Effen

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.

Even though you didn't ask a question, I will give you a question, that will lead to the answer. What does the plan document say?

I think we will just need to disagree on this. I agree there could be a disconnect between the lump sum ($105,000) and the "value" of the actuarially increased annuity benefit. However, I don't believe this is necessarily a problem, and I don't believe 417(e) has any place in this discussion, assuming the plan has always been an account based benefit formula. There is nothing wrong with your interpretation, and a document could be written to require it, and it would certainly be the conservative approach, but I don't believe it is only acceptable method.

Thank you. The "greater of" formula in this site only applies if your plan has a split benefit, where one piece is based on a traditional db and the other piece is based on a hybrid formula. This provision specifically mentions that the piece of the accrued benefit based on the hypothetical account is not subject to 417(e), whereas the piece based on the traditional db is subject to 417(e). These provisions are the reason you can't "set it and forget it" when you convert a traditional plan to a hybrid plan. The whole point of (b)(1) is to state that hybrid plans are not subject to 417(e). Section 1(b)(4) provides exceptions to that rule when the current hypothetical account was created by converting a traditional db into a hybrid.

Can you provide a site for this? I think your final paragraph accurately describes the problem. There is no clear guidance what you need to do post NRD on a hybrid plan. All they have said is it must be a reasonable adjustment.

FWIW, there is a very similar and much longer discussion currently going on about this topic on the ACOPPA Board. I think what is comes down to is the meaning of 1.411(a)(13). From the preamble of the final hybrid regs it states: "Under these final regulations, a cash balance formula or PEP formula is treated as a lump sum-based benefit formula to which the relief of section 411(a)(13)(A) applies if the portion of the participant's accrued benefit that is determined under that formula is actuarially equivalent (using reasonable actuarial assumptions) to the cash balance account or PEP accumulation either upon attainment of normal retirement age or at the annuity starting date for a distribution with respect to that portion." The question is, what is reasonable. I don't think we need to go as far as FAP suggests, although that would certainly be safe, but I do think you may need to give more than a standard interest credit. Is more guidance expected? Doubtful, considering how understaffed the IRS is and the fact that it took them how many years to give us these final regs? They will wait for an egregious test case, then bang them on audit.

You may want to take a look at 1.401(a)(4)-5 regarding the timing of an amendment. Also, those employees who terminated last year have likely not had a break in service yet, and certainly not a 5-year break, so there is another argument that they should be included.

Just as an FYI, the IRS has started to rattle their saber around this issue. They have said the post retirement actuarial adjustment on the cash balance account must be "reasonable", and they have implied that simply giving an interest credit equal to the 30 year treasury is most likely NOT reasonable. In your example your crediting rate is 5% - is that reasonable? I don't know, but since you are crediting the annuity with 7%, you might want to consider using the same rate for the cash balance plan.

I agree with Andy that I think the answer is A. I have heard some people speak that B, or some form of B may be possible, but it seems to me you couldn't pay a retroactive benefit prior to a time when the provision existed in the document. C is just wrong - you cannot pay a benefit greater than 100% of comp, however, if the plan contained a COLA, you may be able to adjust the benefit post commencement, or something like that?? Also, I am not saying this is "your" problem, but we are seeing a lot of this kind of thing when we take over work, especially from TPA firms without an actuary. Personally, this is most likely just the result of bad consulting. Deductions are only valuable if they can get they can get the money out of the plan. I am sure he will take comfort in the amount he saved on admin fees while he stokes a 50% excise tax check to the IRS. Consider raising compensation, or hiring additional employees - maybe spouse or children to absorb the excess.

I wasn't aware of the consensus opinion that different assumptions are not permitted. We have prepared several lump sum windows where different assumptions were used. None of the plan's have been audited, but we had fairly strong ERISA counsel in each who were ok with it. We also did it many years ago in the plan termination situation, that was audited by the PBGC and they specifically looked at this issue and determined it was ok. If there was no lump sum provision for participants over $5,000/$1,000, then I don't see how the IRS can argue you can't have a different basis for lump sums. As long as it isn't discriminatory, I don't see any problem with it. I guess I am saying, we have done it many times and have never had a problem, but if the IRS is saying something different from the podium, you may need to at least consider what they are saying.