SoCalActuary

FAS has a specific funding method (pro-rata unit credit), and a unique amortization of past service liabilities that do not match the funding rules under IRC 412 or 404. FAS allows projection of 415 benefit limits, 401(a)(17) pay limits and other items that are not used in 412 or 404. FAS explicitly counts assets based on the actual time separated from the employer's control, while 412 & 404 have provision for receivables. Asset smoothing is not used in FAS calculations. FAS has extra requirements for underfunded plans that are not related to the extra funding applied to larger plans under 412. FAS requires recognition when benefit settlements are made before they were assumed to occur, treating the gain or loss immediately. Both are based on the plan formulas, although FAS may require recognition of benefits that are scheduled to occur in the future but not already in effect. There's more, but these are the major points.

Interesting question on the bonding: Assume the plan sponsor cannot recover the over-payment and elects to provide a bond to plan. The bond end up being called by an early termination of the plan with insufficient assets. The plan sponsor puts up the funds. Is it deductible? I grant that this is a little off the track, but I just wonder....

It would be sarcastic to mention that Milken & Keating survived ripping people off. Why would an insurance agent feel guilty? But seriously, this sounds like someone who bought into the big promises of 412i, lost faith in their advisor, and now is trying to move on. I still caution against ripping out the policies before you do a proper cost-benefit comparison. The new IRS rules have sobered up some of the more aggressive 412i people, so the numbers are now only about twice what a normal DB plan would offer, instead of 5 times higher.

The plan administrator and/or trustee would expect personal liability if any NHCE participant was not able to receive their full benefit due to underfunding. Are there mitigating circumstances why the person was fully paid? Was there a threat of lawsuit, counter-claims on business practices or other business issues that bring up any dirty laundry? This may be the story behind your story. If it was simply an oversight, then consider whether to file for CAP. Also, I don't find the spot to report this particular distribution in my 5500 instructions either.

The jointly owned company has at least two employees (him & her), but who else? A good design has to pass discrimination testing, but only if there are NHCE's to test. Are there any?

I don't let it in my plan designs. Talk with the big-plan people who do. Sorry I can't help!

No recent experience. My last one was approved in the normal 5-8 months of other plans.

It can be done if you do not have separate asset pools in violation of a26. The separately directed values must be determined in advance of the year, using a definitely determined index unrelated to the actual performance of the plan trust. I administer one, but it's not easy. The potential misunderstandings by participants are many. The plan is still subject to the normal actuarial issues, plus the discrimination issues. You must have a plan for testing benefits when one particular index causes a decrease in plan benefits.

New CB plans without the conversion issue are able to get FDLs. Accudraft has CB as a modification of their VS doc, with easy use. However, it is still individually drafted, with the higher costs. I tell clients that it is worth the extra cost.

Consider a PS contrib of 5% plus CB contrib of 2.5% for all NHCEs. The look for the max CB benefit that passes the general test for the two owners. This meets TH mins, looks like a 7.5% PS to employees, allows 40% + coverage percentages for a26, and gives maximum discrimination. It is harder to control ee costs in a traditional DB.

If the wife was not an employee of the company, not an officer, not a director, and the state was not community property, maybe you could have independent plans. This also requires that her business is her sole and separate property. Did her business get started with any community assets? If so, it probably is joint property also. That said, the separate DB might still be valuable as a way to use up part of the 25% limit. However, you have to test both plans together for discrimination, including the 40% coverage rule for the controlled group. Instead, I would recommend a combination of profit sharing and a cash balance DB plan covering both entities.

Under your scenario, you would have an amendment in 2002 that froze plan benefits with the intent to terminate the plan and distribute assets. However, in November 2003, you amended to start new benefit accruals again. For a one-participant plan, just be sure you kept proper track of the frozen benefit. Did you start a new formula, or adopt back into the old formula? Did you deal with any wearaway issues, past service grants, indexing of old benefits for pay or 415 limit increases? I suspect not, and that may be ok. If you did not employ any NHCE's, just comply with 415 and go on.

We have had a mixed lot on these 5500-EZ late filings. Early after the DFVC program, we were getting favorable IRS responses, but not now. We have one still pending that matches your facts well. Once we filed the seven back forms, we got separate IRS letters on the $15,000 penalty for four of the years. We have now appealed for a waiver. Stay tuned for further developments on this.

