Effen

In the past the IRS has allowed a benefit > 401(a)(17) comp limit to be paid, as long as the benefit formula recognized 401(a)(17) limit. Based on their example, if the benefit formula was 188% of compensation, the 201,667 high 3-yr comp would produce a benefit of $379,134, which is less than $ limit ($379,783). Assuming the participants actual pay was > $379,134, the benefit would be permitted. We have had plan terminations approved based on this. I have had direct conversations w/ agents of various levels permitting this. I have notes that this was discussed in a session at the 94 EA meetings. It looks like they are now saying this is no longer permitted. I hope this gets changed before they are finalized.

If this is true, this is in direct contradiction to numerous IRS statements. I have asked them directly, and have heard them answer others directly, that 415 100% of "comp" limit does NOT recognize 401(a)(17) limit.

I have seen law firms exclude "Associates" or "Junior Partners". Maybe bring them in at a much lower level. If they are good lawyers, they should be able to come up with a creative solution.

If it is a non-profit, this might be helpful message board link

Thanks PAX, but neither applies. This is the employer’s only DB plan and they are all relatively low paid participants. This is the remnants of an old hourly plan.

Yes, all that is happening and the CB is almost gone so they will need to put something in relatively soon, but I don't think it will be enough in the short term. This is also a relatively small plan (< $100K) so the PBGC premiums aren't really "killing" them. It is kind of an acedemic question. It's easy for us to say "just put the $60K into the plan and get rid of it", but until the plan runs out of money, I don't see anything that would force them to fund it. I guess I'm realizing that it is possible for a plan to run out of money and still have a credit balance so that no contribution would be required. If that happens, what (other than morals) would force them to make a contribution?

I'm working on a plan that has been underfunded and frozen since late 70s. It contains no substantial owners, no key employees, no HCEs. Just a few long service employees. It is < 100 participants, so the AFC's don't apply. The funding ratio is around 50%, although they have never missed a required contribution. We have been using unit credit method w/ relatively conservative assumptions (6%), but due to a large credit balance, there hasn't been a required contribution for years. Since it they aren't required, the employer isn't putting anything in and the funding levels continue to drop each time someone is paid out. (It does pay lump sums.) All of the remaining participants are now approaching retirement age, but the plan doesn't contain enough money to pay them all. Is there anything that would force the employer to make a contribution before the credit balance is used up? What if it runs out of money? Is there a Reg that would force them to make a contribution to cover the benefit? Plan document doesn't really address it. The employer is solvent, although they aren't rolling in cash.

You guys have been down this road before.... benefitslink benefitslink2

You should probably start with the Plan's actuary. They should be able to walk you through this calculation.

Also be careful because 401(a)(26) still applies, so excluding 1 or 2 would not be a problem, but 5 would.

I discussed many issues with Mark both on this board and through email. I had the pleasure of meeting him at the 2003 EA meeting. He was a true asset to this board and the pension community. He was always very giving of his time and knowledge. He will be missed.

I don't agree with the "experience loss" idea. The plan would not have experienced the loss since the participant didn't retire. Therefore, this would be in increase in the liability unless you reduce his benefit by the actuarial value of hers. The subsidized early retirement benefits are not subsidized if they are not paid. You said the DRO was fairly clear that she was entitled to $2,000 per month commencing as soon as he was eligible. If his benefit is worth more than that, than I don't really see that this is a reason not to qualify it. She is permitted to receive it at the "Earliest Retirement Date". The theory that he has a bad attorney is not a good enough reason. Because she is commencing her benefit sooner, she may end up with most of his benefit, but he signed the agreement. I have seen QDROs where the spouse got 100% of the participant's accrued benefit. (I can only assume that he got plasma TV & the dog.) Anyway, if his AB is worth < $2,000 per month to her, than I think you should not qualify the DRO. That would clearly be subjecting the plan to additional liability. Often times the spouse receives some percentage of the actuarial equivalent of the Normal Retirement Benefit until such time as the participant qualifies for the subsidy. Once he actually retires and qualifies for the subsidy, then her benefit would be re-calculated to reflect the subsidy.

I missed the reference to PFEA. Bink's comments are right on target.

I feel like I'm walking into a trap, but the rate for 2005 would be 4.86% (December 2004 30-yr). interest rates Not sure why you’re asking the question. This stuff hasn't changed has it? Obviously, your plan provisions dictate the lookback month (assumed December) and stability period (assumed CY

I purposely didn't respond to the legality of such a change because I really don't know. If just seemed strange the employer would be willing to incur the cost to amend the plan and potentially revised election forms, 5500s, SPD, SMMs, valuation reports, etc... to pay two short term employees a relatively small distribution. The bonus would be much simpler and cheaper. My initial reaction was that you probably could amend the plan to change the vesting for two NHCEs. The mechanics might be tricky. Would you do it by name or create some other criteria that only they meet? Could you treat it like a window? Did any other "similar" employees get treated differently? Would the employer open himself up to an employment practice lawsuit based on something else? (gender, age, hair color, etc....) What is he going to do when these two give the pictures to the next two? If either was an HCE, I think you definitely have a BRF issue to be examined. Maybe someone else will chime in with more specific info.

