Effen

You need to check your QDRO. I assume we are talking about a defined benefit plan? QDROs often contain language requiring the AP to commence payment when the participant commences their benefit. I also suggest that you contact the Plan Administrator and ask them for your options.

Correct - there is a circular function to split the total earned income between ER Contribution and plan compensation. Assuming you need some amount of compensation to produce the benefit that is creating the contribution requirement, it w/b rare that the entire Sch C amount goes to deduction, but it is certainly possible if the high 3 is already established, or if you have a fixed dollar formula in a cash balance plan. This could easily create a 415 limit problem. There is also a special adjustment for 1/2 of the SE tax, and you have comp limits that can also come into play, so be careful.

Talked to Cleveland based lawyer friend, he suggested Gary Shulman and QDRO Consultants, Inc.

"With respect to an employer of a participant, a former entity that antedates the employer is a predecessor employer with respect to the participant if, under the facts and circumstances, the employer constitutes a continuation of all or a portion of the trade or business of the former entity. This will occur, for example, where formation of the employer constitutes a mere formal or technical change in the employment relationship and continuity otherwise exists in the substance and administration of the business operations of the former entity and the employer." This is an interesting question. I generally looked at these from as controlled group issue, but if she is really owned 50% and they both "ate what they killed", and didn't combine revenue, if she is keeping her clients and just dropping his name from the firm name, it would be hard to argue that she isn't employed by the same employer. However, if she is leaving and starting fresh, or just taking a few, you could argue she gets to reset her 415 limit.

IRC section 415(h) provides that for purposes of applying IRC sections 414(b) and (c), the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" each place it appears in IRC section 1563(a)(1). I was thinking the rule was "50", but it is actually "more than 50 percent" rule. I don't know the answer, but maybe it isn't a cut and dry as previously assumed.

Why?

Announced this morning at EA Meeting that Joint Board will eliminate physical presence requirement for continuing education retro to beginning of this cycle. https://www.federalregister.gov/public-inspection/2024-05240/regulations-for-continuing-professional-education-requirements-of-the-joint-board-for-the-enrollment

I think that is a question for your lawyer and her lawyer to debate. No one can answer that question based on the 6 words you provided.

Just because some TPA's are big and popular, doesn't mean they know what they are doing. Some of the worse work comes out of the biggest firms because they need to hire a lot of people and they don't have time to train them. Many big TPAs are famous for low pricing and you generally get what you pay for. Maybe just remind them that there is a potential $100/day/person fine for ignoring the 204(h) Notice. This is an old ASPA ASAP, but I think it is still valid. https://www.asppa.org/sites/asppa.org/files/PDFs/GAC/ASAPs/03-07.pdf "Substantial excise taxes under IRC Section 4980F may apply regardless of whether a failure to provide a timely Section 204(h) notice is egregious ($100 per day per applicable individual)." If their "sign and retain" email doesn't even mention the 204(h) notice, seems like a big liability risk on their part. Should you work with them is up to you. Your loyalty should be to the client, not the referral source. I always say, don't let their problems become your problems. If you want to keep working with them, inform them of the issues (go to the leadership, not the person who sent the email) and make sure your clients do things correctly.

Sounds to me like you have a good handle on the situation. Not sure there is anything "wrong" with it, depending on how it is presented. If it is truly, "sign it now but don't tell anyone", that is clearly wrong, but it is, "here is an amendment in case you need it", that might be ok. You are correct that 204(h) notices would be required, so if they weren't included, then they have a different problem. There are fines for not issuing 204(h) notices. Seems like a fairly large expense for the TPA to produce and send amendments when the sponsor didn't request it, but maybe it is all built into their pricing model. Is it better to back date an amendment, or to sign it timely without the intent to implement - both are unethical. I might feel different if it was a 1 owner plan vs. a 2 person plan with one owner and 1 staff.

