JBones

I am converting a monthly single life annuity to an annual term certain annuity (no life). I thought that involved: Plan Basis: Monthly s.l.a. x plan s.l.a. apr at retirement / term certain factor at plan interest 417(e) Basis: Monthly s.l.a. x 417(e) s.l.a. apr at retirement / term certain factor at 417(e) rates Even though its 26 year certain, don't you develop a lump sum at retirement using the 417(e) rates (which would include mortality) and then divide that lump sum by the term certain factor?

The 401(a)(9) regs state in 1.401(a)(9)-6 Q&A that distribution must be paid in the form of periodic annuity payments for the employees life or "over a period certain that does not exceed the maximum length of the period certain determined in accordance with A-3 of this section." In A-3 it says "The period certain for any annuity distributions commencing during the life of the employee with an annuity starting date on or after the employee's required beginning date generally is not permitted to exceed the applicable distribution period for the employee (determined in accordance with the Uniform Lifetime Table in A-2 of §1.401(a)(9)-9) for the calendar year that contains the annuity starting date." The Uniform Lifetime Table has a distribution period of 26.5 for a 71 year old. 26 is less than 26.5. Am I missing something here? Frizzyguy - the plan's normal form of benefit is a monthly life annuity and I am converting to an annual term certain annuity, so isn't that the correct calculation? Multiply by the factor using the plan form of benefit and then divide by the factor for the optional form of benefit?

Hypothetically, a plan is being taken over where the benefit formula in the document was X% of pay accrued fractionally. The plan was administered under this formula for the first year but in the next two years, the actuarial report and Schedule SB were prepared using a significantly higher benefit formula that resulted in all participants accruing the maximum benefit. Participants also received benefit statements illustrating this maximum benefit. There are owners as well as rank and file employees in the plan. The problem is, that the plan's benefit formula appears to never have been amended. No participants have ever been paid out, so there is not any issue of participants being underpaid, but there are obviously other issues, including possible deduction problems. The client does not want to go through VCP and would rather fix everything on a go forward basis and take their chances on being audited. What would be the actuaries responsibility in 2010, the 4th year. Since the final regs are effective in 2010 and there is a free pass on change in funding method if that is the year that you choose to comply with the regs, can the plan be amended to the maximum accrual formula by March 15, 2011 and administered as such going forward? In this case, would a hold-harmless agreement for previous years be useful? Are there any other options/requirements? Also, just because no one can seem to come up with a copy of the amendment doesn't mean that it wasn't actually adopted (why would an actuary sign an SB without it). Absent an actual copy of the amendment or a board reso, can a client certify to the actuary that an amendment was adopted or is there any other acceptable way to illustrate that the new benefit formula is correct?

Thanks Effen. There was no 204(h) notice, it is a takeover plan that just came to me recently and I'm still reviewing the facts before going back to the client. The late retirement benefit section of the document says they receive greater of continued accruals or actuarial increase. The participant began RMDs on his NRA, so I think that I should be okay without providing actuarial increases since no payments were delayed past NRD. Leaving the question: "Are there any future accruals, or is the participant fully accrued?" I would have thought he was fully accrued since the benefit reduction was pro-rata for each year less than 25 that a participant would have at Normal Retirement Date. (I realized that I left the "at Normal Retirement Date" part out of my original post and that may have changed the answer). In this case that fraction would be 5/25 and service rendered after NRD wouldn't affect this fraction. My thought is that going forward, his benefit will only be adjusted annually for changes in average compensation.

Am I doing this correctly? I haven't done any 417(e) calcs using segment rates other than lump sums, so I wanted to be sure that I'm not missing something. Facts: Participant age = 71 = normal retirement age Normal Retirement Benefit = $10,000 Plan normal form is single life annuity A.E. is 5.0% interest and 94 GAR mortality (post retirement only) (age 71 a.p.r. = 119.2314) 417(e) factors are 2.47%, 5.07%, 6.10% - mortality is RP11CU (age 71 PV factor = 122.9886- assume this factor is correct) Participant elected 26 year term certain annuity so they will receive the greater of 1) and 2) below: 1 - plan basis: $10,000 x 119.2314 / 15.0939 (26 year term certain annuity at 5%) = 78,993 2 - 417e basis: $10,000 x 122.9886 / 14.8326 (26 year term certain annuity with first 5 years at 2.47%, next 15 at 5.07% and the remaining years at 6.10%) = 82,918 In this case the participant receives the amount under the 417e factors of $82,918 annually. Thanks in advance.

