Übernerd

This is where I like to pull out my cocktail-party line about how all administrative agencies are unconstitutional (because they simultaneously exercise legislative, judicial, and executive powers).

Hear, hear!

Excellent. That makes complete sense. Thanks!

That was my first thought, but I thought the tables were based on a 35-year average, so even if the wage base didn't change for the last year of that period, wouldn't there have been a change for the first year (i.e., 35 years ago)?

Does anybody know why the IRS hasn't issued the Social Security covered comp tables for 2016 yet? I know the wage base didn't change, but that only affects the end-point of the 35-year average. Typically they issue the tables in a December Revenue Ruling, and we're almost to February. Cheers.

Code Section 401(a)(20) permits a terminating defined benefit plan to distribute benefits to active employees "within one year" of the termination date. If the assets aren't distributed within a year, the plan isn't considered "terminated." If all trust assets are distributed (within a year) through the purchase of a deferred annuity contract, can that annuity contract retain the in-service distribution option, so that active employees can receive distributions beyond the one-year period? I can't find any guidance on this question. Cheers.

Thanks, Andy. My gut has been the latter approach (separate distributions, or rather, distributions of separate benefits, as the LSP is coming from a separate account under the plan).

DB plan allows for bifurcated distributions, i.e., a partial lump sum with the remainder as an annuity. How do you calculate the RMD for such a distribution? Participant has reached required beginning date and wants to roll over as much of the lump sum as possible--but any portion that is attributable to the RMD isn't eligible for rollover. The RMD regs tell you how to calculate the RMD for an annuity or a total lump sum, but not a bifurcated distribution. Cheers.

It appears to be quite broad, though not by statute. The state's supreme court has adopted the "California Rule," which prohibits even prospective reductions in the accrual rate for vested employees (with exceptions not relevant here). It has also extended that rule to plans sponsored by municipalities and other governmental subdivisions. Thanks for the replies, all--they were very helpful.

Thanks, mbozek. My review of the state statutes has turned up nothing on point--i.e., they all concern the state-wide plan. I've done a fair amount of work with the federal-penalty exception to ERISA's anti-assignment rules, but agree that those principles don't apply here.

Thanks, Carol. Ideally, the new rule would apply to this employee, who hasn't begun receiving his benefit; second-best would be for it to apply to employees convicted in the future; third-best only to future accruals. Nothing in the state statutes regarding its state-wide plan applies to Plan X, which is an independent plan sponsored by an instrumentality. So I've been thinking, as you suggest, that it will boil down to a state-law contract issue. FWIW, this state does not have a forfeiture law for its state-wide plan.

This is a new one on me. A state instrumentality ("Employer") sponsors Plan A, its own defined benefit plan (i.e., Plan A is not a state-wide, public plan). Participant X, who has a vested benefit under Plan A, has been arrested for embezzling a large amount of money from Employer. Employer would like to amend the plan prospectively to provide that any participant convicted of a felony against Employer forfeits all employer-provided benefits under the plan. Can it do so? The plan is exempt from ERISA as a governmental plan, so the federal vesting and anti-alienation rules don't apply. Not surprisingly, the state's statutes don't deal directly with this question. (And the statutes governing the state's own pension plan don't apply.) Does this boil down to simple state contract law? Cheers.

I think that's a great idea. I believe the schedule for nonamender failures is straightforward, so the real mystery is what percentage of the MPA practitioners have seen assessed against employers for various operational failures. Here's what the IRM says: 7.11.8.2.2 — Determining Sanction Amount and Correction [Last Revised: 03-07-2014] .... (5) For failures other than nonamender failures, the sanction will be based upon the calculated maximum payment amount (MPA). To calculate the MPA, the specialist will need to determine: a. Which tax years have an open statute of limitations. b. The taxpayer's Form 1120, U.S. Corporate Income Tax Return tax exposure for all years for which the statue of limitations has not expired. c. The highly compensated employees (HCE's) Form 1040, U.S. Individual Income Tax Return tax exposure for all years for which the statue of limitations has not expired. d. The potential liability to the trust if taxes are payable with the Form 1041, U.S. Income Tax Return for Estates and Trusts for all years for which the statue of limitations has not expired.Note: A tax estimation worksheet is located on the shared server in the folder labelled “Closing Agree.” (6) After calculating the MPA, the specialist will submit the following to the closing agreement coordinator: a. The MPA calculations. b. A summary of the pertinent issues. c. Any mitigating factors submitted by the taxpayer. d. Any corrective actions already taken by the taxpayer. (7) The closing agreement coordinator will provide the specialist with a sanction range. The specialist is responsible for the sanction negotiation.

Thanks, that's about what I thought. I've since learned (from the IRS) that they will calculate the MPA but you can do it yourself (subject to their review) if you prefer. I believe there is a "secret schedule" of sanctions--the agent I dealt with on another audit said as much. (I came into that audit after the MPA had been calculated, and it was for a DC plan.)

Is there a resource somewhere on precisely how the MPA would be calculated for a large DB plan? We need to get our arms around the potential exposure. Rev. Proc. 2013-12 lays out the basics, but if you try to drill down there are many ambiguities. E.g., the MPA includes the additional tax if the employer deduction is disallowed for contributions--does that include vested contributions (which are deductible even for a nonqualified plan). How is participant income-inclusion calculated for a plan with hundreds of participants? And does the IRS calculate the MPA, or does it merely review the employer's own calculation? Is the MPA estimated based on the Form 5500 alone, or is there a massive review of other documents? Etc. Thanks for any info.

