SoCalActuary

By discussing the proposed trade with someone who is not his attorney, the conversation becomes discoverable if the IRS prosecutes for tax fraud. He has just described an intent to create the form but not substance of an asset sale to an independent party. Does he understand the problem of form over substance? If your written guidance warns of the potential problem, and the person does the action, your concern should be your E&O exposure. Resigning from the account may be necessary if the warning is not respected. But, I am not an attorney, so What Do I Know?

Simples have lower limits, required match or low non-elective contribution, but no testing. 401(k) has larger catchup contributions and deferral limits, as well as other qualified plan features already mentioned. SIMPLEs are funded with either IRA's that have an independent trustee, or as 401(k) SIMPLEs, which use a qualified plan trustee. Thus a business owner can trustee a 401(k) but not an IRA, although I believe there are restrictions on trustees of 401(k) SIMPLEs.

Try Technical Answers Group (TAG). Also look in Benefits Buzz today.

A group of actuaries is considering a meeting in Los Angeles, possibly June 6 or July 11, at the Price Raffel offices in Century City. We hope to prepare a breakdown of the proposed new 415 regulations issued today. The meeting might be expanded to other topics as well. If you are an enrolled actuary interested in a peer-group discussion, feel free to contact me directly for more information and details.

I agree with Blinky, since the regulations say the interest rate is the lesser of plan or 417, but not greater than 5.5% (roughly, not precise). Thus the APR is the greater of plan or 417, but not greater than the APR on 5.5%.

I agree with pax on the approach, and I would also use commutation functions in a spread sheet. It seems that you have a life annuity of $1,000 during the life of the spouse, with an $1,100 survivor annuity to the participant. If you computed an APR assuming the spouse was primary, and compared to an APR for joint life, you could find the value of the participant's survivor annuity APR. Then your total value is $1000 x spouse APR, plus $1100 x his survivor APR.

I hold to the theory that prior lump sums offset the 415 dollar limit, adjusted for age and actuarial equivalence, but not the 100% of pay limit. One of the earlier posts noted that a person at the pay limit who retired, taking their allowed payments each year, would have accumulated past benefits that would not be offset against their current benefit. Consider all past lump sum payments that do not exceed the accumulated payments at 100% of pay. I don't understand why these would be used to now reduce the benefit below 100% of pay in the future.

What type of distribution are you discussing, lump sum or annuity? Lump sum payment covers the entire balance, and after-tax money can be recovered without rollover. Annuity payments are subject to recovery of "Basis" over the period of the annuity. See IRC 72 for more details. The simplified rule in effect since 1996 governs here.

If an employer or an employee group wants to spin-off into a separate DB plan, then the insufficient assets can be moved to the control of the new group. If that group wants to terminate an underfunded plan without guarantee that all accrued benefits are paid, then they can take the consequences. I don't see why the original plan would be allowed to directly pay 70 cents on the dollar to a terminating group of employees.

Start with the IRS publications at www.irs.gov, specifically Pub 575. In addition, follow the newest published guidance on IRC 401(a)(9), which sets out the rules for lifetime benefits of beneficiaries. Among your concerns are: Is the beneficiary a named individual, or is it a trust? Is the IRA to be divided between multiple beneficiaries?

You would do the plan and participants a favor by projecting the liquidity needs of the plan using reasonable assumptions of future retirement dates. Then have the assets either converted to securities with similar liquidity dates, or have the employer plan to contribute enough each year to cover the benefit payment needs. I believe the trustees have a duty to protect the benefit payments due the participants, and to inform the employer of consequences from failure to have sufficient assets for benefit payment, and I would guess that the trustees are relying on you to give them good information.

The action taken by the broker showed a disregard for legal responsibility and accountability. Unless the participant was a trustee, the broker took funds out of the trust without authorization. This should be reported to the broker's broker-dealer with request for disciplinary sanction. Discipline does serve to train people to do the right thing, sometimes by making a bad example out of people doing the wring thing. Naturally, this is playing hardball, and some TPAs are reluctant to do so, since it would sour the possibility of future business. However, the Plan Administrator and trustees only have to worry about their plan, not future business.

