Dennis Povloski

We are terminating a small plan with excess assets that can be re-allocated to participants (no one is at the 415 limit). Normally, we would re-allocate in proportion to the lump sums, but in this case, the boss wants me do a rate group test because we want to focus the excess on one partner in particular (the idea being that I can allocate the excess in any non-discriminatory manner and allocating in a way that passes an (a)4 test would suffice). I've never done this before, and of course the boss is on vacation this week. Has anyone ever done this? My first instinct is that I would test it like a contribution on an allocation basis, but I wanted to get some thoughts to see if there were any quirks before spending a lot of time on it. Thanks! Dennis

I have a small firm that benefits husband, wife, and 3 employees. The husband is at the full 415 dollar limit and hits normal retirement age this year. The plan allows for in service distributions at normal retirement. The hubby would like to take out his lump sum on his normal retirement date, but keep the plan so that his wife can accrue her full benefit. The client has the ability to make a contribution that will release his benefit so that we avoid any restricted distribution issues (must be nice!). My question is if he takes a lump sum based on this year's 415 limit, and there is an increase in the 415 limit in some future year, will he then earn a benefit equal to the increase? or is he just done because he was fully paid out at the maximum benefit at the time he took the distribution. Any thoughts or leads that I could research would be great! Thanks!

My great dilemma. I'm leaning towards Mike's response as that seems to fit the intent, but taking a very literal interpretation, I can se SoCal's point as well. I did get a reply from PBGC saying that they had forwarded my question to their legal department for review, so I will post the reply when it comes back. That way we'll know what the "officials" have to say. Thanks all!

I'm working on the premium filing for a brand new cash balance plan adopted 12/28/2006 and effective retroactivly to 1/1/2006. My premium snapshot date will be 12/28/2006. The plan includes the following provisions: Years of service prior to effective date are included for vesting purposes. 1,000 hours during the plan year gives you the right to receive a contribution credit. Contribution credits are credited on the last day of the plan year (12/31/2006 in this case). Is there an accrued benefit on the pemium snapshot date? The participants have the right to receive the benefit, but as of 12/28/2006, no contribution credits have been credited. I've got an e-mail into the PBGC, but who knows when I'll get that back. I was hoping I could get some insight from all you bright folks out there in pension land. Thanks!

Is a SEP treated just like any other DC plan for purposes of satisfying the TH minimum allocation? I have a potential client with a SEP that they've already made a significant contribution to (for this question, let's assume all participants got at least a 5% allocation). They want to put in a DB plan to supplement with the idea of phasing out the SEP and going with a large DB in future years. In order to fit the combined deduction limit, my DB benefit has to be less than 2%. Am I allowed to say that the SEP is covering the Top Heavy Minimum? I see a lot of things talking about the defined contribution plan, but since this is a SEP, I don't know if that's included. Thanks!

I have a client who has his first RMD coming up 4/1/06. The plan is scheduled to terminate in July 2006. Under the DB plan, he has the option of starting a monthly annuity for the RMD or taking an annual annuity each 4/1. If he decides that a monthly annuity is the best choice for him, and the plan terminates in July, he has only taken 4 monthly installments from the DB. At this point, if he rolls his remaining lump sum into an IRA, how is his rest of his RMD calculated? Thanks! Dennis

I have a client who has his first RMD coming up 4/1/06. The plan is scheduled to terminate in July 2006. Under the DB plan, he has the option of starting a monthly annuity for the RMD or taking an annual annuity each 4/1. If he decides that a monthly annuity is the best choice for him, and the plan terminates in July, he has only taken 4 monthly installments from the DB. At this point, if he rolls his remaining lump sum into an IRA, how is his rest of his RMD calculated? Thanks! Dennis

Since everyone's tires of talking about 412i plans...ummm...I mean 415 limits....can we talk deduction problems? Here's my situation: Client has both DB & 401(k). Outsourced actuarial firm (us) never new about the 401(k) plan. By random chance, in our annual data request from the TPA, we saw a note hinting to the existance of a 401(k) plan. After discussion with TPA, we discovered that matching contributions were being made to the 401(k). Client had coincidentally decided to make a very large contribution to the DB plan. The DB minimum was far below the 25% deduction limit. The DB minimum + the Matching contributions were below the 25% deduction limit. However since they contributed well above the minimum in the DB plan, they now have a non-deductible contribution. I know that in the case of a lone DB, there is an exemption from the excise tax if the DB contribution is less than the Accrued Benefit Full Funding Limit (which is the case here), but I don't know what happens when a DC plan gets thrown into the mix. I did see in the ERISA Outline Book that there is also an exemption on the DC side if the non-deductible does not exceed matching contributions made for the year (or something like that), but I'm just to green to properly advise on this situation. In the end, I advised the TPA to work with the client's CPA to find the best solution, but I would like to know better for next time. Thanks for any input!

