Calavera

Sorry, I misred the original post as "Assuming the DC contribution...". So, just to confirm, if DC contribution is over 6%, then DB contribution is limited to the greater of a minimum required contribution or an excess of Funding Target over Plan Asset (i.e. no 50% cushion and no normal cost). Correct?

Wouldn't your DB contribution be limited to the greater of a minimum required contribution or an excess of Funding Target over Plan Asset (i.e. no 50% cushion and no normal cost)?

TREATISE, DEFINED-BENEFIT-ANSWER-BOOK, Q 20:41 How is the deductible amount calculated when there is a short plan year? How is the deductible amount calculated when there is a short plan year? When the employer changes the plan year, there must be a short year in transition to the new plan year end. With the change in plan year, there will be more than one plan year associated with the same taxable year of the employer or the sum of the number of months of each plan year associated with an employer's taxable year will be different from the number of months in the employer's taxable year. The deductible limit in all such cases must be adjusted. The deduction limit for the employer's taxable year is adjusted by multiplying the sum of the deduction limits for the associated plan years by a fraction whose numerator, t, equals the number of months in the taxable year of the employer and whose denominator, p, is the aggregate number of months in the plan years associated with the taxable year. The deductible amount for the short plan year is determined by ratably reducing the otherwise deductible amount for a 12-month plan year in proportion to the number of months in the short plan year. [Rev. Proc. 87-27, 1987-1 C.B. 769] Example: 1. Black Rock Inc. has a calendar taxable year and computes the deduction limit for its defined benefit plan on the basis of the plan year beginning October 1 within the calendar year. In 2000, the employer changes the plan year to a calendar year. This results in a short plan year beginning October 1, 2000, and ending December 31, 2000. The plan uses an aggregate funding method and the normal cost for the 12-month plan year beginning October 1, 2000, is $24,000. The deduction limit is not reduced by the full-funding limitation and is not increased by the amount required to meet the minimum required contribution. The plan year associated with the 2000 calendar year of the employer is the plan year beginning October 1, 2000, and ending December 31, 2000. The deduction limit determined on the basis of this short plan year is $6,000 ($24,000 ´ 3/12 ). The deduction limit applicable to the employer's 2000 tax-able year is $24,000, the deduction limit for the short plan year, $6,000, multiplied by the fraction t/p (12/3 ). For 2001 and subsequent taxable years, the deduction limit is the limit for the plan year coincident with the taxable year. Example: 2. The facts are the same as those in Example 1, except Black Rock creates a short plan year beginning October 1, 2000, and ending November 30, 2000, and subsequent plan years begin December 1. The normal cost for the 12-month plan year beginning December 1, 2000, is $38,000. For the 2000 calendar year of the employer (taxable year), the plan year beginning October 1, 2000, and ending November 30, 2000, and the plan year beginning December 1, 2000, and ending November 30, 2001, are both associated with that taxable year. The number of months in the plan years associated with the taxable year is 14. The deduction limit determined on the basis of the short plan year beginning October 1, 2000, is $4,000 ($24,000 ´ 2/12 ). The deduction limit for the 12-month plan year beginning December 1, 2000, is $38,000. The deduction limit for the taxable year (calendar year 2000) is $36,000, obtained by multiplying the sum of the deduction limits, $42,000 ($4,000 + $38,000), by 12/14 . For 2001 and subsequent taxable years, the deduction limit is determined on the basis of the deduction limit for the 12-month plan year beginning December 1 within the taxable year (calendar year) of the employer. Thus, for the 2001 taxable year the deduction limit is determined by reference to the deduction limit for the plan year beginning December 1, 2001.

Wow, I totally missed this one. Just curious, was it always there, or was it added recently?

Mike, Can you elaborate? Does it mean that if the maximum deductible contribution calculated by an actuary is $100,000, and client contributed $150,000, he can deduct $100,000 and not pay the excise tax on $50,000? Will he be able to carry forward this non-deducted $50,000 and deduct it next year?

1.430(d)-1(e)(3) Anticipated future participants. —In making any determination of the funding target or target normal cost under paragraph (b) of this section, the actuarial assumptions and funding method used for the plan must not anticipate the affiliation with the plan of future participants not employed in the service of the employer on the plan valuation date. However, any such determination may anticipate the affiliation with the plan of current employees who have not yet satisfied the participation (age and service) requirements of the plan as of the valuation date. So, you may include those hired before 1/1/2009 if they become participants during 2009.

