Übernerd

Thanks, Andy. We're well over 1,000; I should have mentioned that.

This is a question about line 19 of the new Schedule R. Line 19 requires defined benefit plans to break down their trust holdings by percent of total assets into five separate asset classes (stock, investment-grade debt, etc.). If the plan hold assets in trusts, accounts, mutual funds, or other investment arrangements, line 19 requires the plan to disaggregate the underlying assets. Plan A's assets include a GAC (a separate account) from Giant Insurance Company. Giant will not provide a breakdown of assets in the contract; instead, it will provide only the fair-market value of the whole contract, as determined under FAS 157 and state insurance law, and as reported on its 10Q and 10K. Giant's rationale is that it owns those underlying assets; all Plan A owns is the contract. This makes sense to me, but Plan A's auditors (Huge Accounting Firm) aren't convinced that this is sufficient. Huge won't formally opine either, but points to language in the Schedule R instructions that clearly requires disaggregation of assets held in "accounts" and that provides no exception for insurance company separate accounts. We have been asked, at the last minute, to resolve this difference of opinion between Giant and Huge. I haven't had any luck finding more detailed instructions or even any formal discussion of this issue. Any pointers appreciated, as this is a very time-sensitive question. Thanks.

I don't think the agent is clear about how to calculate the offest (which is actually a side issue for me). If I had to guess, I'd say the agent's position is that (unless your plan expressly provides for the offest) the participant gets, as of the end of plan year 2, the [Delta in the formula benefit from the end of plan year 1] plus [the amount of the actuarially increase in the benefit since the end of plan year 1]. That reflects the (more expensive) approach in the 2002 regs. (And if the plan expressly provides for the offset, you could use the greater of the two Deltas for the plan year.) It's hard to tell here because the Question suggests a calculation method that the agent says isn't available, without suggesting another one. All the agent really says is that the offset implicit in any greater-of calculation is unavailable unless the plan expressly provides for it. And that's my real question: must the plan expressly provide for the offset? I don't see that requirement in the statutory provisions, which just seem to tell you (i) that the offset is available, and (ii) it will apply pursuant to regs the IRS will issue: In the case of any employee who, as of the end of any plan year under a defined benefit plan, has attained normal retirement age under such plan . . . if distribution of benefits under such plan with respect to such employee has not commenced as of the end of such year [on account of his or her termination of employment] , and the payment of benefits under such plan with respect to such employee is not suspended [by means of a suspension notice], then any requirement of this subparagraph for continued accrual of benefits under such plan with respect to such employee during such plan year shall be treated as satisfied to the extent of any adjustment in the benefit payable under the plan during such plan year attributable to the delay in the distribution of benefits after the attainment of normal retirement age. The preceding provisions of this clause shall apply in accordance with regulations of the Secretary. Code § 411(b)(1)(H)(iii). And since there are still no effective regulations (or even Rev. Ruls. or Notices that I know of), I'm not sure how much weight to give this one agent's opinion about the plan document requirement.

Is anyone else fielding questions about the attached Q&A from 2009 ASPPA conference? In it, the IRS representative took the position that a traditional DB plan that does not issue a § 203(a)(3)(B) suspension notice at NRA, but instead provides for continued accruals at the same rate as pre-NRA, must pay both those continued accruals and actuarially increase the benefit year-to-year. Our experience is that a great many plans in this situation provide the greater of continued accruals or the actuarial incease; that is, they offset the continued accruals by the amount of the actuarial increase. They do so without mentioning the offset, and they do so whether the plan (i) provides for a suspension notice (which the administrator fails to send), or (ii) simply doesn't provide for a suspension. The IRS is taking the position that the plan cannot use the greater-of approach at all, unless the document specifically provides for it. The IRS's rationale is that the plan says the participant gets continued accruals, so ERISA (and the Code) requires the plan to provide them. Period. ERISA and the Code also require the participant to be made economically whole for the "suspended" payments. Period. The regs (which regs is another question--see below) offer a means of offestting the adjustment against the accruals, but to use that method the plan must contain language describing it. I can see the IRS's point: the plan requires the continued accruals, and there's an extrinsic legal requirement to either issue a notice or pay the "actuarial increase." The rubber meets the road when you calcuate the increase, however. One can read the 1988 proposed regs (see § 1.411(b)-2(b)(4)(iii)(A)) as requiring the plan to provide for the greater-of approach. The language is pretty soft ("A plan may provide . . ."), but I can sort of get there. I don't think it's the only reading--or that most lawyers and actuaries have read it that way. I don't see a similar requirement in the 2002 proposed regs. Maybe I'm missing it. I'm also confused by the fact that the IRS seems to be opining that the 2002 proposed regs control. The 1988 proposed regs were generally effective as of 1/1/1988; the 2002 proposed regs state quite clearly that they are not effective until final regs are issued. It seems like the 1988 regs (which generally require a smaller actuarial increase) are at least as authoritative as the 2002 regs (becuase they actually have an effective date), but that a good faith interpretation of the statute is still permissible, given the absence of any final regs. And unless I'm mistaken, industry practice is well settled the other way--i.e., plans use the offset without specifically providing for it, both to correct the failure to send suspension notices (in plans that call for them) and to calculate late retirement benefits (in plans that don't). Note that EPCRS has approved a number of corrections for failure to provide suspension notices since 2000, and according to the annual Ernst & Young index of these corrections, the "greater-of" approach was used to calculate the corrective payments. Any comments appreciated. Thanks. 2009_Gray_Book_QA_39.pdf

