SoCalActuary

Yes to both 1 & 2. The CB benefit continues to grow under the terms of the plan, so it is getting the actuarial equivalent. Now, I could construct an argument that the difference between interest crediting rate and the plan's actuarial assumption can cause a problem. But that is just stirring up trouble that does not need to exist.

My understanding is the only way they could maintain both a db and a SEP is if it is a "prototype SEP" or an "individually designed SEP". Both are generally cost prohibitive and most likely not what is being used. However, you are correct, that it is possible, but not very likely. Prohibitive? How costly are they? Don't any major institutions have them for customer use?

current tax deduction. Thanks for all the input. Does the DB plan have to be in place/signed prior to year end for 2012? Only if benefits of the plan are going to be used. No plan - no deduction for 2012.

Good to see that you are considering your client's best interest here, and not simply using the tools you already have. "To a hammer, every problem is a nail." This fact pattern can result in pension contributions up to 4 times the level of the DC plan limit, if the fact pattern is favorable. But my fellow actuaries will tell you to get competent advice and refer it to the right person.

Welcome to the only growing sector of defined benefit plans. Good luck studying this area. The interest credited on the hypothetical account is defined under the terms of the plan. If a plan has consistently exceeded the plan's earnings rate, you can amend the plan to give additional credits. Further, you can select a specific market-based return, which can be the return on the plan's investment portfolio if it is done correctly. However, the IRS has some really stupid thinking to the effect that you must project the latest crediting rate to retirement for measuring 415 limits, top-heavy minimums and non-discrimination benefits for testing. Did I say that their thinking is REALLY STUPID? Just wanted to be clear. Keep studying, and look at some of the recent regs and summaries from ASPPA and elsewhere.

Generally, the cost of a consistent benefit accrual in a DB plan grows each year at the rate of the plan's pre-retirement interest. So a COLA on the CB accrual will not cause increasing benefit accruals when measured against the annuitized benefit at retirement. The exception would be for a COLA that exceeded the interest rate. I believe this type of COLA escalation would probably work. Similarly, a COLA based on years of service would work. But you still have to pass all the normal tests.

Thank you all... and that is where I'm struggling, whether or not I use 25 years as the total years based on maximum years mentioned above, or if I still use 30 as the total years because the participant is projected to have 30 years of service at NRD. The NRD is January 1, 2032. In your document's definition of accrued benefit, the meaning should be clear. If that section describes a limit on service counted for accrual, you would use that limit. If no such limit is implied, then you use all applicable service in the denominator.

I posted something last year about an audit of a plan of this design. It could go either way upon audit. The IRS eventually said that the design was okay but I found out that the auditor's manager and the legal analyst were definitely not okay with the design but the IRS actuary was on our side. I am fine with the design but I always look at the cost savings to see if it's even worth it. I also see no way you can pass testing without a profit sharing plan. Thanks for the reminder that some auditors and legal analysts don't know how common these are, nor do they have an actuary's perspective.

There is an extreme moral hazard here, because the DB plan is accepting an annuity purchase and making a guarantee for future benefits. There are countless examples where the purchase rate decision was made without regard for actuarially sound pricing and reserving principles, as shown by practically every public plan that offers interest rates at least double those used by insurers for air-time. If the inmates run the asylum, don't expect sound behavior. Who you represent matters here: if you work on behalf of participants, expect pressure to use a very favorable conversion rate, the height of fiduciary irresponsibility.

Thanks for that added reminder. The top-heavy rules would allow the second plan to provide a minimum benefit of 5% of pay as a profit sharing plan. In addition, you would need to consider the gateway rules, which might push the PS contribution up to 7.5%

So are you saying there would also need to be a 401k PSP that benefits the NHCE? I find no other way to pass 410(b) coverage nor 401(a)(4) discrimination rules. Your coverage fraction is 0 NHCE participating of 1 total, for a zero coverage ratio. Your rate group has zero EBAR for NHCE's so you don't pass the average benefits test either. Of course, if the NHCE is not yet past the age 21/ 1 yr svc requirement, you can fix the problem later.

I have no problem with your design. But it does require equivalent benefits under another plan for any eligible NHCEs, so you are dealing with a two-plan design. Charge ahead, and charge accordingly....

If you intend to keep the DC character of the funds, it is simply allowing a rollover account within the DB trust, and most standard documents will allow such an option. Of course, you have a fiduciary duty to account for the rollover properly and to allow proper investment decisions. On the other hand, perhaps you wish to convert a DC account into an equivalent DB balance, as is done in many public pension plans that allow "air-time" purchases. Is this your intent? If so, look at the document language in one of the public plan documents.

So long as the document has definitely determinable benefits, you could refer to the maximum permissible deferral limit under a section of the code. Go for it.

I believe you have the essence of it. Your choices range from zero up, so pick the desired choice. Keeping the PFB and using a portion of it against costs is the result with the lowest current cost.

To all concerned with the continued aggravation over 5500 filings, please note that ASPPA's Govt Affairs Committee has a Reporting and Disclosure subcommittee working to document IRS errors. If you have documented examples of penalty assessments or inquiries over proposed late filing issues, please collect the evidence and forward information to me at: bob.mitchell@nrservices.com so we can work with the rest of the industry in correcting the problems in Ogden. Note that you will still have to respond directly to the IRS with protests or appeals over incorrect IRS penalties.

By assuming that the participant will retire at 65, you are funding for a max lump sum at that date. Presumably you are using the 5.5% and applicable mortality. So make that assumption, because you are the actuary. But that does not change the fact that the maximum account is higher.

"Always required" ???? or just if they increase the benefit above the AE of prior benefits earned. Not "always" in most documents.

I don't think there would be any unique 415 issue. The account in pay status would remain subject to the annual benefit distribution limit (and would receive no new accruals), and accruals to the new account would remain subject to the annual accrual limits (i.e., the 401(a)(17) limit). Or am I missing something? Consider a participant who reached their maximum benefit limits, retired and returned to work. While 401(a)(17) determined compensation limits, it is irrelevant to my comments. New benefit accruals could commence only if they did not violate 415(b) limits.

Your approach of a fresh start appears reasonable to me, unless a 415 limitation issue will be in play.

I suspect there is more involved here. Inservice distribution is not usually that important in aftap determination. Do you also have unreduced retirement benefits at 62?

The deduction issue is based on the taxpayer's fiscal year and any extensions in play. The discrimination issue is dependent on the plan year. So a DC contribution for 12/31/2011 plan year would be tested with a DB benefit for 2011. There are ways this could blow up if you don't have calendar year plans, or if the contribution is more than 30 days after the due date. But the normal situation is that you would include that 2011 contribution made by 10/15/2012 if it was considered an annual addition for 2011.

This can get into a big discussion of capital accounts, exemption from excise tax if elected, allocation of cost between years, possible owner tax basis in the contract if it is a sole proprietor, and just the simple tax planning issue: are you turning after-tax money into pre-tax money by making a non-deductible contribution for a taxable distribution?

If the document provides a suspension of benefits notice, and the participant does not take benefits when due, then you can forfeit. I don't see that fact pattern here, so I think the TPA is just trying to cheat the funding.

is the benefit payable at 62 under the formula being adjusted to 65, reflecting the late retirement provisions in the plan? If not, then the actuary is assuming that the participant will forfeit benefits.