david rigby

I'm not sure about your use of the terms "extinguish" and "fulfill". How about "replace"? The solution here is to analyze the source of the severance "liability". For example, if it arises in a union contract based on a "plant closing" (or similar action), then the terms of that collective bargaining agreement will apply. Now suppose the plan sponsor realizes that the cost of this can be handled more easily under the qualified DB plan (rather than using corporate cash). In that case, perhaps the plan can be amended to provide this benefit; however, the sponsor may be required (under the terms of the CBA) to negotiate any change to the DB plan. Likely the sponsor will want to do so to make sure that the union accepts the pension plan as the vehicle for providing the benefit as replacement for the provisions in the CBA.

Often the board resolution and/or plan amendment address (or should) the issue of applying for a letter. Therefore, the advice is "read your document".

Another possibility might be to amend the DB plan to include the severance benefits. This may require some negotiation if a union contract is involved or might include some creative design approach. The advantage of this approach might be to avoid the plan termination, and hence the excise tax. Don't forget to check for discrimination issues before amending.

I like the idea of encouraging beneficiaries to notify in the event of death. It can be very beneficial to the sponsor because it usually means that you get to stop the monthly payments timely, or change to the spouse, as the case may be. Recovering "excess" monthly payments is a hassle to be avoided if possible.

You may have a benefit from this plan. If he named others as beneficiary(s) before you were married, that might automatically be voided by your marriage. I suggest you contact the Personnel or Human Resources representative and inquire.

I believe that the only Pre-tax contributions permitted to a DB plan are under IRC 414(h), and apply to govt. entities. W/r/t DC plans, contributions under 401(k) and 403(B) are pre-tax.

If there is more than one plan in a T-H aggregation group, then the first thing to do is read the documents to determine which plan is responsible for the T-H accrual.

You can't be faulted for trying to correct a mistake. Because of the time involved, I suggest a thorough analysis of what happened, and if possible, why. The purpose is not to point fingers but to identify facts. Also, it is possible that a mistake was not made, or that the amount paid was thought to be correct because someone simply did not have all the correct information. Only after you are satisfied that the facts are all in should you consider an additional payment. It would be prudent to have the plan's administrative committee review all information and make a formal decision. The primary purpose of this is to make sure the process is well documented. It would also be appropriate to get legal advice (competent ERISA attorney) as to who should get any such payment. The amount of any payment should be determined as of the original date of payment, and then adjusted by some reasonable interest rate. Again, the committee is probably the appropriate vehicle for determining what is a reasonable rate of interest.

The issue of Partial Termination is driven by facts and circumstances more than by statute or by regulation. Issues about vesting are contained in statute and regulations for IRC Sec 411. There is also a fair amount of court cases, not all of which will be applicable to most situations. Let me present some thoughts. (I am an actuary, not an attorney. It is recommended that competent ERISA legal counsel review your situation.) Reportable Event: A significant reduction in the number of active participants during a plan year. For this purpose, a significant reduction is defined as: · a 20% reduction from the beginning of the current plan year, or · a 25% reduction from the beginning of the prior plan year. The reduction need not be from a single event. This Plan experienced a 29% reduction in active participants during 1998 (26 out of 90). Thus, the Plan has experienced a Reportable Event under rules of the Pension Benefit Guaranty Corporation (PBGC). Please note that I am assuming your "90 participants" means "90 active participants". If not, you should do the above arithmetic using only the actives. However, the Plan may meet one of the conditions under which reporting is waived. PBGC regulation § 4043 and the instructions to PBGC Form 10 indicate that the reporting of this event is waived if the plan has less than $1 million in unfunded vested benefits. Partial Termination A "partial termination" is an event (or series of events) which causes a significant reduction in active participants. A partial termination usually occurs when a group of participants is eliminated from the plan, either by plan amendment or by involuntary termination of employment. The IRS examines the facts and circumstances of a particular event to determine whether a partial termination has occurred. · Significant reduction in participation. When a group of participants is involuntarily eliminated from the plan, a partial termination occurs if the reduction in participants is significant. The IRS focuses on the percentage of participants, not the number of participants, eliminated from the plan to determine if the reduction is significant. The IRS defines "significant" to be more than 20% of the participants. The IRS discusses this issue in several Revenue Rulings, all of which involved terminations of more than 50% of the participants. Where the reduction is under 50%, but over 20%, the IRS may be willing to consider mitigating facts and circumstances. If an employer believes there are circumstances that should not lead to a partial termination, then the employer can seek an IRS determination letter on the partial termination if it is unwilling to accelerate vesting after a reduction involving more than 20% of the participants. Alternatively, the plan sponsor can amend the plan to award 100% vesting to the affected participants, thus making the question moot. · Litigation. The courts have generally followed the guidelines established by the IRS, looking to whether the percentage of participants terminated from the plan is significant. · Involuntary termination required. To be considered a partial termination, the termination of participation in the plan must be involuntary, either by plan amendment or other employer-initiated action (such as, firing, layoff, or plant closing). The IRS presumes all terminations are involuntary unless the employer shows otherwise. The consequence of a partial termination is to award 100% vesting to affected participants. Some affected participants may already be 100% vested. (Only the vesting is affected, not the amount of the accrued benefits.) Conclusion You must make your own conclusion. If a partial termination has occurred, in order to avoid any ambiguity, you may wish to consider of a Plan amendment to award 100% vesting to affected participants who terminated employment during 1998. Such amendment might be: · targeted to all 1998 terminations, without regard to location or reason for severance, or · restricted to the facility closing, or · restricted to involuntary terminations, or · some combination of the above. Of course, this should be subject to review by your legal counsel. Other The same issue of a partial termination may also apply to any other qualified plan that covers the same employees. However, each plan must be evaluated on its own if the plan covers other employees. [This message has been edited by pax (edited 07-09-99).] Also, check your plan document (and collective bargaining agreement if relevant) to make sure there are no other provisions that would apply in the event of a layoff. Such "plant closing" enhancements might affect the amount of the benefit; the vesting is affected by the partial termination. [This message has been edited by pax (edited 07-11-99).]

