SoCalActuary

415 lump sum limitations have a few different issues, including compensation history, year of benefit determination, form of payment provided, history of past distributions, years of active participation in the plan, years of service with the employer, the plan's actuarial equivalence assumptions, the IRS actuarial assumptions for lump sum determinations, and importantly, the age when benefits are paid. With a plan termination, you may not increase the participant's accrued benefit to reflect future COLA adjustments to the 415 limit, but otherwise you still must provide the range of benefit options available in the plan until the benefit liability has been discharged. So a participant who does not have a constraint on their 415 lump sum would normally receive an increased actuarial equivalent benefit for later payment. However, lump sums are also measured on 417(e) rates, and those produce less expensive lump sums in 2011 than in 2010. You should go through the ASPPA educational materials on 415 limits if you want to have an informed discussion on this issue.

No 204(h) notice, because the employer did not cut back the formula. However, the employee should have a current SPD/SMM that explains what happens when they change status.

Assuming the plan document permits such a form of distribution. Most plan's only give one bit at the apple and won't let you change from an annuity to a lump sum at a later date. Personally, I think the 415 limit is determined at the time the benefit is paid, which may result in a lower lump sum than it was on the date the plan was terminated. I agree. But then you better have suspension of benefit notices to the affected party.

If the issue is that the participant is at their maximum 415 limit, either compensation limit or the notch dollar limit between 62 and 65, then they will lose value of pvab as they wait for benefit. The solution to this is to pay the annuity benefit during the period between plan termination and plan distribution.

You have different answers depending on the intent. For deduction purposes, all members of the controlled group are responsible for the DB plan minimum funding, but beyond that you have discretion. The primary issue is that you are using an accounting method to split the costs. Either establish one for your situation, continue the one used in prior years, or apply to the IRS for a new accounting method.

Why? No participant expected to earn any benefit in 2011?

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asppa will offer such courses. so will the EA meeting. our local ea workshop covers these issues as well.

Well, lawyer up. I don't understand why a plan would allow entry into a plan with a zero benefit. Much better to exclude them from coverage either by name or job class, and only add them if needed.

I believe you are still required to complete this filing, since you still have a plan in force covered by PBGC.

Do you really mean after or before? Once they have completed the accrual requirements you can't have an amendment cutting benefits for the year or you'll violate 411. Otherwise I agree with SoCal's responce. But a properly drafted amendment can stop counting compensation after the freeze date.

Done properly, with timely notice to participants, your math should be fine.

Yes, the regular formula would produce your 60+% formula. But many plan documents also reduce the benefit for the actuarial equivalent of all past distributions. This is usually document specific, in that you must look to the actual wording in the plan to see if the reduction applies. In this example, if the participant took a benefit payment at 50.8% of pay after year 5, that translates into about 4 to 5% of pay for life, using interest adjustment to the next benefit determination date and normal actuarial assumptions. So the net benefit would be 60.96% - 5% or a net benefit of about 56% of pay.

I would start with materials from the IFEBP, if I could not find enough information from the DOL.

This quirk was discussed in the ACOPA forum in past years, and the issue was brought to the IRS. Their response: the plan is still technically underfunded if you did not use up or abandon the balances, so they won't change the rules.

One of the interesting points in Biggs article is on the transfer of liability between generations. If current taxpayers are covering payments for past service benefits, then they are paying for work completed in the past, according to the concern addressed by GASB. Further, if actuaries are recommending 30 year amortization using pv future pay on increasing salary scales, then the liability never actually gets paid for.

The public plan funding question continues to heat up, so I am curious if the written presentation of the economist's position is new or different from the others published elsewhere. Who was the economist presenting their position?

Since you stated this is a corporation with an "S election", the pay is W-2, and the pension expense is for the plan as a whole. However, it is possible to have internal cost allocations within the company where an existing owner agrees to a greater cash balance benefit instead of stock redemption. You need a good corporate lawyer with tax knowledge to make this work correctly. If the corporation was an LLC, the answer might be different. Some Limited Liability Corporations elect to be taxed as partnerships, so the pension costs do flow through to 1040.

Thanks for your thoughtful research. If distribution to IRA was feasible at this time, it would involve liquidating the mortgage. That would be difficult. But there are other plans for closed groups of former participants, especially DB plans, where the plan continues to operate without a plan sponsor. Your reference is not directed at those plans. Any more ideas?

None of these responses discuss plans for a group of terminated former employees, essentially a wasting trust situation, because there are no plan sponsors left. Anyone with experience on plans that remain in place until all benefits can be distributed? The situation that prevents plan termination is that assets are not liquid.

A plan sponsor went out of business, and their employees had benefits transferred into a MP plan, including some beneficiary accounts of deceased employees. The trustee agreed to remain the sponsor of the plan. But we look back and see that the MP language was drafted to cover only employees. There are none. Suggestions?

COPA was the original group, and ACOPA was the merged group. What is COPPA?

I am deeply disappointed at this decision by IRS staffers. It prevents good practices needed by many small businesses, who make their pension contribution decisions while compiling their financial results after year end. This deserves further discussion at a higher level.

That is form over substance in legal terms. You might get away with it, but a good IRS agent would not allow this on audit.

I would agree. The actuarial increase can't exceed the 100% of pay limit even if it is under the dollar limit. And you should also be distributing a suspension of benefits notice.