david rigby

The above limitation is contained in IRC 401(l) (subsection lowercase L). I believe this section defines a "safe harbor". If you can pass a general test under the 401(a)(4) regs, then you can use some other integration formula.

I don't think citizenship is the important factor. Is it U.S. income?

Correct. But watch out for top-heavy minimums.

I think the answer to both questions is Yes. check IRS regs. under 1.414(s).

Not sure of all the facts. If this is a DB plan that is terminated(ing), then the PBGC has a Missing Participants Program. Does not apply to other plans. If this is a DB plan that is not terminating, then what is the big deal? Just leave it as a vested terminated participant. If you have done the required notice about the vested benefit, then the ball is in his court to come back to the plan when he reaches retirement age. By the way, I suggest that your communcation to the vested terminated EE state that and state that it is his repsonsibility to keep you informed of his address. Also, do not destroy any paperwork that documents this benefit or its effective date. If this is a DC plan that is terminated (ing), then you need to do some more searching, using such sources as commercial locater services. See PBGC regs on plan above for their suggestions on possible sources of information. (By the way, you should probably have the money invested in a separate account while you are doing the seaching.) I don't know how you could have an outstanding check for this since you cannot write the check until the participant makes an election on a Direct Rollover (unless not more than $200.) If this is a DC plan that is not terminating, then what is the big deal? Do a search if you want, but if you cannot find him, just leave it in the account. There have been other discussions about sources of information. Try doing a search on the Message Boards, using key words such as "missing" or similar. [This message has been edited by pax (edited 01-29-99).]

No QSLOB. That requires a minimum of 50.

No problem. I spoke to Rowland Cross of the IRS yesterday and asked this question. He stated that since the referenced comment is not in the Code, it will not be applied as a statutory exception to the requirement to establish a base. Therefore, the continued use of the base, and its switch from 10-year to 20-year amortization, is required even for aggregate method. He did seem to be open to other possibilities, but was not planning on taking a poll at the EA meeting, for example. If you have an opinion, he was interested in hearing from you. My opinion is that for larger plans, it (using a 20-year amortization vs. having no base) won't make much difference in the resulting contribution, but that it could in smaller plans, especially if funded with the IA method. [This message has been edited by pax (edited 01-29-99).]

Since it's Friday, I can't think straight; need to think about that some, although it does not seem correct. But, it is my experience that you cannot buy a deferred annuity for small amounts. That is, no insurance co. wants to deal with that. Is that a correct impression? If not, under what conditions would it happen? Would the ins. co. do so only if there are $X dollars (total) involved, for example? If you cannot buy a deferred annuity, then the only alternative is an immediate annuity, possibly in J&S form. That can easily make your monthly benefit very small. If that is the case, it may be one more incentive to the participant to elect a single payment (either lump sum or direct rollover). If I were offered: 1. lump sum of $10,000, (assume the deferred annuity of $300 per month starting in 30 years is unavailable on the open market), or 2. an immediate annuity of $20 per month, I probably would not have any interest in alternative 2. [This message has been edited by pax (edited 01-15-99).]

As an aside, MMBest, that is usually the point to a cash balance conversion. It provides a mechanism for "using up" some excess, either indefinitely, or temporarily as a precursor to freezing the plan. That is, sometimes a cash balance plan is used as a bridge from a traditional DB environment to a DC environment. Personal opinion: It can be good or bad. Much depends on the company demographics, philosophy of management, and the future of the plan sponsor. In many cases, the cash balance approach is done simply to cut current costs, without any analysis or regard for the underlying philosophy about the level of benefits and what the plan sponsor wants.

Oversimplified, if a DB plan is terminated, the plan must provide the accrued benefit in some form, such as the purchase of a paid up annuity or a lump sum. Receipt of a lump sum, if over $3500 (now $5000), requires approval of the EE (and spouse). Once the lump sum is properly chosen, then the participant has the right to do a "direct rollover" to any qualified plan in which he is a participant (and assuming that plan will accept a rollover) or to his own IRA. Note that a rollover to the spouse's plan, or to the spouse's IRA is not permitted. I think that rollover to any 403(B) plan is not permitted but not sure if that has been changed. Help anyone? If the sponsoring ER is replacing the DB plan with a DC plan, then the DC plan can be an available option to accept such rollover, but it is still the EE's choice. The ER, or the mechanics of the plan termination, canNOT require the participant to do any particular action, except when the lump sum is below the mandatory cashout limit of the plan. It is my understanding that your Q2 would be a violation of the rules as summarized above. Do you have legal review of this?

