Effen

Seems to me the IRS might have a problem because this might violate the accrual rules in year 2. If a participant always worked 1000 hours, their accrual in year 1 would be 50% of their accrual in year 2. This seems like it would violate the 133% rule. I would ask the agent for the specific provision that is being violated. If he really just "thinks" its wrong, he may back off. It does seem like a very odd provision, and a bit unfair based on the way the other years are handled.

That isn't the way it works. In your situation, his combined limit for both plans would be 31% of compensation. It is really a 25% limit, but he first 6% doesn't count. See IRC 404(a)(7)

right, you said "years of service" for accrual, but that is inconsistent with your next statement that the accrual "isn't taking into account any years of service prior to the effective date of the plan", which would imply "participation", not service. If it is service, you need to know his hire date. Say he started the company in at age 40 in 2007, then adopted the plan in 2012 and his retirement age is 65. Lets say his 3 year average comp from 2009-2011 was $150,000. The instant he adopted the plan his AB is the lesser of (.8 * 5/25 * 150,000) or (.10*200,000) or 20,000. Now if they amended to plan to only include comp > 100K, his AB is still $20,000. It does not decrease as a result of the amendment. It would remain $20,000 for another 8 years until his plan accrual exceeded $20,000. In 2025 his AB would be .8*13/25*50,000 or 20,800. This assumes no COLA on the 415 limit, which would actually result in small increases over the years. If the accrual fraction is based on participation, you have an argument that the AB was $0 and therefore no cutback occurred. It all hinges on the accrual definition.

It doesn't matter what the valuation said - garbage in, garbage out. I was asking what the plan document says. You said the formula is 80% of average comp, but how is it accrued. Is it 80% per year of service, or 80% times some fraction. If it is fractional, what are the years based on - they could be service or participation.

ok, so back to my original question. How many years of service did he have when the plan was adopted and how many total years will he have a NRA? Assuming he has past service, you could argue he accrued a benefit the instant the document was signed. Even if an amendment was signed a second later, it cant change what he already accrued.

I thought you said the plan was effective in 2012? If it was adopted and amended on the same day, I might just treat it like it was always effective, unless it was intentional. It is a 1 life plan...you have some flexibility. Did you ask your client what happened?

As long as the accrued benefit prior to the change is protected, I don't see a problem. The change can only impact future benefits that have not yet been accrued. It would be helpful to know what the benefit formula is and how the accruals work. If they are using past service for the accrual, he probably accrued a fairly large benefit the instant it was signed. Keep in mind that 415 will limit it to 10% of the $ max in year 1, so that might hold it down a little. I wonder why they amended it shortly after adoption and didn't just "correct" it? This could be a problem, but more information would be helpful

Ok, assuming that is the meaning, then, yes, I agree.

Sorry, I don't really understand your statement - could you edit your post?

If you read the Section 404(a)(7)©(iii) of the Code you will see it is not really a "31%" limit. The way it works is if you put in less than 6% of comp into the DC plan, the section does not apply. In your example, since you are putting in less than 6% of compensation, you don't need to worry about the (a)(7) limit.

The (a)(26) exemption is only for "underfunded" plans, and that exemption has exceptions. Check out 1.401(a)(26). All other NDT still apply. Generally, it is few years before (a)(26) becomes an issue for a soft frozen plan, but it will eventually get them.

Why would they possibly want this?

Lets say I have $250,000 of excess DB assets I am transferring to a QRP. This was a one person plan and the DB participant will be the only participant in the QRP. Lets say his annual compensation is $50,000. Can I allocate $50,000 per year to his DC account since that would be his 415 limit, or do I need to be concerned with the 25% deduction maximum? Seems like I am not taking a deduction, so the 25% limit shouldn't matter, but I am having trouble believing it is ok.

You are probably right, but most of the comment letters are asking for additional time. The way it COULD work is that you would still need to file by 10/15, but you would be permitted to amend the 2013 filing with an attachment on the 2014 SB. Obviously, we won't know for sure until the IRS issues guidance.

Buyer beware is always good advice. I had a recent situation where a sponsor's single employer plan was underfunded by $3M. Instead of terminating, they merged with a multi who took all the assets and agreed to pay all past benefits. 10 years later he withdrew from the fund and had to pay a $1M withdrawal liability. He wasn't happy about paying the liability and refused to see that he traded a $3M bill for a $1M bill. Sponsors can be very short sighted and forgetful. I knew it was a good deal, but the sponsor is probably still complaining about his "bad experience".

