Andy the Actuary

If DC plan was a "pension" plan (i.e., if contribution was required), you may be able to escape federal excise tax on any nondeductible portion and simply carryforward deduction to 2008.

On what basis would you remove the contributions? I do not believe that untimely removal of nondeductible contributions would fly. There is an old Rev. Proc. on the conditions whereby contributions can be returned but I can't immediately put my paws on it.

The following is food for thought since I misplaced by circular 230 notice. Case 2. Can you amend 2007 1040 and claim DB contribution in 2008? Case 1. Notice 2007-28 A-8. When employer contributions to defined contribution plans (other than elective deferrals) exceed 6 percent of compensation of participants in those plans, [a]the amount of employer contributions to defined contribution plans to which the combined limit of § 404(a)(7) applies is equal to the amount of employer contributions for the plan year less 6 percent of compensation of participants in those plans. Thus, the combined limit of § 404(a)(7) (i.e., the greater of 25 percent of compensation, or the contributions to the defined benefit plan or plans to the extent such contributions do not exceed the amount necessary to satisfy the minimum funding standard for the defined benefit plans, treating a contribution that does not exceed the unfunded current liability as an amount necessary to satisfy the minimum funding standard for each defined benefit plan) applies to the [c] total of employer contributions to defined benefit plans and employer contributions to defined contribution plans (other than elective deferrals), less 6 percent of compensation of participants in the defined contribution plans. [a] ( 25%-6%) of 100,000 = 19,000 404(a)(7)=25% of 100,000 or 50,000 = 50,000 [c] 105,000 - 6% of 100,000 = 99,000 So, excess 404(a)(7) = (99,000-50,000) = 49,000 and 19,000 is from DC and 30,000 from DB. In short, you don't get the 150% single plan deduction. Question: Was the 25% contribution voluntary (i.e., PS) or mandatory (i.e., money purchase pension)? If you had to make the 25% and the 412 minimum (without regard to UCL), perhaps you could reduce excise taxes?

Were all contributions made during the respective plan years or were some of the contributions made after the close of the plan year in question but deducted?

Thank you. I'm in your choir. Simply, some of the materials I read suggest otherwise. For example, the early CCH book "New Law Explained" indicates (paragraph 705) that "The [maximum deductible] computation for plans that are not at-risk essentially removes the cushion amount from the limitation alternative." I suspect this early effort was just plain off-base. I've seen this interpretation elsewhere as well. Nonetheless, . . .

This was posted awhile ago but it appears to infer that the "cushion" amount applies to all DB plans (e.g., under 500 participants) and not just to those "at risk." This appears to be what 404 says but seems contrary to what appears in print. I.e., the cushion amount applies to "at risk" plans only. Any thoughts or clarifications on this?

Let assume (likely incorrectly*) the client would adopt the formula and that miraculously, it passes the general test. The particular client has used aggregate funding using realistic, long-term assumptions, I would continue to urge they continue funding on this basis so long as greater than the PPA minimum. *Apart from all else, this formula flies poorly from a p.r. perspective. The point you raise extrapolates to small stable populations where the ucnc escallates (like term insurance) with passage of time. PPA appears to accomplish what ERISA was trying to prevent: Pushing too much funding into the future.

This was very interesting and while Mike is beining tongue-in-cheek in his request, it is worth sharing how a situation can evolve. A 300 participant Client has a 50% flat benefit reduced for fewer than 15 YoS. The accrued benefit is project/prorate. (This is a non-safe-harbor safe-harbor with minimal general testing). The client wanted to reduce benefits for future hires and we had discussed keeing the 50% for the current population and reducing 50% to 35% for future hires and felt they should pass general test for a long while if not indefiitingly. Though I brought this up a couple times since our intial discussions, we hadn't discussed this for 6 months. Then, out of the blue, I get an email that "they" had caucused and come up with 2% per year of service, maximum 25 YoS. When I demonstrated that this was a richer formula than what they had for the current population, they came back with the formula in question. Their motivation was clearly to provide the same retirement benefits for the career employee but greatly reduce benefits for employees who terminated employment prior to age 65. This would have been a good pre-ERISA formula and they would have been fair in administering it (i.e., not fired people at age 64).

But, you would still have to certify the AFTAP, else the default applies. I yet to see stituations that can be resolved strictly by burning credit balance. Thus, it was elective to burn the credit balance. So, it took additional 2007 contributions in addition to burning the credit balance to get to 80%. I had the client elect to burn the credit balance and agree to make additional contributions on the same form before I issued the AFTAP certification.

Yup, this is anything but a design-based safe-harbor and should have absolutely no problem passing nondiscrimination testing so long as you don't have any HCEs with fewer than 33 1/3 years at retirement!

Where is the issue? The frozen DB does not have to provide TH accruals and since no PS contributions were made, the contributions to key employees was 0%, so no TH contributions would need to be made under the PS plan. Those complicated provisions of IRS Reg. 1.416 appear to apply when benefits are being accrued.

You learned me well. a.t.a. (aka Opie Taylor)

Mike, thank you. Virtually everyone has the same impression. Phew. Yet, all agree the numbers appear to work. There is some possibility that no one has ever thought to do this (I certainly hadn't considered it). And, no examples appear that would suggest this is doable or not doable. My gut is if you asked the usual authority, the answer would be "no." It doesn't need to go that far as this would frustrate the initial purpose of ERISA which was to nuke arrangements where employees were fired at age 64 to deny pension benefits. I simply hate to advise "you can't do it" when I'm unable to articulate why! But, I will and since this does not involve my domain -- Nx and Dx -- I would urge the client to seek a legal opinion, which they would have to do anyway because I have not seen and I doubt that there is a prototype plan that provides for such scheme.