I found this in a Mercer article:https://www.mercer.com/en-us/insights/law-and-policy/using-qualified-replacement-plans-to-reduce-excise-tax-on-db-plan-surplus/ Terminating DB plan has no active-employee participants. The rules do not specifically address how the 95% requirement works when none of the terminating DB plan’s participants is actively employed within the controlled group. Consider the following example. Example — “old and cold” plan. Employer Z sponsors plan E, a DB plan. All of plan E’s participants are either retirees in pay status or terminated vested participants. Employer Z terminates plan E and transfers the surplus assets to plan F, a DC plan. None of the retirees or terminated vested participants from plan E benefit under plan F. A literal reading of the statute would suggest that no participants of terminating plan E would have to be covered by the QRP (because 95% of zero is zero). However, some people have raised concerns about this interpretation. IRS seems unlikely to challenge this transaction because it presents little potential for abuse. But IRS might find other situations objectionable. Example — spinoff and subsequent termination. Employer Q sponsors DB plan J. Q spins off plan J’s benefits and liabilities for active employees to new DB plan K. After the spinoff, only retirees and terminated vested participants remain in plan J. Q later terminates plan J and transfers the surplus assets to a DC plan that doesn’t cover any of the active participants in K. Here, IRS might view the spinoff to plan K and the termination of plan J as a single transaction and count the active participants in plan K in determining whether the 95% requirement is satisfied. If so, the transaction would fail to meet that requirement since none of the participants in plan K benefit under the replacement DC plan. IRS, the Pension Benefit Guaranty Corp. and the Labor Department took a similar approach to spinoff-termination transactions in the 1984 Joint Implementation Guidelines on Asset Reversions in Plan Terminations. Under those guidelines, if an employer recovers surplus from a spunoff plan, the remaining ongoing plan has to meet the plan termination requirements (such as full vesting and annuitization). Employers considering this type of transaction should consult with counsel.

I agree with David. We had a similar situation several years ago (no active participants in terminated DB plan) and the ERISA attorney concluded that any transfer would NOT lower the excise tax.

The 1/15 would be from 65-60. If she commenced retirement payments at age 62, they would be 80% of her benefit at 65.

You might want to look at the 5500 filing that is in public domain. The plan provisions are a required attachment to the Schedule SB. They won't be as detailed as the SPD, but they should define the early retirement provisions. https://www.efast.dol.gov/5500Search/

I am not really sure what you are asking, but I think you are asking about the immediate annuity that needs to be offered because the plan is now paying a lump sum? The 417(e) lump sum needs to be the present value of the accrued benefit payable at NRD. It is not required to include any early retirement subsidies. However, the value of those subsidies needs to be disclosed in the relative value disclosures given to the participant with their election form. You must at least offer an immediate QPSA and QOSA, and any other options they are eligible for at the time of lump sum payment. If the plan does not contain any early retirement provisions for ages below ERD, you will need to add them. IOW, if the plan allows early retirement at 55/10, but the participant is 45, you need to know how to determine the immediate annuity at age 45. Typically, we would use the standard early retirement factors until Early Retirement Age (if otherwise eligible), then use the plan's actuarial equivalents (not 417(e) for ages below that, but that should be part of the window amendment. Then, for relative value disclosures you would compare the value of the immediate benefit using 417(e) factors to the value of the actual lump sum and disclose the difference to the participant. You have lots of options with this, but that is the way we typically do it. I believe you could also determine the lump sum based on the annuity at NRD, then divide it by the immediate QPSA factor using 417(e) rates and offer that as the immediate annuity, but you need to be careful about those who might otherwise be eligible for early retirement and your participant disclosures would need to explain that if they waited until they were eligible for an early retirement benefit that their monthly benefit might be significantly higher. We generally don't do it that way because of the inconsistencies, but if your plan doesn't have any early retirement provisions, that may be a simple solution. No matter what you do, you need to follow plan provisions.

Statutorily, the 417(e) factors exist to be a minimum lump sum amount. Many plans adopt them as the sole basis for lump sum determinations, but plans can use other actuarial equivalents if they wish. Therefore, lump sums can be greater than those determined using 417(e) factors, but not less, except in the case of maximum benefits under Section 415. Since you mentioned "window", if the plan has no stated actuarial equivalence for determining lump sums (because they never offered them), and they want to add a lump sum window, they do have some flexibility in choosing the Applicable Interest Rate within the 417(e) regulations. The existing actuarial equivalence factors do not need to be used to determine lump sums unless the plan specifically states they apply for that purpose.

Agree. All makes sense now.

