Effen

Is this a two person company where both are HCEs? If so, then as long as they are both benefiting in the db plan (401(a)(26)), you can pretty much do whatever you want with the benefits because there is no one to discriminate against. Now if you have NHCEs in the company, you have some real issues...

I always felt the MRD from a db plan was simply a payment of the accrued benefit as of a specific date. The participant isn't really making an election of the form of payment, they are just receiving the MRDs which are calculated based on plan provisions and government regulations. They aren't electing a "retirement" option because they haven't retired. What I am suggesting is that optional forms of payment would have no impact on the amount of the MRD because there should be no "election" - the benefit should just be paid. Although I'm sure there are those who would disagree.

This is a document issue. How does the document define the group? If it is really by name, it seems it would be hard to argue he should be in a different group. You can always amend the plan and move him into the rank & file group prospectively, but you would need to give him a 204(h) notice and amendment couldn't take effect for 15/45 days depending on the size of the plan.

Are you saying you used a COB/PFB to help satisify a minimum when you really weren't allowed to because the prior years funded ratio was < 80%? If so, then you now have an unpaid minimum (deficiency) that you would like to clear up by using contributions that were previously designated for the current year to satisify unpaid minimums from the prior year? Could you be more specific and possibly provide dates?

Pay the person whatever they are entitled to based on their actual age/service and let all the rest be water over the dam. Since they misrepresented their age, the sponsor actually contributed less for them than they should have, so it saved them money. There really aren't any damages since his benefit would be the same if he was truthful about his age when he was hired.

Then you have a choice. Keep the plan open and allow people to "benefit" so you can satisify 401(a)(26), or terminate the plan and take your shot with a permanincy issue. Personally, I would terminate it. I assume there is some business reason he doesn't want to fund it and if you are not going to submit for a letter, chances are remote the IRS will ever bring it up. Explain both options to the client, let him make the choice.

Definitely need to get a lawyer involved. These are signifant issues. 3. At the very least your client you client owes an excise tax of $100/day/effected participant, plus, probably interest and penalties for late filing. (4980F) Regarding if the amendment can even take effect, 204(h) states that if there is an "egregious" failure to provide the notice, the participants are entitled to the greater of the benefit before or after the amendment. One of the "egregious" failures listed in the statute is that the failure is within the control of the plan sponsor and the failure is "...a failure to provide most of the individuals with most of the information they are entitled to receive..." That says to me that not providing the notice at all could lead to ignoring the freeze and having to pay the full benefits. I'm not sure changing the SPD would meet this criteria because 204(h) requires a specific notice for one single purpose, to notify the participants of the reduction of accrual, but it might be an argument if they want to put together a CAP filing. I think the facts and circumstances would be very important in determining how to proceed.

Agreed! Now back to the original question. In order to pass 401(a)(26), at least 40% must receive a benefit. The amount of the benefit is never defined in the Code or the Regulations, other than 1.410(b)-3 that states “in the case of a defined benefit plan, the employee has an increase in a benefit accrued or treated as an accrued benefit under section 411(d)(6)”. Since very bad people were designing plans that provided benefits of $1 or less in order to pass a(26), the IRS wrote an internal memo that told the agents to challenge any plan that didn’t provide at least a .5% accrual. This was done because the IRS knew it wasn’t worth the taxpayers effort to go to court over such a small benefit and because of this, people started designing plan’s around the .5%. So, if you provide a reasonable benefit and the IRS accepts it, you are good. If you want to be safe, you can use the .5%. I have seen many plans with approval letters that don’t provide a .5% accrual. Either way, the IRS doesn't want non-PBGC covered frozen plans hanging around, so why is your plan still hanging around? Why not just terminate it and avoid this whole issue?

What is a "PEO"?

I would be highly suspect if a poorly trained auditor pulled out 1.401(a)(26)-3(2) as a challange. The auditors generally don't go beyond their check list, which is why this smells of IRS attempted mission creep. I agree, there should be nothing wrong with the design from a 401(a)(26) perspective. If you can't get the auditor to back off, ask to speak to his/her manager. Then you will find out if it is just him/her, or if it is something deeper.

