mwyatt

thx

Hey Blink: A little curious; noone is debating that TH uses 415 Compensation. SBJPA made changes so that deferrals are to be included in the compensation used for TH purposes. Flosfur's point is that this is a Code change, but has not been reflected in final regs for 415 compensation. His point is that one could argue that you could still use the 415 reg compensation (excluding deferrals) for TH purposes since the final regs (which clearly were issued prior to SBJPA) still exclude deferrals. My point in illustrating with Relius language, since he was looking at VS docs for guidance, is that the document explicitly is adding in language that you include deferrals for TH purposes. Where do you stand on Flosfur's argument; would you include deferrals or take the approach that you wouldn't until such time as the final regs are modified?

Hey Flosfur: Just pulled out a GUST2 Relius Volume Submitter DB document and the checklist. I note that Relius has several options for defining compensation for benefit purposes; however, for top heavy purposes under the Relius VS document, the TH benefit (outlined in Section 5.2 - if you know Relius/Corbel, this is the section) is determined using "415 Compensation". You then turn to the definition of 415 Compensation in Article I, which states: "415 Compensation" with respect to any Participant means such Participant's wages for the Fiscal Year ending with or within the Plan Year within the meaning of Section 3401(a) (for the purposes of income tax withholding at the source) but determined without regard to any rules that limit the renumeration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). For Plan Years beginning after December 31, 1997, for purposes of this Section, the determination of "415 Compensation" shall include any elective deferral (as defined in Code Section 402(g)(3)), and any amount which is contributed or deferred by the Employer at the election of the Participant and which is not includible in the gross income of the Participant by reason of Code Sections 125, 132(f)(4) or 457. I've gone all through the Relius checklist, and I'm really not seeing where there are any options to specify the measure of comp for TH purposes, only for regular plan purposes. So, at least by Relius, you would definitely not be able to argue that the lag between modified Code and final regs issued prior to SBJPA would allow you to continue to strike out deferrals for IRC 416 purposes. Further edit (once the Message Boards came back up): coded in a Plan with compensation defined as 1.415 reg comp and excluding deferrals from consideration; "415 Compensation" still comes up in the document as: "415 Compensation" with respect to any Participant means such Participant's wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan as described in Regulation 1.62-2©) for a Plan Year. "415 Compensation" shall exclude (a)(1) contributions made by the Employer to a plan of deferred compensation to the extent that, the contributions are not includible in the gross income of the Participant for the taxable year in which contributed, (2) Employer contributions made on behalf of an Employee to a simplified employee pension plan described in Code Section 408(k) to the extent such contributions are excludable from the Employee's gross income, (3) any distributions from a plan of deferred compensation; (b) amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; © amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) other amounts which receive special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of any annuity contract described in Code Section 403(b) (whether or not the contributions are actually excludable from the gross income of the Employee). For purposes of this Section, the determination of "415 Compensation" shall include any elective deferral (as defined in Code Section 402(g)(3)), and any amount which is contributed or deferred by the Employer at the election of the Participant and which is not includible in the gross income of the Participant by reason of Code Sections 125, 132(f)(4) or 457. Note that the last paragraph adding back in deferrals still is generating in the document, so I think that you're not going to get by with excluding deferrals, at least under this tack.

Not sure on regs, but as you mention, this change was made back in 1997 by SBJPA '96. Hope this isn't a night before audit posting...

Have gone through the procession of: 1. CCH Paper books (great, until you discover that the ex-secretary, instead of filing the weekly updates, had buried them in the bottom of her desk - also, great fun when you pick the book up and the last person hadn't quite closed the rings) 2. RIA Checkpoint on CD-ROM (a great improvement, although you're now looking at monthly updates, and you're relying on on CD-ROM - access at home is a problem - and you have to deal with sharing issues if you don't want to have people physically transferring the CD-ROM around the office for access) and have settled on 3. RIA Checkpoint on the Web - no more updates to deal with, and can access anywhere I have access to the Internet, whether that be at home, a client, or the office - also no programs to be updated other than adding a bookmark/favorite to everyone's computer. However, took care of that fairly easily via our (little) company's Intranet web page (basically a series of HTML files on the file server). We've been pretty happy with RIA, although there are other good products out there. I was a little leary about having to rely on Internet access to get at the files, but our connection has gotten more reliable (and faster) so I think that this is probably the way to go. However, I still am partial at times to paper.