A few things: 1) Doesn't really matter what the divorce decree says, it matters what the QDRO says. 2) Both participant and AP would have signed the QDRO to accept it (or at least their attorney did). Doesn't mean they understood it, but they should have. 3) Often, but not always, the APs share is based on the # years married / total years working * final benefit. Sometimes it is 50% of the benefit at the time of divorce. Depends on the wording in the QDRO. 4) She has a right to see a copy of their QDRO procedures. 5) The QDRO should have a specific section that address what happens if one of the parties die before benefits commencement. If it was a true "separate interest" QDRO, the APs share would just be forfeit if they died before commencement. If it was a pure "shared interest", the benefit reverts to the participant. Many are a blend of the two where they are shared until commencement, then they become separate. In those cases, if the AP dies before commencement, the benefit typically reverts to the participant. 6) Seems like the only way the AP's portion could be paid to someone other than the participant would be if it was a separate interest QDRO (since they are treated as 2 separate plan participants) and the plan had a death benefit for non-married participants. So, maybe a lump sum or a period certain annuity? Not logical that it would be a life annuity. 7) Easiest/cheapest thing is to read the QDRO. If she doesn't have it, request a copy from the Plan Administrator. She probably only needs to hire a lawyer if the PA isn't following the QDRO.

As Dave alluded to, you can't just offer lump sums to actives because "they would like to". There has to be a distributable event - attainment of normal retirement age, plan termination, death, disability, retirement, etc. I think you can slide down the in-service distribution age to 59.5, but not younger than that without terminating the plan. Regarding freezing accruals for those who take the lump sum prior to NRD, it seems like as long as the effect of the amendment is non-discriminatory, you could do it. I would make sure you accurately disclose everything to the participants, then it is their choice, but it feels pretty scummy. You would also be required to show the plan is non-discriminatory every year thereafter since they froze accruals for non-excludable participants.

If the late retirement provision use the greater of the actuarial increase or the age/service benefit, the actuarial increase will almost always be higher. Therefore, if the participant receives a lump sum, and the plan offsets future accruals by the actuarial value of prior distributions, there will almost always be no future accruals. IOW, the value of the prior distribution will exceed the value of the additional age/service accruals and no new benefits will be payable.

I believe what C.B. Zeller said is correct. s/b 4.96%

Thank you. The article was very helpful. Covenants not to compete are intangible assets amortized over 15 years (Sec. 197(d)). This makes it clear that they would not be "earned income". However, the article mentions a potential restructuring of the Covenants into a consulting agreement, "to the extent that a portion of the consideration can be legitimately attributed to the consulting agreement" but it seems like this is generally done to favor the buyer. Thank you all.

I have a prospective client who received a $500K payment in 2024 for signing a “non-compete agreement”. This will be reported on a 1099. Can income for signing a non-complete be used as “earned income” for pension purposes? This person has other self-employment income that can be used, but wondering if they could also use the $500k in 2024?

"marital share" will be defined by the QDRO, but it is typically 50% of the benefit earned during the marriage, or attributed to service during the marriage. It typically applies to all rights and features of those benefits, including death, disability, early retirement, etc. Different ways to handle all of that. There are "shared interest" and "separate interest" QDROs that can produce different outcomes. As David said, these are very significant legal issues and if you attorney isn't familiar, find one that is.

I could be wrong, but my understanding is that any distribution from the plan must meet a defined form of payment. This would be some sort of lifetime annuity or a lump sum equal to the present value of the accrued benefit (or account balance if cash balance plan). An in-service distribution just means that a participant who has attained normal retirement age (NRA) doesn't need to separated from service in order to qualify for a distribution. The distribution paid still needs to satisfy one of the optional forms of payment stated in the plan document. IOW, I don't think a DB plan can just pay some random amount requested by a participant. If the participant attained NRA and wanted a LS distribution, the plan can pay it (assuming no restrictions apply). If the plan provisions allow that individual to earn additional benefits after the distribution, then they could be paid those as well once they have been earned. I don't really see anything wrong with taking a lump sum equal to the full accrued benefit at the beginning of a year, then another distribution later in the year if they have earned an additional accrual, but I think most documents restrict the recalculation to once a year. I don't think the actual funding of plan is relevant, other than if it impacts benefit restrictions.