mwyatt

merlin: I wasn't proposing that as a solution, only commenting on a proposal that I've heard of before (but felt very uneasy about; if it walks like a duck, talks like a duck... very astute listing of IRS announcements BTW). Pax: you have a very good point also; between the EGTRRA changes and the carnage in the equity markets, even our pre TEFRA over funded plans can get out now after reallocation with no reversion. Only silver lining in this incredibly dark cloud.

Question: was she ever classified as a HCE in any prior year? From Reg 1.401(a(4)-5(B)(3)(ii): Restricted Employee Defined. For purposes of this paragraph (B), the term restricted employee generally means an HCE or former HCE. However, an HCE or former HCE need not be treated as a restricted employee in the current year if the HCE or former HCE is not one of the 25 (or a larger number chosen by the employer) nonexcludable employees and former employees of the employer with the largest amount of compensation in the current or any prior year. Plan provisions defining or altering this group can be amended at any time without violating Section 411(d)(6). Your client has elected to use the "top 20" provision in determining the HCEs for the year, which is certainly valid; I don't think that the fact that she would have been a HCE if the provision was not used would force her into the restricted employee definition. I'd make sure, however, that she never was a HCE in the past as the definition is historical in nature, not just for the year of distribution.

Assume your client wants to terminate plan near-term. Then I think what you are proposing is to purchase insurance contracts providing pre-retirement death benefit which will have low (or no) cash surrender value due to commissions so can be distributed to your client with little or no tax consequence. But consider that they now hold these policies individually and are on the hook for (presumably) sizeable future premiums to keep policy in force. I'd run the numbers carefully before proceeding as what you all you may be doing is transferring monies paid to the IRS to the agent's retirement plan, if you know what I mean. Also, the 412i may be a bit of a misnomer as it sounds like your client wants to rollover PVAB to an IRA; in pure 412i will have to convert all assets to insurance/annuity contracts. Again, fees, commissions, and surrender charges can alleviate over funding (but in the same manner as losing most of the assets on internet and telecom stocks).

Actually, we've always indicated the full year on the top of Schedule B (and tracked FSA interest, etc.) through the full year regardless of the termination date. I don't see how the date on the Schedule B would help; besides, I'm assuming that the Schedule B with the termination date would be included with the prior year filing, not the current year set of forms. The real problem is the elimination of the termination questions on the 5500 (now found on Schedule I) as in no place on the forms do you now enter the year in which the plan terminated. At least on the old 5500-C, you did have the question asking whether the Schedule B was required to be attached, as well as indicate the year in which the plan terminated. Eventually all the bugs will be worked out. Last winter I went through this very same issue on the phone with a contact @ Lawrence; their level of knowledge was low concerning the noninclusion of the Schedule B. She finally talked to her supervisor and found out that we didn't need to include the Schedule B (but of course we still had to write a letter to the effect, which wasted some more time on their error). Best bet is to always include the attachment (and let the client know that the filing may still be bounced).

Just to clarify Pax's comment on the non-vested terms: most documents put the "deemed payout" language in place (we use Corbel/Relius which has had this since before TRA '86) so that you are safe in ignoring any participant who terminated with no vesting rights in the last 5 years preceding the year of termination. As far as the partially vested terminations in that time, if they were paid out their lump sum, then again you should be safe. However, you may be challenged in the course of the IRS's DL review if you cashed all of these folks out in the year of plan termination. You really only need to focus on partially vested terminations in that time period (and remember you need to provide an attachment to Item 15 of Form 5310 listing all partial and non-vested terms anyway so the IRS will be reviewing your decision). As an aside, Pax is correct about the 1984 GCM that started this whole thing (in fact, it arose from REA's extension of the 5 1-Year Breaks in Service before you could drop service; during the mid-80s you focused on whether a participant's termination occurred pre or post 8/23/84 to see if full vesting was required). However, the 5 year rule only applies to DC plans; actually for DB plans there is no corresponding provision "forfeiting" the non-vested portion of the accrued benefit if someone terminated with non-zero vesting. By the logic of the GCM, you really should have to fully vest ANY partially vested terminated participant from day one of the Plan. Fortunately, the IRS never actually crawled out to the end of this branch of thought for this result!

