SoCalActuary

Interesting political comment. Tbob - welcome to the much more complex world of 401a4 regulations and plan designs. If you recognize the math of the cross-tested plans, there are inherent age-discrimination issues to both db & dc plans. Unless or until the EEOC gets authority to regulate or litigate these issues, you should probably ignore the age-discrimination problems arising from a common-sense look at these plans. Instead, look at the possible plan designs and their effect on discrimination testing. Better yet, consider attending one of the advanced seminars on the subject. My favorite is the Larry Deutsch program.

The administrator of the plan is required to follow the written terms of the plan. If a court has proposed a DRO for funds that cannot be taken, then the administrator has a responsibility to follow the terms and deny the DRO, thereby preventing it from being a QDRO. The court and the attorneys have to go back and refine their property settlement to find the money elsewhere. Of course, consult the plan's ERISA attorney because plan disqualification in operation is a very big deal.

To expand on the answer: If the employee had worked 500 hours, then discrimination testing is affected. In addition, many standardized prototype DC plans require a contribution either if the eligible employee worked more than 500 hours or if employed at the end of the year. Non-standardized prototypes and many volume submitter plans do not require a contribution, but may require some contribution if the plan would fail to meet 410(b) coverage requirements. Finally, please note that documents sometimes have specific provisions for contributions upon death, disability or retirement that differ from contributions for terminated employees. Hope this helps you with your research.

The IRS should logically conclude that minor children don't "control" their parents' businesses, but, until they do, we have to choose how to interpret these rules.

With no mention of early retirement in the document, I don't see a clear-cut requirement to use unspecified rates in the 415 calculation. Similarly, I don't equate lump sum rules with early retirement reductions. Having said that, you now have three choices: 1. Use 8% as the safest interpretation & lowest benefit at all ages. 2. Use 5% to age 55, 8% thereafter for your reductions. 3. Ask Treasury to define it. For the sake of the client, if you choose #1, let them know that their benefit at age 55 is a lot less than the law allows. So they should consider amending the plan.

Flosfur - I agree. The IRS puts us in the position that it is a change, when it really isn't. I was making the point (redundant, but so what?) that the takeover and termination of a plan by the new actuary is just a routine fact of life, so get on with it. If it is a change in funding method because the IRS sees a new firm, new software, or such, it is unavoidable because the old actuarial firm did not have a guaranteed contract to do the actuarial work. What I believe is that the IRS does not like a change in funding method in the year of termination when it might dramaticly change the plan cost (either up or down) to avoid funding deficits or to get higher deductions. In this Proc. they added enough rules to make normal practice more difficult, that's all.

Frank - I believe you said that the issue is payment of the maximum lump sum benefit at age 49. Let me clarify other issues here. Does the plan have the 5% language for 415? Does the plan have an early retirement benefit option?

GBurns Thanks for the encouragement. Both the tax advisor and I have reviewed the past personal tax returns. The tax advisor asked me if they could be right. E.g., sole prop who deducts their pension on schedule C without any benefiting employees. Another - deduction on 1040 for $25,000 for "Investment" The TPA wrote a letter to client to put $100,000 into plan, make check to TPA for a "Note" and then endorse the check immediately back to the client. client then pays personal expenses from the same funds. This looks like income to the accountant and to me. So we have plenty of reason to say "severe audit risk" But I'm still looking for advice on the bad boy down the street. Has anyone taken action against criminally inclined competitors?

Blinky, I understand your position and agree that your interpretation is the most restrictive. It would defeat the purpose of the plan if the IRS accepts your view. However, I contend that the document language was written and intended to provide 5% interest reductions from 62 to 55. Reductions below 55 were intended to use 8%. The plan could also have a choice to not pay any early retirement benefits, making the reference in 98-1 irrelevant. As to the second point, if you look around at the majority of db pension documents for small plans, you will find the separate 415 assumption reference is very widely used. I have not seen it challenged by IRS auditors, even when sent to IRS actuaries for further review. The words stand on their own. Of course, we could just agree to disagree and leave it to Frank to decide what he wants to do.

We have had a few instances like yours, although ours were caught sooner and with lower dollar amounts. Since no filings were done, you will need to complete all past trust accounting reconciliations since the 100k asset threshhold. You can also expect the IRS to deny the claim vigorously. With $1m in assets, you probably won't get the sympathy you will get from a smaller plan. Expect to spend some time corresponding with the IRS, who also may pretend they never got your appeal letters and go directly to collection. If the client does not even open the can of worms with the IRS, rolled the account into an IRA, and closed the plan, would the DOL or IRS even know? The gov't might not ever find out, but I dislike this thought process of ignoring scofflaws.

Back income tax 1040's were wrong. Back 1120 forms were wrong. Back 5500 forms were never filed. The old TPA has a history of being way outside the rules. I might consider telling you some excerpts from his client letters. The TPA claims tax and pension expertise but appears to have a competitive edge over people who have the conscience to stay within the law. If the IRS only knew!!! The new client is very nervous about the illegal past activity and wants to operate clean. My inclination is to start fresh and assume the supposed plan did not really exist. But I would like to hear any other suggestions.

