SoCalActuary

No doubt that the Federal authority permits local gov't and religious elections not to participate. That is permission given. However, the issue for the survey is whether or not the individual institution took the election, and how did it affect their pension plan design.

See Rev Rul 2004-55 for a current treatment of this issue. Generally, if disability is provided under an employee benefit plan, and is funded by after-tax employee contributions, then any disability benefits received under the plan are excludable from gross income. However, if the plan is funded with pre-tax contributions, then disability benefits are includible in gross income.

You should talk with Pete Preovolos about this in more detail. They have given us practical solutions on these problems in the past.

Since the prior actuary is not available to stand up for their work, the current actuary has to make reasonable decisions. Does the current actuary agree with the prior proposed assumptions? If not, redo the entire valuation by making decisions you believe to be defendable.

My point is that the action occurs at the state level and requires the election of the individual plan sponsor and their employees. In other words, the state has the local authority to opt out of Social Security. By the way, individual religious organizations have the same authority, and they sometimes sponsor private colleges as well.

Was a DRO sent to the Colorado PER administrator?

I doubt it. I don't see the valid business reason for the deduction, based on the facts given. However, it was not on your watch. You have a valid reason to ask the prior actuary for the justification, but you are not responsible for their certification of minimum funding nor maximum deduction.

GBurns: Start your search with this: http://www.ssa.gov/retire2/stateandlocal.htm Each state has a procedure to determine whether a unit is coordinated with Social Security or is exempt due to state-provided coverage.

Your comment about "us" is confusing. Can you describe the ownership more completely? Is "us" a set of 5 or fewer stockholders with common ownership? Is "us" a corporation that owns the other organizations as subsidiaries? Does one person control more than 50% of any or all the units? Does this include any family attribution of ownership?

You achieve your non-discrimination result of 70% with a maximum service limit in the denominator. In your example, you need 20 / 0.7 = 28.5 maximum years for your NHCE, since 20 is the denominator for the HCE. In addition, your original plan design was not a safe-harbor, so your plan has a disqualification in operation since your benefits failed 401a4. A retroactive fix is proper here, and for practical purposes, you should just adjust the benefit for the terminating employee as the appropriate self-correction. I would also ask who goofed in setting this plan up. Does anyone take responsiblity for a bad plan design?

Thanks for the further clarifying comments. The original post did not start with a QDRO as the reason for the Rule 70 court appointment. I agree that the court can take the action within the context of the DRO, but the plan needs some protection against a later claim by the participant. I also worry that an action under Rule 70 would please bankruptcy judges who don't want to respect the ERISA alienation rules, so I would want assurances that the proposed QDRO is a legitimate family law matter.

A cynic would say that you are conspiring to withhold benefits provided under the plan in an attempt to discriminate against a disabled person. I am not a lawyer, so my comments are not intended to get you into trouble. However, this is a public forum, and your comments are not protected communications nor deliberations.

If the union employees were intended to be excluded according to collective bargaining, then you have incorrect plan administration, which probably should go thru CAP to get a proper fix. The union employees who received a distribution depleted plan assets that belonged to other employees. I would recommend that the remedy is payment to the trust from the employer to reimburse those amounts, with reasonable interest. Certainly all three open years should be corrected. How far back do you feel comfortable? How many dollars are involved? If the numbers have been small in all years, then the correction is probably much worse than the problem after you count the fees for correction. IMHO, Talk with your ERISA counsel to get a specific fact-based opinion.

Your position is that a domestic relations court can take a participant's benefits under a DRO without the participant's consent. I am not a lawyer, but that looks like an assignment of benefits to me. Maybe someone can explain why the participant does not consent. Is it just a case of cussed stubbornness, or are there substantial issues? Has the participant's counsel explained to the court why approval has not been given? Does the court have some reason to impose a sanction on the participant for failure to respond?

