JBones

Am I correct that a plan that has a past service liability will never be able to use a prefunding balance in the second year to reduce their contribution because the prior funding percentage will always be less than 80%? My client's plan used one year of past service to create a funding target, funded enough to cover the funding target and target normal cost for that year and elected to create a prefunding balance based on the contribution in excess of MRC. Now in year 2, they have a PFB, but can't use it. Is that correct or am I missing some sort of exemption that would apply here?

Curious if anyone has come across a real world example of this topic yet. I have a takeover plan that was effective 1-1-08 and I am now responsible for the plan for the 2009 year going forward. I cannot match the prior actuaries numbers and have found some absolute mistakes as well. The contribution made definitely met minimum funding and was below the deductible limit. In order to run the 2009 val, I am not sure if I should: -Redo the 2008 valuation and use that as my starting point for 2009 or -Use the shortfall amortization and prefunding balance from the prior actuary while running the 2009 valuation.

Thanks. It is a one participant plan that had large earned income in the past and will have much smaller wage under the corporation. They want the large deduction, so they want to count the prior comp to get a large benefit. The corp is a continuation of the sole prop business, so it sounds like they can accomplish their goal. Will the document need to specifically name the sole prop as predecessor employer or does that only affect credited service?

If an individual has been a sole proprietor for several years, incorporates during 2010 and the new corporation subsequently adopts a defined benefit plan, is the earned income from the sole proprietorship eligible to be used in the determination of 415 high 3 compensation?

A calendar year client puts their 2009 corporate return on extension, files it on 4/12/2010 with a $0 pension deduction. Later it is determined that a minimum contribution is due. Client makes the contribution by the 9/15/2010 but does not amend their corporate return. Is the contribution allowed to be carried over to the next year? I know that it would be if they had not put the return on extension, but wanted to confirm if the extension would cause any problems.

I just emailed the address on the PBGC practitioners website: premiums@pbgc.gov, and received a response the next morning.

I emailed PBGC and they informed me that the plan "would be considered to have made the distributions therefore eliminating benefit liabilities. . .The fact that the checks were not timely cashed is a mute point." At least now I have their opinion in writing.

A client terminated their PBGC covered cash balance plan effective 7-1-09. The client informed us that all distributions occured prior to 12-31-09 and provided copies of the checks. Forms 1099R were prepared for the distributions for 2009. While completing Form 501, the client informed us that the last check was actually cashed on 2-4-2010. The owner had held onto his distribution check, made a deposit to the plan in 2010 to fully fund his benefit and cashed his check at that time. We certified on Form 501 that the last distribution date was 2-4-10. 1- I am preparing the 2009 PBGC filing. For my participant count at 12-31-2009, do I need to determine the number of participants whose checks hadn't cleared and use that as my count or can I say that there were no participants who whom the plan had a liability on that date because the checks written were an accrued distribution? 2- Would this be the PBGC final filing for the plan? The form asks for the date of the event that ceases the filing obligation. I would either have to enter 2-4-10, which is after the filing year, or the date the last check was written, which wouldn't coincide with the date certified on the Form 501. 3- Can I file a final 5500 for 2009 or will I have to file a 2010?

If a plan has unreduced assets in excess of the funding target, but the assets drop below the funding target when reduced by COB, is there a funding shortfall causing quarterly contributions to be required? 1.430(j) regulation says that there is a quarterly if there is a funding shortfall and defines funding shortfall using asset reductions under 1.430(f)-1©. Example: Plan Year is 2008 calendar with EOY val. As of val date: FT - $100,000 COB: $10,000 Assets: $105,000 Assets reduced under 1.430(f)-1©(1) would be $95,000 and there is a shortfall, but assets reduced under 1.430(f)-1©(2) would be $105,000 and there is no shortfall. Are quarterlies required for 2009?

Thanks, that helps. I may be taking over a handful of plans that I know the actuary did not request or receive written balance elections on and am trying to get an idea of what to do about the missing written elections.