There have been several discussion threads on this topic in the past few months. You will probably find some useful information if you do a search on all the Message Boards, probably using such words/phrases as "404" "404 limit", "deductible limit", etc. (without the quote marks of course). Good luck.

I agree with comment about amend rather than terminate. Seems that provisions deemed too "generous" is hardly a reason to terminate.

You have combined two issues. First, the funding method is an issue under IRC section412. The new actuary can change the funding method under IRS Rev. Proc. 95-51, section 4.04, with the conditions set forth in that section. Second, the issue of deductibility is under IRC section 404. Different rules govern. The answer may be yes or no, depending on other circumstances.

Not sure I understand all the facts. In your second paragraph, you state that it was "contributed to the Plan" does this mean it was actually deposited into the trust? If so, then the earnings are part of the trust and would be allocated to participants under the terms of the Plan. The company has a $900K deduction. If the $900K was merely in an account owned by the company, then the $100K appears to be earnings, which is probably part of the company's taxable income. What has been deducted? What fiscal year and what plan year does this apply to?

I'm not an attorney, but I have always thought of the clause in quotes (in the Dowist message) as a sort of definition of "legally separated". That is, a married couple does not need a judge or court to get a separation; they can execute their own document. Becaues a divorce requries a court, the IRS reg is requiring a court to define a separation. Does that help? [This message has been edited by pax (edited 06-24-99).]

Also, see Q&A posted on What's New page 6/22/99, specifically related to a terminating DC plan.

This issue is addressed for terminating plans in a Q&A posted on the "What's New" page as a Technical Tip dated 6/22/99.

Vesting is defined in IRC section 411. Top Heavy is in IRC section 416. As I understand your question, the EEs who have severed employment will use the vesting schedule in effect at the date of severance, unless the plan is later amended with a more generous schedule AND the amendment is retroactive to before the severance date. I don't think top heavy has any relevance to this issue unless the change in vesting schedule is automatic due to the plan becoming top heavy. As many users of these message boards often advise, check the provisions of the plan document.

I have never used Datair or Quantech, but I know users of each. I hear more good comments about the former and more negative comments about the latter.

I like Alan's suggestion. Make it a certifed letter. Make sure he knows that there is no immediate tax liability if it is rolled into an IRA.

No problems in our office. Tell the IRS office to get with the program.

Of course, a plan is permitted to have a vesting schedule based on years of service after the plan's effective date, ignoring all service prior to such date.

Govt. plans are also exempt from paying PBGC premiums. We had a govt. plan in our office that paid premiums for several years (we did not know of their govt. status). When we found out about the status, we urged them to apply for a refund, and were surpised when they got a refund without any real debate or stalling on the part of the PBGC. So I would recommend that the church plan go ahead with asking for a refund.

Actually Larry's question may not be so hard to deal with. Whenever the EE terminates is what usually determines the amount of the Accrued Benefit. Then the commencement date is usually NRD (if it is a vested term) or the first day of the month following the last day on the payroll (if already eligible for retirement). That is, use the plan's definition(s) for this. Thus the lump sum is the actuarial equivalent of the Accrued Benefit. If the benefit should include an actuarial adjustment for late retirement, then use it first.

I agree with Wessex, but I would convey some practical issues. We have not changed the stability period on any plans, primarily so we don't have to face the grandfathering issue, but also because there is no compelling reason to change to something other than annual. Also, the practical issue of doing a calculation of a lump sum, communicating to the terminated EE, getting response (including spousal signoff), and producing a check all point very strongly to the impossibility of using a monthly stability period. It also can be a problem with a quarterly stability period. I don not see any significant "funding issues" here. If there is concern for funding adequacy, then the actuary should be using a post-retirement interest rate that reflects (at least approximately) the rate used for the lump sum calc. Of course, this could be a problem if market rates are changing rapidly. Of bigger concern might be cash flow. For example, if a large lump sum is anticiapted in the near future (or even within two years) then some advance planning is appropriate. "Large" is a relative term, depending on the size of the fund.

In our office, we usually interpolate all such issues on the basis of completed years and months. However, I believe this is ultimately an admininistrative decision; just be consistent once you make it. It is pretty easy to defend your practice to anybody when you do it based on something pretty close to "exact". For that reason, I do not recommend using "age next birthday" or "age last birthday". Note also that it may be OK to have different handling of service, because that is usually defined more precisely in the Plan. For example, service might be based on plan years, which in turn are based on the 1000-hour rule, even though you might calculate an early retirement reduction or optional form conversion based on age and months.