Has the IRS clarified what constitutes "significant benefits in the nature of medical care" beyond the Examples in Q&A 10 of Notice 2008-59? We're dealing with a free, on-site clinic that offers a level of care somewhere in between the clinic described in Example 1 (physicals, immunizations, allergy injections, minor pain relief, and treatment of on-site accidents), which doesn't render the employees ineligible for HSA/HDHP, and the clinic described in Example 2 (all employee medical needs), which does disqualify them. All the discussion I've been able to locate merely restates the Examples, and we'd like to know whether the IRS has spoken (even informally) about the shades of gray in between. Thanks.

Thanks, Andy. Actually, Plan B already has an early retirement beneift, one component of which is an unreduced benefit at age 62. (Not quite an NRA of 62, but it has identical results in some situations.) Company B is braced for the administrative difficulties, but wants chapter and verse on the legal and Code issues. In answer to your question, the Plan A benefit is truly frozen (i.e., there's no combination or wearaway with the Plan B benefit, just new accruals--though, of course, Company A service counts for vesting and eligibility purposes under Plan B). Just for grins I add that yes, both Plan A and Plan B have grandfathered elective lump sum for various groups of participants. Sigh.

Company A sponsors Plan A; Company B sponsors Plan B. After Company B buys Company A, Plan A is frozen and merged into Plan B. Company A employees begin accruing new benefits under Plan B. Normal retirement age (NRA) under Plan A was 62; Plan B's NRA is 65. Plan B has been amended to provide that former Plan A participants fully vest in their frozen Plan A benefit at 62. Must Plan B also be amended to provide that former Company A employees retain the NRA of 62 with respect to Plan B accruals? If so, is that just for vesting purposes, or for all purposes where the Code triggers something at NRA (suspension of benefits, 411(b)(1)(H), top-heavy minimum contribution, etc.)? This seems extreme, given that these are new accruals. On the other hand, not "lowering" NRA for the Plan A transferees would mean that each transferred Plan A participant would have two NRAs--62 for their frozen Plan A benefit, 65 for their new accruals. I can see an argument under § 411(a)(10) that the merger is an amendment lengthening the vesting schedule for Plan A participants with respect to post-merger accruals, as well as problems for the actuaries, but can't close the loop on whether two NRAs is flat out impermissible. Thanks for any comments.

No, it's not discretionary, it's fixed (just as if it were a money purchase pension plan).

Calendar-year profit sharing plan has a fixed contribution (equal to a percentage of participant compensation); i.e., it's funded exactly like a money purchase pension plan. Sponsor has been hit by the downturn and can't, for the time being, make the '08 contribution. If the plan were a money purchase pension plan, Sponsor could apply for a minimum funding waiver (or, if that were unavailable, permission to implement a retroactive cutback). Obviously, profit sharing plans are exempt from the 412 funding rules, and accordingly the waiver and retroactive cutback relief wouldn't seem to apply, but the plan's situation is essentially identical to a money purchase plan whose sponsor is in financial difficulty. Does anyone have experience with the IRS granting analogous relief in these circumstances? Any suggestions appreciated.

I just meant that I'm familiar with pop-up benefits and that, as ak2uary helpfully pointed out, the recovery provisions of the disability provision at issue somewhat resemble a pop-up. The similarity to something familar has allayed the concerns I expressed in the original post.

