mwyatt

Well, if we start as a premise that the plan will end when the owner retires (presumably prior to 25 years), going with the 25 year flat reduction design will produce a smaller benefit than a unit accrual approach. The "downside" is that the funded projected benefit in this case would obviously be larger for your population resulting in higher costs going in (in fact it would be larger for anyone with more projected accrual service than your owner, assuming that if you took the unit approach you limited credited service to say, the amount of service your owner might have at retirement). However, this may not necessarily be a bad thing as the front loading inherent in unit accrual, especially if there is a real disparity between the owner's service and other participants, may mean that when your owner retires you may be looking at an underfunded plan.

As an aside, I'd like to point out that our intrepid Leader (Dave) managed to fix the smilie problem (originally, my reference to (B) came out like ( . Feel free to post Code cites without looking like a dimwit...

Actually, reposted this question to TAG, and their opinion is that for active employees, the terminated plan distributions would fall under the 5-year, rather than the 1-year, rule, "despite what the Code says". So buyer beware out there, at least until we get further clarification of this point from the IRS.

An addendum (after spending about an hour this morning trying to track down the submitted application): Correct address to use now for funding waiver applications is Internal Revenue Service McPherson Station PO Box 27063 Washington, DC 20038 Would have been nice if the IRS had publicized the address change... (fortunately the application did eventually make its way to the right place).

Dave, this site is a godsend... hope you don't take these comments the wrong way as we're just adjusting to the new software. Keep up the good work!

Thanks Merlin for the reply. Would be nice to get a definitive answer from the IRS on this issue as it certainly could have a real bearing on the continuing plan's status. Consider a DB that terminates that is clearly top-heavy, and a successor 401(k) that is clearly not top-heavy on it's own, but if you add back distributions from the DB plan to actives would be overwhelmingly top-heavy. Obviously this could be a real problem in years in which a 3% contribution is not received in the 2-5 year period by non-keys if one group is saying that it isn't top heavy, while the louder voice of the IRS is saying that it is top heavy.

A little confused here about taking into account a terminated DB plan for top heavy testing purposes after 2001. From looking at the new Code 416, we have a decrease in the look-back time from 5 to 1 year period ending on Determination Date. (3) Distributions during last year before determination date taken into account. (A) In general. For purposes of determining— (i) the present value of the cumulative accrued benefit for any employee, or (ii) the amount of the account of any employee, such present value or amount shall be increased by the aggregate distributions made with respect to such employee under the plan during the 1-year period ending on the determination date. The preceding sentence shall also apply to distributions under a terminated plan which if it had not been terminated would have been required to be included in an aggregation group. (B) 5-year period in case of in-service distribution. In the case of any distribution made for a reason other than separation from service, death, or disability, subparagraph (A) shall be applied by substituting “5-year period” for “1-year period”. However, when I look at (B) immediately above, would you deem distributions to currently active participants as falling under "in-service distributions" (hence you keep around for 5 years, but delete out distributions to terminated participants falling out of the 1 year window), or do all distributions disappear for testing purposes after 1 year? Thanks for any help, insight here. I'm leaning to keeping active participant distributions for testing purposes around for 5 years, but maybe I'm reading this wrong.

Make darn sure that you clear out any previously reported participants who have subsequently been paid out (unless you are sure that you're going to have all plan records, bank statements, cancelled checks available for the next few decades to prove that they in fact received payment). We received a call from a former participant a couple of years ago who was paid out in the 1980s over $15,000 but wasn't taken off of the SSA in the year of payment. She received the Social Security letter and calls the client looking for her funds. You would think someone would have a little recollection that they received a check for an amount equalling 50% of their salary at the time, but she sure didn't (selective amnesia). Try finding cancelled checks from 15 years past (especially when the bank at the time went under 10 years ago) to prove your point...

Anything of importance to report to us non-attendees?