Past experience is that the form will be bounced (as prior 5500EZ filings were bounced also as there were never any questions on the Form relating to termination). We always included an attachment to the filing to the effect of Attachment to 2000 Form 5500XX Plan Sponsor: ABC, Inc. Plan Name: ABC, Inc. Defined Benefit Plan EIN/PN: 04-1234567/001 This pension plan was terminated on December 31, 1999. As the date of termination precedes the first day of the plan year covered by the 2000 filing (i.e., January 1, 2000), no Schedule B is required to be attached as the plan is no longer subject to the minimum funding standards under IRC 412. Sometimes someone would actually read the attachment and we would hear nothing back, sometimes they wouldn't and we would get the reject letter. Upon explaining to the reviewer, however, no further action would be needed (although the DOL seems awfully picky in having you write a response correcting their error, rather than the IRS's former flexibility when informed on the phone of their error). To be safe, may want to inform client ahead of time that the DOL may erroneously kick out the form.

Assuming that this is normal whole life insurance, I would have to speculate that in order for the CSV to cover the benefit that the face amount of the policy(ies) would be quite large; most likely substantially over 100 times the projected benefit at retirement. How would you reconcile this with the incidental death benefit rule? Also, assuming that your client had the misfortune to die, wouldn't you be basically passing all of the excess onto the IRS as an over funded plan rather than to the beneficiaries?

A little confused; how would pure insurance (a benefit payable at death) provide the benefit provided under a defined benefit plan (an annuity payable for life?).

Of course the contribution will be higher, your client is funding two retirement plans (his and the agent's;) ).

Actually, looking at the language in question, this has nothing whatsoever to do with the Plan itself. It is merely adding a "stick" (i.e., if payment of the benefits to the ex is not made, the participant, NOT THE PLAN, has to make the ex whole). Haven't seen that phrase before in a QDRO, but as this doesn't affect the plan (nor does it add a BFR in the plan itself, as the sanction is from the individual's assets, not the plan), I don't see it as an issue. Some smart attorney thought that this would be impressive language to add to prompt the participant to ensure that the payment is followed through.

My thoughts: I think that you would be hard-pressed to pursue damages for two reasons: One, assuming GATT amendment in place in a timely fashion, there was specific protection under IRC 411 on anti-cutback. Two, since this change is the "G" in "GUST", most plans have only recently (or haven't yet) updated documents for GUST restatement, so current SPD hasn't been issued yet. (BTW, I haven't seen too many SPDs that cover IRC 417 rates). I don't think, given the transition time, that you have much basis for pursuing a greater LS using PBGC. Assuming someone (Mike Preston or Mbozek, are you out there?) will probably have a more definitive answer.

Seems a little odd to me. I'm from the private sector side, but seems that there could also be problems with 415 limits (or at least up until this year) if someone had significant accruals of vacation/sick pay.

I'm assuming by the reference to "retroactive" that your client's accrued benefit under the Plan is running into the 100% of High 3 Year 415 Limit but not the 415 dollar limitation due to lower salary. Otherwise, benefit could be increased for late retirement. Is this the situation?

As far as the post-retirement 415 adjustment goes, the use of the mortality decrement(s) hinges on the death benefit provided by the Plan. From my experience, we haven't seen too many plans where the beneficiary isn't entitled to the PVAB post NRD where the benefit runs up to the 415 limit. In this case, you ignore mortality decrements in determining the post SSRA (now 62-65) adjustment to the 415 $ limit.

A little clarification on your plan document. Most of the language I've seen for the class allocation method has the Employer providing written instructions to the Trustee of how much to contribute to each Class; in turn the contribution will be allocated among each Class on the basis of comp to total comp within the Class. Assuming that you have this type of language, I don't exactly see how you could do an integrated allocation staying within the confines of allocating on comp within the Class. I would think that you would have to amend your document if you wanted to change the allocation method. Now, you could run your desired integrated allocation and try to match this up approximately (assuming that your participants who would receive a share of the integrated allocation were unique to a given class). An approximation, but would probably work. I don't think that you could call this a "safe harbor" in end result, but... Use the General Test on allocation w/ imputed disparity (instead of Cross-Testing) and you would most likely have no problem passing. Hope this is of help. What does your plan language say for the allocation method?