Say what? 12xmonthly annuity ain't a lump sum (unless I've been sorely mistaken over the last few years). Lori, please clarify, although I think you don't need to except for one poster... The day after posting: Sorry Blueglass, I shouldn't be on message boards after company christmas parties. I think what everyone here has understood the question to be is the difference between keeping the monthly annuity payments in the trust vs. settling the benefit as a lump sum (one big payment eligible to be rolled over, whether over or under $5k), which cancels any future payments from the trust. How does this choice impact the trust (and remember, the participant not the trustee, is the one who makes this decision)? One, you have to contrast the liability held for the retiree using the funding assumptions vs. the amount calculated using the lump sum assumptions. As previously mentioned, the low 417 rates and 94GAR will most likely result in the lump sum being more expensive. Hence, an actuarial loss will probably be generated if the lump sum is elected. Two, in the long run, if the participant has a long payment stream (say lives to 90), then overall the plan will eventually incur a loss if annuity payments are elected. However, we're talking about an experience loss well in the future. Three, on the other hand, if the participant passes away relatively early (and any death benefits don't continue for a long period of time) then the plan would be losing any future mortality gains if the participant had elected an annuity payment. However, if the plan is in the habit of purchasing an annuity contract to settle retiree benefits, then given the prevailing market rates, you may find that the cost of the annuity contract could potentially be higher than the lump sum payment. You may still be generating an actuarial loss depending on what assumptions were being used to value the benefit in the prior valuation, but in practical terms the plan is expending more dollars to settle. Now, if somehow the majority of posters here have misread the original question and the issue of monthly v. annual payment (which is NOT a lump sum), then you could be seeing some losses/gains depending on how the plan document is constructed (are the annual payments for the year in the future v. arrears? any interest adjustment made since payments are being made sooner rather than later). However, the gain/loss will definitely be smaller than contrasting via the lump sum. In point of fact, assuming interest adjustments for annual v. monthly bring things into equivalence, the only point I could see where you could argue one for the other is when death ultimately kicks in (ie, if payments for year are made BOY, and participant dies receiving more benefits than they otherwise would have, assuming that there isn't some sort of recapture mechanism for overpayment specified in the plan document). Other than that, can't really see where this would make much of a difference in comparision to annuity v. true lump sum.

Anyone remember madly mailing out 242(b) elections in Christmas of '83? I'll concur with Mike Preston as this type of election seems dubious, barring a legitimate 242(b) election. Hopefully someone with more time can come up with the correct site from the 401(a)(9) regs.

I'd second Effen's analysis, especially given the switch to 94 GAR and the predominately low interest rates that you would use for 417 purposes. Unless your post-retirement funding assumptions were pretty conservative, you will most likely generate an actuarial loss if the participant elects a lump sum. However, as Effen noted, this is a decision by the participant, not the trustee, to elect the lump sum (assuming that this an allowable option under the plan; given the annual benefit you mentioned, clearly the $5k bar has been passed). I would note that if your plan takes care of retiree payments by the purchase of an annuity contract, you may find that the lump sum option may be less expensive, given prevailing interest rate conditions on single contracts.

I will chime in that this very point (TRA '86 changes v. final regs) is actually addressed in the recent IRS exam guidelines and firmly comes down on the side of service v. participation for compensation used in the High 3 limit. Kids need to go to bed or I would dig in further in this board as I know the cite has been web-referenced in the last few years here. As far as the Benefit Formula goes, a formula over 100% of comp is fine, as long as you respect the overriding IRC 415 limits in funding. Also, if there are other employees involved in this plan, note that the prior opinion here is that accruals should definitely be determined PRIOR to application of IRC 415 limits.