A plan document provides for a normal retirement benefit of a flat percentage of high 3 year pay - 254%, reduced for years of participation at retirement less than 25. The benefit is accrued fractionally over years of participation. NRA is later of 65 & 5th anniversary of participation. Participant enters plan at age 66, so his NRA is determined by 5 years of participation and his normal retirement benefit before the accrual fraction is 254%*5/25=50.8% and has been for each of the last 5 years. If he continues in employment past retirement, will his NRB reduction fraction increase for additional years of participation, i.e. would next year be 254%*6/25 = 60.96%?

My document provider says that according to their language, once RMDs begin, participants are not eligible for insured death benefit. I would like to amend this away, but only if the law allows it. A previous post was very clear that insured post-retirement death benefits are not permitted. Is a participant considered "post-retirement" simply because they have begun RMD's (they are still employed accruing benefts)?

Thank you David. The document does seem ambiguous. It states that those participants who are prior to "Retirement Date" will receive the insured death benefit and those participants who are "subsequent to the Annuity Start Date" are not. But, based on the definitions of Retirement Date and Annuity Start Date, there is an argument that the participant in question is both prior to retirement date and subsequent to annuity start date. Effectively, the document states that he is both eligible and ineligible for the insured death benefit. Based on your comments, is it safe to say that there is no applicable law that would prevent a participant from being eligible for an insured, pre-retirement death benefit, even though they are in pay status solely because of the requirement to start RMD? If that's the case, I will definitely amend out the ambiguity.

Is a participant in a DB plan who has reached 70.5 and begun a period certain annuity to meet RMD requirements, but continues employment and continues accruing benefits still eligible for an insured pre-retirement death benefit, or does the fact that they have started an annuity mean he is no longer considered "pre-retirement"?

An owner participant begins RMD's on 4/1/2011 in the form of a term certain annuity with a 26 year certain period. The participant is still employed and still accruing benefits. The plan provides for an insured death benefit. If the participant dies prior to actually retiring, will the beneficiary still receive the proceeds of the insurance policy as well as the remaining payments on the annuity? Are they even eligible for the pre-retirement death benefit after RMD benefits have commenced? The document defines the pre-retirement death benefit as the greater of policy proceeds plus theoretical reserve, so I find it hard to believe that the beneficiary would get both.

I am taking over a DB plan that provides a death benefit of the greater of policy proceeds less c.s.v plus Theoritical Reserve, or the PVAB and unfortunately I have very little experience with this method of providing life insurance in a plan. There will be 2 new entrants in the plan this year, and the plan will be purchasing policies for each of them. What assumptions must be used to calculate the Theoritical Contribution for this purpose? Is it required to use the plan's AE, or can I use any "reasonable" assumptions? I would think that it would have to be consistent from participant to participant, so will I have to go back to the prior administrator and request their methodology?

I disagree that the RMDs were incorrectly processed. Regulation 1.401(a)(9)-6 Q&A 1 states that "distributions under a defined benefit plan must be paid in the form of periodic annuity payments . . .The interval between payments for the annuity must be uniform over the entire distribution period and must not exceed one year. . ." Paragraph © then states "The first payment, which must be made on or before the employee's required beginning date, must be the payment which is required for one payment interval. The second payment need not be made until the end of the next payment interval even if that payment interval ends in the next calendar year." If this is an annual annuity form of benefit, the payment interval ends on 3/31 of each year and the benefit should be paid at that date, even though it falls in the next calendar year.

WRERA provided relief for the 436 benefit accrual freeze if a calendar year plan's AFTAP was above 60% for 2008 but below 60% for the 2009 AFTAP and this was extended by the funding relief that was issued this June to apply for 2010 as well. Does this still apply if the AFTAP is deemed to be below 60% because it was not certified by 9/30/10 or does the late certification result in benefit accruals being frozen anyway?

Thanks Mike.

I'll try to shorten the question. The AFTAP for a plan using an end of year valuation date is not certified by 4/1/2010 which causes the 2010 AFTAP to be deemed 10% lower than the 2009 AFTAP, drop is from 89% to 79%. A carryover balance exists and is deemed burned at that time in order to avoid restrictions. At what date is the burn treated as occuring?