The auditor requirement is part of every annual 5500 filing for plans with over 100 participants. This has been in place for quite some time. Obviously plan assets are gone over with a fine tooth comb; our experience has also been that census data is verified in some manner also. Also, the elapsed time v. 1000 Hours requirement skirts the real issue here - vesting service not counted while an excluded employee. Think plan sponsor could just have easily messed this up using either way of crediting service (i.e., if using elapsed time just count from date of status change rather than date of hire). And I would also say that the "part timer" rational for using 1,000 Hours method of crediting service is certainly not endemic to Defined Benefit plans. If anything (especially with top heavy plans), motivation is actually higher for a DC plan to exclude part timers as under IRC 416, they get a TH contribution regardless of hours worked, while under a DB plan, only get TH minimum accrual if complete 1000 Hours of Service in TH year. Interesting discussion (but a nightmare situation to contemplate).

So I shouldn't have to worry about the retro increases in the 200k limit (applied to 2001 and prior years) since in order to use this new limit either retro or going forward, I need the EGTRRA amendment signed by 5/31/02. So I do this amendment by 5/31/02, and elect NOT to retroactively use $200k, only apply to 2002 years going forward (or if I want, not at all). Second, I need the amendment in place by 6/30/02 if I do NOT want to recognize the 415 increases. Of course, in my situation, this is a moot point since the benefit under this particular plan is nowhere near the old or new limits, even with the 200k salary limit. Hence my only real action is to get the EGTRRA amendment in place by 5/31/02, electing NOT to apply retroactively. Thanks for clarifying this...

The Job Creation and Worker Assistance Act of 2002 allows for employers to keep the old 415 limits (pre-EGTRRA) to avoid the "pop-up" of accrued benefits if amended by June 30, 2002. My questions are as follows: 1) Pop-up occurs not only due to increase in 415 limit but also due to retroactive increase in 401(a)(17) salary limitations to $200,000. Can an employer keep the "old law" pre 2002 salary limits in place? Some sources describing JCWAA as recognizing combined effect of salary and benefit limitation increases, but when I read JCWAA, only really recognizes 415. Am I reading this wrong? 2) What would form of amendment look like? Has IRS issued any model language to date? 3) If this does allow you to keep the old compensation limits (which obviously provide for additional pop up consequences), would you stick with prior $170k limit in projecting compensation limits for future years (i.e. 2002 and beyond for projected benefits), or would you recognize 200,000 limit in 2002 and future years. Thanks for any help.

Blinky and Chamelix - my bad. Hadn't thought of Qcbn issues in a while - helpful to read regs from time to time (haven't really looked at this stuff in excrutiating detail since developing an Excel spreadsheet back in 1989 to calculate this stuff). Also very helpful to have these discussions on the Boards (especially for us solo actuaries) before finalizing valuations/Schedule Bs.

I see what you are saying about the crediting of interest from the beginning of the year on the Credit Balance. It's been about 6 years since I've had to deal too much with Qcbn interest charges, although investment returns over the last two years may fix that for my clients. What Q&A #12 seems to be saying is that you are disqualified from using the credit balance for a particular quarter if the actual date of deposit of the amount giving rise to the FSA CB is later than the due date of the QCbn. But, ponder the following counterexample: Same situation, calendar year plan with Required QC of $20,000, due 1/15/01, 4/15/01, 7/15/01, and 10/15/01. But client has an FSA Credit Balance of $80,000 as of 12/31/00, due to a contribution made at the last possible date of 9/15/01. Now clearly this credit balance more than satisfies the Quarterly Contribution requirements. But a strict reading says that you would be ineligible to use this balance at all towards 4/15 and 7/15 contributions and the employer would need to pony up additional dollars to satisfy these minimums. In fact, let's go further and say that your 2001 IRC 412 contribution is $0 (say it was $80,000, fully covered by the Credit Balance)., so employer has no intent to deposit anything at all for Calendar Year 2001. But our first interpretation is that the 4/15 and 7/15 contributions were never met at all, since we have decided that the CB is ineligible to satisfy these payments. I don't think that this result makes alot of sense to me. I would rather say that Late Interest would be charged on the 4/15 and 7/15 payments, based on the $80,000 increased w/ FSA interest to 9/15, and based on the 9/15 payment date. So with this interpretation, I guess I would fall back to using the 5/31 $5,000 towards the 4/15 credit balance, increased w/ FSA interest from 12/31 to 5/31.