You better pull a heck of a salary scale assumption (remember the 100% High 3 Year Limitation)!

And, given relative asset performance over the last three years, an assumption that someone will be working longer than they expected is unfortunately all too reasonable...

Hey IRC: I know that these are involuntary distributions. I guess I'm a little uncomfortable with the idea of sending out checks to people without their knowledge and without verification of receipt/current address, and potentially triggering serious tax consequences for these folks due to their nonreceipt of funds. I do know I'd be a little ticked off if this occurred to me. As to your point of recalculating under current year minimum lump sum assumptions, I would guess that this could be argued a couple of ways. You could take the point, if you contend that they were paid back in 2002, that their inaction to cash a check (that of course they never received) warrants no payment of subsequent interest, or at best additional interest credited on the check at the rate in effect for the year in which original distribution occurred. The argument that you should recalculate using the current year assumptions to me would have to begin with the acknowledgement that distribution in point of fact never was made to these people (in which case a 1099-R should never have been issued in the first place). I still think that you are in a rock and a hard place here, without proof of sincere actions to ascertain the most recent mailing address before you originally sent out the checks. Just my two cents... Upon further review, I really don't see the rational behind forfeiting these unpaid vested benefits in the first place (assume this is a PBGC covered plan). Worst case if you could never find these people is upon termination of the Plan, their benefits would be paid to the PBGC via the Missing Participant Program. Unless you assume that this plan would never end, why would you assume in your actuarial valuation that it would be ok to not carry an actuarial liability for these missing participants?

A couple of observations (from the hypothetical perspective of the recipient): How did you guess that I didn't want to roll this amount over to an IRA, rather than have it paid to me directly? I know that I still have the 60-day window available to me, but I now have to float my funds in order to make up for the mandatory withholding amounts that you took out of my distribution, causing me "pain and suffering" in order to make my retirement distribution whole... And two, I guess you didn't ask me, since I was obviously not able to make this decision, since you never contacted me in the first place. And are you so sure that it wasn't a mistake on your HR department's side that caused this check never to reach me? My point: hope that none of these folks who now face IRS inquiries put their heads together and find some hungry lawyer. Otherwise, I'm not sure that this type of practice really is defensible in the court of law...

An epiphany just struck me: Switch to a beginning of year valuation. I'm assuming in your pool that you have diligent people, as well as those folks who like to ride on the "double secret probation" edge up to 10/15. You're doomed to failure if you're counting on the procrastinators to get their act together. Move to a beginning of year valuation, and regardless of how this argument of divvying up costs plays out, at least you know what is going on before the fiscal year is over...

Hey Doug: What I was getting at was more the point of allocating DB contributions based upon the costs incurred by the underlying partners. Let's say you had 3 equal partners, 1 60 years old, and 2 30 years old. Clearly a DB plan would more than likely have a tremendous cost being developed for the 60 year old partner and nominal amounts for the 2 younger partners. Really wouldn't make a tremendous amount of sense to me to split the aggregate cost in equal thirds.

Intriguing that the regs say to split DB contribuitions on partnership interest (try explaining that to the 60 year old partner and the 30 year old partner BTW), rather than on what develops from the actuarial valuation (of course you're dealing with a large partnership that probably uses a funding method other than Individual Aggregate). Would you also use this strategy in a cross-tested DC plan, ignoring what each partner actually received? I can see allocating cost of non-partner participants on partnership percentage, but in the DB world allocating costs strictly on partnership interest doesn't make a tremendous amount of sense (or will cause the wars between young and old partners to move to WMDs).

