Penman2006

Blinky, can you ask him about the wording at the end of A-8 that I mentioned in my earlier post? Nobody commented on it, but I think it's a mistake and it could be both a limiting factor and a needless twist to be concerned with if not corrected (assuming it is a mistake). As I mentioned above: "I notice that throughout Notice 2007-28, the author (Jim Holland) uses the phrase "6% of compensation of participants in those plans" everywhere except at the end of the last sentence in A-8 where he says "6% of compensation of participants in defined contribution plans". .......Hmmm."

Regarding Q&A 8 of Notice 2007-28, from what I read the following example would apply: Total Comp = 500,000 DB MRC = 100,000 PS Contribution = 50,000 6% of Pay = 500,000 x .06 = 30,000 25% of Pay = 500,000 x .25 = 125,000 The 404 deductible limit would not be exceeded because 100,000 + 50,000 - 30,000 = 120,000 which is less than 125,000 (25% of Pay). The actual 404 limit would be a total DB + PS of 155,000. Agree or Disagree? I think there was some uncertainty amongst practitioners (or maybe just me) before this guideance. I had thought that the consensus on this board was that the limit was the DB min + 6%, but if 6% was exceeded then the 25% applied (no "free" 6%). In that case, in the example above, the limit would be 130,000. I notice that throughout Notice 2007-28, the author (Jim Holland) uses the phrase "6% of compensation of participants in those plans" everywhere except at the end of the last sentence in A-8 where he says "6% of compensation of participants in defined contribution plans". .......Hmmm.

thanks, i overlooked that.

I am starting to do some 12/31/06 CB/PS combined plan coverage and nondiscimination testing and it seems I'm a little rusty. I have a calendar year plan with a participant that terminated employement during 2006 with only 300 hours. The PS plan provides a 3% safe harbor PS contribution to avoid ADP testing. Since there cannot be a last day or hours worked requirement on that SH PS contribution then it seems like that participant would then be benefitting for the purpose of receiving a gateway minimum. I don't see a way around the 3% SH plus the gateway but it is weird t give a gateway to someone that can be excluded for 410(b) and 401(a)(4) testing because they are terminated with less than 500 hours. What am I missing?

I think the regulations define CL as the present value of all benefits accrued to date, not the "plan termination liability". If you are making an assumption that participants will retire at an age greater than NRA then that is what the CL pvab will be based on/discounted from. Large plan valuations typically use retirement rates. In that case a given particpant would have pieces of his benefit discounted from the variuos retirement ages, some of which would be after NRA. I don't see the difference, it's just that you are assuming 100% of the participant retires at age 60 (past NRD). Regarding the PBGC liability, the Schedule A says right on the form "assumed retirement age". (I'm assuming it's not really a one man plan since no PBGC filing would be required.)

Regarding a restristed employee situation, when making up the list of Top 25 HCE's of all time would one include HCE's that are part of the controlled group but were never covered by the plan (because the plan is only for one company of the controlled group)?

A plan terminates 12/31/06 and the one HCE is at the 415 accrued benefit limit at 12/31/06, but distributions are obviously not made until 2007, does anyone think that the 2007 415 limit would then apply to that persons benefit? Personally, I do not think so because the plan is terminated and all benefit accruals have ceased, but, I would like to be wrong.

You know, I initially overlooked the fact(?) that the Top 25 measurement is the Top 25 HCE's OF ALL TIME. Is that correct?

A client has asked me to look into a bond or a letter of credit so that a couple of retstricted employees retireing next month will not have their lump sum infringed upon in any way. These two are not management and if the other participants hear of a restriction that's going to be bad for moral. The plan has 400 participant's so that a lot of ill-will. Can anyone give me the name(s) of an insurance company that they have worked with on a restricted employee bond issue?

So, as mentioned, the 1/2% benefit accrual is currently considered the benchmark for what is a meaningful benefit. In a cash balance plan the cash balance % of pay contribution must be converted to an annuity basis and then compared with the .5% meaningful accrual benchmark. Depending on the participants age, something like 2% or 3% of pay cash balance contribution may be enough but you have to do the conversion and check. Then, per 401(a)(26), in general, the lesser of 50 employees or 40% of the employees that would otherwise be eligible under 410(b) regardless of non-statutory exclusions, must be getting a meaningful benefit. For 401(a)(26), it's okay if some participants get less than .5% as long as enough of them do to pass the 401(a)(26) test.

Thanks Effen. I have only one CB plan that does not use the 417(e) rate as the interest crediting rate, but that plan has fairly frequent terminations so I need to get a handle on this.

