SoCalActuary

You assume that participants will take the lump sum payment. This must be paid under the plan's assumptions, or under 417(e) rates, both of which are gender-neutral. For valuation purposes, you use the funding segment rates but the AMT to determine the lump sum expected payment. Read and study the regulation again with this perspective in mind.

I would say 12/31/2010, since we don't have the final regs yet. But the 5.5% level is still under debate. If you can argue that 5.5% is lower than the 3rd segment rate for the vast majority of measured intervals, the IRS might listen to you and grant a determination. We must wait and see what ideas come from the minds of our glorious leaders at the government.....

Something like: "Cash Balance: Hypothetical Contribution is $6,000" ?? Maybe this is too simple.

'(i) Definitions For purposes of this section - (1) Key employee (A) In general The term ''key employee'' means an employee who, at any time during the plan year, is - (i) an officer of the employer having an annual compensation greater than $130,000,' I presume your CEO fits this definition. You can be a key employee without ownership.

Every pension plan document that I use in private plans has a series of definitions that explain compensation. You either have w-2 pay and its offspring or you have net earned income for the partnership and sole-proprietor employees. How do you take an allocation of income for 1040 purposes and turn it into one of these two items? Well, you pay the non-owner spouse a wage with appropriate tax on wages. That is simple to handle. Or, you make the non-owner spouse an owner (partner) who has SE income, subject to SE taxes. You don't get to have compensation for pension if you don't make it subject to tax on wages. Otherwise, you are just trying to have a tax dodge.

Each one of these has highly competent, motivated professionals, as does AON, who would be on the same list. (Unless you are looking to leave AON.) Each will have some very good and some mediocre actuaries, consultants, administrators, and benefits lawyers. I seriously doubt that any of them has a significant business advantage over the others, but I would expect that some of them have a short term technology edge over others.

Note the OP's 2nd sentence... community property state (ie: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). See IRS Pub 334, page 2 and IRS Pub 555 in whole. But that puts us back to the original question: does community propertly and income law result in the non-participating spouse having the right to accrue a benefit under a DB plan? Oh, and Gary, see pub 555 for the answer to your SE tax question (it's imposed on the one carrying on the trade or business). Thanks for the cites on pub 555 and 334. I still hold that the earned income is attributed to the person conducting the business. If you are trying to assert that the earned income is split but the SE tax is not, I see this as inconsistent.

Produce the partnership agreement that splits the income between the two individuals, and don't forget to file 1065 instead of 1040 Sch C. If you don't have a partnership, how does the spouse get income attributed?

This situation requires a notice of suspension of benefits.

Is there any problem in keeping the plan document as is for the actuarial equivalence part (it simply refers to 417(e)) and then we just amend the 417(e) to include the post-ppa segment rates. Your PPA amendment will require that you follow the PPA changes in the 417(e) assumptions. You should consider the choice of your actuarial equivalence assumptions for optional forms other than 417(e) required payments. If you are selecting the 417(e) rates for conversion of J&S benefits or period certain for example, then you will vary the optional rates every time you change the rates for a new stability period. Some plans do this monthly, although most use an annual stability period. This makes the optional form elections more confusing, since you have to worry that a participant might change their annuity commencement date and change the factors. Also, the 417(e) rates are subject to a phase-in period. Are you using the phase-in rates as well?

For your general sales knowledge, the actuary is not allowed to project a funding benefit that exceeds the 415 limit. However, for plans where the HCE has not been granted a benefit increase by amendment recently, you can deduct a contribution that brings the funding ratio up to 150% of funding target. So a 415 limit benefit of $620,000 would allow you to deduct for a target asset of $930,000. What you do with the excess assets upon plan termination - well that is another discussion that involves your actuary.

