SoCalActuary

AndyH, can you explain how a QSERP is not a separate BRF? If it is in the plan, how is it not separate? If it is not in the plan, it won't pass 401a26. If it is a non-qualified benefit, you have other issues, including the possibility that the plan sponsor can't have one.

My concern is that you need to keep track of the offset benefit applied on a uniform basis, and keep the account values for the non-uniform added contribution in a separate account. Thus you could properly compute the offset benefits that comply with the current IRS position.

Gary had posted the question in another discussion that was getting off the point, so I thought it best to bring the issue out separately.

I share your opinion. If the HCE was the only one allowed to take an annuity payment at 55, then BRF would be an issue. Your issue is only about the amount of payment. This does affect the Most Valuable Benefit calculation for 401a4 testing, but I don't see it as a BRF issue.

The IRS recently highlighted the treatment of required minimum distributions for defined benefit plans. In particular, cash balance plans were singled out for these calculations because of the confusion they cause. A cash balance plan is a defined benefit plan. When a participant is required to take a minimum payment, the account is converted to an equivalent monthly benefit using the plan's actuarial equivalence assumptions. That monthly benefit is paid as an annuity form of payment for RMD purposes. A cash balance plan is not a defined contribution plan. You do not have the ability to use DC rules on the RMD. The only way to use the DC rules is if the CB plan is paid out into a lump sum distribution as a rollover during the year that payment is due.

This belongs in the SEP forum.

Two small points of interest: 1. a DB plan can require after-tax employee contributions. Those can pay for the cost of the insurance, and therefore no PS 58 cost required. 2. the term cost is in addition to the regular cost for the normal retirement benefit. You said the term cost is taken from the regular cost. Retirement normal cost of $100,000 Term cost of insurance of $5,000 Scheduled premium to policy of $12,000 $105,000 is contributed, with $12,000 going into the policy, and $93,000 remaining in the investment fund. Presumably, the policy then builds at least $7,000 of cash value.

I may be repeating the obvious, but: When we have these situations and we are not certain of the outcome, we get an ERISA attorney to do the fact-finding and issue a letter. Then the IRS would have to fight with the attorney if they disagree. If the attorney advice is to get a PLR, then the client asks them to do so.

You might also consider merging the overfunded plan with another entity. Several firms are active in marrying the overfunded plan to an existing underfunded plan. They would have to explain the economics and tax issues, but I have seen this work very well. But my preferred answer is that the two partners probably have relatives, heirs, etc. Hire them to take over the firm after a period of time, and the new employees will have the pension plan already funded for them. This has worked very well also.

Start with this reasoning. You only count income from the adopting employers, of which you appear to have three. The sole prop gets 1099 income. The 50% partner works for a partnership. The W-2 wages are working for another entity, I assume. If the partnership income and the 1099 income are used for plan purposes, both organizations must have adopted the plan. For a DB plan, then you must include both partners in the plan to avoid 401a26 issues. You did not disclose any info for ASG issues or CG issues, such as common control, management services, service organization, etc. So I don't know what to do with the W-2 wages, nor the other employees of the other entity.

For a standard PBGC termination of an underfunded plan, this is the defacto standard method. For a nonPBGC plan, the plan administrator would have to change the default language in most plans so that the allocation of assets on termination allows all others to get paid first. The legal precedent is a little off track, but may be relevant here. If the owner is trying to waive benefits that are actually funded after considering all other employees' benefits, then the court case makes good sense. Is the employer trying to use pension money for other purposes without taking taxable income from the pension distribution? If so, I would agree with the IRS that this is an attempt to avoid taxes. But looking back at the original posting, the plan sponsor could raise benefits by amendment if it is before the termination of the plan. If this resulted in the owner getting zero, or near zero benefits (so that no one else was underfunded at termination), this course of action would not result in taxable transfer of benefits from the owner's pension to the others who benefit.

As called for by the situation. If we are reviewing for other issues, we might offer this PFEA/PPA amendment at the same time. If the plan will be submitted with the Individual Designed Plans, we will probably have this included in the restatement. Otherwise, no. We are not doing a massive mailout for PFEA.

Mike, I have no problem with a 412c8 amendment that reduces future accruals, but I do see this applied to accrued benefits. A timely c8 amendment can reduce projected funding to reflect a lower expected benefit at NRD. Is that what you mean, or is there another example that actually limited the accrued benefit?

