SoCalActuary

Looks like he still gets 100% of pay for the rest of his life. He chose to work past the optimal retirement date. So just follow the law.

For a one-person plan eligible to file 5500-ez or 5500-sf but with total assets under $250,000, what tolls the start of the statute of limitations? It probably would not get audited unless part of a bigger audit, but it might require keeping plan records far beyond the three year period normally in place.

It doesn't dictate employment policy, only retirement benefits. It simply gives incentive.

Well, you get better risk management by reducing benefit volatility, but the administration is more complex. If you are over-funded, this is a good option compared to freeze plus new plan, because you can use the surplus to fund the CB benefits. If you are not over-funded, then it is much easier to freeze, so you can manage the limited risks of that group. Then start a new and separate cash balance with its different record-keeping for the current employee group.

jpod, thanks for the suggestion. Belgarath, you are correct. as that was the exact outcome.

We encountered this issue in the current year by having an IRS audit of the client's tax return (1040) in which they had K-1 with a big loss from their LLC, and W-2 for the same person. The net income was negative, so there was no net earned income. The business has to restate their tax returns for the audit year and following year, and corrected it in 2015 return. So, in this case, the IRS enforced their position.

Are you discussing the True-up issue? Do you want to apply it on year-to-date compensation each pay period? Does your payroll vendor and your plan document provide for this?

well, we have resolved to ask the insurer how they determined the premiums for past years, and asking the prior tpa for their explanations, but meanwhile we are proceeding assuming that future years will not be fully insured, nor exempt from actuarial certification.

Since RASD is a benefit option provided by the plan sponsor, while QJSA is a qualification issue on the plan in practice, I would resolve this with either a VCP or a one-time amendment to pay the prior benefit - weighing the value of plan compliance to be most important. Others are welcome to suggest an alternative priority on remedies.

Just curious why this is a DB forum question.

A new client was placed in a plan claiming to be a fully-insured (412(i)) cash balance plan with a companion fully-insured profit-sharing plan. This was originated back in the mid-2000's, driven by an agent who may have regulatory issues, which we are investigating. I am challenged by several issues, and appreciate your thoughts in general, and if you have personal experience, maybe some stories or facts to share. First, it is clear that this must be an individually drafted plan. Is it possible to get copies from the IRS of any past plan submissions for qualification? None of the vendors (agent, or the three insurance companies used) has produced a plan document, although we are still pressing the issue. Second, given the disparity in contributions by policy, we need to test non-discrimination. Would a cash balance plan projection be based on the credited interest rates in the individual policies? (So far, we do not see any variable annuity policies in the history, so I expect some stability on this issue.) Third, I would expect that the fully-insured status was used to avoid an enrolled actuary certification, although I would expect that the insurer had actuarial review on the proper premiums for each policy. How does this meet the requirements for avoiding EA review, given that this is not a level premium safe-harbor design for a flat benefit or unit benefit plan with a minimum 25 year accrual rate (as far as I can determine so far)? Any suggestions or comments would be appreciated.

This sounds like a governmental plan. What do you mean about "turn over my 401 contributions"?

Does spouse qualify as a key employee? I would normally think so. So that person is not required to receive a THM.

How about a collective bargaining agreement?

Only if the document provides for it. However, this is 99% likely to be a discrimination issue because the HCE is the only person who will benefit from a 415 escalation. If you allow this increase, then you don't have a hard freeze.

This is a simple problem for most actuarial students. But what is the motivation? Also, what is the interest rate to be used? Finally, why pick a mortality table for the nearly dead, when most people live much longer than the UP84 table?

mwyatt has the best perspective on this issue. If the one-person company still needs tax deductions, then continue the plan and fund as appropriate. If they don't have earned income to offset the deduction, then don't fund the plan. If that means a termination and rollover, so be it.

dmb, you can pay a 50% lump sum with a 60% aftap and failing the 110% test. You just have to comply with the rules for keeping that separate account in escrow. If you are not interested in that solution, then the only choice left is an annuity option that pays a life annuity or lower payment. So your understanding is reasonable and correct.

Ef - I think he is asking a different question. I read it to say that the sponsor has ongoing employees who do not benefit under the plan, and that there is an underfunded DB benefit which is only benefiting the retired owner. He wants to continue funding the benefit already earned. Did I understand the question correctly?

Both rules apply. If the plan is below 80% aftap, then you also fail the 110% test. But the 110% test applies on the remaining amounts after the distribution. If a participant is eligible for the 50% lump sum, but they are a restricted HCE, then I would look at the effect of the 50% LS on the 110% test. If you would fail the 110% test after the partial lump sum, then you can pay a life annuity benefit, or you can have an escrowed part of the 50% lump sum, subject to reclaiming it by the trust.

chc - the actuarial equivalence is not an increase in benefits. If a participant elected a J&S option, would that be a target normal cost? No, of course not. Late retirement is just the same issue, because it is the actuarial equivalent of the prior accrued benefit.

I agree with your approach.

If the 1099 is for services to a separate entity, and not as S-Corp K-1 income, then the separate entity needs its own tax filing, netting out expenses and SE Tax. If that entity also is an adopting employer, then the net profits can be considered.

From your description, you have made an irrevocable purchase of an annuity with no residual market value. However, you have not discharged the plan's liability for benefits, because the participant does not have the exact same interests as the plan. So I would value the market value of the benefits at the normal funding rates, and value the annuity contract as an offset to that benefit. The valuation of the contract does have some flexibility here, because you can value the future payments at current market rates, at MAP-21 rates, at plan actuarial equivalence rates, or at maximum funding rates. So you have essentially purchased a financial instrument to minimize some of the longevity risk.

Yes, Mike, that is my understanding.