No one answer. Try: 1. other EEs, 2. phone book, 3. relatives in phone book, 4. internet search, 5. Social Security Administration, 6. IRS, 7. private locator services, 8. another organization that might have address, such as college alumni records, 9. forwarding address at phone company, etc. If this is a termination of a DB plan, then PBGC has a procedure (Missing Participant Program).

Don't think so. Yes he is HCE. But the plan still has to do ADP test since there are other EES, assuming that some of these are actually eligible to participate in the plan.

Question related to comment from Tom Poje: If EE can opt out but is still counted for 410(B) purposes, what does this mean for the W-2? That is, as implied under David Shipp comment, and as we know, the usual reason for an opt-out is to be able to make an IRA contribution. Does an opt-out accomplish that? Does the ER complete the W-2 check-box appropriately to reflect that? Does revocability have any bearing on this issue? Sorry for asking questions I should already know. If there is already a discussion on this, please let me know. Thanks.

If you include ERISA qualified plans in that waiver, you will probably set yourself up for trouble, especially if you are dealing with full time EEs. The examples of your proposal that I have seen usually involve P-T employees. Example, a bank hires data entry workers who work 2-3 hours per day. In exchange for more cash (such as an extra 25 cents per hour), the EE waives all benefits. This is not a problem for the qualified plans because the EE never gets close to 1000 hours in a year.

this is an admin. boo-boo. Seems perfectly reasonable to fix it so that the NHCE is not harmed. First order is to determine what should have happened, then to determine how much is required to fix it. As near as I can tell, the overpaid HCE has all of the money that belongs to the NHCE, but someone else might be at least partially at fault for the administrative problem. If the HCE is even partially responsible, then that EE has very little standing to say his IRA won't pay, in my opinion (actuary/consultant, not attorney). I don't think the identity of the IRA custodian is relevant. If the HCE resists (likely), it is worth noting that he received too much. That is a status that should be corrected as well as the other EE's underpayment, esp. since the amount is clearly not trivial. If he got too much, then his rollover may be disqualified. Seems to me that corrected 1099's are appropriate, perhaps even mandatory, certainly advisable to document and too prove that no one is trying to hide anything. Good luck. Let us know what happens.

HD, Some basics may help you. A DB plan defines an "accrued benefit" at any point in time using some formula, usually taking into account the employee's compensation (or some average thereof) and service. Note that compensation and service are each defined in the Plan so don't just assume; for example, service might be defined as a plan year in which the EE works at least 1000 hours; compensation may be defined as all comp or may omit overtime, bonuses, etc. Read the documentation carefully. (That is, start with the definitions.) Now that the accrued benefit is defined, note that it is usually payable at Normal Retirement Date (also defined), which is very often age 65. For ex. an EE age 50 with 20 years of service may have an accrued benefit of $500 per month, but the plan will not commence that $500 until age 65. Then the plan may permit a reduced benefit to commence earlier, usually some percentage of the $500. The reduction is to account for (approx.) the longer time period that the benefit will be paid. Remember that a DB accrued benefit is usually an amount that is paid for the life of the retiree; one of the attractions of a DB benefit is that the EE cannot outlive the money, which is not the case in a DC plan. Hope this background is not too verbose for you. If you have more questions, just post.

There is some similaity to the situation where ER terminates a DB plan (or merely freezes it) and all future benefits are earned in a DC plan. The younger EEs probably like this because they have more years to take advantage of compounding (in addition to the concept of the individual account), but older EEs get very little value from only a few years of compounding. In fact, the above situation is probably better for older EEs because they get something, but in a cash balance conversion, they may get no additional accrual. The comment by MWyatt above is correct: cash balance plan is a career average plan. From ER perspective, it may be more manageable / predicatable cost than a traditional DB plan based on Final Average Comp. But the cash balance plan has less flexibility: harder to deal with early retirement subsidies or windows. Also, it usually gives a larger death benefit than a traditional DB plan. [This message has been edited by pax (edited 12-31-98).]