We took the position that the PFEA amendment is not needed unless the plan terminates. We also made a good-faith amendment of the lump sum 415 rules under PPA. When we terminate a DB plan, that is our chosen add-on amendment, until IRS comes up with something better.

I suspect you must issue a 1099 for the insurance cost, regardless of the deduction available elsewhere. I also don't like the idea of reducing the deduction and not issuing the 1099. I think you issue the cost of insurance on 1099 and show the total pension deduction on front of 1040. Any accountant who wants to correct me if I'm wrong?

flosfur, the J&S annuity has a different and lower APR than a period certain annuity for the same life expectancy. The same total number of expected payments is involved, but the J&S takes place over a longer period, so that some of the payments after the end of the joint life expectancy are discounted further. With a lower APR under the QJSA than under the period certain, the reduced actuarial equivalence value ends up with a higher periodic payment. 3i - I was agreeing with you. This form of increasing annuity with a period certain is not the plan's QJSA form, so the spousal consent would be required.

3I - I agree. The increasing annuity for a period certain not to exceed the joint life expectancy of the participant and spouse, or the joint life under the MDIB rules, should work best. This option does need spousal consent, because it is not the automatic form of payment under the plan document.

The increasing annuity with the extended payout period: 1. gives the lowest annuity payment, 2. deferring taxes to the maximum possible extent, 3. and comes the closest to the old account balance method for determining the amount paid. If the plan document allows an open-ended option of "whatever an insurance company would offer" you probably have the freedom to offer this form of payment. If you are not comfortable that your document allows this, then you would have to use an add-on amendment that is not covered by your volume letter (if you have one.) Some people don't understand the "re-annuitization" issue, but the IRS is looking to db plan participants to start taking their annuity payments (more taxes that way.) Treating the payments as a string of lump sum amounts is more complex because you have multiple annuity starting dates, and even the IRS is challenged to administer these.

Sal has a lot of good material, but some of it is dated since PPA. Look for some of the more current discussions here on combined plan deductions. In addition, Sal has good info on gateways, top-heavy issues, cross-testing, average benefit percentage tests, and other DB/DC combo issues. You should also consider getting ASPPA's recent sessions from their annual conference.

I have experienced enough changes in fiscal year to know that it is done for other reasons than break-in-service rules. None of my clients ever discussed that aspect of their change in fiscal period. It usually follows an accounting rule, although sometimes it allows an individual to accelerate their benefits in a very small plan. If someone has the ability to time their re-employment, they must have a good reputation as a worker and a company that always has opportunities available. In many businesses, that is a rare combination. With that background information, I believe you have the right focus in making the break-in-service issue a personal one. If the person wants to retain their prior benefit rights, then they need to look at the summary annual report each year, which discloses the plan anniversary. (Oops, that is going away....hmmm?) Otherwise, the employer's web site might have info, current employees might have news, or the person can just ask the benefits department.

Someone in CA learned how to spell "unions" for municipal workers. They lobby very effectively. Arnie tried this in 2005 and lost badly. The big changes will be coming when GASB disclosures are enforced by the SEC, and municipalities will have to pay for their promises. However, for part-time school workers, they did implement a contributory cash balance plan, which was pretty good progressive thinking. Actually, they were forced to, since the schools did not want to pay FICA taxes for the part-timers.

I can see that I was mis-interpreted. In the interest of time, I gave you the correct, but very abbreviated, answer. Adding a DB plan to a 401(k) plan is a great idea, starting in 2006. But they need to be separate plans until at least 2010. Choosing a cash balance formula vs a traditional DB formula is the next decision. If you don't know the advantages of each type plan, then you should get help. Either start studying the differences, or work with someone who does both types of plan. This forum could give you plenty of discussions about combined plan deduction rules, cb vs db formulas, the effects of PPA, etc. But a quick answer will not be much help. To do this well, you need to be prepared.

mjb - check your 415 rules again. Did you think that Congress would accept 100% pay limit on themselves with all their other gov't service. Look at 415(b)(11) which exempts govt plans and multiemployer plans from the 100% limit.

Read the literature. Ask your actuary.

I guess that makes two rhetorical questions in a row. Actually, you could just terminate the employment of a whole bunch of SD employees, and only rehire them with a new and more affordable pension plan, and/or outsource their work to private employers without a plan. But that may be too fiscally responsible and hard-hearted to actually get done.