Maybe I'm confused on the answers here. But it seems to me that REA requires that spousal consent be given for any optional form not a QJSA when the plan allows any annuity option.

Two issues are involved, both based on the actual plan document. 1. Frank needs to confirm - Is this a plan that allows early retirement annuity benefits? If so, does the plan have a schedule of early retirement factors at age 49? If so, then 98-1 would lead to the 8% reduction in the Q-7 Step 2 calculations. However, many of our plans with age 55 NRA do not have an early retirement provision, and therefore no reference to early retirement interest rates. At age 49, the participant is eligible for lump sum treatment, or deferred benefits at 55. Then you go to the 417(e) rules based on the 415 limit at 55 using the 5% post-retirement rate. 2. In addition, the better designed plans have a specific set of assumptions for 415 limit calculations, usually at 5%, in addition to the other actuarial equivalence assumptions. In these plans, the separate 415 language applies, not the 8% rate.

Just met with accountant for plan sponsor who showed me past admin work for a possible takeover. 1040 Tax forms were wrong. Participant was advised to borrow back all the pension contributions, by way of the pension administrator who accomodated the transaction. Big deductions for a db plan for two 35 yr olds. The TPA wrote to explain how all the prohibited transactions would be done. I agreed the admin looked wrong. Then I checked the DOL who did not receive any of the prior 5500 forms. Thus, the copies of 5500 for db that were given to client and signed by client were never filed. The forms did not disclose the loans. In addition, the forms did not show the actuary's cert. so I cannot ask if there was a valid enrolled actuary's work done. My attorney says that the client can ignore the invalid past work at their own peril. Or, much better to go back and correct 4 past tax returns and 4 5500 filings, go into CAP, and sue the old TPA for damages for all the back penalties and underpaid taxes. Any suggestions on handling this situation?

We don't agree that 8% is the rate.

While I am not a trust officer, my reading is that the payor issues the 1099R. If the trust is the payor, then the form is issued under their tax ID. The trust can contract with outside services to prepare the 1099R, but that is equivalent to asking the accountant to prepare them. On the other hand, if the trust transfers funds to another party, eg, Penchecks, who then pays the benefits, then the payor to the participant issues the 1099R. This could also apply when the trust sends the funds to the plan sponsor, who issues the check and administers any tax withholding.

My comments lead to this issue: Under 415, age 55 is early retirement. What does the document provide for benefits at age 55? I would interpret my documents to provide 5% interest from 62 to 55, because they are directly affected by the post-retirement period, eg after 55.

This question also gets to the issue of indemnification against claims. Who is responsible for defending the work? If the Fund family is providing the services and subcontracts for actuarial services, then the fund family is jointly responsible for the quality of the workproduct. If the actuary takes sole responsiblity for the actuarial services, then the fund family has a legitimate defense against the actuary's potential errors. However, the actuary then has a higher duty to insist on oversight of the work.

Not paying your fee - that's worth getting even. Insist that all work product be returned. The new EA cannot use your work product. To do otherwise is to steal your property. Make a copy for the Joint Board, and consider sending it. Maybe consider having your attorney send the letter to the client.

The amount in the plan must be converted into an equivalent benefit at normal retirement. I use the post retirement assumptions to adjust from age 62 to NRA for 415 limit purposes. Thereafter, I adjust from NRA to current age using the plan pre-retirement interest. In both cases, I must also do the IRS method of adjustment, using the greater of 5% or the plan rate, and using the IRS required mortality table. So the question is: does the plan provide that interest is 8% until NRA and 5% from NRA forward? If so, then the IRS method uses the same interest rate pattern. Don't forget at the end to compute the lump sum using 5.5% in 2004-5.

rlb - does it require them to eliminate all annuity forms (as I suspect)?

Document usually addresses this issue. In general, if a forfeiture is used as an annual addition under 415, then it is part of the minimum contribution under top-heavy. Does the forfeiture get added to the contribution, or does it offset a contribution as in the old money purchase plan rules? Check your plan doc for the rules of this plan.

I agree the benefit formula provides no benefit amount, so you are probably ok, but I would still offer the amendment freezing eligibility.

This gets to the question of professional responsibility. If the actuary is subject to protection under the TPA's insurance as if an employee, then the TPA can administer as much of the plan as possible, using the actuary for the strictly actuarial services. These include the valuation, schedule b, pbgc premium. Under that scenario, the TPA decides if they have competent staff to perform distribution calculations, and if not, have the actuary do the work. On the other hand, if the actuary is solely responsible for their work, then the actuary should supervise the administration of employee records, communicate directly with the client and their advisors, review the distributions, and all other aspects of the administration except the investments.

Even in a community property state, you can have sole and separate property if it is set up at the beginning of the business and the capital comes from separate property. But most times, the exception is not met and both must be considered. Why not set up a single DB plan? I know you have discrimination issues that might make her employees mor expensive, but it allows them to proceed.