david rigby

And why? What are you trying to accomplish?

It is also on BenefitsLink: http://www.benefitslink.com/IRS/ir99-80.shtml

Sorry, bad phrasing. I do not mean that this "academic discussion" is bad policy. I was trying to state that it is not part of the EE comunications of the plan because it does not matter. My "free money" analogy (oversimplification) was an attempt to illustrate that the plan (typically any DB plan) is a single entity, not two separate "accounts". The "options" available are a design decision. If the primary purpose of a DB plan is to provide reirement income, then it may be counterproductive to include an unlimited lump sum option in such a plan. If jlf is disappointed that he does not have such option, or even any input into what the options are, then that seems to me to be a personnel policy issue more than a benefits issue. Perhaps employees who feel strongly should request such input; you sure won't get the opportunity without asking. If he feels that the portion of the total he is "paying" is high, he may have a legitimate gripe. I hope he gripes to the right people and shares with us how that goes. However, I still return to the "primary purpose" of the plan and to who is making the promise and committment. It seems that the ER is making the promise of a lifetime retirement income (in the case that jlf describes, it is the taxpayers who are making the promise). That promise has nothing to do with the assets available, thus the ER is taking the entire investment risk. To me, that is a very significant feature of the entire plan structure. (Others may not care, but they would care if asset yields over the past 15 years had been similar to the prior 15 years.) [This message has been edited by pax (edited 11-23-1999).]

timing is important. In the original message, you state "in 2000, the plan will have been amended..." What do you mean by that? Do you intend that to be retroactive? If the plan is actually amended on 1/6/2000, then the rehire on 1/5/2000 probably should not wait until 1/1/2001.

It is bad policy to discuss it at all. That is not the purpose of the plan! If you insist on viewing the 300K as "yours" (it is not), then perhaps you should consider that you are getting free money. That is, for putting up 30K per year, are getting that back with an additional 11K annual bonus.

You might be able to accomplish the same thing by reverting to the life annuity as the normal form, but then define the conversion factors for optional forms. For example, the J&50%S form could be defined as 99% of the life annuity. The J&100%S form could be defined as 98% of the life annuity. If you have to do any 401(a)(4) testing, then you will have to pay attention to the "most valuable" benefit, but if you have a safe harbor plan, it should not matter.

I've seen that before, or something similar. I think it is OK as long as you have passed the "effective availability" test. Anyone else?

Be careful there. How is he being paid? If it is thru regular payroll for which he will receive a W2, having FICA tax withheld, etc., then that might imply that he has "hours worked". Anyone know if this is a problem or if I am being too concerned?

I'll try. Yes, it is possible that the 1/1/2000 asset values will be different for determining the min contribution (412) and deductible limit(404). I'm not sure that it matters whether the sponsor files an extension for tax purposes for the 1999 FY. It also may be that both the 2000 min and max are not within the 60-80K range you are seeking. Not likely to be a 10% excise tax on the scenario you describe as long as you don't contribute *before* the beginning of the applicable FY.

Can't you use elapsed time method for vesting, or am I confused?

Why is it not disclosed? Simple, because it doesn't matter. The plan is not promising to "make up" any difference. It is promising to pay a benefit, probably for the life of the retiree. If the investment of the funds is good, then more of the total cost is "paid" by investment earnings. If the investment of the funds is not so good, then more of the total cost is "paid" by the plan sponsor in the form of increased annual contributions. In either case, the EEs are paying a fixed amount, based on a percent of comp. [This message has been edited by pax (edited 11-16-1999).]

Another point: don't get hung up on the mechanics, because that might contradict the intention of the plan. For example, if the payroll system is tracking "matchable contributions" per payday, and the participant is also making additional contributions, then the participant can reach the $10K limit and not have the correct amount recorded for matching. This is merely a mechanical discrepancy, not a plan failure. To avoid this problem requires careful EE communication, and careful design of how payroll and contributions are tracked in the payroll system. [This message has been edited by pax (edited 11-16-1999).]

I agree with Dave. This is an issue that centers around how the plan defines compensation and the matching contribution. It may be fixable, via amendment, but be careful about timing of the amendment and to make sure you don't affect something else.

so, the 300K is a ficticious amount? BTW, I estimate that you would need a guaranteed investment of about 11% for the 300K to yield annual income of 41K. I doubt that is going to happen! [This message has been edited by pax (edited 11-15-1999).]

Not an attorney, but my read of IRC 402© would lead me to answer "yes". Note however, if at some point, the EE (with agreement of ER and the plan) received the value of all remaining payments, then that lump sum would probably not be one of the "substantially equal periodic payments".