Certain governmental organizations are protected under state laws from a requirement for Social Security coverage. Instead, they must have a pension plan that provides an equivalent benefit, most commonly either under the Public Employees Pension or the Teachers Pension plan of that state. Thus, they have a pension benefit which is much larger than equivalent private plans because it includes the Social Security benefit indirectly within the state plan. The decision is partly a matter of state law and partly a matter of an election by the specific employer that has been approved by the affected employees. I had recent experience with a quasi-governmental body that opted out of SS and replaced it with their own private plan. The employees looked at the state PERS, voted against it, then looked at SS, voted to leave it, and completed the election by installing their own private pension plan with equivalent benefits. If you are making a comparison, you should know whether the plan sponsor is covered under a state program, Social Security, or a private plan. Then your comparisons are more informative.

A non-cooperative participant is a problem for the plaintiff's attorney and the judge to consider. However, the plan should not accept a QDRO that was not agreed by the participant. My advice is to have your ERISA attorney state the plan's position clearly to the court.

Be clear about the availability of 403b vs 401k, and whether Social Security coverage is included. Also, be clear about church based vs gov't vs non-profit vs profit-based plan sponsors. Each has different tax rules, and direct comparisons need to consider these differences.

Even with a cash balance formula for future accruals, the existing underfunding must still be addressed. I would measure the plan on a payout basis, as if the PBGC had to take it over, then explain the deficit of assets to liabilities to both the union and plan sponsor, so they could figure how to pay for it.

The basic problem is the identity of the union employees who were to be excluded. If I were in charge, I would insist on the employer getting corrected data, going back as far as needed. Then I would revise the allocations if I found any ineligible employees who received an allocation. If any employees received payouts while ineligible, I would argue for employer duty to 1. try to recover the money, and 2. reimburse the plan for the improper distribution. However, I would also insist on review of the collective bargaining agreement to see who was covered, whether pensions were negotiated, and whether the exclusion is allowed.

You must confront the underfunding when presenting the plan termination to the PBGC. Either the company completes the funding or the PBGC files a claim against the plan sponsor up to 30% of employer net worth. Only 50% owners can waive their benefits. You should look seriously at the expense of the termination before you decide. If you don't have an experienced actuary looking at this, get one. Your situation does suggest that a freeze with continued funding of past benefits is needed. The cost of the underfunding ($500,000 over 10 years) is about $60,000 annual contribution(about $5,000 per year for your 12 actives). This should be included in the discussion with the union. I wonder if there is any room left for 401k company contributions. There are probably some interesting stories about how this plan became so dramatically underfunded for its size. High interest rate assumptions, deliberate underfunding, dramatic underperformance of assets?

For distributions where tax withholding must be administered, the employer is simply acting as the agent for payment, with the 1099, 945, etc., all showing the employer's tax ID. However, the employer is clearly acting as a fiduciary and has a duty to act promptly on behalf of the plan participants, a duty that is sometimes neglected.

As a day-trader, is he receiving a K-1 showing income from the LLC as a member? Or was the LLC taxed as a corp., requiring salary for earned income. Or did the business lose money? No earned income means no 401k deferral nor company contribution. I think you are ok to set up the plan on the expectation that he will have future income, but just accept no current contributions until they are deductible.

WDIK, look then to the instructions for 3©. You would put nothing in 3b, but the discounted contribution in 3©. Blinky, thanks for the small correction.

Were these union employees who had bargained on pension benefits? If the employer was paying into a union based pension plan, you would think (perhaps foolishly) that they knew not to include them in the profit sharing plan. If the employer had bargained on pensions with the specific agreement to make no pension contribution, then it might have been more likely they forgot. However, if they did not bargain on pensions, then they do not have any exclusion. Bottom line issue: does the employer have any written confirmation that pensions were bargained?

Yes, certainly you add in the contributions made after the valuation date but prior to the filing date. Remember to adjust for interest using the funding assumption pre-retirement interest rate. The instructions state that this procedure is optional for smaller plans, but it may be imperative to avoid an expensive variable premium.