Lorraine is correct. There are brief mentions of IRC 404(a)(1)(A)(ii) in a few places: 1,404(a)-14(f) 1.404A-2 Announcement 98-1 Rev. Rul. 94-75 Rev. Rul. 82-125 Rev. Rul. 80-267 These cites don't really say any more than the IRC language. A logical interpretation of this is that a plain reading of the statute is your only real guidance.

this is a great question. My gut feel is the opposite, howver. That is, when you buy an annuity, it is supposed to provide all of the features of the qualified plan., such as the same J&S factors, same ER reduction factors, etc. My guess is that the annuity would be required to do the same for the EE contributions. Another possiblity might be to determine the ER portion at plan termination, refund the EE amounts, and purchase the annuity for the ER portion. Don't know if this is permitted. Even if so, it would likely require EE (and spouse) signoff to distribute a portion of the benefit. Good luck.

Not sure if this would help, but consider if the plan could invest in the land along with others (other plans or other investors) so that the portion of the plan's assets that are tied up in real estate is minimal. that's the diiversification issue mentioned above.

go to Governmental Plans message board and ask this question

the above comments seem to focus on the numbers. but there is another part of the equation: demographics. the ratio of workers to recipients today is about 4 to 1 (I think). That ratio will be cut in half in the next 30 years. Part of the reason is the large cohort of people (called the Baby Boom) that is aging into retirement. the other issue is the governmental activism that has (falsely, in my opinion) encouraged low birth rates. why have they encouraged this? so that more married couples can be two income families, generating more tax revenue for the politicians and bureaucrats to spend. OK, I'll get down off my soapbox now. I believe that major surgery on the SS system will be a failure, because of the time it takes to see the problem and the success of any solution. those who call for investment of monies in the equity market are just looking back over the last 15 years with regret, relaizing that we should have done it sooner. Perhaps so, but the large volume of dolllars will sway any market, whether it is stocks, bonds, or t-bills. Remember that about 2025, SS will be paying enormous amounts each month. These amounts are cash, so that no matter what the investments are in, they must be sold to generate cash. that will cause that investment market to have more sellers than buyers and prices will go down. My suggestion is to raise the SS retirement age, probably to 70, gradually. In addition, some of the funds should be invested in other securities, but not a significant portion. [This message has been edited by pax (edited 12-17-98).]

What do you mean? You do not treat the 1994 accruals as a "new employee" in terms of participation, vesting, etc. I'm not really sure what you are asking. If, for example, you are referring to a service maximum, then the "second part" of calculation will normally recognize any service included in the "first part", but the addtional benefit accrual beginning in 1994 can be any formula you want (generally). If the frozen part included SS integration, then there is still a max of 35 years (total) for use of 401(l) safe harbor definitions.

Need more info. My experience is that 100% of DB plans offer a lump sum, although most of these are the involuntary cashout rule (now $5000). Also, the prevalence of lump sums of larger amounts (perhaps even without limit) is guided by many factors, such as nature of the industry (for example, I have seen many hospital plans with lump sum limits of $7000 to $10,000). The single most significant factor is the desire of the owner. Is the DB plan sponsored by a sole owner, or possibly a family business? If so, much higher likelihood that the plan will include an unlimited lump sum option. Another factor might be the nature of the workforce; for example, a plan covering primarily attorneys or achitects. Another factor is the management / owner philosphy and level of paternalism. If management is concerned that a blue collar workforce may squander lump sums, then the lump sum limit will be set low.

Gary, The SOA publishes an very valuable resource entitled "Statistics for Employee Benefit Actuaries". It is issued in April of each year. I use the book every day (literally). For example, Table 1A has 30-year Treasury values and PBGC rates beginning with January 1978. Many of the items in the book (perhaps all) are included on the SOA website (in Zip files). Enjoy!