Obviously they have the negatives Why not just pay them a bonus equal to what they would have received from the plan. It just seems like a lot of effort to amend the plan for two terminated employees.

I had a girl friend tell me that once All I'm trying to say is if they really had a need, it won't take months to figure out if they can afford to hire you. They would just fill it. It is possible, that they are trying to find a place for you. Trying to free up money to grab a well qualified person. It's really hard to tell. I once had a "great" employer string me along for months. I finally couldn't wait any longer and took another job that worked out very well. The "great" employer took another two months to hire someone who only lasted about 2 months. Big companies can be notorious for lack of direction or quick directional changes.

FWIW, I tend to lean more towards GBurns' scenario, but I think Lame Duck offers the best advice. Tell them you're interested, but you can't wait around for ever. I would also begin to wonder about this great company that can't seem to make a decision. The decision process is critical in any organization and if they can't get a simple hiring done, how will they treat other issues? Maybe you should ask some of the "great people" who work there if this is a typical process. Be careful what you wish for.... Your rose colored glasses my be shading your vision.

Andy makes very good points.

Part of the actuary’s professional responsibility is to define "reasonable" for the given situation. Other actuaries my have other opinions, but the signing actuary bears the responsibility. Also, unless you are the owner and/or plan sponsor, the actuary is probably not going to change the assumptions based on your suggestion no matter how much ammunition you provide. Hopefully the employer understands what and why the actuary is doing what he/she is doing. It would similar to asking the auditor to change a statement in the financial report because it might impact the stock price. The actuary is supposed to be independent. Do I think 4.5% could be reasonable? Sure, it could be. What do you think a reasonable rate of return for the mutual funds? (What kind of mutual funds are they? Blue chip? Long term, short term, value, balanced, growth, etc..) Lets just say we expect them to earn 7%. Now, is 4% reasonable for the bonds? How about 2% for the cash. Put all that together and you get 4.7% (.50*.07+.1*.04+.4*.02) Again, oversimplified, but I think you get the idea.

Your problem is that you (or someone) tied your compensation to the plan's normal cost. The plan's normal cost is based on the funding method and the actuarial assumptions used. It is for plan funding and NOT benefit payments. The ultimate benefit you receive may have little relationship to your historical normal costs. Even using individual aggregate funding methods, the normal cost is still calculated in the "aggregate". Your ultimate benefit will be based on the plan document. If your plan provides a lump sum, the lump sum will be based on the document provisions at the time of payment. By using 5.5% for funding the actuary is trying to anticipate the rates that will be in effect when it will be paid. Congress may change the law in the next few years or interest rates may rise or fall. Lets say 4 years from now you terminate and lump sum rates are at 6.5%. The fact the normal cost was based on 5.5% is meaningless. You will get the 6.5% lump sum which will be less than the 5.5% lump sum. The reverse is also true if lump sum rates stay below 5.5%. You could end up with more than the 5.5% lump sum. This is also a huge oversimplification. There are many other factors that need to be considered, but the lesson is that the accumulation of normal cost can be dramatically different from the value of the actual benefit paid.

PAX, now that you are back, did you pick up anything of interest? (Information that is. It probably wouldn't be appropriate to discuss your personal life in this forum. )

I may not have the exact answer, but this should help. I encountered a similar situation a few years ago and the attorney explained that since it is a non-profit and it was a profit sharing plan, deductions and funding requirements are none issues. Therefore the 8 1/2 month rule doesn't really apply. They looked to the filing of the 990 which is due 5.5 months after the year end, but can be extended for 5 (?) additional months. Therefore, the "due date" for allocation purposes is 10.5 months after the plan year end. So they could make a contribution on 5/15/05 and allocate it to the 6/30/04 plan year. I may be off on my months, but you get the idea.

AAhh, the clouds have parted and it all becomes clear.... Thanks for jumping in "K".

My thought is that if he is paid on a 1099 then he is self-employed. If he is self employed, then he is not an employee of the guild. (since you said he only receives 1099 income.) If he is not an employee of the guild, how is he covered in their plan? Kind of like covering your accountant in your company's pension plan because you paid him a consulting fee and issued a 1099. If he was an employee, he would get a W-2, not a 1099. Again, I'm probably the confused one, so I will wait for others who got more learn'n