SoCalActuary

Sorry for the short answer. I meant to say that the Plan can keep the policies in effect as a general investment of the trust after dropping out of 412i compliance. Insurance face amounts could be frozen with no new issues. This approach may be the best fiduciary duty if the policies have surrender charges that go away by keeping the policies in force for a few more years. You could also instruct the insurer that the face amount must be reduced if needed. An example of this occurs when the benefit formula is amended and the existing face amount would violate the incidental benefit rules. Finally, buying the policies is an exempted party-in-interest transaction if the participant pays the plan for the fair-market-value of the policy and takes ownership. This is very important when an individual is no longer insurable at standard rates. It is not a distribution if the participant makes a purchase with other funds (after-tax funds - not transfers from other plans).

I am looking to see if there are any significant changes to the NIP before an IRS filing. My current form was originally authored in 1996 when we still filed with each local Key District Office, and when the advance dates were 7 to 21 days. Any format (text, WordPerfect, or MS Word) would be fine.

The SARSEP is a 401k type plan with restrictive discrimination tests, built on an IRA investment platform. I agree that it is a dinosaur. However, it does not require the forced match of SIMPLE, and it has the higher limits of a 401k. You should ask for the document implementing the SARSEP, dated before 1996. In addition, does the payroll record show whether any salary deferrals were made? If none were made, go forward with the DB since the SARSEP is not active. If salary deferrals were made, check for discrimination under SARSEP rules, and limit the HCE contributions accordingly. Then, make no employer contributions and terminate the SARSEP agreement for future service. Then you might be able to start the DB plan. Finally, the IRS has a new publication allowing the plan sponsor to check whether the SARSEP meets all the regulations. Print it off the IRS web site, and review it with the plan sponsor or their advisor. It might give you a better professional posture before your client.

Having encountered this issue before, I offer these concerns: 1. Once you stop using level pay life insurance policies or annuities, you simply loose the 412i exemption. So, by changing the investment strategy, you have to start compliance with the rest of 412, and look at PBGC coverage, among other issues. You then include the actuary in your administration work. 2. If the insurance policies are still in the early surrender stage, with high surrender charges, you can choose to keep the policies, sell them to the participant, or allow them to lapse. A proper cost-benefit analysis is needed. Compare the value of future benefits by keeping the policies against the cost of future premiums to get the benefit. Don't forget to include the surrender terms of the policies if premiums stop. 3. Watch out for liability issues if the 412i was aggressively pushing or exceeding the current IRS position. Is the plan vulnerable to audit for the past few years? Did the 412i advantages disappear with the new rules? Good luck with the analysis.

Failed to operate the plan according to its terms. Self correct if possible. One choice - write the IRA trustee and get return of amount due participant. Second choice - write the participant for same.

When I look to my document, it defines Actuarial Equivalence for 417(e) purposes and separately for other purposes. Is a defaulted loan subject to 417(e) in your plan? If you argue that loans are a lump sum distribution subject to 417(e), then you offset the loan using the AE rules for 417(e) at the point of the defaulted loan. I suggest this is the correct interpretation, since the loan looks like a single sum payment instead of a periodic payment. However, I can't speak for an auditor who might disagree. The safe thing to do: Have your loan provisions refer to 417(e) rates in the document.

My reading is that they disallowed this option for traditional DB benefits. The plan accrued benefit is to be paid in an annuity form, presumably QJSA. You also have a very short time after year end to make this calculation of the annuity benefit. If you transfer the PVAB to an individual account plan, then you can use the life expectancy method. New accruals of benefit will start a new annuity starting date on the added benefit. (Bitter political comment here: The IRS did a bad thing here. This forces business owners with DB plans to take higher income now. I don't see any positive value from their hard-nosed attitude.)

Where did you find the term "DB Super Max" in ERISA? I would like more detail.

First situation: Employer is one person company and the trustee Generally, declare the income as if paid timely, make up the distribution as quickly as possible, and pray for no audit. Second situation: Employee is not a party to control of plan (i.e., not the plan sponsor, not the plan administrator, not the trustee) The plan failed to follow its own terms, a disqualifying event. Pay the distribution ASAP, self correct, and if at all possible, see that the payment due by April 1 gets into taxable income in the same year. The participant should have no penalty on this, since the participant presumably had no control over the distribution. The participant gets taxed on the money when received. Remember, in a DB plan, that you can also make up to 12 months of retroactive payments if the required form is an annuity. One more concern: If the participant was given election forms timely, but failed to return them, then the participant might have some liability for causing the delay. But not likely, since the plan administrator could force the distribution, with default 10% income tax withholding on the plan's normal form (J&S for pension, MDIB for PS).

