John Feldt ERPA CPC QPA

Yes, 411 does not allow the 415 lump sum to decrease? or, yes, the 415 maximum lump sum is now lower?

An employer has A.E. defined as 7% interest and uses the applicable mortaility table. An HCE-owner terminated many years ago but the plan is restricted due to 110% C.L., so no payment has been made. The plan will soon be out from under this restriction. This terminated HCE is at the 415(b) limit and is at retirement (age 65). The 415 limit for lump sum purposes is calculated using the 7% plan rate. This HCE had been a 50% owner years ago, but no longer has any ownership. He had made some verbal agreements years ago about his plan benefits before selling his 50%(without consulting their actuarial service provider), and the amount payable now is higher than he had agreed upon. The current owner and this terminated HCE discussed the issue and they want to know if it's possible to lower the lump sum payable for the terminated HCE. He intends to elect a lump sum payment. If the plan amends the definition actuarial equivalence to 8.5%, no other participants lump sums are affected since they are all based on 417(e) minimums. All accrued benefits are unchanged. Due to the 415 limitations, the lump sum for this HCE would now be limited to the lesser of the amount determined at 8.5% or at the 415 rate of 5.5% - is this correct? Does 411 prevent the lump sum amount from being lowered in this manner?

As to your questions, I am not aware of any "safe harbor" formula that automatically satisfies nondiscrimination in a pension equity plan. However, I have only worked with a few pension equity plans, but none since PPA of 2006, so I could be wrong about this. Yes, you are correct that a determination letter can be obtained for a qualified plan when a company submits the plan to the IRS. After the IRS reviews the document (and maybe after some negotiated language changes), the IRS generally issues an opinion saying the written language of the plan satisfies the requirements of the applicable IRS cumulative list. Getting a determination letter from the IRS is voluntary, so not all plans have one. However, I think of a D letter as clothing. It's not required for a plan to have an IRS opinion letter, advisory letter, or determination letter - BUT, I think of the plan as being naked without one of those, allowing the IRS to see everything, giving them the option to challenge any text in the document if they choose to audit the plan. So, it seems likely that most Fortune 500 corporations would have a determination letter for each of their qualified plans, but since it is not required, some might not. Firms could apply for an opinion regarding each amendment, but I think this is rare. Instead, the IRS has a remedial amendment period that allows a plan to be "fixed" when it applies for its determination letter, even if the fix is retroactive in nature (although some limitations may apply). For individually design plans (those that are not pre-approved), like pension equity plans, cash balance plans, ESOPs, governmental 401(a) plans, etc. the remedial amendment period is a 5-year cycle based on the EIN of the sponsor or based on the type of plan sponsor as described Rev Proc 2007-44. This five-year cycle was designed to ease the IRS burden of having large spike in applications all at one time, so most individually designed plans now submit for a D Letter application once every five years with the deadline being based on the last digit of the plan sponsor's EIN. A determination letter has some importance, other than the audit protection that it provides. In certain individual bankruptcy issues, assets in a plan covered by a determination letter have protection from creditors. Also, if the plan has a significant operational error that needs to be fixed, the plan has to have a Determination Letter as one of the conditions if they want to self-correct the problem. If a participant wants to prove that their rollover is qualfied, a copy of a D letter can sometimes be used as proof. The determination letter does not protect the plan against plan provisions that violate ERISA, the law (unless the regulations or other guidance has rendered such provision of the law as inapplicable, such as 401(a)(26) for DC plans). But, the D letter does protect the plan's language regarding provisions that might disagree with the interpretation of the law as spelled out in various regulations, However, the IRS does not just hand out these letters, they can and will require plans to remove or amend language that does not meet their standard for meeting the qualified plan requirements under 401(a). I hope this has helped.

Starting some DB benefit accruals now in a brand new plan at age 44, if they are less than one-tenth of the 415(b) limit, can leave room for much much larger contributions at age 50 than a brand new DB plan that first starts up at age 50. Just something to consider. Also, consider that the contribution limit in a 401(k)/PS plan is an annual contribution limit each year with no lifetime limit, but the DB benefits have a single lifetime maximum. When the DB contributions become large enough to squeeze back the contributions on the 401(k)/PS plan because of the deduction limits under 404(a)(7), you don't get those unused contributions from the 401(k)/PS plan back again in any future year. This could also affect how soon you want to establish the plan.

Assuming this is a DC plan only, the "gateway" itself is never more than 5%. Now, there could be additional profit sharing above the 5% minimum gateway (as needed to help pass 401(a)(4), maybe to just one person), but gateways over 5% only begin to apply when a DB plan is involved. Probably Mike had a typo and really just meant 5%. Mike is also right about the amount to give to the 2nd component plan - it has no bearing on the others (unless a lot of money is going in and the 404 deduction limit becomes an issue), just make sure the gateway is applied to the whole plan, not just to one component plan within the whole plan. edited to add: Okay, now if you are using some compensation (less than total comp) that passes 414(s) and you want to use the 1/3 gateway at 5.5%, I can see how that is workable and could actually be less than minimum gateway using total 415 compensation at 5%.

Depending on how many NHCEs you have, you could component test, sometimes called restructuring. In essence, you have two plans for testing: Plan 1: Test the older HCEs and the youngest NHCEs on a benefits basis. Plan 2: Test the young HCEs and the older NHCEs on a contributions basis. Make sure each "plan" passes the 70% ratio test for coverage. Also, make sure the plan document allows non-uniform contributions. Edit to add: Tom got here first - listen to him.

