himt4

yep, I know that there is no definitive answer yet, but usually there emerges (what I am calling) an industry conventional wisdom. (It's like that great 2006 message board post last year about being an HCE in 2006. Some felt strongly that the regulations supported the view that you are HCE in 2006 if you earned over 100,000 in 2005. However, the Industry conventional wisdom is that you are HCE in 2006 if you earned over 95,000 in 2005. )

BING!

Thanks AndyH and J4fkbc for your answers. If possible, I would appreciate Socalactuary, Blinkys, and anyone elses answer to my 21%DB/10%DC deductibility question. How much do you think is deductible. I want to see if I can ascertain the current industry conventional wisdom for issue.

Ok J4FKBC, here's how I am confused... in my example shown above with a 21% DB contrib and a 10% DC contrib, it seems like this full 31% would be deductible from the interpretation that you just gave. However, ANDYH interpreted that only 4% of the the DC was clearly deductible although he says that perhaps you could deduct 6% if you wanted to take the risk. You then agreed with ANDYH but said that you would take the risk with the 6%. Neither of you supported the deduction of the full 10% in the DC. Which i believe is deductible under your interpretion: 21% in DB plus 4% in the DC (the amount over 6%) with the first 6% in the DC also being deductible. Sorry that I am such an example guy, but it would help me a lot if you could give me your answer to my specific example: 21% in DB, 10% in DC. How much is deductible? how much is subject to an excise tax?

No one seems to be supporting the interpration that I cited in the "ASSPA asap" that seems to say you can deduct 21% in the DB and 10% in the DC in the example I gave. I just googled "DB DC Combo 31%" and interestingly I found a 11/28/06 post in this message board where J4FKBC was giving this interpretion... - - - 4. anything above 6% in the DC is deductible but only up to the point where DB + (the DC% above 6%) is equal to or less than 25% of elig comp. - - - This supports the full 31% deduction in my example. J4FKBC, it looks like that you now no longer support this interpretation. What did you see that changed your mind? can you point me to it?

Okay, I was just talking to someone who says that in my 21% DB contrib, 10% DC contrib example, that the full 31% is deductible. He gave me this as the backup. From a 9/14/06 "ASPPA asap", it says... "while further guidance is still needed, the common interpretation is that if the...DC deduction exceeds 6%, only the contribution in excess of 6% of pay will be counted toward the limit under 404(a)(7)" So, if we agree the normal limit under 404(a)(7) for this combo is 25%, then I have 21% in the DB and 4% in the DC (since that is the amount that exceeds 6%) and my total of 25% does nto exceed the limit. So, nothing exceeds the limit, not the exempt 6% and not the other 25%, so the full 31% is deductible. So, was there further guidance after that "ASSPA asap"? can you point me to it becauce it seems like everyone else disagrees with the 31% being deductible. Also, sometimes I have trouble interpreting what some of you are saying. From rcline46's post, I can see that he thinks that the most common intrepretion is that 27% is deductible in my example (21 + 6). I think that socalactuary and andyh are saying that they think only the DB's 21% is deductible. Can you two confirm that I have your interpretation correct? (to keep thinks simple and on point, assume that the minimum required 21% for the DB is greater than 100% or 150% of the unfunded current liability, so that no possible complications are added to the 25% limit discussion)

"Also, as you may be aware, you can currently ignore 404(a)(7) if the overall Employer contribution in the DC plan does not exceed 6% of compensation" I have heard the above rule phrased that way and I have heard it phrased this way "when applying the 25% combined limit, you can ignore the first 6% in the DC plan". The phrasing at the top seems to have an "if cliff", as if it is saying that if you go over 6% in the DC plan, then you are back to having a 25% cominbed limit. So please confirm: If the DC contribution for 2006 is 10%, will a required 21% contribution to a DB plan be deductible?

If the owner is within 10 years of NRA and makes the maximum salary, and the 12 NHCEs on average are 30 years away from retirement and averaging $30,000 salaries, then its very likely the plan will be top heavy. but if you also add in 9 non-key HCEs to the mix, it's very likely the plan will not be top heavy.

just some thoughts: Last I remember, DB needs to cover 40% to pass participation test. so, if there are 22 non-excludable employees, you would need to cover 9 of them. So you could exclude all the non-owner HCEs from being in the Plan, and additionally you could exclude 4 of your NHCEs. The remaining benefitting employees will pass the coverage test at (8/12)/(1/10) > 70% with ease.

