mwyatt

Pre-ERISA, plan could do whatever was in the document, as I recall. Post-ERISA, could use a minimum age of 25; this was reduced to 21 effective either in 84 or 85 (short-term memory loss) by REA.

You're kidding me, right? This guy is questioning an adoption of the plan prior to the end of the first plan year, and also questioning IRC 412? Good luck... Reminds me of the good old days when we had an IRS agent in our office blatantly using our phones to call in bets to his bookie. Be thankful that his questioning points are easily parried.

God I hope not, as we've never had anyone pay SS taxes on a DB (or PS/MP/401(k) for that matter) LS distribution. I would venture a NO.

I'll throw out a recommendation for those who rely on Internet Explorer. You should really take a look at this free download which runs on top of IE SliimBrowser The advantages are great. Instead of multiple instances of pages across your taskbar, everything is tabbed to switch among pages (and it may be my imagination, but pages seem to load faster). Also, a builtin popup ad blocker. Give it a try and let me know what you think.

Hey Blink: Interesting link. Looks like someone got caught (thanks to Mike Preston). I think the analogy of a house of cards is appropriate with this carve out scenario... Actually Dom: After reviewing Blink's link, my only advice is watch your back. You need to...

I'll just add the following that occurred with a new client at a meeting last week. He had been pitched heavily about 412(i) plans, both pure annuity and with insurance levels three times as high as the traditional 100x limit. We did a study of what a traditional DB plan would do, and it came out to be a difference of 320k for the traditional plan and 400k for the 412(i) plan w/o insurance. Of course, the CSV of the annuity contract at NRA was about 30% over the current 415 limit valued at best case assumptions (94GAR @ 5%). This guy was pretty sharp (Wharton MBA) and finally figured out that it didn't make a tremendous amount of sense to get an additional "deduction" now that he would never see again. His comment: you know, I can take out a million dollars cash out of the bank, burn it up, and get a deduction for a million, but I'm still out 600,000 dollars...

I think your example points out the dangers of pushing to the wall with a small group. Let's face it: in a situation where the termination/addition of a single participant causes massive swings in ratio test percentages, are you really doing the client a favor by establishing aggressive coverage designs when the termination of one employee can blow up your whole scenario the following year? I just reviewed a DB design where the kitchen sink was invoked to exclude participants to the bare minimum allowed to pass 401(a)(26). As you pointed out, one person leaving sinks the plan. How much do you really save to beat out nurse nancy from her 2k contribution when you run the risk of DQing the plan in toto?

Thanks MGB. Could you clarify this a bit for me? I think my gut reaction that, if the CL i% is higher than the plan i%, the resulting CL should be less than the "cash balance" is correct (in which case the 110% threshold should be met). So assume I have a person with a cash balance of $100,000. The plan rate for the year is 5%, mortality table is 94GAR. I would first convert the cash balance to a SLA to the participant's age. For sake of argument, let's say this amount is $10000/year. To value for RPA '94 Current Liability, I would then value $10000/year using (from your question) 94GAR, rather than 83GAM/F since LS is the assumption, but I would use the CL rate (say 6.5%). So my resulting value is say $85,000, due to the higher rate. Am I on track?

Running into a brain cramp here and want to make sure I'm passing on the right information. A lawyer asked my opinion on a proposed design for his law firm on a new cash balance plan. They plan on using very conservative interest crediting assumptions coupled with conservative investments to avoid any underfunding exposure (and also sidestepping any "whipsaw" issues). One comment by the consulting actuary who had proposed the plan is the top 25 restrictions under IRC 1.401(a)(4)-5. In this situation we can assume that cash balances roughly equal assets by design. My thought would be that you convert the cash balance to a SLA benefit, then value using 83 GAM and F and the RPA '94 CL interest rate (90-120%). The conversion to SLA would be done using the plan assumptions, then valued using CL assumptions on the resulting SLA accrued benefit. Presumably (unless we have an inverted yield curve), the spread between the plan interest rate and 120% of the weighted rate would put us comfortably over the 110% threshold that would trigger the top 25 restrictions. Am I reading this right or do you take the cash balance and convert using CL assumptions to SLA and then revalue using CL assumptions to end up back where you started (in which case you would be nailed given the client's proposed investment strategy)?

Certainly the accrued benefit is limited to the IRC 415 limit. However (and this happened to us about 15 years ago in the midst of a messy professional corporation "divorce") unless your definition of accrued benefit explicitly states that the projected benefit will be limited to the IRC 415 limit prior to application of whatever your accrual ratio is, the interpretation that will stand up is blind calculation through accrual, and then application of the IRC 415 limit to the accrued benefit.

What does your document say? Do you limit the projected benefit first to the 415 limit and then apply accrual rules or do you calculate all the way through and then apply 415 limits to the accrual. Corbel (or should I say Relius - showing my age) says their document argues for the second approach. Your document will spell out how the calculation should be performed.

Actually I'd vote for small plans that the Variable premium would only be based on the benefit as limited by the maximum amount that PBGC would cover. Assuming that your client obeys the early termination restrictions, premium should focus on plans that are really in danger of creating liabilities for PBGC.

Just to clarify, this question on the checklist is actually a two-part: pre-2000 and post-1999, which deals with Bliinky's observation on the 1.25 415(e) buyback (which was rendered moot with the 2000 repeal of IRC 415(e)).

I'd lean towards the gross benefit; in fact for testing, I'd take the stance of ignoring the QDRO reduction entirely for your testing benefit (ie, add it back into the participant's net benefit and ignore the variations of payment for the spouse). I wouldn't really think that a QDRO should affect the results of the General Test, as a logical argument. And if the QDRO was on an HCE, I sure wouldn't want to hang my hat on any results wherein I pass on the net benefit, but not the gross (pre reduction) benefit.