(1) Start with a radix (arbitrary) at age x, say there are 100,000 living at age x, so Lx=100,000 (2) Create the entire table by Lx+1=Lxx(1-qx) (3) Then, curtate life expectancy ex=(Lx+1+Lx+2+Lx+3+ ...) / Lx (4) To get the complete expectancy, add 1/2 to approximate that death occurs mid-year This can be done quickly with an Excel spreadsheet What's been done is you have summed the propabilty of "x" living one year, "x" living two years, "x" living 3 years etc.

Okay, the Brobdingnagians have usurped US political office and the stock market has bullied up. Your frozen plan is now well overfunded. The Plan provides that excess assets revert to the employer, but the employer is so thankful for the glowing economy that he chooses to amend the Plan to spread the windfall among the participants. The frozen plan forgiveness applies to 436(d) which would otherwise restrict lump sum distributions. 436© precludes amendments to increase liabilities if a plan is underfunded -- deemed or otherwise. Consequently, if there has been no timely AFTAP certification, it doesn't appear the Plan could be so amended.

Thank you Mr. 3-Eye. Would appreciate if any of the naysayers would be kind enough to explain their positions. Perhaps, I'm sniffing the wrong fish trail. Could it be possibly that the age 65 benefit is age rather than service-related and that's a no-no? The ERISA position was incorporated to prevent egregious backloading, which is what the suggested formula can produce.

Please someone help with this. The Normal Retirement Benefit for someone entering the Plan at the earliest age is 50%. 3% of 50% is 1 1/2 %. The benefit formula caps after 33 1/3 years. 411(b)(1)(A) states (Notice 2008-7): Section 411(b)(1)(A) provides that a defined benefit plan satisfies the requirements of the 3% method if, under the plan, the accrued benefit payable upon the participant’s separation from service is not less than (A) 3% of the normal retirement benefit to which the participant would be entitled if the participant commenced participation at the earliest possible entry age under the plan and served continuously until the earlier of age 65 and the normal retirement age under the plan, multiplied by (B) the number of years (not in excess of 33 1/3 years) of his or her participation in the plan. Please explain how the example misapplies this rule?

An employer wants to consider a benefit formula that is 1 1/2 % of average compensation per year of service, maximum 50%. Further, he wants employees who have completed 15 years of service at age 65 to get a 50% normal retirement benefit. This appears to satisfy the 3% accrual rule of 411(b)(1)(A). However, this means an employee hired at age 50 has accrued a 21% benefit at age 64 and then his benefit increases to 50% at 65. This smells worse than last weeks fish. Assume there are no HCEs. Can anyone explain why this dog don't hunt?

I'm sorry, I was on the example of two Schedule C's with 100K income each, not back at your original example of profit v loss. It just seemed that whatever applied in your example would apply in the example I posed and I simply cannot see an answer.

I see. Then when your determining earned income by substracting off 1/2 SSE, what do you subtract????

This is interesting BUT suppose you had two Schedule C's each with 100K net income. Would you figure SS self-employment taxes separately, so that you effectively paid self-employment tax of about $30,000 rather than about $18,000 (if net earnings were aggregated)?

Yes, Mr. Andy, the new law brings so much joy into my life. I haven't been so elated since the pigs ate my little sister. PPA brings with it the following documentation issues regarding employer elections: (1) Required employer elections (e.g., optional interest rates; quarterly contributions) (2) Choices with no apparent required election (mortality table, asset valuation method) (3) CYA I typically scan these regs for the word "elect." This gives all references to where the employer has to make an election. I could not find any instances for elections being required in the examples in (2) and would appreciate if you would point out to me if I am in error. When the employer does not have to make an election, what do you do, including for example, when the default interest rate applies. I leave this great conundrum to you. Question: What were you doing before PPA? Here is my explanation email re; credit balances: At some point, you may wish to use a credit balance to reduce the current years obligation. You will be able to do this provided your plan was 80% funded last year. Do you remember that certification I sent you that you didn't understand. Well, that sort of tells you whether you can use a credit balance. I say "a" credit balance rather than "the" credit balance because there are at least two of them and more may arise if it becomes perceived that actuaries are finally getting a handle on how these animals behave. You will need to give me at least 145 days notice that you will use the credit balance because every number I have ever given you will change. My strongest advice is to just contribute the g.d. money and burn the credit balance. At this juncture, Webster has not introduced the nuance of "burning." In this case, it means to forfeit irrevecobly the use of this money which was attributable to your unsuccessful attempt to keep your plan well-funded by contributing more than was required.

I am sending clients an email with attachment (see example attached) for plans where discussing the theoretical issues would be impractical. Body of email: The Pension Protection Act requires that the Plan Sponsor elect which set of 3 segment interest rates should be used to value Plan liabilities to determine minimum required contributions. The first interest rate is used to discount benefits payable within 5 years; the second interest rate is used to discount benefits payable in years 5 through 19; the third interest rate is used to discount benefits payable in years 20 and thereafter. There are 11 choices of interest rates sets from which to select. Practically speaking, 10 because the 11th choice is to use an array of rates that vary by 1/2 year of distribution and I doubt you want to incur the expense to implement that (it's bad enough we have to use 3 rates!). These rates are shown under columns (4) and (5) for the months of Sep, Oct, Nov, and Dec of 2007 and Jan of 2008 at http://www.datair.com/rates.htm. I selected the 4th preceding month because it will be known the earliest and will facilitate planning for 2009. We are playing guessing games on whether or not to use the transition rates but it is only a two year transition as it goes away after 2009 so this is truly not a issue worthy of too much discussion. Interest_Rate_Election.doc

Mike, you appear to be considering as two entitities Siamese twins that have not been separated.

Won't this work if the plan credits a year of participation for performance of one-hour of service and the participant gets up early?