Well, here in Mass a few years back we had an infamous case of a retired schoolteacher having been paid her annual benefit monthly for several years (we're talking high 6 figure overpayment here). She of course claimed "I didn't know" but somehow had about 8 different semi-anonymous bank accounts holding the overpayments (you would think that one would notice if your payment is coming in at 12 times your anticipated amount). I don't remember the outcome but the Commonwealth was certainly not amused and took steps to recover the overpayments. I always wondered who was doing the reconciliation of the pension plan assets myself...

I for one usually just use prior year's NEI when doing beginning of year valuations. I can see your logic of projecting prior year's NEI, and then adjusting for current year SET and possibly current year contribution, but in the end don't you just end up with an artificial figure anyway since you're not using current year Sch C Income? I would just use the prior year's NEI, since this is analogous to the corporate side, and given your logic, which I'm not disputing, wouldn't you again make these adjustments as well for the corporate side for principals since there is a total amount expended by the Employer (salary, Employer FICA, and contribution) in determining salary for current year?

Actually this is a pretty good question with applicability to all types of plans. A good friend of mine was working his way up the ladder in the litigation department of a big law firm. It was common practice there for the associates to spend about 6 months at some point of time as an Assistant District Attorney (both to help out the state and to get some seasoning in court without having to learn the ins and outs of courtroom behavior at the firms' clients expense). Not sure who covered what as far as salary goes, but this may be a more common situation than first contemplated.

Blinky: Not quite sure what you are asking here. Do you mean in the second example that the 2001 valuation (performed as of 1/1/2001) was done using assets as of 1/1/2001, but used the 2001 net earned income (analogous to a BOY val using comp paid during the year of the val - think we had a message board discussion about that not too long ago). Your first situation as of 1/1/2001 was performed using 2000 NEI (Net Sch C less SET deduction less Contribution). Please clarify...

I always agreed with not utilizing the 3-Year Cycle and for that matter the EOY snapshot testing for small plans, unless you think you could, with a completely straight face, tell the IRS agent that due to the complexity of reconciling data for your doctor and 3 nurses that you were relying on 93-42 to pass the General Test.

Can we clarify one point here? Are the incomes you previously cited (160k year 1, 350k year 2, 60k 3-5) 1) total revenue of this entity (i.e., are these amount going to comprise salary or net income if unincorporated PLUS the contribution), or 2) are these salary figures with the contribution figures coming from some other source. This is important as if this is case 1 combined with your statement that there is no past salary history, your situation could be even worse since the 415 $ limit may be academic; you may be more constrained by the High 3 Year comp average. I really don't think you've got the funds available to contemplate a 412(i) (you just have one big projected year 2 and then everything dwindles down to nominal amounts).

Actually, the solvency issue is something to consider (having had my dad go through the Executive Life fiasco in the 80s while at Honeywell). By sheer observation, all your eggs are in one basket with a 412(i) plan, whereas a traditional DB plan would (hopefully) have assets relatively diversified... These companies are rated highly now, but times do change.

Could you clarify a bit the "401(k) safe harbor"? With another entity by any chance? Just on the side, a little curious why an entity that only employs the husband and wife had to resort to a safe harbor plan design (and this question pertains to any type of db implementation - something sounds a little odd here and presumably the SH match/discretionary will run afoul of IRC 404 if you put in any type of DB if not shut down properly). I'm assuming also that your "salary" projections cover both income and contribution. Unfortunately, most of the 412(i) illustrations assumes daddy warbucks as the plan sponsor (witness the past thread with the $300k deduction for a 35 year old).

Yeah, I kind of thought picking fights with the IRS, no matter their position, is somewhat foolhardy. Kind of reminds me of a time back in the 80s dealing with an IRS agent on a TDR restated MP plan and its ability to provide the 3% TH minimum. The contribution called for 10% of Total Eligible Compensation to be contributed by the employer, and then this amount allocated first to individual's excess compensation (5.7% over TWB), with the balance allocated on flat compensation. For the life of me, I couldn't get her to understand that it was mathematically impossible for someone not to receive the 3% (eligibility for contribution wasn't a problem since it covered TH requirements). Finally gave up, but I always wondered where those who failed algebra ended up later in life...