Do you remember the Twilight Zone episode where Dick York one day gains the power to read minds? It goes something like this…Dick York is working in a bank and he hears the thoughts of one of his older co-workers. The co-worker is thinking how at the end of the day he is going to walk into the bank’s vault and fill his briefcase with money and walk right out. Dick York alerts his boss, and at the end of the day the security guard grabs the old man and opens his briefcase only to discover that no money is there. Dick York is very embarrassed and confused by the whole incident. Later the old man confesses to Dick that he finds it fun to fantasize about robbing the bank, but, of course, he would never actually do such a thing. Some things are just fun to think about. And sometimes when you think them through it helps you find a realistic solution.

A client has a PS plan. The Plan is top heavy. Jane's been in the PS plan the last several years and has gotten at least the top heavy minumum contribution all those years. Effective 1/1/05, the client starts a DB plan. For 2005, Jane was given a 0% PS contribution in the PS plan, and got the top heavy minimum accrual in the DB Plan. Jane terminated in early 2006 with under 1000 hours. Since the DB plan excludes vesting service prior to the 1/1/05 effective date, Jane is 0% vested in the DB plan. Jnae will get no payout from the DB plan. Jane is 100% vested in the PS plan. If she had gotten a top heavy minimum in the PS plan in 2005 she would have ended up with it, but she ends up with nothing for 2005 because she got it in a plan where she was 0% vested. Unless, there's a rule I'm forgetting.... Is there any rule that says something like if you have two plans, you must apply the better of the two vesting schedules to top heavy contributions???

Is it possible that the Broker forgot that he also opened a DB Plan for his client effective 1/1/05? Since the DB plan bases the benefit on a salary average since date of employment and the client had w-2 wages prior to 2005, he might have a significant DB contribution for 2005.

The 2006 Pension Answer Book, Q16.4, asks "what does age 59 1/2 mean"?. It answers "Although there is no provision defining age 59 1/2, it is believed that it means the actual date on which the employee attains age 59 1/2" So, if no exception applies, if someone receives a distribution before the date that is 182.5 days after their 59th birthday, it seems they get a 10% penalty.

Some were educating, some were interesting, some were intense, some were funny. What are your nominees: post the "Topic Title" of the best threads of 2006.

Given that you have correctly determined that you are eligible to contribute a roth IRA, I will answer your question: YES, you can open a Roth IRA CD. Just walk into (or call) your bank, and tell them you want to open a ROTH IRA account and you want the account invested in a CD.

10/25/06 Seeing how these new RMD rules are based on accrued benefit and vesting service, it seems to me that those things should be heavily planned out when designing a new Plan for a client who is already past age 70.5. So, I would imagine that without otherwise lowering your deductible contribution amout, you should start a plan for this client with a NRA of later of age 65 & 5 years of participation. To keep the accrued benefit small you should base the formula on years of participation instead of years of service, and you should exclude vesting service prior to the plan's effective date. Does this all sound logical? Any problems with it? And what if the client mention that he's really semi-retired and only works a couple of days a week in between his golfing. If he reports each year that he only worked, say, 728 hours, wouldn't that mean that he doesn't accrue any vesting seervice and would be 0% vested until his NRA. Wouldn't that mean that he wouldnt have to take a RMD until his fifth year in the Plan? (The plan would be written that you need 1000 hours to accrue vesting service, but no hour requirement would be needed to accrue credited service for benefit accruals). Does this all sound logical? Any problems with it?

OK, Thank you. (I'll continue my thread here, but I'm also going to start a new one called "starting a new DB plan for a post 70.5er", watch for it) Now to get more complicated with this thread... Its my understanding that to get the $2400 RMD used in my example even smaller, I can convert it to a 100% joint and Survivor form of payment. So I would take the actuarial equivanlent of this 2400 Life Annuity and convert it to 100% joint and Survivor using the Plan's interest and mortality and perhaps get a much lower number like $1963 as my RMD. Is this logic correct? any problems doing this? are there other ways to get the RMD smaller like this?