In my research, it appears that when a PBGC covered plan terminates, it looks like in the year of termination, you can deduct the full amount of the contribution necessary to cover the plans benefit liability (with a few exceptions...of course!). What happens if you make the contribution to make the plan sufficient in the year of termination, and something happens to delay the distributions into the next plan year. Let's say that the applicable interest rate in the new year causes lump sums to increase, and thus another contribution is required to again make the plan sufficient. How does deductibility of these contributions work? Is it one of those 10 year amortization instances? Any ideas where I can begin my search? In my example, there are no majority owners, so no one is able to waive receipt of benefits, so they would have to make the contribution in order to terminate. Thanks! Dennis

Thank you all! I agree with Mr. Duck as well, I just wanted to make sure that there weren't any other issues that I didn't think of. For this case, as the TPA just informed me, the business is an LLC in which both husband and wife share ownership and will continue despite the fact that the hubby is passed away. So it looks like essentially, he comes in accruing one year of participantion, then in the next year, he has an accrued benefit but drops out of the funding.

Hello all! We prepared a proposal for one of our TPA clients for a husband and wife plan. Before the plan could be adopted, the husband dies. Can the wife still adopt the plan? I know that this depends on what the business structure was (the client's receive earned income, so I have the TPA verifying the business structure), but are there any other pitfalls to be aware of? Thanks! Dennis

I'm sure you've all gotten a smart alecky post from Tom Poje at some point in your Benefitslink travels. He's a year older today so we're sharing our birthday wishes with all of his friends on Benefitslink.

If you go into plan specs, under the Actuarial Methods page, there is a tab for Cost Methods. The second to last entry on the left hand side is "Maximum Deduction uses IRC 404(a)(1)(d)?" and you have to code this as "Yes - Override". Then it will calculate the unfunded current liability and compare that to the maximum deductible contribution, and give you the larger of the two. There is a just plain old "yes" entry in the drop box, but I can't figure out why this doesn't work for me. It is possible that if you just check "yes" that it will only work with plans of over 100 lives, but we only use Relius for our small plans, so I haven't been able to verify this. It's my understanding that under the current rules, this now applies to all plans regardless of the number of lives. On the output, this shows on the Contribution Analysis report. The contribution is the calcualted max contribution. RPA Current Liability Floor is your unfunded current liability. Maximum Deductible Contribution is the larger of the two. We are still on Relius 9.1, so I'm not sure what changes have been made in later updates, but I hope this helps.

I've never done this myself, but I do use Relius for small plan DBs. Out of curiosity, what are you trying to accomplish by assuming early retirement? It would be interesting to see what we would need to do to bend the system to our will.

I have a situation where a participant died prior to normal retirement. The death benefit is described as 100 times the monthly retirement benefit. The lump sum of the retirement benefit actually comes out quite a bit larger than the death benefit. The way the document reads, the death benefit is: "Upon the death of a Participant prior to the Participant's Retirement Date, the Participant's Beneficiary shall be entitled to a death benefit in an amount equal to the Policy proceeds payable as of the Participant's date of death. "Such death benefit shall not exceed 100 times the Participant's anticipated monthly retirement benefit determined as of the Participant's Normal Retirement Date. Any amounts in excess shall inure to the Trust Fund and be used to reduce the future contributions of the employer." Further down, it states: "In the event of a Terminated Participant's death subsequent to the Participant's termination of employment, the Participant's Beneficiary shall receive the Present Value of such Participant's Vested Accrued Benefit as of the Anniversary Date coinciding with or next following the date of the Participant's Death." This comes from Corbel's volume submitter DB document. I understand that death benefits are incidental in a retirement plan, but it sounds like this would tend to provide a more valuable death benefit to a young person (who would have a smaller PVAB and be more likely to get more from the insurance), than to an older person (who would be more likely to have a larger PVAB, which could be larger than the death benefit..especially with low GATT rates in effect). Does that seem odd to anyone else? Also, in the event of a terminee becoming deceased, do they get the larger of the PVAB or the policy proceeds? It seems that the conditions of the insurance policy proceeds simply say death prior to retirement date, and the conditions for the PVAB simply say death after termination date....both of which apply to this participant??? Anyone else come across anything like this? Thanks all!

