david rigby

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.

Larry is correct, and he has hit the major points. If you have any specific ideas or concepts that you would like feedback on, just post. One other thing to consider might be whether there are areas outside the qualified plan arena where you can help with the employee relations issue for older EES.

I'm confused about this. My understanding of the IRC 414 regs is that it is impossible to "convert" a DB plan into a DC plan. That is, the regs state that such an action is equivalent to a plan termination. The PBGC will treat it as a termination of the DB plan. If you try to do this, you will end up with a new DC plan which has a different plan number from the DB plan. Therefore it is a NEW plan. If you terminate a DB plan, then a DC replacement plan can accept a Direct Rollover from the DB plan, but this requries the participant to have had all options with respect to receipt of that first. And if this happens, there is NO J&S requirement on that rollover amount, since the EE (and spouse) have already had that option and declined it (I guess that is the reference to "anti-cutback issues"). To summarize, this is two separate actions: terminate the DB plan, and create/modify a DC plan to serve as a replacement. They can be co-ordinated with respect to timing and communication, but they are distinct actions.

I generally agree with Wessex. Almost all plans in our office use the annual stability period. There is great variation in the choice of lookback period, but it averages 2 months. Personally, I believe that 3 months should be the minimum, in order to give you sufficient lead time in doing lump sum calculations, but that choice may present a problem with the regs.

I think the answer is no. But I suggest you look on the 401k Message Board. Going back about the last 6 months, there are a few different discussion threads on the topic of administrative fees.

Are you trying to sell universal life? If so, you have come to the wrong venue! Group term life is a (usually) a very efficient method of providing coverage to EEs who are still employed. You state, "Today, the price of term goes down, but so does likelihood of a benefit being payable when it is truly needed." The last part of your statement is the reason for the first part of your statement. (Duh.) The answer to your last question is multi-faceted, but the short response is: money, and no need to change. Employers usually don't consider it their job to provide cash value insurance or paid up coverage, so why should they pay a cent more Does that make sense?

Chris, I don't think that is the position of the IRS, and I agree with them. A qualified plan must have a sponsor. The trust cannot fill that role. Once a sponsor ceases to exist, then the plan should be liquidated, or some other organization must agree to assume sponsorship. Generally, the IRS says that you can have a "wasting trust" for up to 12 months, which means that you have one year to find all participants and pay them out. The participant is not really the deciding factor here, although this does predate the Direct Rollover/20% withholding requirements passed in 1992. I'm not sure the revenue agent was correct in claiming that the plan should be disqualified (maybe) but the response you got (distribute all remaining account balances and file a final 5500) seems quite reasonable to me.

Actually, a cash balance plan has a ficticious account that "accrues" at a rate given in the plan, usually involving an interest credit and a service credit. But the plan still should have a DB accrued benefit underlying the account balance. The PV of that is tested for T-H, with the possibility that the account balance is also a minimum to that PV. Gary, I'm curious. Most T-H plans are small, usually under 50 lives (although we have one in this office with about 200 actives). Do you have a situation where a sponsor is adopting (or considering) a CB plan and is also likely to be top heavy? (So far, I have not seen any CB plans of small employers.)

This seems to be a question for a different Message Board. Perhaps you would get more response that way.

Since a cash balance plan is a DB plan, then the DB plan minimum would apply. No special T-H handling for cash balance plans. I would look to the plan's definition of Accrued Benefit. The T-H regs in 1.416 Q&A T-26 state that no actuarial assumptions are mandated for testing the present value of accrued benefits. "The assumptions must be reasonable..." In our office, we often define this in the plan document, using 5% and the 1983 GAM. Note that unisex mortality is not required here. Q&A T-25 thru T-28 are worth rereading.

In addition to reading the document (always good advice), consider amending the document if it does not seem to be as flexible as you desire.

My understanding is that govt. plans are exempt from IRC sections 401(a)(11) and 417. Also exmept from sec. 411. My conclusion is that they are exempt from the lump sum minimums under 417(e). BYW, because they are also exempt from 411(d)(6), it may be possible for such a plan to modify its lump sum definition so that the amounts are decreased. However, as Carol Calhoun reminds us often, there may be applicable state statute(s) that could affect either or both of these issues. I'm curious, if the Plan is terminating, is the sponsor filing with the IRS for a determination letter?