Had a proposal roll across my desk in the last couple of days and seem to have lost my train of thought. 1) 1-Man Sponsor, previously maintained a DB plan. Plan was terminated in 1997, distributed LS in 1998 to successor PS plan. Plan at that time had NRA of 60, participant was age 59 at time of distribution. Lump sum received to PS plan in 1998 was 1.078m. AE in old plan was 1983 IAM, all ages setback 4 years, pre-ret i of 7%, post-ret i% of 5%. 2) Looking to establish a new DB plan to take advantage of increased 415 limits. Plan would be effective 1/1/2003, age 64 at start, NRA of age 69 (5 years of part rule for NRA). What is throwing me for a loop is how to calculate value of prior LS received, as far as assessing a SLA annuity value. Do I: - Determine SLA AB based on actuarial equivalence assumptions in effect at time of distribution (looks like GATT played a little into benefit at that time), using LS paid, attained age at distribution, and retirement age under prior plan, and then actuarially increase to new NRA based on prior plan assumptions? - Determine SLA AB under proposed plan assumptions (say 94GAR @ 5.5%) using attained age at distribution and NRA of 69 under new plan? Help (trying not to get caught up too much in minutae as far as exact age - principals on nearest age would be fine to get back on track).

As far as funding goes, one observation would be if you were to use exact month for the benefit, you should also make modifications to your immediate annuity factor (inconsistent say to use a limit/benefit calculated to 61 and 10 months while using an age 62 nearest year annuity factor). Benefit distributions would use exact month calcs.

Hey now Merlin... I must be getting up in years, but memory serves of a Super Bowl win (if that's what they call it, my mind is getting hazy) in 1991. 2003-1991 = 12 2003-1918 = 85 (and counting) The RSN's only hope: McKeon pulls it off, Georgie pulls his best Captain Queeg, and fires everybody... Go marlins...

Have to be careful with PVAB allocation with an integrated plan formula, as you are likely to run afoul of the max integration levels with the expanded benefit. We usually have allocated excess assets on a basis of 1% of Average Compensation multiplied by Years of Service with a maximum of 5 years, although I'm sure you'll get some more educated responses (I'll admit too, been about 4 years since we've had excess assets given market crashes, switch to 94GAR, and extremely low interest rates).

Here's a thought: convert the PS plan to a 401(k) plan. You stated that the only participants are the three owners with no other employees, hence ADP test is inapplicable. Your 3 owners can then, in addition, to the DB plan, "defer" salary under the 401(k) plan for additional contributions without impacting deductibility under 404 combined plan deductibility limits. With the increases in the 402(g) limit to $13,000 plus the $3,000 "catchup" for 2004, these additional numbers might justify keeping the PS plan open for 2004.

Hey Andy: Just had to chime in (although this obviously has nothing to do with this "get rich quick" scheme that originated this thread). Was listening to WEEI on the way home and Ordway had Steve Buckley from the Herald in house and Sean McAdam from the Projo and Tony Mazarotti from the Herald on the line from NYC. Glenn and Tony almost reached the "f*** you" stage on the decision, as Maz was defending the decision to leave Petey in for the 8th. Maz did bring up the valid point that what would have happened if you lifted Petey and threw Timlin/Embree into the mix in the 8th, given the amazing pressure of the situation. I guess Petey is human after all, but after this season's experience with the bullpen, Grady would have been equally bashed if he had lifted Petey and went to the bullpen and the same result happened. Given Timlin (who had been great BTW in the playoffs) immediately throwing balls, who is to say that the game would have ended any differently (except the rant would go that Forrest Little took out a 3-time Cy Young winner and let the bullpen implode). They got out of the 8th (and the 9th) only by two amazing plays by the much defensively maligned Todd Walker (please - resign this guy for next year, Theo). Our best hope for us long suffering Red Sox fans: Clemens and Wells are gone (a certainty), Don "the ghost of Woody Hayes" Zimmer leaves as he said today, and Joe Torre finally says "Take This Job and Shove It". Go Marlins!!!