That's very helpful, thanks. I should have thought of a pop-up benefit.

Actually, § 1.411(d)-4, Q&A 1(d) doesn't refer to disability benefits. The only reference to disability in that reg has to do with the impermissible exercise of employer discretion (n/a to this question, I think). You're probably thinking of the definition of "ancillary benefit" in § 1.411(d)-3(g)(2)(ii): (2) Ancillary benefit. The term ancillary benefit means . . . (ii) A benefit payable under a defined benefit plan in the event of disability (to the extent that the benefit exceeds the benefit otherwise payable), but only if the total benefit payable in the event of disability does not exceed the maximum qualified disability benefit, as defined in section 411(a)(9) . . . . I highlighted the part of this definition that makes me think the disability pension in question isn't ancillary: it doesn't exceed the benefit otherwise payable because it's an early payment of the accrued benefit and therefore reduces the benefit payable at normal retirement age. So it's not "ancillary," nor is it a "disability auxiliary benefit," because it reduces the benefit payable at NRA and the annuity starting date is the date of disability. Reg. § 1.401(a)-20, Q&A 10. I've always read these regs to differentiate between an early payment of the accrued benefit to a participant who isn't yet eligble for early retirement (what we have here) and something seperate from and in addition to the accrued benefit. Do I have this wrong? Thanks.

Sorry for the delay in responding. I can't get our spam filter to stop killing the notifications. It's certainly possible that I'm missing something, and I agree that the disability benefit and the accrued benefit seem to be mixed up here. I'm talking about the difference between a "disability auxiliary benefit" and an immediate payment of the accrued benefit on account of disability. Here's a snip from Reg § 1.401(a)-20, Q&A 10 on the distinction: © Disability auxiliary benefit —(1) General rule. The annuity starting date for a disability benefit is the first day of the first period for which the benefit becomes payable unless the disability benefit is an auxiliary benefit. The payment of any auxiliary disability benefits is disregarded in determining the annuity starting date. A disability benefit is an auxiliary benefit if upon attainment of early or normal retirement age, a participant receives a benefit that satisfies the accrual and vesting rules of section 411 without taking into account the disability benefit payments up to that date. Example. (i) Assume that participant A at age 45 is entitled to a vested accrued benefit of $100 per month commencing at age 65 in the form of a joint and survivor annuity under Plan X. If prior to age 65 A receives a disability benefit under Plan X and the payment of such benefit does not reduce the amount of A's retirement benefit of $100 per month commencing at age 65, any disability benefit payments made to A between ages 45 and 65 are auxiliary benefits. Thus, A's annuity starting date does not occur until A attains age 65. A's surviving spouse B would be entitled to receive a QPSA if A died before age 65. B would be entitled to receive the survivor portion of a QJSA (unless waived) if A died after age 65. The QPSA payable to B upon A's death prior to age 65 would be computed by reference to the QJSA that would have been payable to A and B had A survived to age 65. (ii) If in the above example A's benefit payable at age 65 is reduced to $99 per month because a disability benefit is provided to A prior to age 65, the disability benefit would not be an auxiliary benefit. The benefit of $99 per month payable to A at age 65 would not, without taking into account the disability benefit payments to A prior to age 65, satisfy the minimum vesting and accrual rules of section 411. Accordingly, the first day of the first period for which the disability payments are to be made to A would constitute A's annuity starting date, and any benefit paid to A would be required to be paid in the form of a QJSA (unless waived by A with the consent of B). I have seen a number of plans under which, upon the participant's disability, the accrued benefit becomes payable, reduced for early payment (as in part (ii) of the Example), the participant makes a permanent election with respect to form that is subject to the QJSA rules, QPSA coverage is terminated, a retroactive annuity starting date is implemented, and there is no "second election" at normal retirement age. The intention, I think, is to be "done" with such participants (including the QPSA coverage) and not burden the plan administrator with the second election, which could be 20 years down the road. No comment on whether that's a good idea. We now have a question regarding the proper treatment of a participant who recieved such a pension for a period of years, recovers from his disability, and resumes employement. Sponsor would like to amend the plan to give such participants credited service for the period of disability and treat all the payments (including the retro payment for the RASD) as "gravy"--i..e, an ancillary benefit. It struck me as odd that--for a period of time--the participant is getting his accrued benefit paid to him, then it suddenly becomes a true (ancillary) disability benefit, and he's once again entitled to an unreduced benefit at NRA. Maybe this is more common that I realized.