I'm somewhat confused (which is not necessarily surprising). jlf, in your 11/12/99 postings, the numbers don't seem quite right. If you start with a 5500 salary at age 30 and increase by 2200 per year to age 65, then the final 3 year average at age 65 is not 70,000, but is 71,500. I assume that is what you mean since the latter amount would yield the annual benefit of 41,792. By "account balance" I am assuming you mean the accumulated EE contributions with interest. I also assume that you are using the 8.75% AIR because that is what the actual average yield was (or something close), not because the plan actually credits interest at this rate. If this is correct then I get a value for this "account" of about 266,000. This is, as you have pointed out, and is probably the major point you have been grying to make, about 63 percent of the total "value" of the age 65 retirement benefit. That is a fairly high percent of a benefit for an EE to "finance", but it oversimpliflies the analyis by ignoring several things: 1. There are ancillary benefits that have been left out of this comparison. 2. The plan probably has a generous early retirement benefit that is no longer relevant at age 65. 3. The actual yield on the invested assets is the risk of the employer, not the EE. Therefore, it is not a valid comparison to impute the actual yield to the EE contibutions. 4. The benefit has a guarantee (that is the nature of the DB promise) that is unrelated to the amount of assets, contributions, yield, funding mechanism, etc. That guarantee is made by the ER, who is then asking the EEs to help with a fixed amount. If the EEs believe their share of helping is too high, then that is a perfectly valid position, but based on the market place for labor supply and demand. If actual yield had average 3%, the ER will not ask the EEs to contribute some more at retirement to make up the shortfall. BTW, in NJ is there state law that says the benefit (that is the entire plan) cannot be diminished for any EEs? For example, if the state designed a benefit and 5 years later discovered that it was too expensive, could it be changed for existing EEs or only for new EEs? If the latter, then that is another guarantee, one I might add that does not exist outside of government employment. [This message has been edited by pax (edited 11-15-1999).]

Not bad. A DB plan that uses a 1.67% formula is better than almost all that I see. Also, a high 3 year average is better than most. Your "inital reserve" of $410K is about right, although it might take quite a bit more than that to purchase a commercial annuity for that annual benefit, at least in today's interest rate environment. However, I'm not sure where you get the $300K as the employee's "account balance". Could you elaborate on how this was developed or estimated? [This message has been edited by pax (edited 11-12-1999).]

Actually, I have a variation on the original post. Modify the first sentence to be a governmental plan, which means that it is not required to comply with IRC 417. However, the plan does contain the J&S language normally found in non-governmental plans. Although the plan is not subject to IRC 401(a)(11) and 417, my conclusion of the above circumstance is that the inclusion of the language in the document demonstrates that the sponsor intended the plan to include the J&S requirements, and *therefore* the entire body of regs in this area probably would apply. I know this gets into the issue of state vs federal law. Any comments on the original or this variation? BTW, yes it would be easier to buy the annuities, but the sponsor is making the decision to offer this lump sum to retirees. My limited experience in this area is that retirees are very skittish about making changes and many do not understand the alternatives being offered. The time spent doing hand-holding and individual explanations is often quite intrusive to the sponsor. Any others want to share experience with offering lump sums to already retired employees?

I hope this is not a stupid question. Could the agreement be drawn up so that the entire distribution is done as a direct rollover (to a new IRA with no other funds), and the EE then withdraws the entire amount and signs it over to ER? I think the tax to the EE is the same. [This message has been edited by pax (edited 11-11-1999).]

Not a lawyer, but my preference is to place a higher priority on the statute than on the reg. That is, if you can figure out the meaning and intent of the statute without the reg, then you don't really need the reg. (I know, gross oversimplification.) But in this case, it should be very simple. Since we know that the statute was changed to reflect age 18 instead of age 22, then it is not a large leap to simply replace 22 with 18 in the reg.

I'll probably regret this, but jlf, you have 3 posts on 11/3/99. which one are you asking about in your post of 11/10/99? BTW, I'm curious, since the NJ plan requires EE contributions, is it on a pre-tax basis? Also, what benefit (formula) are you getting for your service and your 5%? Do you think it is a good benefit (at least good relative to your contribution)? My hunch is that you do not because you believe (in hindsight!) that you could have done better had you been able to invest the 5% on your own. Correct? [This message has been edited by pax (edited 11-10-1999).]

mwyatt makes a good point, but my read of IRC 402©(1) and (4) is that the rollover is still available. Anyone agree or disagree?

A non-governmental DB plan is terminating and amending the plan to offer a lump sum to current retirees and beneficiaries. If the annuitant wants the monthly benefit to continue, then the plan will purchase a commercial annuity. The lump sum will be calculated as the present value of all future payments, using the form of payment in effect and the definition of actuarial equivalent in the plan. The question is what spousal signoff is required for those who want the lump sum? 1. If retiree was not married at date of retirement, is any spouse signoff needed? I suggest NO, even if currently married. However, if retiree elected a J&S with a non-spouse contingent beneficiary, would that beneficiary need to signoff? 2. If retiree was married at original annuity commencement date and spouse is still living a. J&S was elected, spouse signoff is required, whether now married or now divorced? Presence of a subsequent spouse is not relevant. b. J&S was waived in favor of a single life annuity. Any signoff required? c. J&S was waived in favor of a 10C&C with spouse as beneficiary. Signoff required if still within 10 years? Signoff required if now beyond 10 years? d. J&S was waived in favor of a 10C&C with nonspouse as beneficiary. Signoff required if still within 10 years? Signoff required if now beyond 10 years? Signoff by spouse AND by beneficiary? Do the applicable regs [i think 1.401(a)-20] require the plan to offer a J&S upon the offer of the lump sum, which might effectively create a new annuity commencement date (I don't think so, but looking for cites and reasoning)? If so, this might create a new requirement for the retiree who was single at DOR but is now currently married. By the way, if the original election was a J&S and the spouse is now deceased, then the lump sum will be the present value of the single life annuity to the retiree. Anyone disagree? A somewhat rambling question, but would like any other advice related to the offer of lump sums to retirees. Thanks. [This message has been edited by pax (edited 11-09-1999).]

If there is E&O coverage, the carrier should probably be notified, but I suggest that you let your attorney do that.

there have also been other discussion threads on this topic. try searching the Message Boards for more help.