It might sound awful when taken out of context. If the employer funded the same benefit in a single employer plan would the liability been higher? Probably. So if the employees received a higher benefit, and the employer paid less for it, so why is that automatically bad? Not really trying to get into a debate about the merits of multiemployer plans, but to automatically dismiss something because you don't understand it, isn't always giving the best advice. Yes, these plans have issues, but no more than single employer db plans. Lots of discussion about w/drawal liability because of poor pension laws that forced trustees to raise benefits, and adverse investment results in 2007-2008. The bad funding laws have been changed, but many plans are still slowly recovering from the poor investments. Not all of these plans are in bad shape. Many are very healthy and provide a nice benefit for a very reasonable cost.

Interesting...however, the trustees of the plan are 50% Employer representatives, so is this any different than a private citizen not being permitted to sue Congress because their mismanagement caused them to pay higher taxes? I agree at one level it feels like taxation without representation, however, the reality is they are represented.

I think it time to fluff up the pillow. You thought they had quarterlies due, but in fact they did not. Your clients were very wise not to spend their cash foolishly.

How do you take over a plan in the first year? That would set off a lot of alarm bells in my head. The amounts you stated don't seem unreasonably high to me, assuming a fairly low interest crediting rate. I believe the theory many actuaries use to justify the deduction of the service cost in year 1 is that it is the at-risk funding target, assuming the plan offers immediate lump sums. If you search this board and the COPA board, you should find some discussions. I believe the IRS has agreed (although maybe not formally) that this is ok.

"It's a Volume Submitter plan, so that provision has the IRS blessing, at least." Ha Ha - I would certainly not hold that assumption. I assume you saw the EBSA Assistance Bulletin 2014-1 that was released early this week, but that only applies in the case of plan terminations. I think your only real option is the forced rollover. I would never recommend a forfeiture unless the amounts were very, very, very small.

I think there was a Grey Book question about this 5-10 years ago, but unfortunately I can't access my old Grey Books. I believe the IRS said that contributions must be attributed to a specific year and unless you could prove the contributions allocated after 2.5 months were attributed to hours worked in the prior plan year, they should not be counted. It used to be fairly common to count contributions after the 2.5 months, but I think everyone acknowledges that it is not proper and the practice has generally stopped. If you count the contributions will you avoid the deficiency long term, or are you just kicking the can down the road one more year? If you are only saving one year, why fight the battle?

Has anyone had one of their health fund clients do a HIPPA self-audit? The attorney for one of my clients is recommending they retain a firm to perform a HIPPA audit. The idea is to do self audit in order to minimize fines/penalties if the IRS/DOL came in for a real audit. This is a self funded fund with around a $5 million in assets and 300 members. It all sound reasonable except the only people they have found who will do the audits are the big national firms and they want $50K to do the audit. It all seems like overkill to me, but I am in no position to question the attorney. Has anyone else gone through the process? Are there cheaper alternatives? Are these worthwhile for a fund this size?

FWIW, everything I am hearing implies that Congress is fairly likely to change the law. The NCCMP proposals have some strong supporters and possible legislation is being drafted. It is still a long way from reality, but it isn't completely out of the question either. The current thinking is that Congress will most likely let the PPA provisions sunset, then they will jump into action in early 2015 and apply some sort of retro-active fix. Most people seem to want real change, but we might just get another band-aid.

A few things to consider: 1) Generally early retirement "reductions" in a multiemployer plan are really subsidies and are designed to provide incentive to take early retirement. Even though they are lower value, the reduced value does not compensate the plan for the lost interest. In other words, it is generally to the advantage of the participant to take the early retirement benefit. This is just a generalization, you would need to really review the actual factors being used to determine if this is true in this case. 2) consider the individuals life expectancy and general health. If he does not intend to live well into his 80s, less now is probably more valuable than more later. (This assumes that he is not currently "active" with the union or working in the industry. Would he have to terminate employment to collect his benefit, or has he already terminated? Obviously, many other considerations if the has to terminate employment to collect this benefit.) 3) It is very difficult for a participant to make an educated analysis of the plan's funding position. Participants often overreact to the plan's current status. Just because the liabilities exceed the assets doesn't mean the plan in in imminent danger of collapse. It could be in trouble, but if it isn't currently Critical or Endangered, it probably has a decent life expectancy. 4) If it is a dying industry and or dying local, that is a bad sign and could definitely lead to problems down the road. 5) Currently there is no way to ratchet down benefits to lessen the impact of an insolvency. Several unions are working with the PBGC and Congress to develop such a system, but so far nothing has come of it. The benefits would stay at their current level until the fund completely runs out of money. Once that happens, the benefit are slashed down to PBGC maximums (very low) and the PBGC loans the fund money to make the payments. This would then basically continue until in perpetuity. 6) If the plan is really going to be insolvent in the near future, it would be best to take less now, because the future will only bring even less. However, the participant is most likely overreacting to the plan's current situation. It may be in trouble, but still 20+ years to insolvency. It is really hard to tell without more information.

I believe the IRS killed these unless the mergers are for some other bonifide business reasons. I could find some cites and court cases if you need them. I don't think anyone is still out shopping these mergers anymore.