I see three different admin systems on a regular basis, Relius, Datair and ASC. The pricing of each system is just my opinion, based on my experiences and quotes I have seen, so you might get a different opinion when you ask for quotes. With that caveat, here is what I have found: Relius has the largest initial fee, Datair next, then ASC has the lowest initial fee. ASC has the largest renewal fees, then Relius, then Datair. The usability of each system, including flexibility, required information, length of time to process, etc. differed among each system's users. Relius was the most demanding of accuracy, had the most features, and required the most training. Datair had both a DOS-based and now a Graphic User Interfaced (Windows) system. It was judged very easy to use, but had fewer options that Relius. ASC also had both DOS and GUI systems, with the GUI just a front-end polishing of the DOS system. ASC has easy usage and considerable flexibility, at least equal to Datair. Each firm has competent staff with good knowledge of administration and systems requirements. Relius has the deepest, including the computer systems components. Relius and Datair will require a Windows Network server, while ASC also allows Novell and Unix/Linux servers. Recommendations: Any of the three can do what you describe. For simplicity, go with Datair or ASC. For total cost of ownership, you have already made the big initial investment in Relius, so the ongoing cost will be lower for it. But don't take my word for it, get quotes, including the projected costs over the next 5 years, ten years, or whatever your planning horizon.

I am still concerned that there is substantial risk of litigation by the participants who did not find a successor plan. I am also concerned about withdrawal liability when a group of employees leaves the plan. We have a multiemployer plan that took over the benefits from a prior plan, and the new plan guaranteed the total of the prior benefits plus new accruals. In operation, the employees get their total accrued benefit, of which we get the amount to be paid by the prior plan and the new plan covered the remainder. However, the spinoff employers still got hit with over $1 million in withdrawal liability, since the prior plan was underfunded as well. I assume you have a good ERISA counsel familiar with SEPPAA before you start spinoff actions.

Do you find the immediate gain method to your advantage, given the requirement to track changes? You might consider a change in method to a Frozen Initial Liability, where future normal costs are spread on tabular entry age costs.

After a group has transferred into a new plan, you transfer their prior accrued benefits. What assets go with them? Are the asset/liability ratios of the old plan better or worse after the transfer? If worse, then I question whether the plans satisfy 414. If the old plan drops a higher percent of liability than assets, did it also look to the withdrawal liability rules of MEPPAA, or do you think those are waived? Does the withdrawing group (really their employer) get hit with funding requirements to get out? Finally, if the successor plan is willing to take on these underfunded benefits, they will eventually have to pay for them. If they are willing to do so, then it seems you should be able to give increases, since they are not participants in the plan that had the 412(e) ruling.

I will try to work on an example when time permits. Maybe HaroldA can show us the example of his plan as a starting point.

I believe that floating integration, whether PIA offset or step rate covered compensation, are intended to compute the accrued benefit only at the time of a benefit event. I contend that the accrued benefit can decrease. If a participant has a dramatic increase in PIA, (unlikely in later ages since there is 35 year averaging), then the plan offset does increase.

Can you make a compelling argument for the exemption? One additional factor: Did you show the stock sale as a realized gain/loss on the income tax return? In other words, if you had properly sold the stock for cash, you would be able to contribute cash to the plan, which could then buy the stock, but at the same time, you would be required to realize the income on the stock sale. One of my clients told the stock broker to re-title a security into the plan. We had them correct the instruction to the broker, showing that it was a sale and purchase, and had them correct their income tax. No harm, no penalty from the IRS audit then in process. In fact we found this problem while preparing the annual administration information just before we received an audit letter. But we were vigilant about the correction, able to get the cooperation of the accountant, and had the broker "accept responsibility for misunderstanding" the sale.

Are you using a projected benefit funding method such as entry age normal? If you are using unit credit, and there are no past service increases, then your accrued liability would not change by increasing the formula for future years. Any benefit increase under this approach would be a part of the normal cost. If you have granted past service credits in the increase, or if you use a projected method, then you should be able to measure the plan's accrued liability before and after the amendment, arriving at the change due to amendment eligible for the 30 year amortization.

Can you address the issue of withdrawal liability for the spun-off group? Is the spinoff employer responsible for making their portion of the plan whole by putting in a big contribution? Does this presumed contribution relieve the plan of its funding deficit? The issue is that you do not spin off a plan unless each participant is at least as protected as they were before the change. It seems to me that unless the employers are willing to up the contribution rate, the underfunded plan will never be able to increase benefits.

A couple of quick thoughts: 1. Is this a scheme to get around the rules? 2. Is the spin-off done with adequate funding to assure that withdrawal liability was satisfied under MEPPAA? The ability to spin-off carries the responsibility of the trustees to assure benefits were protected.

You should also consider the effects produced by having more employees. Does it allow you to provide better service, avoiding error? Does it require more stress to train or manage the employee? Does it allow you a more productive span of control, so you don't have to do so many things (with the inevitable loss of quality)? Do you have the potential to rapidly expand your business to cover the costs? Will this employee reduce the profitability of your unit or increase it?

mbozek did not complain about a new cash balance plan?

If the youngest gets a 5% benefit, this will have an effect on the Avg Ben Pct Test. Not a problem if each rate group passes as 70%, but potentially fatal to a test that needs the ABPT for individual rate groups. I don't see how component testing solves the ABPT problem.