = 1000, J&100 = 850, LS = 194,000, value of J&100 on 417(e) - 166,000 LS is 117% of QJSA. Now I think you might have a problem.

Sorry, I don't have anything in writing but I have been at several meetings with high ranking IRS representatives who were very clear on this point. Once the minutes from the meetings are published, I can provide something more concrete. In the meantime, you can assume that by the time your participant is ready to terminate the plan, it should be accepted as common knowledge.

Also, the IRS has been very clear in their comments since the notice was published that they do not intend to change anything that existed before a few PLRs were released that triggered the run to cash out retirees. They have been clear that participants who are receiving an annuity will be able to convert to a lump sum at the time of separation from service or plan termination.

I think you are getting some terminology confused. In your example, he is NOT receiving a "lump sum". He is receiving an annual annuity. A lump sum is a one-time payment equal to the present value of the annuity. Your participant will still be able to receive a lump sum upon termination of employment, or upon plan termination, assuming the plan is properly amended to accomplish it.

Thank you. Very helpful.

If a "Critical and Declining" plan elects to lower accrued benefits, how does that impact a contributing employer's withdrawal liability? Is that run through the calculation like any other "gain"? In other words, are there any special rules that exempt the impact of the reduction from the withdrawal calculation?

Such an amendment would not be possible at all. A lump sum is a protected right and feature of the accrued benefit and cannot be removed. The best you can do is remove the lump sum option for future accruals, but you can't take it away from benefits already earned. Therefore, it would be effective for benefits earned after the effective date of the amendment.

As Lou said, the document holds the answer, but basically they have 3 options: 1) Fund the shortfall 2) Reduce the benefits for a select few owners/hces - what ever they feel is equitable 3) Reduce the benefit for everyone in accordance with plan doc. 1 or 2 are the best options as far as the IRS is concerned, but legally, there is nothing wrong with 3. Also, if it was PBGC covered, they would force the owners to reduce their benefits and make sure any non-owners received full value. Don't kid yourself into thinking the PBGC would have provide any realistic benefit in this situation.

The IRS perceives that elderly people are being taken advantage of in these lump sum buyouts. They are also concerned about changing mortality standards and want to slow down lump sum windows that occur before they can get the new 417(e) tables released. Their main position is they don't agree with the two PLRs that were released that many have been using to justify lump sum windows for retired populations. In their mind the final regulation won't "change" anything that existed before the PLRs. You will still be able to convert retired benefits to lump sums upon death, termination of employement, or in conjunction with a plan termination. You will not be permitted to simply offer your retired population a lump sum buyout.

Actuaries are held to various professional standards, so when you say "requirement", we are required to use "reasonable" assumptions. It is typical that small / tax shelter plans typically ignore non-retirement benefits. However, the larger or traditional retirement plans would typically have more explicit assumptions. Larger plans typically provide termination benefits, disability benefits, death benefits - all of these would have a probability assigned and a benefit valued. Tax shelter plans typically don't provide disability benefits, and typically assume no one will terminate or die prior to retirement. This is fairly common practice justified by administrative simplicity. The fact that you are trying to do an FASB valuation tells me it is most likely not a tax shelter situation and therefore, the actuary should review the plan provisions and determine if it is reasonable to ignore the non-retirement benefits. If the plan pays disability benefits, termination benefits, pre-retirement death benefits, those should most likely be explicitly recognized. Also, no offence intended, but if you are an actuary, and are asking these questions, you should also consider having a more experienced person peer review your accounting work.

You should show all expected benefit payments. If your assumption is that only retirement benefits will be paid, then that is all you should have in the expected payments. One might question if "retirement only" is a reasonable assumption, but that is a different discussion.

I found an AON presentation to referenced "highest early rule" of Reg. 1.411(a)-7©, but the words "highest early" don't appear in 1.411(a)-7©, so I don't really understand the reference either. http://www.aon.com/attachments/human-capital-consulting/New-Final-and-Proposed-Regs-on-Cash-Balance-and-Other-Hybrid-Plans.pdf

Lots of comments on this if you search the board and the internet, the short answer is, "no", you can't charge participants in db plans the way you can in dc plans. I am not sure if you statement was a typo, or if you really meant to say the "defined benefit plan does have individual accounts"? DB plans do NOT have individual accounts. They have hypothetical accounts that may be equal to the participant's accrued benefit. The assets of the plan support support all of the plan benefits. The plan is always either overfunded or underfunded. Money is not actually allocated to individual people unless the plan is being terminated. This is the main reason why participants cannot be charged administrative fees. Even in a QDRO situation, you cannot charge the participant fees related to the QDRO. I am not sure what you read that implied you could, but the DOL has been pretty clear about this as well.

True dat. However, if your document calls for the greater of AE of AB or age/service benefit, the AE of the distributed benefit could easily exceed the value of the additional age/service benefit and therefore, the net effect is no new accrual. The plan must contain this "greater of" language, otherwise, they would interpret it to be "both" the rollup and the age/service benefit. Either way, based on Ombskid's most recent post, it sounds like there were several problems. The "partial" distribution was not a permitted form of distribution, the "no accrual" may also be a problem depending upon the wording, and the lack of distributable event is most likely also be a problem. This sounds like a situation where he should amend the plan to make sure they allows for everything he did, then terminate the plan and tell him to cross his fingers and hope he doesn't get audited.

I don't believe the law allows for partial distributions from a db plan, but it is something on a lot of professional organizations wish list. It would be helpful for phased retirement. Probably the best you can do is have an in-service distribution at age 62.

Both. You determine his maximum 415 lump sum, based on the plan document and the applicable regulations, and compare that to his benefit under the plan. Most likely, the 415 maximum lump sum won't come into play, unless he is near the 100% compensation limit.