AFTAP for 2009 is certified based on 12/31/2008 valuation to be 89.54% on 9/30/2009. 2010 AFTAP is not certified until September 28, 2010 based on 12/31/2009 valuation. On 4/1/2010 the presumed 2010 AFTAP is deemed 10% lower than the 2009 AFTAP and a restriction would apply because it is now below 80% - but there was a carryover balance that when reduced brings it back up to 80% ($219 reduction). Per the preamble to the regulations, the election is treated as having been made on the new AFTAP measurement date - 4/1/10. When is this reduction treated as having occured? The reduction was based on the assets, FT and COB as of the 2008 valuation, so do I have to amend the 2008 SB to show the reduction occuring in that year (which would change my other valuation calcs such as shortfall) or does it show up on the SB line 12 for 2009 or 2010? Some of these PPA timing issues have me completely lost.

I didn't see that previous post, but I guess everyone seems to agree. Thanks all.

For a plan with a beginning of year valuation that had late quarterly contributions in the prior year, when determining the valuation assets for the current year, can someone confirm that the contributions made for the prior year after the current valuation date are still discounted using only the effective interest rate and no additional discount is applied for the late quarterly interest?

1) If a plan's benefit accrual formula has been frozen, but the amendment was not a hard freeze, and benefits increase due to an increase in average compensation, should those increases be funded through the target normal cost or do they get lumped into the funding target? 2) If a plan is frozen but a participant continues to be a active past normal retirement age and their benefit increases due to actuarial adjustments for late payment, does that increase end up in TNC or FT?

I was told today that if they don't make their contributions and they terminate the plan they will be subject to the 10% excise tax which the IRS cannot waive, but that the IRS may waive the additional 100% tax for not correcting the deficiency. Has anyone had experience with this?

Carrots - Thanks, but unfortunately, the plan is currently frozen and the termination amendment is being finalized now, I am already using age 65 & 5 for the normal retirement age (none of the participants have even reached age 60, so it seems hard to justify using a higher age), and the $80,000 contributions already take into account the interest only SF payments. I'm pretty sure there is not really much if anything that can be done, but I'm just hoping that someone has an idea that I'm just overlooking. It seems like this is a situation that would be occuring often lately. Has anyone else had a similar experience and if so, how did it play out?

Our client sponsors a non-PBGC client DB plan that is very underfunded. There are two owner and two non-owner participants in the plan. Their business is doing very poorly and they cannot come up with any money to make this year's contribution of $80,000. They would like to terminate the plan as soon as possible and have the owners waive a portion of their benefits to the extent funded, but since we're already in 2010, they will have another contribution for this year as well of about $80,000 again. I told them that they are required to make the contribution even though they don't have the money, and they're wondering what happens if they just close it, make their payouts and file 5500's showing the unfunded contributions. I realize that they can't take the waiver into account for funding, so: 1) What options (if any) do they have? 2) What happens if they don't make the contribution and just close everything out?

Our client sponsored a DB plan for several years and then acquired another entity. They froze their plan timely in order to avoid covering any of the employees of the new entity. Now after several years, the plan has become somewhat overfunded. The current benefit formula is pretty low (i.e. the 2 owner/participants are well below the 415 limit), so the overfunding can be eliminated by amending the benefit formula, but they have a rather large staff now and do not want to have to provide benefits to staff in order to increase their benefits. They aren't looking to close the plan right now, so the overfunding is not a problem just yet, but they want to know if there are any other options other than providing benefits to staff or paying the excise tax should they need to close the plan in the future and it is still overfunded. Do they have any other options?

Our client sponsors a safe harbor 401(k) plan. The company fiscal year end is June 30. The plan was on the same year end as the company through June 30, 2009 until the plan year was changed to calendar year end, with a 6 month short plan year ending December 31, 2009. Going forward, they would like to base their deduction on the plan year beginning in the fiscal year. The company plans to make a profit sharing contribution for the short plan year and one for the 2010 calendar year. Both plan year's begin in the fiscal year. Can they deduct both contributions for the 6/30/2010 fiscal year?

Thanks for the help Effen. I thought that was the answer, but just wanted to confirm.