Actually with a traditional DB plan, you would presumably not be funding for a benefit at retirement using post-retirement assumptions well in excess of what you could pay out as a lump sum using 94GAR and a best case rate of 5%. You would also probably be recognizing the likelihood of ultimate payment as a lump sum, so you wouldn't be funding for 100J&S form of payment to develop a larger contribution. So yes, your deductions would undoubtedly be lower than would develop under a 412(i), but you wouldn't be setting yourself up to create a horribly overfunded plan. Even if pension law stays the same, a 412(i) funding for the subsidized 100%J&S payment with an extremely low interest rate is going to create an overfunded situation, unless your client wants to accept payment in an annuity form (see Mike Preston's points). A traditional DB plan, through FFL applications and more realistic assumptions, would most likely not put you in such an overfunded state. One other thing: the 30-year rate at some point is going to be replaced and the 415/417 interest rate will undoubtedly be heading higher. The level of overfunding could explode if this rate heads back up to the 8% levels we were at when GATT was originally put in place, making the situation that much worse. A regular DB plan could adjust to rising interest rates much easier than a fixed contract at 3.5%. Sure you get the deduction, but it's kind of fool's gold if you don't get to see the money back at the end.

Thanks Blinky. I also got a call back from our document provider who provided the same language. They also stated that since the IRS had signed off on the VS language, I should tell the agent that they had no authority to challenge any language in the plan document, so drop the issue. I decided to rephrase that comment before speaking with the IRS...

Actually the reference to RPA '94 in 412(m)(1)(B) is the interest for the penalty portion is the greater of 175% of Mid-Term and the rate used for RPA '94. So in this situation RPA '94 rate is less than 7.92% so can be ignored.

Actually, I beg to differ on the applicability of 417 to SS offsets. From the proposed 1.417(e)-1T(d)(6) regs: (6) Exceptions. This paragraph (d) (other than the provisions relating to section 411(d)(6) requirements in paragraph (d)(10) of this section) does not apply to the amount of a distribution under a nondecreasing annuity payable for a period not less than the life of the participant, or in the case of a QPSA, the life of the surviving spouse. A nondecreasing annuity includes a QJSA, QPSA and an annuity that decreases merely because of a cessation or reduction of Social Security supplements or qualified disability payments (as defined in section 411(a)(9)).

I agree with Pax. Unfortunately, I think that we may be on the crest of favorable pension legislation at the moment. I wouldn't want to be the one setting up that "136,425 at 55 plan ala 1981" right now with a disastrous outcome in a few years when your client wants to actually see some of that hard-earned money that they put into the plan. Keep a little off the table; at some point the government is going to come around again lookin' fer revnue...

Here is a real "dumb" question (or so I hope). A well-known VS provider has in their checklist the option to define the GATT interest rate as the rate in effect as of the first day of the plan year in which annuity starting date begins (coupled with a stability period of the plan year), along with the 1,2,3,4, 5 and blended lookback periods. As this corresponded to the old PBGC minimums (which usually referenced the rate in effect at the beginning of the plan year) I didn't really give this much thought. For the most part, we generally amended for GATT with some form of lookback period, given the lag in the IRS actually issuing the 30-year rate. However, we had one case that did use the 1st day of the plan year. We recently submitted the plan for a letter on termination and the reviewer is questioning this definition of interest rate. The response of "well, the VS document was approved already by the IRS so why are you questioning this?" didn't seem too appropriate, but I've yet to find anything that would support this in IRC 417 or the proposed regs. Can anyone help me out?

One question that just arose under IRC 404(a)(8)© is whether you would want to proceed with a 412i plan for a sole proprietor which would be partially funded with insurance policies, since under 404 the premiums are not deductible? Am I all wet, or is an underlying condition of 412i that the plan sponsor be incorporated in some fashion? -------------------------------------------------------------------- Actually, answered my own question (I think) in that IRC 404 is explicitly talking about true cost of insurance (ie PS-58) rather than actual premium paid, which is same case regardless. Of course, the current taxation of PS-58 is undersold in the presentations I've seen WRT 412i plans.