Because it is for testing results, not for plan design.

Are you an ASPPA member? Even if you are not I suggest you contact Brian Graff or someone in the government affairs committee at ACOPA about this issue. They may help you in your fight. I think the IRS is clearly overstepping here, but then again I believe the overstepped when they defined "meaningful" to be a .5% accrual. They often "legislate" knowing that they can't legally back up their demands, but also knowing it isn't worth your client’s money to fight them.

Can you be more specific about this? Who does the db plan state IS benefiting? In order for the plan to be qualified the benefit must be definitely determinable. In order to be definitely determinable, it must first define specifically who is eligible. If the plan does not exclude certain employees, then most likely the plan covers everyone. If the plan as written covers everyone, I don't think the IRS will let you go back and say you meant to exclude them. They tend to go by what the plan says, especially if it means you are potentially taking benefits away from NHCEs.

Assuming the AFTAP is ok, why would you think this would be a problem? Plans get amended all the time to raise benefits for retired participants and beneficiaries.

In what context does the actuary speak of it?

There are some long threads on the ACOPA board regarding this topic however they also added a statement at the end of all of the threads basically saying that you can't copy/forward the threads. But at the risk of being jailed for the next 100 years, I am passing along this small section of one of the threads with a few edits to protect the writer: If you can't get on the ACOPA board, send me a message and I will try to get you something more complete.

The theory we generally work under is that anything that requires a Plan Sponsor election is a change of method, anything else is an assumption. There really isn't any clear guidance on this, so either way you are probably ok.

So, was there an actuary involved or did he just contribute whatever he felt like?

That is my understanding. Do you think there is some question about it?

Plan termination liabilities literally fluctuate every day, probably every minute of every day, as the market changes and the insurance companies try to work their own internal magic. The best way to find out what the market rate of the plan's liabilities is would be to ask an several insurance companies to quote it - generally they will do this for free, but many brokers are willing to help you for a fee. Most brokers will do all the leg work and will quote the plan for free on the assumption that you will eventually let them broker the deal when it happens at which time they will take their slice of the pie. If the plan pays lump sums it should be fairly simple for the existing actuary to tell you what the plan term liability is based on the current lump sum rates. Other than that, the actuary should also be able to tell you if the current funding target is most likely higher or lower than a plan termination liability. In most instances right now today, it is probably a low estimate since annuity rates are a little lower than the segment rates, but there are always exceptions. SoCal's advise was the best - hire a good actuary, or if you already have one, ask him or her.

Coming onto this train a bit late, but ... Am I correct that the AFN requires a statement that the "Plan’s annual report is available on an Intranet website" which I guess doesn't mean it has to be posted there, but it must be available via the intranet website. However, PPA requires that the actuarial information included in the annual report "shall be displayed on any intranet website maintained by the plan sponsor" which means that the 5500 SB needs to be posted on the intranet website. Andy, is this why you were reminding us that you are from Missouri? Are you arguing that there is no requirment to post the entire 5500 in the intranet website? This appears to be what others are saying, but it is far from clear. Is my understanding correct?

I not get one either.

I don't understand what this means? Are you saying the plan document called for a benefit of 135%, but the policies call for 168%? Are you saying that you have a plan document that does not match the amount of the policy? Who is requesting the valuation and what makes you "feel" it is overfunded if you have never done one? Also, what do you mean by "a valuation"? What is it that you are trying to value?What is your role in all of this? If the client is funding a policy in excess of the benefit provided by the plan document the contributions for the excess may not be deductible. You could amend the plan up now, but that won't help you with the past contributions. Also, you need to make sure you are not violating the 415 limits. You also should look into the "listed transaction" rules and make sure they are not a concern.

For the benefit of the group, could you share the answer. Thanks

Why not ask the agent who sold him the policy? What do you mean he "made contributions"? Did the contributions go to the insurance company? How did he determine how much to contribute? Who should he have consulted with before making the contributions? If it is a 412(i), all payments should be going to the insurance company based on the amount they are billing. If he made contributions to a trust (and not the insurance company) the 412(i) status is most likely blown and you have some bigger issues. I think we need more specific information.