Yes, that's possible. If the disability pension doesn't reduce the accrued benefit payable at normal retirement age, it's ancillary. If it does (i.e., if it's an immediate payment of the accrued benefit), then it's not ancillary. If it's not ancillary, the annuity starting date is the date of disability, there's no more QPSA coverage, and no election at NRA. If it's ancillary, there's still QPSA coverage, and the participant gets an election at NRA.

Company wants to amend the disability pension provisions of its DB plan so that the annuity starting date is the date of the disability determination (i.e., the benefit would not be a disability auxilary benefit and there would be a retractive annuity starting date with an election, spousal consent, etc.), unless and until the participant recovers and returns to employment, in which case the participant gets credited service for the period of disability and there is no offset (i.e., the benefit becomes an ancillary benefit in addition to the accrued benefit). Can a benefit "flip" this way, from being a payment of the accrued benefit to being ancillary?

We're updating some of our plans for the final § 415 regs. A few of the multiemployer DB plans have definitions of compensation for § 415 purposes. I'm guessing that these definitions are left over from before § 415(b)(11) removed the compensation-based version of the annual limit for multiemployer (and governmental) DB plans. Is there any reason not to simply delete the compensation definitions at this point? Thanks.

By a very zealous IRS agent. We have, in fact, asked for citations supporting his position, but his view is that a distribution is prohibited unless expressly authorized. We tend to see it the other way in this case -- it's OK unless it's prohibited.

Well, we're really looking for anything that speaks to the question, pro or con. We've found the same batch of Rev. Ruls. that you probably have, from the 60's, that speak to voluntary withdrawals. There is one (Rev. Rul. 67-340) that appears to permit the mandatory distribution of after-tax contributions on the elimination of the contributory aspect of the plan. I guess we'd argue that the emplolyee becoming ineligible for participation in the plan, and the transfer of the obligation to pay his or her benefit to the managment plan, would be analogous. We'd like something better, though. The force-out is based on (i) the Union's strong desire not to have money attributable to managmeent employees in the Union plan, and (ii) the management plan's unwillingness to assume the accounting obligation for any transferred after-tax amounts. We're trying to get to the result the committee (which is half union, half managment) wants.

I don't think the automatic rollover rules prohibit mandatory distributions, in this or any other case. Section 401(a)(31)(B) merely requires that -- in the event of a mandatory distribution of more than $1k, when the participant fails to elect to either receive the distribution in cash or roll it over to an IRA of his or her choosing, the plan has to provide for an automatic rollover to an IRA selected by the plan administrator. Auto-rollover is provided for in the draft amendment in question. The plan says nothing relevant about in-service withdrawals, of either pre- or after-tax contributions. Such distributions have, in the past, been mistakenly permitted under a provision that refers to termination of employment (as opposted to merely leaving the bargaining unit). The point of this amendment is to correct that omission, and to make the distribution of after-tax amounts mandatory, rather than voluntary. We are being told (without substantiation) that this is impermissible. So we are searching for anything in the Code or other IRS guidance that would prohibit the mandatory in-service distribution of of employee after-tax contributions (plus interest) upon a transfer out of the bargaining unit. As I noted in the original post, we haven't found anything but § 411(a)(11), which is N/A to governmental plans.

The Plan doesn't say anything about either the distribution of after-tax contributions or the transfer of pre-tax contributions, but an ambiguous provision has been read to provide for both. All parties (the Union, managment, and the Plan Committee) want to amend the Plan to clearly provide for both the distribution and the transfer, but they are being told that the proposed amendment would be impermissible because it would provide for the in-service distribution of employee after-tax contributions without the employee's consent.

Employer is a governmental entity with two DB plans: one for collectively bargained employees (“Plan CB”) and one for management employees (“Plan M”). Plan CB requires employee contributions; Plan M doesn’t. Employer is now picking up the contributions to Plan CB under 414(h), but for many years they were made on an after-tax basis. When an employee transfers from the bargaining unit to management -- and therefore from Plan CB to Plan M -- Plan CB distributes his or her after-tax contributions and transfers his or her pre-tax contributions to Plan M. Employer is now being told that it can’t distribute the after-tax contributions without the employee’s consent. Is this correct? The union doesn’t want the money in Plan CB, and management doesn’t want it in Plan M. It seems to us like there's support for mandatory distributions of after-tax amounts: Voluntary withdrawals of after-tax contributions are expressly permitted under these circumstances. See Rev. Rul. 60-281; Rev. Rul. 60-323; and The only Code provision that requires participant consent to a distribution is § 411(a)(11) – and, according to § 411(e)(1)(A), none of Section 411 (with one irrelevant exception) applies to governmental plans. So there's no prohibition on a mandatory distribution. Are we missing something? Thanks for any insights. [i hereby disclose that I cross-posted this topic in the Governmental Plans forum, which gets very little traffic.]