A Few Examples: Example 1: A client had an existing carryover balance, there was never a balance election prepared, client used a portion of the carryover balance to offset minimum contribution for the year and Schedule SB was prepared reflecting the offset - did plan actually meet minimum funding? Example 2: A client made a contribution in excess of the minimum contribution, there was never a balance election prepared, Schedule SB lists the excess amount on line 38 (which instructions say is maximum amount PFB can be increased, rather than amount PFB is elected to be increased) - is the prefunding balance now zero, or is there a prefunding balance, but a qualification issue based on missing election? Example 3: A client had an existing carryover balance, there was never a balance election prepared, client made a deposit in the exact amount of the minimum contribution - is the carryover balance wiped out by not preparing the election?

What is the consequence of not having a balance election timely in place for a plan for the 2008 calendar year? Is this a qualification issue or would it cause any balance that would have existed to either be erased or not established, or in the case of a plan that intended to use a credit to meet minimum funding, would the plan be considered as not meeting its MRC? Is there any correction available? I don't suppose that maintaining these elections beginning with the 2009 year would be considered a good-faith interpretation of the proposed regs?

In an end of year valuation, if a participant has an accrued benefit limited by 415 and the prior end of year benefit increases on the first day of the current year due to the COLA increase, is the increase from prior benefit to beginning of year benefit included in the funding target or the target normal cost? Example: Participant with 6 years of service/participation and average comp/plan formula benefit in excess of the 415(b) dollar limit. at 12/31/2008 benefit is $9,250 at 1/1/2009 benefit is $9,750 at 12/31/2009 benefit is $11,375 Am I correct that the funding target be based on $9,750 because it represents benefits that "have been accrued, earned, or otherwise allocated to years of service prior to the first day of the plan year" and the accrual for Target Normal Cost would be based on $1,625 ($11,375 - $9,750)?

I thought that the market rate was an issue related to 411(b) accrual rules rather than lump sum issues (411(a)(13), 411© and 417(e)). If that is the case and I pay out the lump sum based on 417(e) assumptions, won't I still have a problem with the accrual rules? Also, if I pay the lumps sum on 417(e) and it turns out 5% does not exceed market rate based on future guidance, did I violate the terms of the plan by overpaying participants?

A short version of the question above: Does a cash balance plan using a fixed interest crediting rate of 5% prevent the ability to pay out the hypothetical balance as a lump sum based on the proposed regulations?

Our client (a takeover plan) is terminating their cash balance plan. The plan was effective 1-1-07. The plan provides for annual hypothetical interest credits based on a fixed interest rate of 5%. Actuarial equivalence in the plan is 5.50% pre and post retirement interest with 1994 GAR post retirement mortality. 417(e) distributions are defined in the document as being based on applicable interest and mortality. It’s my understanding that the proposed regulations provide in 411(a)(13) that a cash balance plan can pay out lump sums based on the hypothetical accounts without violating 411© or 417(e). Separately, 411(b)(5) provides that the accrual rules of 411(b) are not violated as long as, among other things, the guaranteed rate of return does not exceed a market rate. I realize the regs caution against adopting interest rates other than those specifically named, but unfortunately, I’m stuck with the design dropped in my lap. Based on my reading of the regs, the fixed rate of 5% may cause the plan to violate the 411(b), depending on future guidance, but the issue of paying out the lump sum should not be affected by the fixed rate and is not a “market rate of return” issue. Am I correct in my understanding? Can I pay out the hypothetical balances rather than the 417(e) equivalent? If not, won’t I still have a potential 411(b) issue? Or does the 417(e) distribution language in the document overrule all of this and require lump sums to be based on the applicable interest and mortality? Is anyone else designing new cb plans using fixed interest rates?

In addition to the comments above, I found that the seminars offered online through www.theinfiniteactuary.com were very helpful for me. I didn't take the EA-1 seminar, but did for 2A and 2B. It was very helpful to hear and see examples worked out, and be able to pause, rewind and rewatch sections that I had trouble with.

FAPInJax, would you only use the 5% increased discount for the 4th installment under that method?