Thanks for asking good questions. 1. You need a more informed plan rep. You got the wrong answers. Under 80% funded - maximum lump sum is 50%. 2. Look for an explanation of IRC 436(d), describing the restrictions on lump sum payments. 3. There is another and more restrictive limitation in the regulations under 1.401(a)(4)-5 where an HCE is unable to get their benefit unless the plan is considered 110% funded after the payment is made. If the person only takes an annuity payment, then neither restriction applies. Don't forget that a benefit payment to the person will just make the funding ratio worse for the plan. A little algebra here: D is the distribution to the person. DL is the plan liability carried on behalf of the person. A is the asset before the distribution used for all participants. L is the total plan liability for all participants. F is the funding ratio used for the test, generally F(old) = A / L. So F(old) is less than 80% in your example. The new funding ratio will be F(new) = (A-D) / (L - DL) Now, if the ratio of D / DL is less than F(old), then F(new) would be higher than F(old). In practice, that is never true. Lump sum payments that underlie the calculation of D are based on very low interest assumptions, while the liabilities that are used to determine DL are based on a higher interest rate. So my experience is that D is higher than DL. This means that D / DL is greater than 100%, so F(new) will be lower than F(old).

Frankly, if he takes all of the plan assets and rolls over the amount he does not have to receive as taxable income, then what? Oh, yes, the remaining assets are more than sufficient for all of the other participants. Hmmm. I guess that's OK.

So anyone sees anything strange in this.... say no other employees. The only issue I see is 415 limit application to the accrued benefit.

You need the final language on the 415 lump sum rules.

No.

Easy. the way you describe it, employees get a higher benefit of 70% up to the maximum covered compensation. Then they get a lower22+% above covered compensation. Now if your question was about a plan with 70% of total compensation plus 22+% of excess compensation, I would have to think about it. But not until that last 5500 is done......

What does the plan say? Normally, the plan specifies and actuarial equivalance basis for non-lump sums. But some documents simply punt to the 417(e) rates when the plan benefit form of payment requires it. They override the regular AE rates, and use only the 417(e).

Generally your approach has some merit. No, you are required to payout in a reasonable time period, which might be subject to waiting for the IRS FDL. If you don't payout within the 180 days, why not? If there is a good reason, you better tell the PBGC, and also take action to eliminate the obstacles. Taking the loan to pay the last funding charge might make good sense if the owners intended to take a taxable distribution in any event. Here's your scenario: Loan > meets funding requirements > loan defaults because they didn't have the funds in any event > taxable income. Taxable income is charged tax at current rates. But an alternate scenario is: No loan > fails 412 > 10% excise tax > all remaining plan assets are rolled without tax > funding deficit is gone when plan is fully distributed. Now you have choices, based on the best tax scenario for the client.

Assuming the plan allows participant loans, you can do so. In effect you are transferring a business risk into a personal risk. If the loan is not repaid, the participant has a taxable event, but the business is not responsible for the loss. Instead, the benefit is reduced.

Probably correct, but it depends on the document language. You could define eligibility based on the next entry date after a person changes employment status.

My compromise would be to add to the PFB, but only a portion of the excess. To avoid quarterly, just get to 100%.

Lou, It's not just that the contribution has gone up (which it has). It's that the amount we are being advised we owe the Plan participants has gone up substantially too because the actuary is saying that the participants must accrue their benefit faster under PPA. That's what we are questioning. P.S. I appreciate that this stuff is complicated and I appreciate the job the actuary has done. But, I just wanted to get a "second opinion" on his application of PPA. Thanks. If the plan was failing its non-discrimination test, the actuary may have implemented a new amendment to correct the problem. Or if the plan had a low formula and it became a top-heavy plan, then the accrual during the first 10 years makes sense. Was the plan top-heavy? Was an amendment made?

Maybe. If NRA is 62 or greater, I agree. If NRA is 55, then the benefit is discounted at 5.0%, because that is the rate applicable to the post-retirement period. If a lump sum is to be paid, then the 417(e) mortality and 5.5% is used to cap the lump sum amount. Max monthly benefit at 58 = (195k/12) x (APR62/APR58) / (1.055^4), where APRs are based on 83GAM, 5%. A second calc should be done based on the current 417e mortality table and 5% interest. The 415 limit is the lesser of the two results. I'm pretty sure it would be the first one. ... Scott

No life insurance involved. I presume you concur with previous YES response. YES