That last sentence would be... "All benefit accruals as of the last day of the first distribution calendar year must be included in the calculation of the amount of annuity payments for payment intervals ending on or after the employee's required beginning date." So, in my example, this would translate to: "All benefit accruals as of the last day of 2006 must be included in the calculation of the amount of annuity payments for payment intervals ending on or after 4/1/07" So, the answer is I calculate the monthly accrued benefit as of 12/31/06. Ok. let me just fine tune for the vesting issue, just to be certain. When it says "benefit accrual" is it also taking into consideration vesting? If the 12/31/06 monthly accrued benefit is 1000, but the guy is only 20% vested as of 12/31/06, is his RMD 1000 X 20% X 12 = 2400?

All the prior DB RMDs I calculated were done using the account balance method. I have some questions about the annuity method. I'd like to keep this simple at the start and get more complex with follow-up questions (though it always seems impossible to keep these discussions simple). Lets say.... An owner turns 70.5 in 2006, and must take his RMD by 4/1/07. He doesn't want to deal with monthly annoyances, so he wants his RMD to be taken annually. So, it's my understanding that he can calculate his vested monthly accrued benefit, multiply it by 12, and distribute this before 4/1/07. Before getting into issues of being allowed to convert that accrued benefit into alternate forms, Here's my first question: as of what date do I calculate the vested monthly accrued benefit? is it 4/1/07, 12/31/06, or 12/31/05?

We heard something to the effect that the IRS will be stepping up the number of audits they do on plans that terminated without IRS filing. Has anyone heard the same? is it rumor or some thing more official?

A client’s DB plan is terminating. One of the assets of the Plan is a Limited Partnership that they cannot liquidate. In order to get all the Plan’s assets liquid, it would be nice if the client could purchase that Limited Partnership asset from the Plan so that the Plan would have liquid cash. However, the client cannot do this since that would be a prohibited transaction (i.e a Plan doing business with a party-in-interest). The client also has a Profit Sharing Plan that they are not terminating. The Profit Sharing assets are pooled. Here’s our question: Can the Profit Sharing Plan buy the limited Partnership asset from the DB Plan? Would that be or not be a prohibited transaction?

You might also want to double check that the surrender value is the proper amount to be shown on the 1099-R. You probably need to report the "fair market value" and I though that Rev. Proc. 2005-25 made this more complicated than just using "surrender value" as "fair market value" ...greater of: A) the sum of the interpolated terminal reserve and any unearned premiums plus a pro rata portion of a reasonable estimate of dividends expected to be paid for that policy year based on company experience, and B) the product of the PERC amount (the amount described in the following sentence based on premiums, earnings, and reasonable charges) and the applicable Average Surrender Factor described in section 3.04 of this revenue procedure. Hopefully, I am wrong, but I had a similar question when a client was buying his policy from the plan. The purchase price used to be the "surrendr value" but now its this crazy 2005-25 calculation. I imagine its the same logic if client is taking over policy instead of buying. http://benefitslink.com/boards/index.php?showtopic=30911&hl= You may need to ask the insurance company to calculate the "fair market value" under 2005-25.

With regards to the rule that you can deduct up to the unfunded 404(a)(1)(F) current liability. There is that part that you can not take into account any benefits that were the result of a plan amendment that increased benefits in the last two years. I request feedback regarding whether a brand new plan is or is not considered an amended plan (i.e can a brand new plan deduct up to its 404(a)(1)(F) current liability in year one?) Let me know if there is any official confirmation that supports the answer, or whether the answer is just the current conventional wisdom based on reasonable interpretation.

Just checking to see if it is still the conventional wisdom that a "new plan" is not considered an amended plan and can take the unfunded current liability as a deduction in year 1.

Ok, we decided that we will not change our letter to the client, and therefore instruct him/her to file the B & P along with the 5500ez. With my and socal's vote it brings the tally to...6 votes to file the B anyway and 3 to not. Do file B - mwyatt, pax, bird, rcline46, SoCalActuary, himt4 Don't file B - flogger, effen, norman Thanks again for your contributions.