Reading Q&A 12 as I write. I think that in the first part of the answer where it speaks of using the 12/31/88 Credit Balance of $10k, note that the 1988 contributions were all deposited by 12/31/88 (hence the ability to credit FSA interest from 12/31/88 to 4/15/89). Your situation falls in the second part of the answer, where the CB exists as of 12/31/88, but due to a contribution made on 5/31/01. I would apply payments for 4/15/01 payment in your example where you have a $20k Quarterly Contribution (QC) as follows: 2/28/01 contribution of $10k, increased @ FSA i% to 4/15/01; you don't specify a rate, so let's just say that this increases to $10,100 for the sake of argument. So you have remaining QC of $9,900. Apply $5,000 5/31/01 payment QC1 balance, so you have remaining balance of $4,900; also calculate late interest charge on $5k. Apply $4,900 from your 7/31/01 $10k payment to complete QC1; calculate late interest charge on $4,900 from 4/15/01. Balance of $5,100 applies to 7/15/01 QC. I wouldn't think that you would skip the $5,000 credit balance in applying since it was actually made prior to 7/31/01 deposit. Key observation: Just treat the contribution equalling the credit balance (if made after EOY) as regular deposit made on actual date of deposit and you should be fine.

Mike, thanks so much for your reply.

Andy thanks for the tip. Appreciate everyone's help on this issue.

Focusing on the last sentence of KJOhnson's paragraph is key: if not being done for sufficiency purposes.... Why else would you do the waiver at termination? At first my heart stopped reading the question, then settled down to normal beats. So if you are terminating with a waiver and an underfunded plan, no taxation would occur. Consider the following situation (which I would guess is what Holland was thinking about): A small DB plan of a wholly family DB plan with adequate funding. Substantial Owner waives benefit (although not needed) so as to create additional excess assets which are then reallocated to other family members (and hence escaping estate/gift taxes). In this case I could see his point as to taxation issue, although I haven't seen this in theory or real life (just trying to imagine what he had in his head). Thanks KJohnson and MBozek for your help!

I've run into that issue before; I think that the semantics that the IRS accepted was that you aren't actually reducing the vested benefit (a 411 cutback) but that the owner is being "paid" the lump sum value of his vested benefit at less than "fair value". (An angels dancing on the head of a pin argument, of course, but it reconciles IRS with PBGC's position). My recollection from a termination long ago is that this issue was settled. If you look, here is #21 from the 1994 EA Meeting Grey Book: QUESTION 21 415(e) DB Fraction if Substantial Owner Waives Accrued Benefits -- 415 If a defined benefit plan subject to PBGC coverage terminates with less than sufficient assets to pay out all benefits as a lump sum, the PBGC expressly permits majority owners to waive a portion of their accrued benefits so that all non-majority owners are paid in full. For purposes of calculating the majority owner's defined benefit fraction under Section 415(e) of the Code, is the numerator equal to the actual benefit that had been accrued, or is it the actual (reduced) benefit that was paid out? Would the answer be different if the Plan were not subject to PBGC coverage? RESPONSE: The numerator should be equal to the actual benefit that is paid out. It makes no difference whether the plan is subject to PBGC coverage. Since Holland and Weller were part of the panel, I would have thought that they would have objected to the validity of the waiver in their response. As an aside, I think that they have since reversed this answer (as in for 415 you now use the whole benefit, not the amount effectively received), although in the post-415(e) world the effect is less relevant. Only would be an issue if another DB plan was established in the future.