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S-Corp ESOP currently provides for cash-only distributions (i.e., employer stock is in all cases liquidated within the plan). Employer would like to amend the plan to allow participants to elect a distribution in stock, subject to a requirement that the stock immediately be sold back to the ESOP (the idea being to allow participants to get capital gains treatment, rather than ordinary income treatment, on part of the distribution). Is there any problem with the "immediate put" requirement? The relevant Code Section--§ 409(h)(2)(B)--isn't clear on this point (or any other--boy, what lousy drafting), and nothing the IRS has said seems to directly answer the question. There's some close-but-no-cigar guidance in Rev. Rul. 2003-27 (NUA for shares distributed from an S-Corp ESOP) and Rev. Proc. 2004-14 (permitting rollover of S-Corp shares to IRA if plan requires immediate repurchase). Thanks.

Employer currently relies on an ADP/ACP safe harbor by making 3% non-elective contributions to its 401(k) plan. It would like to switch in 2008 to the new auto-deferral safe harbor created by the PPA, using annually escalating matching contributions with a 2-year vesting schedule. Per the current safe-haror rules, employees vest immediately in the 3% non-elective contribution. Will Employer run afoul of the post-Heinz regs on changes to the plan's vesting schedule if it imposes a vesting schedule on the new matching contributions? Section 411(a)(10) and the applicable DOL regs do speak in terms of "employer contributions," but one could argue that there's a difference between a non-elective contribution and a match. [Edit] One more thing: the plan currently contains boilerplate allowing Employer to choose between safe-harbor non-elective contributions and safe-harbor matching contributions and stating (as is required) that either would be fully vested when made. Employer has never made a safe-harbar matchin contribution. So a related question would be whether the new PPA matching contributions would have to be treated the same as the safe-harbor matching contributions for which the plan currently provides. If so, the upshot would be that nobody using the current safe harbors could switch to any version of the PPA safe harbor that incorporates a vesting schedules--surely that wasn't the intent? Thanks for any insight.

Plan Sponsor (PS) of a large DB plan (Plan) is in the process of dissolving--not in bankruptcy (so no PBGC trustee)--it's just going out of business. Upon dissolution, all PS's remaining assets will be transferred to charitable foundations. PS has terminated Plan and annuitized all benefits that it knows of. It was extremely careful, but Plan is huge and participants could have been missed. Per PBGC Reg. § 4041.23(b)(9) and a 1991 PBGC opinion letter, PBGC's position is that it's not on the hook for an overlooked participant's benefit, PS is. [On the other hand, I've appended a snippet from the letter, which does appear to contemplate ultimate PBGC liability for "uncorrected" errors.] So, who's on the hook after PS dissolves? Officer, directors, and DB Plan fiduciaries want to know their exposure, as well as any exposure of the charitable foundations. My initial thoughts on potential claims against these individuals: - Individual § 409 / §502(a)(2) fiduciary claims seem dead in the water because plaintiffs in such cases must be acting on behalf of the plan as a whole. Also, given the well-documented, extreme care with which the termination was handled, proving imprudence would be a challenge. - § 502(a)(3) claims seem out, given the absence of an equitable remedy. - § 502(a)(1)(B) claims seem out--even if Plan is deemed never to have terminated (because it failed to satisfy its benefit obligations), who will be forced to fund the benefit? - ERISA § 4070 claims (civil suits re termiation of single-employer plans) seem the most likely avenue, but only equitable remedies are available, and I don't see paying a fixed sum of money flying as an equitable remedy post-Knudson & Sereboff. Am I missing something? Thanks. ****************************************** Here's the snip from the 1991 PBGC Opinion Letter: If a participant did not receive his or her full plan benefit, or was simply missed in the distribution of plan assets, the plan, and therefore the plan sponsor, would continue to be liable. And in the event the error remained uncorrected, the PBGC would ultimately be responsible. See ERISA S 4041(b)(4). - May 3, 1991, Letter from Carol Connor Flowe, 18 Pens. Rep. (BNA) 850.