Here are two websites I definitely recommend to visit. http://www.trustgordon.com/ http://www.livingtrustsontheweb.com/pages/index.html

Didn't you answer your own question? As soon as majority owner(s) elect to forego their benefits, the plan is 100% funded.

I think the following is how the IRS looks at it. MVAR is based on QJSA payable at earliest retirement date. Cash Balance plans offer an immediate lump sum to terminated employees. In order to offer the immediate lump sum, they also need to offer the immediate QJSA. So for the MVAR purposes, there is the QJSA payable immediately that needs to be normalized with the standard rate.

From Defined Benefit Answer Book Q19:104 Example: The funding target of $1,452,362, in Q 19:102, is used in this example. The value of assets in the plan as of December 31, 2007 is $1,000,000. The plan had a funding standard carryover balance of $100,000. Therefore, the value of assets to use is $900,000. The transition rule from Q 19:105 is used, so the funding target is multiplied by 92 percent, or $1,336,173. The shortfall amortization base is equal to $1,336,173 less $900,000, or $436,173. This base is amortized over seven years using the segment rates in effect. Since there are two segment rates in effect over a seven-year period (the first segment rate is effective for the first five years, and the second is effective for the last two years), the calculation of the amortization is a little more complicated. The present value at each year must be calculated using the particular rate, and then added together... I thought the transition rule (i.e 92% of target liability) is used for the exemption from the shortfall amortization calculation. But if not exempt, full target liability is used to calculate the shortfall and the shortfall amortization base. Did I miss some corrections, explanations, etc. that stated that 92% of the funding target could be used to calculate a shortfall amortization base?

Under the first approach you have $300,000 of FSCOB left for 2009 (ignoring interest). Under the second approach you will be exempt from setting up amortization base ((Assets-Prefunding CB only) / FT >92%). Therefore you will only use $100,000 of FSCOB to cover the 2008 minimum, and another $100,000 of FSCOB to cover the 2009 minimum/quarterlies. I vote for the second approach.

If I didn't certify AFTAP for the first 5 years of the plan, the only applicable restriction is a restriction on the accelerated payments. Am I correct that the ERISA 101(j) notice is not required, since the one person plan is not subject to ERISA, and there are no other consequences? I understand that there may be some parallel requirement under IRC/DOL/etc., I just couldn't find anything that would require any notice.

I have couple more sole-proprietor related questions. 1. Do we have to amend the NRA? Can we leave it at 55 and let the IRS review all relevant facts and circumstances to determine "whether the age is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed" (how would you define it for a sole-proprietor?). 2. Let say, he didn't terminate his employment, but his benefits cannot be actuarially increased past age 55 due to the 3 year average compensation limitations and 10+ years of service. Would you say he has to terminate his DB plan when he is age 55, since he cannot start in-service distribution and his benefits cannot be increased?

What about late retirement actuarial increases? Those who reached 85 points and continue to work may receive greater of AE of Normal Retirement Benefit or Accrued Benefit. Does the actuarial increase need to be protected after NRA amendment?

It could also be a PBGC Q&A from EA meetings http://www.pbgc.gov/practitioners/law-regu.../page13190.html

Thanks Andy!

In the absence of circular 230 notice you can always start from the Schedule SB disclaimer: To the best of my knowledge... Case 2: So, 30,000 of the DB contribution should be counted as 2008 contribution; 1040 should be amended Case 1: This was my reading of the Notice 2007-28 as well. Does the non-deductible contribution have to be removed from the plan's asset (DC only, DB only, both) or does it become the part of the asset after you pay excise taxes? Another variation of the Case 2 if both contributions are made during the year and we are still in that year, could $19,000 with proper earnings be returned back to employer on the fact of error or non-deductibility or something else (and I mean something else legally).

Let's break it down to two situations: 1. DC and DB contributions were made during the Plan Year 2. DC contributions were made during the Plan Year and DB contributions were made after the end of the Plan Year but before 4/15. Both clients filed their taxes deducting $105,000. I need to give them some idea as to how to fix it besides just telling them that they need to talk to their attorney and/or tax advisor.

