ak2ary

I agree with Mike on using accrued to date. I can tell you that the IRS in the past has challenged pay credit rates in excess of 10% and flat dollar pay credits in excess of $10k for not being meaningful based on the .5% accrual standard ( this was years ago when many plans had very very early NRAs) What do you base the 0% projection on? IRS allows that floor for purposes of backloading testing under 411(b) , but I don't recall that for 401a26

Seems to me that these kind of schemes show up now and again and rarely if ever work...and even if they do work, you wind up spending more than the tax savings defending yourself. My clients don't like audits, don't like appeals and don't like tax court.

There is no right and no wrong answer. In some cases the lump sum will be significantly less valuable actuarially because it is usually the value of the age 65 benefit and may ignore subsidies available at early retirement. But then again, most of the plan that offer windows provide only a QPSA as a death benefit, so that there is a significant forfeiture at death (a total forfeiture for the unmarried)...the lump may be knocked down by the potential for forfeiture, but theres no chance you get zero. At the end of the day, normally the lump sum and the annuity have the same value using conservative assumptions. I believe most will take the lump sum because they are guaranteed to get "something" and that something is usually a LOT of money they dont want to end up with "nothing" they have concerns about the security of their pensions long term, if Detroit doesnt have to pay... they have concerns about the extent of the PBGC guarantee AT the end of the day, the lump sum is better if things go bad (short life, money crisis etc) and the annuity is better if things go good (long life, no crises etc) People arent worried about what happens when things go good

good point

Frank I agree that your cite brings you to the section that says you cannot have an interest credit rate so low that it fails to provide an actuarial increase without making some other adjustment. ALOT of standard documents, including the Relius standard document , have language guaranteeing that this requirement is met by providing that post NRA the benefit is the greater of the actuarial equivalent of the NRB and the accrued benefit taking into account salary and service through actual retirement It is this language that sets up a comparison between the account balance-provided benefit and the actuarial equivalent of the NRA annuity and seems to invoke the "greater of " language I cited. My 2 cents The reg is specific that, in the opinion of the IRS, the requirement to provide actuarial increases post-NRA trumps the ability to simply pay the account balance. Now you can still pay the account balance if you have suspension provisions in your plan and you can still pay the account balance if you provide an interest credit sufficient to provide an actuarial increase and your document doesn't provide some other measurement such as the one described in the original post.

Look at the original example and the proposed answer...The proposed answer was that the lump sum would stay at $105,000 and the annuity would be the full actuarial equivalent at 7% of the NRB which is greater than the benefit that can be provided by the $105,000. This means that the account balance is NOT providing the benefit in the plan and the plan's terms provide the greater of 'the actuarial equivalent of the NRA annuity' (this is a traditional benefit) and the 'benefit that can be provided by the account balance'.(this is a lump sum based benefit). This leads you directly into the "greater of" section I mentioned If the interest credits were increased, in this case to $107,000, you could argue that the entire benefit is provided by the account balance and arguably avoid 417(e)

1.411(a)(13)-1(b)(4)(ii)(A) - "Greater of" formulas

It's a plan language issue. The way the plan is written, the benefit post NRA is the greater of the actuarial equivalent of the annuity payable at NRA or the benefit provided by the account balance. This appears to be a greater of benefit formula where one of the benefits is a lump sum based formula and the other is not lump sum based. The final regs are clear that, if this is such a formula, the lump sum value of it is the greater of the account balance or the annuity benefit valued at 417e rates. There may be an argument that this doesn't apply if the account balance is at least the PV of the actuarially increased annuity, but it falls dead flat if the account is not sufficient to provide the benefit. Certainly if the account is sufficient for the annuity, the plan can be written to avoid the problem Consider the example above and take it forward five years... do you really think the IRS would be ok with the account being credited with interest at 5% (or even 0% depending on the plan interest credit rate) while the annuity climbs at 7%?

Its interesting that under $5000 lump sums are NOT 411(d)(6) protected and can be removed at any time. They can then be put back later with any look back permitted... so I find the IRS position curious but they have said it at ASPPA conferences too

I disagree with Mike. I believe that the account balance should be increased to the extent necessary to be the actuarial equivalent of the normal retirement benefit. There is no exception to the post retirement accrual rules that says it doesn't apply to lump sums. The final regs are clear that crediting sufficient interest to make this happen will not cause the plan to have a greater than market interest credit rate. If the plan is written to provide enough interest post NRA to ensure at least the actuarial equivalent one some reasonable basis is provided, then the entire plan remains a cash balance plan and the lump sum is the account balance There may be an argument that this could be looked on as a " greater of" benefit where one part of the greater of benefit is the cash balance account and the other part is the actuarial equivalent of the normal retirement annuity (which is not a cash balance benefit) In that case, the minimum lump sum is the greater of 417(e) value of the annuity or the cash balance account.. This is what happens when you have a top heavy min in a cash balance plan. Based on the plan provisions you described, this second concept could apply to what you have and would cause a lump sum considerably higher than the account balance, as the actuarially increased benefit might not be considered a lump-sum based benefit and thus would be subject to 417(e)

For purposes of the gateways, the average of the equivalent allocation rates for NHCEs as can be treated as the actual equivalent allocation rate for each NHCE who actualy benefits under the DB plan. So for those who are in both the DB and DC, if the average DB equivalent allocation rate is .5%, then they must get at least 7.0% in the DC. Those not participating in the DB must get 7.5%

The schedule SB is wrong...no question about it...the burn was involuntary based on the asset level...since this involved no election on the part of the sponsor, IT NEVER HAPPENED...no choice but to amend the SB...don't woorry about it..even if it raises IRS curiosity, you are covered

This is not an uncommon plan provision, but it has the potential for trouble. An employer switching from a DB based program to a dc based program will often say that anyboby hired before x/xx/xx stays in the db plan and anyone hired later goes in a new DC. Yours is different in that it sounds like the date chosen was done to pick a group big enough to pass coverage but not too big. In that case , wthout any valid business reason for the choice of 1/1/10, the IRS may well determine that the "Hired before 1/1/10" eligibility condition is, in fact, an impermissible service requirement edited for many typos

At the end of the day, the answer to all of those questions depends on who the common law employer of the workers is. The PEO/Leasing world has argued time and again that they are either the employers or co-employers of the workers. Without knowing the circumstances I can't comment on your particular situation, but in the situation where the recipient employer is clearly real employer, you would aggregate the MEP benefits with the recipient org plan. But you also have to worry about what happens if the leasing co really is the employer or co-employer. Then the leasing co would have to count the workers too. Seems to me the best way to go is that both Leasing and Recipient setup safe harbor plans, based on the same employee contribution (the leasing Co plan should be a MEP cosposored by the recipient), that way no matter who the employer may be, the employer is a sponsor of the MEP covering the employees and whether they have to be aggregated or not, the plans meet coverage and nondiscrim, for whichever group may be found to be the employer.

The leasing company can setup a MEP with the recipient employer as co-sponsor. Assuming the leasing company plan is new and has no contributions, then the recipient can sign onto that and all should be well. If the leasing company had operated the plan as a single emplooyer plan for a few years, then it is likely not a qualified plan and having the recipient sign on now is likely no help, but a new MEP should work. Make sure you are working with someone who has worked with them.