SoCalActuary

More headlines from San Diego - Callan Associates paid about $4.5 million to San Diego, because they did not want the publicity. Now the actuarial firm Gabriel Roeder gets to defend themselves. I know it's naive, but why don't the San Diego politicians just take responsibility for their own problems and fix them?

Gary - yes, I believe you understand that benefit and/or contribution rates by individual person can be established in the plan document. This does not prevent a plan from being tax-qualified. I would warn about any distinction that is not based on an objective criteria, such as job title or location. Such distinctions could still be discriminatory in the civil-rights sense of the word. For example, you could not use in your document such distinctions as sex, race, religion, national origin or age to define your groups. If you use such criteria or have a high correlation between these characteristics and your benefit formula, you may still be discriminatory.

Interesting question. Do you have access to the table Medicaid wants you to use? Can you get it under FOIA? If so, please publish your findings for others to review. Your direct question also deserves either an ERISA attorney, a letter to your congressional representative, or you could ask ASPPA or another DC based lobbying organization such as AARP to investigate.

Unless the assets were in earmarked accounts with individual investment direction, I would just re-allocate. If the assets were already given to the individuals to invest, I would ask for more contribution.

Let's say you did everything right, but you have a lawyer for a client. Big mistake, I know, but: Lawyers sue people. Without insurance, you have to pay to defend yourself. With insurance, they pay the defense team. Defense fees can easily reach $25,000 just to get the case dismissed for lack of evidence. More typically, costs run well over $100,000. Now we could assume that you never make decisions that could be challenged in court. Further, your competitors never challenge your work, because you always have the clearest explanation and the exact interpretation that the IRS would apply. Your clients always appreciate the work you have done, and never dispute your fees. Your service agreement clearly describes the scope of your work, which you never exceed. And furthermore, you never have to deal with clients who are just unhappy and looking for someone to take the blame. Or, maybe your firm is featured in a Martin Scorcese movie, and no one would dare to sue you, because you could give them a compelling argument they couldn't refuse. If not, you might consider the risks of going uninsured.

A couple of points to consider: You discuss the allocation rate test. Usually these are done with several types of test, including the annual accrual and the accrued-to-date test, both with and without permitted disparity. If you pass any one of these tests, you have demonstrated compliance with 401(a)(4) rate-group testing. Older HCE's usually get better results by using the annual accrual test with peritted disparity, provided you can pass the gateway test for combined DB/DC plans. If you can pass the ABPT, then you get to use the mid-point percentage test for rate group testing. You might also avoid the need to prove an objective business purpose for selecting your groups. Consider providing benefit rates by name in a small cash balance plan or a money purchase plan. For a profit sharing plan, define an allocation rate separately for each employee. But back to your question: If you want objective job classes, try work locations, job titles, departments, salaried vs hourly, commissioned vs regular pay, clerical vs technical vs management, etc.

So your fact pattern is this: 2002 less than 1000 hours 2003-2006 1,000 hours or more. We find in our documents (see Accudraft) that a year with no service credit would be a year excluded from the compensation averaging. So you would have four years of service and four compensations to average. What does your document say about years that don't count? For what my opinion is worth, there is nothing unfair that the benefit was based on the 3+ years of actual compensation. The person worked 3 full and one partial year receiving compensation and providing services to the employer. But they received four full years of pension credit.

Fairness to the participant is what you seek. If your plan only counts full years of service for benefits, then you should not prorate the compensation, because they get a full year of benefit on all past years. If your plan counts months of service for benefits, then you should compute a monthly average pay based on actual months worked. Try the math and you will see what I mean.

The SEC has issued a cease & desist order against the City of San Diego, noting that the people who prepared bond issues were aware that their pension funding obligations were about to explode. http://www.sec.gov/litigation/admin/2006/33-8751.pdf link will give you the text. If you ever get a chance to talk with the parties involved, the municipal conflict of interest issues were huge. The same people approving their own higher benefits were responsible for underfunding the plans and also for the misleading SEC filings. Thanks to Susan Mangiero, CFA for the information. Her discussion is found at http://www.bvallc.com/pensionblog/

I have no direct cite in the 404 code or regs, but someone else might have one. But it is now consistent among the IRS speakers at recent conferences, including ASPPPPPPPA. Marty Pippin, Jim Holland (reluctantly), and other IRS policy people are making clear statements that action of the employer to increase HCE benefits is an amendment affected by this rule, whether it was the start of a new plan or the change of an existing one. Don't fret though, because you still get the normal deduction rules for new plans during the first three years. You just don't get to deduct 150% of current liability for that portion of CL that reflects benefit improvements for HCEs.

The amount paid by September 15, but after the due date of the return, is deductible for the next year if it is needed to meet minimum funding standards for the prior plan year. Otherwise, it is deductible for the current plan year under separate rules, assuming it does not become non-deductible for some other reason. This reasoning applies to plans subject to IRC 412, since I am paraphrasing a section of IRC 404 deduction rules that rely on 412.