W2=100,000 MRC = 100%UCL = 50,000 150%UCL = 80,000 1. The deductible contribution is 150%UCL + 6%W2 = $86,000 (correct?) 2. Client made $105,000 as 150%UCL + 25%W2. Since DC plan contribution is over 6%, 404(a)(7) applies. What contribution amount is subject to excise tax? Is it $19,000 (25%W2-6%W2) or is it $49,000 ($19,000+ $30,000 (150%UCL-100%UCL))? Does the non-deductible contribution have to be removed from the plan's asset (DC only, DB only, both)? If $49,000 is subject to excise tax, will paying excise tax on $19,000 and removal of $19,000 from the DC plan's asset put you in #1 above and make the full 150%UCL deductible?

I am adjusting the dollar limit. This person has over 10 years of service and participation and his salary is over $230k.

Since multiple annuity regulation is under construction, below are 3 versions of 415 calculations. The goal is to maximize the 3rd lump sum payout. Any comments, suggestions, corrections, your own versions, known IRS objections, etc. are highly appreciated. Current age – 67 Prior Lump Sum 1 at 51 – 366,413 - (prior DB plan) Prior Lump Sum 2 at 66 – 1,269,653 - (current DB plan, in service distribution) What is a maximum 415 lump sum that could be paid at 67? Version 1: Using 5.5% and GAR with no pre-67 mortality Offset1 = 366,413 * 1.055^(67-51) / 10.7588 = 80,213 Offset2 = 1,269,653 * 1.055 / 10.7588 = 124,501 Additional Annuity at 67 = 214,955–80,213-124,501 = 10,241 Additional Lump Sum at 67 = 10,241 * 10.7588 = 110,181 Version 2: Using 5.5% and GAR for converting to immediate annuity. Using 5%, GAR and no mortality from payout to 67 to adjust for timing 415 Annuity Equivalent 1 at 51 = 366,413 / 14.6490 = 25,013 415 Annuity Equivalent 1 at 67 = 25,013 * 15.4995 * 1.05^(67-51) / 11.1910 = 75,621 415 Annuity Equivalent 2 at 66 = 1,269,653 / 11.0372 = 115,034 415 Annuity Equivalent 2 at 67 = 115,034 * 11.4934 * 1.05 / 11.1910 = 124,050 Additional Annuity at 67 = 214,955–75,621-124,050 = 15,284 Additional Lump Sum at 67 = 15,284 * 10.7588 = 164,438 Version 3 (Modification of Version 2): 415 Maximum Annuity payable at 51 – 88,488 415 Maximum Annuity payable at 66 – 199,331 415 Maximum Annuity payable at 67 – 214,955 415 Annuity Equivalent 1 at 67 = 25,013 * 214,955 / 88,488 = 60,762 415 Annuity Equivalent 2 at 67 = 115,034 * 214,955 / 199,331 = 124,050 Additional Annuity at 67 = 214,955–60,762-124,050 = 30,143 Additional Lump Sum at 67 = 30,143 * 10.7588 = 324,303

Here is my understanding of PPA Sec. 501(d). PPA Sec. 501(d)(1) states that new notes will be required for plan years beginning after 12/31/2007 and eliminates the requirement for 4011 notice for plan years beginning after 12/31/2006. So calendar year plan does not require any notices for the 2007 plan year. Since the new notices have to contain FTAP for the plan year and 2 preceding plan years, PPA Sec. 501(d)(2) defines what to report for 2006 and 2007 instead of FTAP. I hope this is correct.

Andy, I agree with (1) but where is (2) came from?

I never said it is going to be an easy calculation. IRC 414(p(3) refers to a qualification of a DRO meaning "do not assign more than plan document said". Previous post stated that there are more generous early retirement factors (aka early retirement subsidy). It also stated that according to a QDRO, spouse is entitled to pro rata share of this subsidy. But you cannot calculate the subsidy and therefore pro rata of this subsidy until participant retires. And there is no subsidy if participant retires on his Normal Retirement Date or later. So approach was to start paying the actuarial equivalent of spouse's portion of Accrued Benefit (easy part). Adjust if needed upon participant's retirement without increasing the total value of benefits payable from the Plan (hard part).

I assume they do not have a minor child. Otherwise it is a controlled group anyway. Section 1563 deals with the corporations. I assume you came to 1563 from 414©, which says: "The regulations prescribed under this subsection shall be based on principles similar to the principles which apply in the case of subsection (b)." And subsection (b) refers to 1563. This is how 1.414©-4(b)(5)(ii)(B) describes this exception: Such individual is not a member of the board of directors, a fiduciary, or an employee of such organization and does not participate in the management of such organization at any time during such taxable year. Hope it helps.