The facts presented were: payment of $400,000 was made and reported on FSA. $100,000 was credit balance. Deduction taken was $300,000, and $100,000 was not deducted. No contribution was made before year end 2002, so no excise tax applies. The funding for 2003 will show that $100,000 FSA balance, plus interest, is adjusted out of plan assets for determining 412 normal cost in 2003. The 404 cost will show $100,000 of un-deducted contributions without interest, which is adjusted out of the plan assets for 404 normal cost. Did I miss something?

In the year of termination, which may be a partial year, you can keep the funding method in place. But the IRS actuaries are claiming that a projected funding method on a frozen plan is not a proper funding method. Informally, I understand that the desired method is traditional unit credit on a frozen plan, with 10 year amortization of the initial unfunded due to change in method, and 5 yr amortization of gains & losses until the plan is liquidated completely.

My normal practice on a plan termination is to have the resolutions address the issues of vesting, future entrants, and future accrual (full vest, no new, no accrual) and espress the intent of the plan sponsor to terminate the plan. This amendment is still valid, even if the termination is rescinded. The notice to employees in a non-pbgc case is primarily the 204(h) notice of change in accruals. If an IRS submission is involved, then a Notice to Interested Parties is given. Finally, some terminations are rescinded after we find out how much payout is required. Some employees have already received benefit distribution options and election forms. If the employees have not separated from service, then generally you should not pay them after the termination is rescinded. Where are you in your termination process? Separately, for funding purposes you have already filed a Sch B with your chosen assumptions and methods. If the Sch B matches the plan termination documentation, then you should have changed to unit credit funding under current IRS funding rules. Assuming this is a valid change in funding method, you are probably also stuck with this method for five years.

You might have a 242b election from 1983, if the participant has been in the same plan continuously since then. This would exempt the owner from 70 1/2 distributions, assuming that no prior distributions have been made. Such an election should be in the plan's administrative records if it exists.

Your document has a default method for computing the minimum, even if the participant does not make a choice. The trustee must cut the check, even if it is not cashed. At the end of the year, 1099r is issued, even if not cashed. This protects the plan. The participant should get either one-year back payments, or actuarial increase for delayed retirement (DB). The plan administrator is not responsible for the tax consequences or other financial problems of the participant, merely for following the document terms.

Some people are not joiners! Frankly, the costs of membership don't always give a good value for the benefits obtained. The CLU (who might be an actuary?) should have some kind of public recognition. Do you know other people in his community who have worked with him in the past? Ask around in his community for references. Eventually, if that does not prove satisfactory, you could have someone contact the person directly. Of the many actuaries I have worked with, some as clients or customers, some as fellow employees, some as competitors, I am not surprised that the (maybe) actuary could be uncomfortable on some aspects of plan design. Passing the exams to get in the business is no guarantee that you are good at it. My 30+ years tell me that you have to keep working at it to stay current on plan design. I have seen a few who passed the early EA exams who have no business representing themselves as competent. In fact, one of them is a CLU as well. If you suspect that misrepresentation is involved, your best choice is to go to the JBEA or the Academy's ABCD, who I have found helpful in the past.

From the facts you presented, you don't appear to have any problems. You said the excess contribution was not deducted, so the funds were not in the trust before they were deductible and no excise tax. You do need to assure that the next year funding has room for the deduction. From the perspective of minimum funding standards, you get interest credit back to the beginning of the 2003 year by crediting the excess to 2002. That gives more FSA credit in case you need it.

The list is not inclusive. It does not show all actuaries I know.

Blinky - You're right - I over-simplified!

My understanding is that 5.5% is the annuity factor (combined with 94GAR) to convert your monthly benefit to lump sum. All other adjustments are done on 5% or plan rates, whichever produces the lower monthly benefit. However, for 2004, you can protect the lump sum value that was in place as of 12/31/03. This does not apply to new accruals, but you might argue that it applies to the cola increase in 415 to $165,000.

A further point: Age weighted plans just about automatically produce the same EBAR for testing among all eligible participants. Exceptions include TH minimums, 415 maximums, or using different testing assumptions than the rates in the document. Tiered plans have an advantage, since you can "over-benefit" one NHCE to pass the Avg Benefits Pct Test, presumably a younger lower-paid person.

'The guy wanted a raise, and the business owners (who do not generate substantial wealth in this business), said "Fine, but we can't afford to pay you more AND make profit sharing contributions.' This is a compensation issue. What is the employee worth? By forcing no profit sharing contribution, you are 99% likely to have zero contribution allowed for any of the HCE's as well. If the employer does not care about the tax advantages of company contributions, then don't give the employee a contribution. (IOW, throw out the baby with the bath.)