ScottR

Agree that it's a stupid provision. One possible remedy to make it a little more workable: Amend plan to give affected participants a 1-time option to take the remainder of their monthly benefits in a lump sum, for some specified period of time after the plan becomes > 80% funded. ... Scott

The deduction for 2011 is limited to net k-1 (or Sch C) minus 1/2 SE taxes. I don't think the tax on nondeductible contributions applies to DB plans any longer, does it? I imagine any unused deduction could be carried over and claimed in 2012, but i'm not 100% sure. To avoid any problem, have them fund just the deductible portion during 2011, and the remainder in the first 8.5 months of 2012. ... Scott

I think it depends on how the plan defines a Year of Service. If it's a PY w 1000 HOS, then the pre-2011 service probably wouldn't count (and comps for those years would be ignored in the high 3 avg). But if elapsed time or equivalencies are used, then it could be a different story. As was pointed out, no immediate impact. But it will have impact down the road, when we're clear of the 3-year averaging period. ... Scott

I've generally been relying on 404(o)(2)(B) in the initial PY. i.e. employer may fund toward PVVB at EOY. Anyone disagree? For a H/W situation, it's generally possible to take the EOY PVVBs right up to the Section 415 max permissible lump sum benefits. Generally, that's the most that I would want them to deposit anyway, to avoid potential surplus problems. If you really want to max things out for year one, give past service credit to create BOY benefit liabilities at 415 limits, and make 100% J&S the normal annuity form. Funding toward 150% of FT will probably be a lot higher than EOY 415 lump sum limits... not sustainable, but okay for one year if everyone understands what's going on. ... Scott

IMO, all benefits received by a participant in the current limitation year would count against his/her 415 limit. Thus, what you describe wouldn't help if the final lump sum is paid in the same limitation year as the catch-up monthly payments. Assuming a participant is subject to the %-of-pay limit (and not the dollar limit), I would pay him 12 x monthly limit during 2011, and distribute the lump sum in Jan 2012. I don't believe the 12 monthly payments for 2011 would have any adverse impact on his lump sum limit in subsequent limitation years. Also, the 20% reversion tax applies if 25% or more of the surplus is transferred to a qual successor plan. I would transfer ALL of the surplus to that plan. Since no money reverts to the employer, 20% x $0 = $0. No reversion tax. .. Scott

I agree that you have to amend the provision dealing with surplus assets, to allocate surplus to the participants. But you don't have to amend the benefit formula in an attempt to make PVAB exactly equal to assets. ... Scott

I don't see how you can allocate surplus assets to one participant if there aren't any surplus assets. Certainly, one HCE could get full PVAB while others take the hit for the funding shortfall. But I don't think you can go the next step... i.e. giving one person MORE than his pvab while shorting others. I like Andy's idea of amending the plan to increase pvab's for all participants, so that no one gets more than pvab. .. Scott

I would think that, at the very least, he'd have to get the formula benefit based on salary and service thru late retirement date. It's no longer permissible to freeze accruals at NRD, is it?

This should be spelled out carefully in the amendment that changed the PY. I think it's certainly okay to prorate accrual service credit. For comp averaging, I think you may either annualize for the short PY, or change the number of months in the denominator; I would lean toward the latter. ... Scott

Also, the health insurance deduction for owner may not exceed: Net Sch C income, minus deduction for 1/2 SE taxes, minus deduction for retirement plan contributions. Thus, we need to leave "room" for the HI deduction, when quoting max retirement plan contributions. Effectively, this means that retirement plan contribs should not exceed net Schedule C - 1/2 SE tax - HI deduction. ... Scott

I've had good experiences with Dietrich Associates. Their website shows up to date interest rates for annuities, which are currently in the 3.75% - 4.25% range. https://www.dietrichassociates.com/Default.aspx

ILP was an old funding method, under which the annual "premium" was the level dollar amount that needed to be funded each year, from the participant's entry date until his NRD, in order to accumulate to the projected lump sum at retirement. To illustrate, assume that projected monthly benefit is $16,250, and that projected lump sum at retirement is $2.4 million. Further assume that there are 20 years from date of entry to NRD, and that a 5% interest assumption is called for. The ILP would be $72,582. i.e. $72,582 deposited at the end of each year for 20 years will accumulate to $2.4 million. The ILP would remain fixed from year to year unless there is a change in the projected LS at retirement. ... Scott