You might be referring to Section 404(o)(4)(A) which excludes the increase in liability attributable to HCE's from your cushion amount. 404(o)(4)(A) IN GENERAL. --For purposes of determining the amount under paragraph (3) for any plan year, in the case of a plan which has 100 or fewer participants for the plan year, the liability of the plan attributable to benefit increases for highly compensated employees (as defined in section 414(q)) resulting from a plan amendment which is made or becomes effective, whichever is later, within the last 2 years shall not be taken into account in determining the target liability.

Does anyone have any suggestions or ideas on how to calculate the late contribution interest for quarterly contributions when using an end of year valuation under PPA? I've seen the suggestion to "do something reasonable" but are there any suggestions on what is actually considered reasonable? Is it actually reasonable to only apply the 5% increase to the fourth installment as the preamble to the proposed 430 regulations seems to say below? ". . .The proposed regulations would provide that, if the employer fails to pay the full amount of a required installment, then the rate of interest used to adjust the amount of the contribution with respect to the underpayment of the required installment for the period of time that begins on the due date for the required installment and that ends on the date of payment is equal to the effective interest rate for the plan for that plan year determined pursuant to § 1.430(h)(2)–1(f)(1) plus 5 percentage points. This increased interest rate applies only to installments that are due after the valuation date for the plan year because section 430(j)(3) refers to interest being charged on late quarterly contributions.. . ." Based on this statement in the preamble, does the situation below seem "reasonable"? 2008 calendar year plan 12/31/2008 valuation date Subject to quarterly contribution requirement No PFB or COB Quarterly contribution amount is $27,642 due 4/15/08, 7/15/08, 10/15/08 and 1/15/09 MRC as of valuation date of $122,853 Effective Interest Rate is 6.80% Plan Sponsor made an early contribution to the plan of $80,000 on 10/3/2008 and a final contribution of $42,631 on 2/26/2009. First project the three quarterly installments and the early contribution to the valuation date using the effective interest rate to determine the amount of required installment not made as of the date of valuation $27,642*1.068^(260/365)=$28,968.21 $27,642*1.068^(169/365)=$28,496.95 $27,642*1.068^(77/365)=$28,028.30 Total:$85,493.46 $80,000*1.068^(89/365)=$81,293.66 Amount of quarterly contribution requirement for installments due prior to the valuation date that have not been made is $4,199.80. Since this amount is attributable to installments due prior to the valuation date, according the the preamble to the proposed regs, it is not discounted at the increased rate of interest. In this case, the $4,199.80 of unpaid quarterly is not actually useful going forward, but would have been had contributions exceeded required installments up to this point as the additional amounts would be applied toward the next quarterly. The final installment due on 1/15/2009 was not made until 2/26/2009. Therefore $27,642 of the $42,631 final contribution is discounted at 11.80% from 2/26/09 to 1/15/09 and 6.80% from 1/15/09 to 12/31/2008, while the remaining $14,989 is discounted for the entire period at 6.80%. $27,642*1.118^(-42/365)*1.068^(-15/365)=$27,215.80 $14,989*1.068^(-57/365)=$14,835.80 MRC as of 12/31/2008 is $122,853, and discounted value of contributions made is $81,293.66+27,215.80+14,835.80=$123,345.26. Therefore, minimum funding has been exceeded by $492 as of the valuation date. BTW, I learned the hard way that accidentally hitting escape after writing a long equation filled post can sometimes erase an hours worth of work and the undo button won't bring it back.