You indicate when the plan was frozen, and you show zero accrual for all employees, assuming this was a "hard freeze". Be prepared to justify the benefit accrual rates and non-discrimination results for the last plan year before the freeze occurred.

401(a)(26) issue comes up if you spin off only 1/3 of the group, without changing the employee count. If it were my problem, I would freeze benefits until funding reaches an acceptable level, adjusting their individual contributions to get the desired result. By that, I mean that the older person who wants their pension must also take responsibility to get it funded first. The remaining two would also have to adjust their funding to get what they have accrued. My understanding of the rules on terminated plans is that 415 only acts on the benefits actually paid. This is an old position, and I do not recall seeing authority for the IRS to change it by offsetting the new plan benefit by the old accrued benefit that was never paid. But, someone else is welcome to correct my impression.

Yes, in my opinion, you get to recapture 415 limit usage for the two "skipped" years.

So you fresh-start the benefit formula in year 5, granting up to 3 past-service years, and use wear-away of the prior benefit. Why worry about 133 accrual rule at all? You have uniform accrual going forward.

The only addition I would make is that asset restrictions and prior taxation of funds may turn the policies into segregated assets for the plan. If the insurance policies have restriction on how assets can be used, or if the employment agreement requires a security for the benefit, then you may have a funded plan. To the extent that assets set aside have already been taxed, this adds to the argument that the plan is funded.

Actually, each of the issues is a legal problem. Do the trustees agree? Is the plan permitted to improve benefits? If yes, then you simply amend, notify participants, modify the SPD, and start administering the plan under the new rules.

The key problem is that multiemployer plans are subject to the governance of the plan sponsors, or the board of trustees. My prior experience on this area is that you need the approval of the management side and the union side (easier to obtain) when improving plan benefits. The actuary also needs to be involved. Don't forget that this amendment will result in more benefit payments, since more people will vest. Does the multiemployer plan have the room to allow a benefit increase in its funding? Look at asset/liability ratios.

See Treas. Reg. §1.401(a)(4)-8©(3). It defines the cash balance safe harbor rules. These were not removed by PPA 06. If your cash balance plan has a formula that looks like a safe-harbor DC plan for 401(a)(4), and you use one of the published interest rates, then you have met the most important conditions for a safe harbor cash balance plan. Sometimes, these are also the best plan design.

For such a plan, I would even consider adding ttott to the eligiblity list. But I want to be in the db portion please. Seriously, your scenario seems likely to pass the general test as well, provided the ABPT works. In addition, please note that naming in the eligible participants is considered safer practice than naming out the ineligibles. Then if you test and find you need more people, you add what you need. The name-out alternative is much riskier, because your expensive benefit formula could add someone you did not intend to cover, but failed to exclude on a timely amendment.

I will admit a simplifying assumption. A merger of plans involving a DB into a DC acts like a plan termination in my way of thinking. This looks like a distributable event in many, but not all cases. Once the db provisions are out of the picture, then the DC plan just had to guarantee the initial transfer of funds was at least equal to the benefits in the db plan. After that, no guarantees of investment return. In fact, the only DB feature left in the DC plan would be the available forms of distribution.

Blinky was giving 401(a)(26) its proper respect, while keeping the DB coverage as low as possible.

Look for clarification at the ASPPPPPA conference on the deductions for new plans. A substantial number of people are on both sides of this issue. Does a new plan constitute an amendment that cannot be considered for the 150% or 100% CL deduction rules? In addition, the deduction is limited to the greater of the DB minimum contribution or 25% of pay, plus you get to add another 6% of pay for a DC plan. Any DC contribution above 6% of pay would not be deductible, and would be subject to excise tax, assuming the DB deduction uses up the 25% deduction by itself. If the DB deduction is $50,000 in your example, the DC is deductible to $12,000. If the DB deduction is less than $18,000, then you deduct the DC limit of $44,000, plus the DB deduction. Any other DB deduction between $18k & $50k results in a total deduction of $62k or less. If the DB deduction is more than $50k, then you get the DB + $12K DC.

Change the words from "cash balance" to "traditional defined benefit", and you would see that the answer is exactly as Effen suggested. You need a distributable event first. Remember that cash balance is just a defined benefit plan with an odd benefit formula.

A DC plan with a last day requirement is different from a DB plan with a 500 hour requirement. I don't believe DB plans require an accrual or continuing credits for less than 500 hours worked unless the plan uses the elapsed time method or has special language lowering the hours requirement. I do indeed administer DB's where the employees under 500 hours are not credited with any service, vesting or accrual for the year, regardless of last day. I also exclude them from testing. If I look hard enough, there is a cite on this in the non-discrimination reg's.