Yes. If a subsidized J&S benefit is selected in the adoption agreement, it means that a married participant's monthly J&S benefit will be the same amount as his SLA benefit. For funding purposes, I believe it would be totally proper to assume that all married participants will elect the J&S annuity rather than the SLA. Why wouldn't they? ... Scott

I don't see a problem, as long as the document language clearly excludes the individual, and the plan passes coverage testing without him. ... Scott

I don't think the plan's NRA has anything to do with it. To compute the current 415 lump sum limit... 1) Compute the max monthly benefit payable under Code Section 415 starting on participant's 62nd birthday. i.e. $1625 x YOP (max 10 yrs). 2) Compute the immediate monthly benefit that is actuarially equivalent to the deferred monthly benefit computed above. It should be done two ways: based on the plan's defn of AE, and based on 417e mortality table and 5% interest. Take the lesser of the two results. 3) Compute the lump sum equivalent of the Step 2 result two ways: using 417e mortality and 5.5% interest, and using plan's defn of AE. The lesser of these two results is the Section 415 max permissible lump sum benefit. ... Scott

I would deduct the full contribution immediately. You should be able to justify the deduction under Code Section 404(g) and/or 404(o).

And what, pray tell, is the PBGC going to do with that information? File it next to the notices of missed quarterly contributions?

I don't think there's any disagreement. If we're valuing a deferred annuity, starting 18 years hence, the discounting from benefit commencement date would be based on the second segment rate. And the APR at retirement would be based on 2 years at the 2nd segment rate and the remainder at the 3rd segment rate. Where do you see a contradiction? .. Scott

I agree with everything SoCalActuary said, but would add that a small DBP for 2010 might still make sense, even though the 2010 contribution might be limited to 6% of pay. Setting it up immediately will give the owner a year of participation for 2010, which will be a big plus when determining future Section 415 dollar limits. .. Scott

That wouldn't be a very good plan design, IMO. Word will quickly spread to employees that they're going to get 5% of pay, whether or not they defer. IOW, the match is bogus. I think you'd be better off with the flat 3% SH. It could be used for TH purposes, gateway minimums, and rate group testing. Triple duty. .. Scott

I don't see how he could take an in-service distribution, since he's not 62 and not beyond NRD. I suppose you could amend the NRA to 55, but that would seem foolhardy in light of recent IRS position on NRA's below 62. Plan termination would be a viable option. Can he later set up a new DBP? I don't see any problem. .. Scott

Correct. It's essentially the same as if you were valuing a deferred annuity, but using 417e mortality instead of 430 funding mortality. ... Scott

I think the 3/31/10 payment covered your 2010 RMD requirement, and all remaining benefits may be rolled over in 2010. The DB RMD rules require that a series of annual payments commence by the required beginning date. There's no need to "double up" in the year following the First Distribution Calendar Year, as there is with a DC plan. Just make the initial RMD by 4/1 following year of attainment of 70.5, with subsequent payments on the anniversary of the initial one. I don't agree that the 3/31/10 payment was for 2009. It was paid in 2010, and therefore covers the RMD requirement for 2010, IMO. Again, the rules for DBPs are different than for DC plans. .. Scott

I have questions about how the Section 415 limits affect the funding and testing of CB plans. Let's say that the first year's contribution for a participant is $150k, and that this is less than the current max permissible lump sum benefit under Section 415. Further assume that the plan's NRA is 65, and that this is also used as the Testing Age. For testing purposes, we take the $150k contribution, project to NRA using the current int crediting rate, and convert to an equivalent annual benefit. Let's say that this result comes to $20,000. Since this exceeds the 415 dollar limit after 1 YOP (i.e. $195k x 1/10 = $19,500), do we use $19,500 or $20,000 for running the general test? How about the impact on funding? Here, we project the $150k contribution to ARA using a "reasonable" interest rate, and then discount back to PV using the funding segment rates. After we project to ARA, do we limit that result to the 415 max permissible lump sum at ARA, before discounting back at segment rates? TIA. .. Scott

The max LS at 62 should not exceed one based on 417e mortality, 5.5% interest. Once you've computed your max LS at 62, discount back to age 40 using the applicable segment rate. The max LS at 40 (for payout purposes) is based on a 2-step process: 1) compute the max monthly benefit payable at age 40 (the lesser of plans rates, or 417e mortality and 5%), 2) compute the max permissible lump sum by taking the least of 3 calcs (plan rates, 5.5% and 417e mortality, 105% of 417e LS). .. Scott