SoCalActuary

The amendment is effective in 2010. If the sponsor wants to make it retroactive, they can choose to do so. But it is not required.

First, the plan document must allow in-kind distributions. Second, you must create a market value for this asset, so you know what to put on the 1099R.

First, you must confront the fact that you need a taxable distribution, including a 1099R showing the payment. Next, you need to show that the distribution occurred in the trust records in the event of an IRS audit. This should include any specifics of the optional form of payment that might have been elected. The payment needs to be at least the amount of a 100% J&S benefit annuity payment (if that is the option elected.) Second, the funds will be in the hands of the employee. If that money is deposited back into the plan, it must be tracked for tax treatment. Is it an employee after-tax contribution, or a contribution by the employer? If the employer makes the payment, what will be the tax treatment of the funds? Is the deposit coming from the bank accounts of the S-Corp plan sponsor? Don't ignore the fact that the contribution is from the assets of the S-Corp, and the deduction is on the S-Corp's 1120-S form. If the money is deposited as an after-tax employee contribution, then it should come from employee wages as a payroll deduction, not as a separate employee check. If you don't make the payment out nor the payment into the trust, then you have no defense that you complied with 401(a)(9).

As Andy pointed out, you have two parties to this transaction, the participant and the business owner. The participant must take a taxable distribution from the pension trust. The business owner may be required to make a deductible or non-deductible contribution to the plan. If the owner does not have business income, then the contribution might not be deductible.

If your benefit accrual in the short year is smaller because it is a short year, then your TNC is smaller; but the basis of the TNC is to pay for the benefit being earned in the period.

Frankly, I am amazed that this very settled area of law has any confusion at all. DB plans have been allowing participant loans for a long time, well before the restrictions of the 1980's hit. Vested Account Balance has been the common standard for these as well.

Law practicing document provider - I generally call that an oxymoron. Interesting observation about Brucker, Shardlow, Hochman and a few others. But, perhaps your experience is different.

You must practice law differently than most document providers. Here is an excerpt from the Relius DB Document loan instructions from GUST: 52. LOANS TO PARTICIPANTS..... Generally, ERISA §408(b)(1) permits loans to be made to participants and beneficiaries as an exception to the “prohibited transaction” rules, provided that there is a loan program that satisfies certain specific criteria. Loans must be made available to all participants and beneficiaries on a reasonably equivalent basis. The DOL has indicated that a loan program limited to “parties in interest” will avoid the necessity of making loans available to most terminated or retired participants. Loans must be adequately secured. For this purpose, the participant’s accrued benefit may serve as adequate security, provided that not more than 50% of the vested interest at the time the loan is originated is used as security.

CA is the golden state for this type of problem. Once the participant demonstrates that they have insufficient income (which is the fact of this situation because the plan did not promise this benefit under its terms), then our generous system acts to help those at the lowest income levels. However, the person does have to go thru the normal process of finding any other resources like family.

Yes but the employee must put up collateral for the loan since the the employee has no account holding assets in the plan to secure the loan. The collateral is their vested account balance. Am I missing something?

So plan a gives a person a 0.5% benefit accrual rate for 6/30/09 and plan b gives a 2% equivalent allocation rate for 12/31/09. For sake of illustration, the plan a 0.5% benefit accrual rate is worth a 1% equivalent accumulation using the DB plan's actuarial equivalence and the testing assumptions. The 2% plan b allocation gives a 1.25% benefit accrual rate using only the testing assumptions. With separate plans you get a BAR of .5 + 1.25, while the EAR is 1% + 2%. So separate ID attribution of DB benefits gives 0.5% in plan a, and then you must compute the net 0.15% BAR from plan b, knowing what the plan a results used. Similarly, the EAR gets 1% in plan a and 2% in plan b as ID. Doing this separately is a bother, when you really want to just add the two base rates and build the ID on the sum.

We probably are talking semantics here, but as Andy points out, how would you do the calculation if the plan years were different and there was different compensation? One could have compensation in excess of the twb for one period and not the other. That's why I see no other way than to impute in one plan or the other. You get to the same result 99% of the time, but that 1% is Andy's world I suspect. Of course. I don't have any great answers on the different plan years or compensation. If I were making the rules, I would select the calendar year compensation, and the average would be the average of calendar years. But that is just an opinion worth what you paid for it. But each plan could have benefit levels below the level that recognizes full imputed disparity (ID). For example, a SH 401(k) plan would have 3% not subject to ID, and 2% subject to ID. The DB plan might have a modest benefit like 0.5% accrual, also below the level of reaching the maximum ID. Do you just pick one plan and give it ID, leaving some benefits off the table?

I believe the intent is that you add the basic benefits together as if it was a single plan, then imput disparity to the total. My interpretation of the rules is that you are not allowed to take each plan benefit, add imputed disparity, and then add them together, as that would double count the addition.

Well, that eggsplains everything.

Eggplantation? Oh sorry, not what you meant!

You also need to determine whether the company prior to now is a part of a controlled group or ASG within 415 meaning. If the person was not a majority owner, you might need an attorney's determination about aggregating the old & new plans.