I'd second Blinky's observation (I did see the PS reference at the beginning). I've also had some accountants fall into that trap after dealing with PS plans for a long time, that they also assumed that the same held true when the client moved to a DB plan. So I guess it is OK to take the deduction for the DB plan, but they have the pleasure of donating 10% of the amount to the IRS's Widows and Orphans fund since they went past the minimum funding deadline.

Actually, we've been trying to move away from EOY valuations for our small plans. One of the real problems with EOY is if there are unexpected changes in the contribution, it's generally too late to do anything about since you're into the next plan year. Plus you have the dance of trying to zero out profit between salary and contribution. If the val is done BOY, fairly simple for the client to figure out how much to bonus out on 12/31 since they have the DB cost in hand already.

Hey Blinky: No, didn't mean to imply that the guaranteed benefit levels affect the variable rate premium (certainly you use the full accrued benefit for premium calcs). What I meant was that for most small plans where the owner has a substantial benefit (particularly if the Plan is top heavy), the PBGC's real exposure in many cases is zero. Let's say you have an underfunded plan with the owner's accrued benefit say around $70,000/year. Plan has been in existence for 15 years. If the PBGC was to actually take over this plan, first haircut would be to the guaranteed amount, so the $70,000 gets lopped down to around $40,000. Next haircut is due to the fact that the PBGC guaranteed amount phases in over a 30-year period for substantial owners, so he loses another $20,000 ($40k x 15 / 30), so the underfunding from the PBGC's standpoint is drastically reduced, if not eliminated. Now certainly this isn't always the case, but I've seen enough of them to wonder why small plans should really be paying for the steel, auto, and airline industries when the effective "coverage" provided by the PBGC is minimal. My comment (and I'll admit I'm going off on a tangent/rant here) was whether worrying about how the change to XRA would affect CL and hence PBGC premiums struck a nerve.

Not sure on the "current benefit at future retirement age" reference. I think that what you are trying to do is to make an assumption as to Expected Retirement Age for your owner (only), which in this case is after Normal Retirement Age under the Plan. I've seen that done, and really don't have a problem per se with that type of assumption, but I would think that since you are assuming that your owner will be working until age 70, that your projected benefit for funding purposes should reflect that fact (i.e., do the steps through actual benefit v. prior year's with actuarial increase through ages 65 to 70). Now for Current Liability calcs, which use AB only, I would again use the current AB calculated at 65, then actuarially increased to age 70. This may or may not equal your projected benefit at 70, depending on formula, salary history, etc. Unfortunately, due to the economic downturn and severe asset losses, an assumption that your owner will work past NRA is very reasonable, at least in the real world. As far as the variable rate premium goes, (I'm assuming this is a small plan), odds are that once the guaranteed benefit limitations are applied to your owner (remember that the PBGC maximum guaranteed benefit phases in over a 30-year period for substantial owners), PBGC's potential exposure is most likely slim to none in this case.

The 7.5%-8.5% corridor is taken from the definition of standard interest rates contained in the final 1.401(a)(4) regulations. I suppose that one could use a lower interest rate, which would produce less than "optimal" (by way of skewing towards older, presumably HCE participants), but your general test would need to be performed using a corridor rate. So, one consequence is that you would need to really run the General Test, instead of relying on the mathematical certainty that all participants have identical accrual rates if you had used a corridor interest rate (only exception being those who get a higher allocation due to IRC 416). Now, one would assume that results would pass, but I don't think you could necessarily make that blanket statement if you have NHCE parts who were older than the owner.

Consider the following "traditional" DB plan: Each year you are credited with a specified percentage of your salary paid during the year; the specified percentage decreases by 1+i from the prior year' percentage. A lump sum feature is allowed as an optional form of payment. Clearly IRC 417 applies to this plan. Once could also arithmetically express this formula, using the actuarial equivalence assumptions specified in the plan, as a fixed percentage of salary accruing to the account of the participant. Here you have a "cash balance" plan. It is now argued that IRC 417 shouldn't apply in this situation since you are expressing the value to the participant as an account balance, rather than an annuity payment. Why is this a compelling reason that IRC 417 shouldn't apply?

Actually, what I recall reading was that the judge's "reasoning" as to why a MP plan wouldn't be discriminatory is because the employees "get what they get for investment return"; under a CB plan they only get a hypothetical fixed rate of return (which BTW doesn't look too bad right now). Not sure how that reasoning works as to how that would make the CB plan discriminatory, but that's what I saw in the AP write up.

Any comments out there on IBM losing the cash balance suit? Looks like this could make an already unsettled situation even more dicey.

I usually put an attachment to the Form 5500 or 5500-EZ explaining why there is no Schedule B attached to the filing, for the aforementioned reasons (plan termination date precedes first day of form year). However, my experience is that these filings invariably will get a question letter from EBSA as the form structure does not handle the situation at all (not like the old days on the 5500-C where there was a question to the effect "is a Schedule B required to be attached?"). Basically, you then politely reiterate the words on the attachment that the computers ignored and the problem is resolved.

Well, I did the testing including the Money Purchase Plan (which is 5.7%/5.7% integrated BTW) and reached an interesting result. Due to the excess contribution under the MP plan, it actually was MORE expensive to include the MP plan in for testing in order to pass the General Test. Kind of an interesting result (even after imputing disparity on the MP and PS contribution, but not the deferral).

Thanks for the responses. One other point to confirm. I think that if I take into account the MP plan (and for the sake of argument let's say that this contribution is 9%), then the amount of my calculated gateway should be based on the combined contribution also, so that the new gateway would be 1/3 of 9% MP plus the 6% PS, or 5%, rather than just the gateway of 2% calculated on the 6% PS contribution alone.