For some reason at least every 3 years sticks out in my mind. The land in question is actually in a profit sharing plan, so I'm not sure if that makes a difference or not. Thanks! Dennis

This one is a toughie! To attack the question from a different angle. What happens when you freeze a cash balance plan. Are the hypothetical accounts frozen, or are they converted to a monthly benefit at retirement, and that is what's frozen? I guess that would really determine how this could work. Thanks all for the input!

We have come across the case of a cash balance plan that bases it's interest credit off of S&P 500 rates. The plan does not allow for distributions prior to normal retirement, so generally, the whipsaw effect doesn't affect the plan. However, the clients are interested in terminating the plan, and if that happens whipsaw will have a big effect, and we feel that the plan will be underfunded on a termination basis as a result. Are there any issues with amending the interest credit rate to match the 417(e) rates? Are future interest credits a protected benefit? My instinct is no because the 417(e) rate is variable itself, but I wanted to see if anyone has had any experience with this. Thanks!

Believe it or not, I do actually use Relius for DB...granted we use this exclusively for our small plans. Our office tends to shy away from 412(i), so I've never run one, but I can comment that in running the plans that I do have with insurance, the insurance input screens are not at all user friendly. It does appear to have some type of download capabilities, but I've never run a plan big enough to try to figure out how to do this. Also, if you have all of your information nicely laid out in a spreadsheet, there is no way to import the insurance info with a data entry routine, so the info must be manually keyed anyway...... Good luck in your search!

I know that somewhere there was a notice or ruling to the effect that when determining the maximum lump sum at the 415 limit for principals, instead of using GATT interest, you can't use anything less than 5.5% interest or the plan's AE rates or something like that. I'm trying to look it up, but can't seem to find it. Can anyone provide a cite where I can dig up more info? Thanks! Dennis

Under the restricted distribution regs, there is a reference to Rev Rule 92-76 which describes escrow accounts that can be set up to allow for a HCE to receive his/her distribution if the plan is not funded sufficiently to allow for the distribution. The Rev Rule also says the following: "The plan also provides that the obligation of an employee under the repayment agreement alternatively can be secured or collateralized by posting a bond equal to at least 100% of the restricted amount. For this purpose, the bond must be furnished by an insurance company, bonding company or other surety approved by the U.S. Treasury Department as an acceptable surety for federal bonds." Does anyone know what type of bond they are referring to? Is it like a fidelity bond (with a relatively small annual premium). Or is this like an investment type bond?? Thanks a million! Dennis

We have a 2 person plan that terminated. The assets were distributed completely, the DB account was closed, and we filed the final 5500-EZ. Residual interest of about $750 was credited to the plan's investments, so the investment house re-opened the account. To get the money out, does this really count as a distribution? or is it just an interest credit? Do I have to revise the final 5500? Thanks! Dennis

Learn something new everyday! Thanks for the confirmation on that! Dennis

With regard to Non-Deductible Contributions to a DB plan, in going through the ERISA Outline Book, it appears that you can disregard contributions that are not in excess of the old ERISA full funding limit for purposes of calculating the excise tax due on the non-deductible, and then the non-deductible gets carried forward into the following plan year. this references IRC 4972©(7). Is anyone familiar with this, and if so, did I understand it properly? Thanks! Dennis

We have a client that we are helping withdraw a nondeductible contribution from her DB Plan. Under Rev Proc 90-49, it says that we must attach to the Schedule B an actuarial certification, copy of the plan language or corporate resolutions condintioning the contribution on deductibility, and a certification from the employer that the contributions were not deducted on their tax return. Does anyone know if there is a standard format for the last item? Is it just a generic statement saying something to the effect that "I hereby certify that this amount has not been deducted on my taxes"?? Or are they looking for something specific? Thanks! Dennis