The standardized rates come from the final 401(a)(4) regs issued in the early 90's. At that point in time, those were "comparable" rates to the PBGC immediate rate in the late 80s (remember the knee jerk "anything lower than 8%" dragnet with the Small Plan Audit). Always wondered when they were going to get around to amending those rates (of course this would cause some interesting problems for all the cross-tested plans out there). ScorpionPenn: The whole purpose of the minimum lump sum amount under IRC 417, as Mike Preston alluded to, was to approximate the cost of what the prevailing annuity contract would be based on the time of distribution and the amount of benefit that could have been received in annuity form. The original PBGC rate structure was badly in need of fix; hence the introduction of the 30-year treasury rate as the replacement back in 1994. What happened since then? Issuance of the bond was scaled back under the Clinton administration in favor of shorter-term bonds; Bond was discontinued outright in 2001. Ever heard of the scarcity factor? What was originally thought to be a rough and ready benchmark for what insurance companies were charging in their contracts had been skewed due to scarcity, and further skewed (as you mentioned) in flight to safety plunges (LTCM in 1998, WTC, etc.) My brother-in-law was a trader in the 30-year pit in Chicago for 15 years; the 150 basis points is widely recognized as the depression in yield due to the scarcity factor, never mind any short-term flights to safety. So yes, Congress will, and has to, find another benchmark, as the index is not doing what it was intended to do (and it was NOT intended to provide a windfall for those electing lump sum distributions). And no, you didn't bruise me. It does seem you're bringing alot of outside baggage into an area that doesn't deserve it; I don't quite see the connection between modifying the 30-year rate as a pension index and wiping out the "drug countries" (oops, what happened to Marin County?) or the sinister aspects of NAFTA, GATT, or the Trilateral Commission.

Do you want to talk about the 30-year rate or do you want to rant? Obviously, anyone getting a lump sum right now is catching the crest of the wave, especially given that the computation is tied to a rate artificially depressed at least 150 basis points lower than if the index was tied to an actively issued security. An interesting comment here: "Why is there a problem with this generation? They are being brought up with the ideology that the Government will take care of them if things get real bad." I suppose that you haven't seen the surveys about the long-term health of Social Security and the polls among younger workers about SS being around 20 years from now to take care of them. Confidence level, about 0%. I'd actually bet that most of the younger generation, after the move to 401(k)/DC plans (hey what a great deal, I get to lower my salary to get a benefit), has a decidely less naive notion than you're portraying with that shot. Let's see, you probably had to pay nondeductible FICA taxes with a Taxable Wage Base hovering between 1-2 times of National Average Earnings. Quite a kick in the pants now for us "middle class" workers who are probably coming to the realization that they are paying a ton of money that they not only won't see a return on (and that they also have to pay taxes on both fed and state), but also whatever they receive will be taxed YET AGAIN when or if they do get it! I do understand your plight (and your agnst, believe me I do). However, does the phrase "rats deserting a sinking ship" mean anything? If you continue to let people strip pension funds of excess payouts via lump sums due to artifically low interest rates, what about the poor saps still in the plan counting on those funds in the future? BTW the popular press isn't doing anyone any favors with their portrayal of the issue (I know, I've been in correspondence with the Boston Globe). Their understanding of economic issues is about par with the National Enquirer. Remember, the trustees of these plans not only have an obligation to current retirees, they also have an obligation to those remaining in the plan after your windfall. Or would you prefer that your company be forced to terminate your plan at about the worst time possible given current market conditions (in which case all of your bad dreams WILL come true).

Here's where you went wrong: Year 2001. S412 NC: 55k; S412 Min: 75k (=NC+Prior Yr Definciency+int(=0)). S404 NC: 55k. Deductible Amount: 75k? (Greater of S412 Min & S404 Cost). Contributions made: 35k on 06/15/02 20k on 08/27/02 Stop right there; the 9/28/01 contribution not shown on the 2000 Schedule B completes your funding! 20k on 10/05/02 => late for 2001 Sch B, so goes to next yr Sch B but deductible under S404(a)(6) since made on/before 10/15 tax flinig extension. But what about the 20k made on 9/28/01 that you didn't show on the 2000 Schedule B? In point of fact, you didn't have a funding deficiency for 2001!