Calavera

Is this a beginning of year valuation or end of year?

About 5 years ago during EA meeting, I discussed a “last day rule” in a cash balance plan with Carolyn Zimmerman (the IRS actuary). She said that this provision is often missed by the IRS reviewers during the determination letter process. She suggested amending the plan to remove this provision. She also suggested using the relief under IRC 7805(b) so it would be allowed to amend this provision prospectively.

I agree that defined benefit plans could not have a last day requirement. However, if you have a determination letter, just amend the plan to remove this provision on a prospective basis for 2019 and future years.

I suggest to read the plan document sections about the computation periods. It may specify that you re-start a computation period to be 12 month of employment upon rehiring only if a participant incurred 1-Year Break in Service. And if it is silent, I may still base my decision on the 1-Year Break in Service rule described in the plan document, i.e. if a participant incurred 1-Year Break in Service, treat him as a new employee for eligibility purposes.

Yes You guess your best. However, I am missing something here. If your Assets+Contributions > TL+NC, the AFTAP is over 100%, and you do not subtract credit balances. And if not, waiving the credit balances will not make AFTAP over 100% And for FTAP, why would you need it to be over 100%? When your FTAP is less than 100% the only consequences are the quarterly contributions, which you can satisfy with credit balances.

Rev. Rul. 2007-43 If a partial termination occurs on account of turnover during an applicable period, all participating employees who had a severance from employment during the period must be fully vested in their accrued benefits, to the extent funded on that date, or in the amounts credited to their accounts.

Also keep in mind that at least for 2018 all terminated has to be 100% vested, not just those who terminated in October.

Yes it is true. The deduction is taken on 1040 against earned income from partnership, and can not create a loss. See IRS publication 560 for more details.

Since it is not a 5305-SEP, you legally can have a CB plan in addition to SEP as long as SEP's document does not prohibit it. Also, if this will not be a PBGC covered plan, your SEP contribution will become limited to 6%

It just doesn't smell right. Unless there are some minimum benefits (i.e. 0.5% annuity) or top-heavy benefits that override the value of some account balances. Client may ask the actuary to provide liability results per person to see if all participants affected or just some of them, and then ask for detailed calculation of a sample person.

Generally, none of the liability measurements will match the total of CB hypothetical account balances. You project with your credited rate and discount with the discount rate. If credited rate is higher than the discount rate, you will get higher liability.

Not necessarily. A plan document should outline the methodology. For example it may utilize the recalculation based on the total service and benefit formula in effect upon the latest calculation date (generally end of the year) and offset by the actuarial equivalent of benefits received resulting in the same $1,000. This situation occurs a lot in case of in-service distributions, or in case of RMD payable to an active employee. Same here. Plan document may say something like this: "...pension shall cease and any election of an optional benefit form shall be void...; re-calculate benefit based on the total service and benefit formula in effect upon the latest retirement date and offset by the actuarial equivalent of benefits received..."

Gray Book 2004-42 Other DB Plan Issues: Date of Retirement and Required Minimum Distributions Treas. Reg. §1.401(a)(9)-2, A-2(a) provides that except in the case of a 5%-owner, the “required beginning date” is April 1 of the calendar year following the later of the calendar year in which the employee attains age 70-1/2 or the calendar year in which the employee retires from employment with the employer maintaining the plan. If December 31, 2003 is the employee’s last day at work, and the last day for which he is paid or entitled to payment of wages, is that the date of “retirement”. Or is January 1, 2004, the first day he is not employed, the retirement date? When is the employee’s required beginning date? RESPONSE “Retirement” is the last day worked, not the definition of retirement date in the plan. What date is an employee’s last day worked is a facts and circumstances determination. The facts and circumstances are based on the employer’s practice concerning the last day an individual is considered an employee.

I would use monthly attained age to convert dollar limit to a lump sum limit. I don't think the administrative practice of the plan should impact the 415 calculations

Under 1.411(a)-(7) anniversaries are counted from the first day of the year in which a participant commenced participation. What was the date of participation, and what is her DOB?

Since all NHCEs are participants of the DB pension plan with no benefits, your plan is covered by PBGC, but you pay premium only for owners.

April 5, 2007

1.415(a)-1(f)(7) (7) Effect on other requirements.— Except as provided in § 1.417(e)-1(d)(1), the application of section 415 does not relieve a plan from the obligation to satisfy other applicable qualification requirements. Accordingly, the terms of the plan must provide for the plan to satisfy section 415 as well as all other applicable requirements. For example, if a defined benefit plan has a normal retirement age of 62, and if a participant's benefit remains unchanged between the ages of 62 and 65 because of the application of the section 415(b)(1)(A) dollar limit, the plan satisfies the requirements of section 411 only if the plan either commences distribution of the participant's benefit at normal retirement age (without regard to severance from employment) or provides for a suspension of benefits at normal retirement age that satisfies the requirements of section 411(a)(3)(B) and 29 CFR 2530.203-3. Similarly, if the increase to a participant's benefit under a defined benefit plan in a year after the participant has attained normal retirement age is less than the actuarial increase to the participant's previously accrued benefit because of the application of the section 415(b)(1)(B) compensation limitation (which is not adjusted for commencement after age 65), the plan satisfies the requirements of section 411 only if the plan either commences distribution of the participant's benefit at normal retirement age (without regard to severance from employment) or provides for a suspension of benefits at normal retirement age that satisfies the requirements of section 411(a)(3)(B) and 29 CFR 2530.203-3.

Is it possible that agreement was amended?

I am not sure what this means. More information is indeed needed.

Tell to the IRS actuary that if he/she is using the "accrued-to-date" approach, the total average compensation should be used for a cash balance plan, as you would use for a career average db plan. This should give you the same results as if you just do calculations on the annual basis.

Assuming your client already has 10+ years of participation and his 3-year-average salary is above $220k, this is correct. However you may gain some of this decrease back when the IRS issues new 415 $-limit. Yes he can forego portion of his benefits upon plan termination. He will need to fund by the distribution date based on the decreased lump sum that corresponds to his age at distribution.

Is this a cash balance plan?

This will be considered the 2017 PY contribution. It will impact your 10/1/2018 asset but it will not be counted as the 2018 PY contribution. It is possible that the 2018 PY contribution will still be required. As long as your 2017 max deduction covers your February contribution that was deducted, you are ok and there is no need for a plan amendment. You need to be sure that your 2018 max deduction is enough to deduct the September contribution for the 2017 PY, and the 2018 PY contributions (if any).

It is a wonderful idea to put post-tax money into pre-tax account and get taxed again upon withdrawal. However 25% of net $0 is still $0.