How come nobody is talking about whipsaw being eliminated with the enactment of PPA'06 (immediately). I have not had to do any cash balance distributions recently, but someone has......what is being done? What if, for arguement sake, a plan had a 3% interest crediting rate, would you just pay out that cash balance amount, forget about 417(e)? Are distributions being held up until guidance is issued and we are told what "reasonable rate of interest" means? How can you do that? Help!

Also, under the new law, effective in 2008, if the DB plan is covered by the PBGC it can be ignored for the 404(a)(7) combined plan deduction limit.

BTW, what is "market rate of return"? Is that term defined somewhere?

Thanks Andy. I will read those cites tomorrow and see what that tells me. I searched on "target benefit" but I didn't read all the threads that came up so I must have missed the discussion on ave. comp. I will go back through them.

Chester, This is a takeover plan. The the plan has been administered for who knows how long using the current average pay for the target benefit calculation that drives the funding. Initially I had the same thought as you, to project current comp. Based on how the plan reads, I don't think that using the current average pay to calculate the contribution violates any plan provision. I think using AMC is fine in this case but I would welcome any other thoughts because this is my first target benefit plan (that I can remember).

I didn't mention it because I don't think it matters theoretically but this is a target benefit plan. Average monthly pay is used to develop the contribution. If you average a 9 month salary into the high 5 consecutive average the average will go down (and not properly reflect a participants pay level). Regarding vesting, I don't see any problems because for the short plan year, a year of vesting service is prorated to 750 hours. Also, the Limitation Yr is defined as the Plan Yr and the Plan Yr is defined as 4/1 -12/31. As an example, let's say someone has 5 years of service from DOH to 12/31/05 and has always earned a salary equal to $100,000 per year. Then, since comp is defined as comp for the plan year, for the short plan year period from 4/1/05 to 12/31/05 their comp would be $75,000. Average Monthly Comp is defined as the high 5 consec. plan years so you have ($100,000+$100,000+$100,000+$100,000+$75,000)/5 = $95,000. The participant gets screwed and they would continue to get screwed for the next 4 years, as long as that $75,000 is averaged in. I think the plan amendment is a good idea.

I have a restated plan with a short initial plan year (9 mo). The definition of average comp is high 5 consecutive plan years. The definition of comp for the short plan year seems to imply a 9 month comp period because it is defined as "comp for a plan year" and the plan year definition indicates an initial short plan year. The ave comp definition does not address the short plan year. Based on that, it would seem that you would treat the short plan year pay as just another plan year without taking into account it is only a 9 month period, effectively averaging 57 months of pay over 60 months. That doesn't seem right though. I can't remember the last time I did a short plan year val, can I get some input on average pay and a short plan year? Are there guidelines in the Code? I couldn't find any. Thanks.

Effen, One of my clients is in the exact same situation. I agree with you that it seems hard to argue they did anything wrong because the distribution complied with the laws in effect at the time. Let's hope that relief is issued for this type of situation.

PBGC covered DB plans are removed from the 404(a)(7) equation as well as DC contributions up to 6%.

No problem, I was not clear.

I think it is pretty much correct. If a plan names names as an eligibilty requirement, then it must pass the ratio % test because naming names is not considered a nondiscriminatory classification, therefore the two-part ABT cannot be passed. If the plan also names names for benefit level purposes, then the plan can use the mid-point to pass 401(a)(4) as long as the ABT part of the two-part ABT passes (regardless of the nondisciminatory classification test).

There have been a number of discussions on naming names in the plan document on this message board. I have not reviewed them or the regs before writing this but I believe that while naming names is acceptable it forces the plan to pass 410(b) coverage based on the 70% ratio percentage test because the average benefits test is a two part test, one part is the numerical average benefits test and the other part is the nondiscrimatory classification test. Naming names fails the nondiscriminatory classification test. However, with respect to rate group testing under 401(a)(4) for this plan that names names, if the plan passes the average benefits part of the average benefits test, then the rate group testing can indeed use the mid-point between the safe harbor and non-safe harbor range based on the NHCE Concentration % to pass, rather than needing 70% to pass.

Thanks very much.

I have a situation where a small business owner that has had a DB plan for a number of years and is now past NRA could maximize his LS distribution if he were to take it right now while PFEA is expired and prior to new regs, assuming the new regs make the 5.5% interest rate on 415 lump sums permanent. The plan would continue and the plan assets would just barely cover 110% of Current Liability (based on the Treasury rate CL interest rate corridor as applies since the expiration of the PFEA bond rate corridor, and prior to any pension reform legislation). Being cautious, I am uneasy about having him take the distribution right now because of the black box of pending legislation. On the other hand, how can there be a problem if the distribution meets all of the applicable criteria based on the law in effect at the time of distribution? I would appreciate any input and thoughts that will help me sort this out. Thanks.