Sounds perhaps like it's a pension equity plan.

You are correct, the deadline is the partnership's tax filing deadline plus any extensions. I assume you're talking about a Form 1065 for the partnership. Consider having the contributions made by the partnership into the plan. Individuals contributing to a plan sounds a lot like a deferral (a lower limit) or like a voluntary after-tax contribution.

The 10% penalty exception actually allows you to terminate when you are age 54 as long as the year that you separate contains the 55th anniversary of your date of birth. Example: You terminate February 2013 and are paid out. You reach age 55 in October 2013. No 10% penalty. Also, for payouts after 8-17-2006, there's is another exception at age 50 for payouts from a DB plan for qualified public safety employees.

So the question becomes: What is significant? If no significant changes have occurred, you are okay to rely on the prior test result in this 3 year period. I think the IRS would be the final decision maker on what is significant. Is it really that hard to just test again? If this is a small plan, it won't take much to be significant.

Might be a good thing - no 404(a)(7) limitation if you're PBGC covered.

If this is done, the RMD for the qualified plan for 12-31-2012 had to be made (assuming one was required). I think the extension for QCDs being used to count as an RMD was only for IRAs?

Wouldn't the pre-ERISA participation rules apply?

That's what I would conclude, but I'll be interested to hear what Mr. Richter, Mr. Watson, or Mr. Forbes have to say.

Doesn't the limitation on the number of rate groups apply to the discretionary employer nonelective allocation (the profit sharing allocation)? Check that with the document. You have 1 group getting nothing (they are both getting a required allocation of safe harbor and one is getting a required allocation of a gateway minimum) You have 1 group getting enough profit sharing to pass testing (I assume that more than the minimum GW, otherwise you really just have one group) That's just 2 groups. I certainly could be wrong about this. Since my plans are all in Volume Submitter documents, these silly restrictions do not apply to any of our plans. Thus I did not spend much time researching the answer provided above.

Why is the plan in a prototype document?! Rhetorical question. I agree with Jim that you have 2 rate groups.

How about having the loan fee charged directly to the participant for this first 30 days? After the 30 days, then any other future fees related to the loan could just be charged to accounts?

Am I correct that the sponsor does not need to file a 5300 during its normal cycle? I would not restate. Although the restatement requirement applies to plans that request a determination letter, I recall something about it not applying to plan terminations. I have not found the citation, so I could be in error. Before submitting, be sure all interim amendments were timely executed. For example, a DB plan would need to have a Code Section 436 amendment adopted (if not already adopted).

Yes, the same rules apply which only allow the remaining portion to be eligible for rollover. As for the calculation, it is based on the prior 12/31 vested accrued benefit plus any prior unpaid RMD amounts that could not be paid in prior years because they were not yet vested. Just be aware that the RMD amount differs greatly when a full lump sum is paid vs. when only the minimum gets paid. If they're only taking the minimum out, not the entire lump sum, the RMD amount is generally much larger.

Since the participant has elected a lump sum payment, my recollection is that the "account balance method" can be applied for RMD purposes for the year in which the payment is made. The rest can be rolled over. For ongoing participants in a DB plan that are only getting the minimum distributed, the account balance method went away as an option several year ago.

This may be only loosely related, but here goes: It is not necessary for the top heavy minimum to be expressed as a cash balance pay credit in a cash balance plan. Generally, a top heavy cash balance plan provides the top heavy minimum in the DC plan anyway, but if that is not the case, then the cash balance plan defines an accrued benefit equal to the greater of the top heavy minimm (2% x TH years x 5-yr avg pay) or if greater, the accrued benefit provided from the conversion of the cash balance account into an annuity, payable at retirement age. The pay credit in a top heavy cash balance plan would simply be the usual formula that applies for any pay credit, however, a minimum accrued benefit must be earned, but it does not have to be in the form of a cash balance pay credit.

If the plan only allowed deferral changes on the first day of the plan year, then an employee who wishes to defer will only have one deferral type available for that year. This gets closer to the edge. Any employee who elects to defer pre-tax thus does not also have a Roth option for that year. Any employee electing to defer Roth thus has no pre-tax option for the year. Not that this changes anything, just something to mull over.

My understanding is that if you apply for a D letter and are "caught" having missed an interim amendment deadline, such as HEART, then you are no longer eligible to submit that problem under VCP because your submission places you "under exam" (see sections 4.02 and 5.07(3) of Rev Proc 2008-50). The IRS sanction should be higher than the usual VCP filing fee, but should be less than the usual audit cap fee, unless something else is found in addition to this problem.

It would not have to be a 401(k), but some type of defined contribution plan is assumed to be in place to provide benefits to the NHCEs and be combined-plan tested in conjunction with the DB plan, and if needed, the gateway minimum is assumed (or more as needed) - whatever is needed to pass. Alternatively, another DB plan could exist to give benefits to the NHCEs, but now I'm just getting ridiculous.

§ 1.401(a)(26)-3(2) says "A plan does not satisfy this paragraph © if it exists primarily to preserve accrued benefits for a small group of employees and thereby functions more as an individual plan for the small group of employees..." I think frizzyguy is familiar with this. Some IRS agents try to argue that the DB plan you describe is failing the above section of 401a26 - the portion intended for frozen plans. These agents will argue that the plan is considered as primarily preserving accrued benefits for a small group of employees and thus failing, or some similar argument. IMHO, they are wrong. But it might cost the employer more to convince them that they're wrong than the cost to give some small benefit to just one NHCE. Just something to consider.