But the IRS dealt with this issue. The benefit change cannot reduce any values accrued to the signing date of the change. A choice to go with the same formula at a later NRA is a cutback in benefits, so you also need to do your 204(h) notice as well. So a signed amendment now will provide the correct NRA adjustment, retro to 1-1-09, but the only problem will be for people who took an inservice distribution at the old NRA between 1-1-09 and the signature date.

Carrots, you understand correctly. For funding, the IRS expects you to use the modified, averaged yield curve, while they expect you to payout using the current yield curve merged with the long term treasury rate. If you need more money, then fund for the cushion amount. 417(e) rates will not appear in your funding calculations. If your plan has some very expensive equivalence assumptions (say 3% and the live-forever mortality table), then you can use that set of assumptions for projecting your lump sum amount. Similarly, if you have a cash balance plan that conforms, then you can use the expected CB balance. But neither of those scenarios will even touch the 417(e) interest rates. It does not have to make sense.

abanky, the minimum requirement is to change the nra to 62. Existing employees still retain full right to the benefits that existed before the change, so someone could retire at 60 and get their full current accrued benefit. But future accruals have no such guarantee. If you want to make the plan whole, then compute a reasonable actuarial equivalent of 32% at 60 to a higher rate at 62. Maybe this would end up with a 37% benefit at 62, depending on your mortality and interest assumptions.

I appreciate the pain that this causes. Private pensions are often inadequate for a full retirement, and her pension is not much to count on. From my personal experience, I have relatives who live entirely on their Social Security check. The pension plan can only pay what was in the written contract. That is the nature of defined benefits. The amount is based on a conscious decision of the employer about their ability to pay for the benefits instead of taking the profits for themselves. Employees sometimes pay into the cost of the pension, but in most private plans that is not the case. No one has a liability to pay what was not promised in the terms of the plan document. Ultimately, the problem still remains at a personal level. These people need to contact their local welfare department, or public service groups like AARP (when they are not just selling insurance) to see how they will cope with the facts.

We have lots of examples of people who expected a better retirement than they received. Madoff & Stanford ponzi schemes are other examples of this. In the case of your client, 401chaos, we have a large safety net for those who are destitute. If they cannot rely on their old pension, then they need to take careful stock of their existing resources and make plans that they can live with. If the answers still come out too low, we have welfare programs they can use. Further, there are charities, relatives, and less expensive living arrangements to consider. But this is a pension forum, and pension professionals have a lot of reasons to see that exactly (and only) the correct benefits are paid. Fiduciary responsibilities are a highly important part of our daily jobs. I don't see any entitlement to amounts not promised. Further, I see a duty to attempt to collect on misapplied funds. Pension plans don't have a capital structure that includes a margin for errors. All the funds are intended for the participants.

401chaos - would you please restate those last few sentences. I did not understand the multiple negatives. Double negatives in sentences can lead to a lot of ambiguity. Could you give us a simpler statement of your position?

That's the excitement of legal practice... getting something you don't deserve by a clever argument. It more satisfying than being an an escape artist actuary who wants to be immunized from liaiblity for mistakes that cost the plan money. I know a plan sponsor who sued an actuarial firm that calculated excess plan benefits for all plan participants when aDB plan was terminated which resulted in the plan getting a lower refund. The actuaries blamed the employer/HR for not reviewing the calculations which where I come from is called Chutzpah. It took a while but the employer received a satisfactory settlement. I dont see any problem under ERISAs rules of equity in limiting the amount of a recovery by the plan due to overpayment to the period available under the statute of limitations that applies for claims filed against a plan, e.g., the applicable state law remedy, say of 4 years subject to a further reduction in the case of financial hardship on the participant. I agree. Nice counter example. Mistakes are the cause of overpayments. But I don't see the statute of limitations argument or the class-warfare argument as justification for misapplication of trust assets where they don't belong.

It is possible that the client did not give full disclosure of the prior plan information, and highly possible that the new actuary did not research any prior plans of the same employer. That may be a valid reason to leave that firm on the basis of careless or negligent practice. More likely, they did not get along well. Why do you want them back? <insert snarky comment about tiger & elin> Is it worth it? You need to disclose clearly the extent of any 415 limit violations that may have occurred, and to advise if there are any other problems you see, but you need your facts straight. I would look at the time needed to analyse the issues and charge my normal $0.50 hourly fee <grin> for writing up those problems. If the client won't pay for that analysis, then I won't take them back.

The excise tax is the problem of the plan sponsor. The plan can be terminated independently of the plan sponsor's tax problem. There is a long history of this with many distressed plan sponsors who could not possibly make the deficiency up. PBGC deals with these cases all the time, sometimes as abandoned plans. If the plan is in distress, then they try to get the shortfall of funds from the plan sponsor. The IRS does not impose the 100% penalty unless they can find an employer who can afford it. That is also why plans get terminated and paid out ASAP, because it stops the funding requirement and limits the extent of the penalty.