I think the cite you're looking for is §1.401(a)(4)-11©(2) which allows for deemed equivalence of statutory top heavy schedules under 416(b)(1)(A) - 3 year vesting - and 416(b)(1)(B) - 6 year graded vesting. §1.401(a)(4)-11. Additional rules © Vesting-- (1) General rule. A plan satisfies this paragraph © if the manner in which employees vest in their accrued benefits under the plan does not discriminate in favor of HCEs. Whether the manner in which employees vest in their accrued benefits under a plan discriminates in favor of HCEs is determined under this paragraph © based on all of the relevant facts and circumstances, taking into account any relevant provisions of sections 401(a)(5)(E), 411(a)(10), 411(d)(1), 411(d)(2), 411(d)(3), 411(e), and 420©(2), and taking into account any plan provisions that affect the nonforfeitability of employees' accrued benefits (e.g., plan provisions regarding suspension of benefits permitted under section 411(a)(3)(B)), other than the method of crediting years of service for purposes of applying the vesting schedule provided in the plan. (2) Deemed equivalence of statutory vesting schedules. For purposes of this paragraph ©, the manner in which employees vest in their accrued benefits under the vesting schedules in section 411(a)(2)(A) and (B) are treated as equivalent to one another, and the manner in which employees vest in their accrued benefits under the vesting schedules in section 416(b)(1)(A) and (B) are treated as equivalent to one another.

Would an RMD still be required for 2009 from a rollover account within a defined benefit plan assuming the defined benefit portion was continued? WRERA and Notice 2009-82 both refer to defined contribution plans and IRA's specifically and the Technical Explanation of WRERA refers to defined contribution plans as defined by Section 414(i). Regulations Section 1.401(a)(9)-8, Q&A-1 states: ". . . The distribution of the benefit of the employee under each plan must separately meet the requirements of section 401(a)(9). For this purpose, a plan described in section 414(k) is treated as two separate plans, a defined contribution plan to the extent benefits are based on an individual account and a defined benefit plan with respect to the remaining benefits." Based on WRERA referencing defined contribution plans and the regulations stating that a rollover account in a DB plan should be treated as a defined contribution plan, I would argue that the distribution would not be required. If my thinking is right, I would assume that DB plans in this situation would have to follow the "clarification" laid out in Notice 2009-82 and be required to adopt amendments reflecting the change.

I have a plan with an age 65 normal retirement age with a benefit formula of 2.4% x YOS (max 10) x High 3. There is an active participant in the plan who is fully accrued (was by age 65), is age 70 and has yet to begin receiving benefits. Up to this point, his benefit has been actuarially increased due to his late retirement. The plan provides that the late retirement benefit is the greater of the actuarially increased benefit or the NRB taking into account any accruals after attainment of retirement age. The plan is amending the benefit formula from 2.4% per year to 5% per year. Would the increase in benefit formula be considered an accrual after retirement age, i.e. would his benefit at age 70 be 5% x 10 x High 3 or would it be 5% x 10 x High 3 adjusted from age 65 to 70?

I’m not arguing whether J&S or lump sum is the correct way to calculate the MVAR. I would rather use J&S because the results are typically better in a cash balance plan. But here’s an example of how I have always calculated the MVAR when required by an IRS reviewer to use the lump sum. It is exactly the same calculation as if it were simply a profit sharing allocation. Plan AE is Applicable Interest and Mortality (4.68% with 94 GAR for 2007) Normal Retirement Age / Testing Age is 62 Testing Assumptions are 8.50% ‘83 IAM Male Participant is age 52 Hypothetical Contribution Credit for 2007 is $50,000 Compensation is $225,000 APR’s: 4.68% 94 GAR age 62 sla 13.06008 4.68% 94 GAR age 52 sla 15.85085 8.50% 83 IAM age 62 sla 9.32642 8.50% 83 IAM age 52 sla 10.54998 If the immediate lump sum is assumed to be the most valuable form of benefit payable under the plan, then it is normalized by converting the benefit (the lump sum) to an actuarially equivalent straight life annuity commencing at the employee’s testing age using the testing assumptions per the definition of normalize in 1.401(a)(4)-12. $50,000 x 1.085^10 ÷ 9.32642 = $12,121.39 MVAR = $12,121.39 ÷ $225,000 = 5.39%

I usually 8.5% and one of the standard tables other than the DB plan's table as my testing assumptions. When normalizing the most valuable benefit, 1.401(a)(4)-12 says that the assumptions used to normalize the benefit must be reasonable and that standard interest and mortality tables are considered reasonable. In either case, qjsa or lump sum, the most valuable benefit is normalized using the testing assumptions. Not that it can be relied on very much, but this matches the results that I have gotten from several discrimination software systems.