Plan A is a traditional DB plan with a Final Average Earnings (FAE) formula. It defines FAE as the average compensation for the 60 months of Employee's last 120 months before retirement that produce the highest average. Plan A counts post-severance payouts of accumulated vacation pay in FAE. Typically, it's paid in the month after the Employee terminates. E.g., if Employee terminates on 1/15/15, the vacation payout will be made around 2/15/15. Is there a legal impediment to counting that February payout as part of January's comp (the last month for which Employee received a regular paycheck)? This would be more favorable to Employee's FAE because it would spike January's comp, rather than marooning it in February. I can't find any authority one way or the other. Thanks for any replies.

Plan A has an unusual feature that strikes me as impermissible. If a participant submits a benefit application mid month (e.g., January 7), when the first check is cut (say, February 15), in addition to the full monthly payment for February it includes a "make-up" payment for the fraction of that month from the date the paperwork is submitted through the end of that month (here, January 7 through January 31). This seems to either (i) violate the requirement that the annuity starting date be the first day of the first period for which the benefit is paid [§ 1.401(a)-20, Q&A-10], by making it the day the paperwork is filed rather than February 1, or (ii) provide for payments for a period before the annuity starting date (which can't be earlier than February 1, as I see it). Is there some way this is permissible? Thanks.

Is a Form 5310-A (or any other special filing) necessary for the division of a master trust into separate trusts for the constituent plans?

Interesting speculation about the origins of the odd provision, thanks. We generally do advise giving the agents what they want, and there is no objection at all to changing the rule prospectively, but in this case the price tag for retroactive application is well into seven figures. No reason to go near that mess if the provision is, in fact, permissible.

My understanding of the 133 1/3% rule is that it measures the rate of accrual (determined in this case by the percentage of compensation taken into account), not the dollar amount of the accrual for the year. We have asked for specific provisions, but the agent isn't providing them. Instead we are being asked to "prove" that we satisfy the rules. No argument from me that it's an odd rule! I'm just not convinced it's illegal.

I've never seen this system before, either. The plan language is quite old, and nobody at the sponsor recalls why it was drafted that way. They've simply been applying it written, for decades. There's no motivation whatsoever to disadvantage participants, but the problem with changing the rules retroactively (as has been requested) is that this would immediately generate a considerable amount of additional benefits for hundreds of retirees, along with an administrative nightmare tracking down former participants who received lump sums. I agree with your side-note regarding double proration--we're already on top of that.

This came up during d-letter review of a DB plan. Plan A requires 1,000 hours of service for a full year of credited service in all years except the participant's first and last years of participation. For those two years, Plan A requires 2,000 hours for a full year of credited service and credits partial years for anything less than that. Anything wrong with having such different rules for the first and last years? 2,000 hours (by itself) is fine as a minimum--the regs say so. § 2530.204-2. I can't find any guidance that says you can't use a different threshold for the first and last years.I don't think this constitutes an impermissible "last day" requirement for the first and last years because the participant need not be employed on any particular day, provided he/she gets 2,000 hours. § 2530.200b-1(b).I don't see a backloading issue--the plan uses a vanilla fixed-percentage-of-comp formula, so unless the "different rules for different years" is itself impermissible, it clearly passes the 133 1/3% test.Nonetheless, IRS is claiming the first and last year's rules are impermissible, simply because in an other plan year a participant with 1,000 hours would get a full year. Any thoughts appreciated.

Employer has two DB plans--a Union Plan and a Non-Union Plan. For employees who transfer out of the union, and therefore accrue benefits under both plans, the Non-Union Plan benefit is calculated by counting all the employee's service as if it were non-union service and then reducing the Non-Union Plan accrued benefit by the benefit the employee accrued under the Union Plan. Because the plans have slightly different ERFs, this offset arrangement can cause the benefit actually payable from the Non-Union Plan (i.e., after the offset) to be lower at NRD than it was at some early retirement dates. Does paying the lower Non-Union Plan benefit at NRD violate the requirement in § 411(a)(9) and Regs. § 1.411(a)-7©(6) that the normal retirement benefit be the greater of the benefit payable at (i) NRD or (ii) any early retirement date? If you consider the aggregate benefit payable from both Plans, the benefit doesn't decrease; nor does it decrease if you look at the Non-Union Plan's formula standing alone. It's just the offset arrangement that causes the Non-Union Plan benefit to decrease. Any thoughts appreciated. Cheers.

If the plan uses comp after rehire, then the "frozen traditional benefit" won't be frozen, will it? Of have I misunderstood your question? Not completely. It would be frozen with respect to credited service--i.e., there would be no additional accruals. Another way to state the question is "Is it permissible to totally freeze the traditional formula benefit?"

Company's DB Plan currently uses a traditional final-average-pay formula. Company is switching to a cash-balance formula for new hires and rehires only (i.e., no conversion of prior traditional accruals and no switch for continuously employed participants). Vested terminated employees with traditional benefits who are rehired after the switch will have a frozen traditional benefit and a new cash-balance benefit. Is there any need for the plan to provide that compensation from the period reemployment will be taken into account when calculating payment of the frozen traditional benefit? The regs suggest that this would be necessary if the traditional benefit were converted to an opening account balance, but I don't see any requirement that later comp be counted if you don't convert. Any thoughts appreciated. Cheers.