From the original information given, I believe you state that the total plan benefit is $7,500, of which $1,200 is a "cash benefit". The total in the plan would then exceed $5,000, assuming that the $7,500 is a present value, not a periodic benefit at retirement age. The $5,000 rule applies to the total present value of vested accrued benefits. Do you know that amount? If it exceeds $5,000, then cashout is not automatic. Both employee and plan sponsor consent are needed. Before I can help any further, can you clear up what the "cash benefit" means? Is this a contributory plan, as with many governmental plans? Or does it represent a transfer of a DC plan account? Is it attributed to an employee rollover from another retirement plan or IRA? Perhaps you are talking about a benefit under a "cash balance" plan formula. Can you also explain what is meant by the $7,500? Is this an annual benefit at retirement, or a monthly benefit? Does it represent a present value of benefits?

I worked on the calculations with multiple interest and mortality assumptions just to see the sensitivity of plan assumptions. The Excel spreadsheet attached can be used if you want to see my results. 415_limit_calc.xls

The example got confused at the last step. If the annual benefit is 90,060.57 payable at age 55, then the lump sum is $1,012,363 using the age 55 APR at plan assumptions (not the age 62 APR).

Thanks for the Gray Book response. Did the IRS consider 1.404(a)-14(d)(2)(i) not to apply? The Pension Answer Book says this section justified that actuarial assets are reduced for the plan contributions that were not deducted. It would seem to me that the excess contribution not deducted has to be tracked until it is paid or deducted. In addition, I see non-deducted contributions by a sole proprietor as tax basis under IRC 72.

I agree with your reading, but I think the way out is to make an election to distribute the PVAB each year into a DC account, which could include a separate account within the DB plan. The reg's did allow the account balance method for this portion of a DB plan. This is unfortunately a targeted tax increase for small business owners with DB plans. Sneaky regulation issued below the radar screen of small plan lobbyists. The choice of annual rollovers of PVAB is burdensome, with plenty of opportunities to get it done wrong. Auditors will be delighted! In addition, it eliminates the ability of the plan sponsor to catch up for bad investment years with added funding. On top of that, the new regulation will cause a problem for new plans that grant substantial past service credits, because it will force higher current distributions even though the funding has not been completed yet for the past service benefit.

At the risk of sounding too simple, I would simply suggest that the Plan Sponsor write in their corporate minutes what they intend to do. A reference to the code section would add support to their election.

This is probably an old topic, but... A sole proprietor contributes to a DB plan enough for minimum funding, but more than their net schedule c income. The excess is not deductible in the year funded, which happens to be before year end. The amount would be otherwise deductible to meet minimum 412 funding. No penalty applies. But when does the contribution become deductible? Do we continue to carry the non-deductible portion as an offset to plan assets for purposes of 404 funding rules? (My belief is that we do carry forward the non-deducted amount.) Does this become a part of non-taxable basis in the contract if the participant closes the account before the deduction is credited?

When I work in large plans, the cash flow calculations have to be projected for each of the decrements built into the FASB valuation. If you have decrement assumptions, each decrement creates a matrix of future payments by year. FASB appears to want you to disclose the total of all such future payments by year for all decrements used. In small plans, I usually assume that lump sums will be taken, but not always. When the plan has a history of annuity payments, then I feel constrained to use the same complex model as I use for large plans. This is not a problem for people who use large plan software, but none of the small plan packages that I use (Relius, ASC, Datair) have built the reports needed.

Generally, a US employer with non-PR address goes thru the normal qualification procedure. A PR based employer is subject to Title I of ERISA, but not Title II, since PR has their own revenue code. One particular feature is that PR was more restrictive about employee deferrals. PR has a few pension firms, so you should check with them. Wyatt had an office, as well as a local small plan firm. Warning, my information is seriously out of date, so get more research from the locals in PR.

The NIPA conference gave an introduction to cash balance plans, and alluded to the possibilities available. A couple of points to follow up: 1. Cash balance plans are DB plans, and the hypothetical balance must be converted using the plan document's rules into an equivalent annuity benefit. That benefit is tested for TH minimums, 415 maximums, and EBAR's under 401(a)(4). 2. An annuity benefit can be cross-tested as a DC test. Since cash balance plans use lower interest rates for benefit conversion than the interest rates in 401(a)(4) testing, this can be advantageous to younger HCE's. We use cash balance/401(k) combinations to get high flexibility of contribution rates, and test both plans together when it helps.

The method works very well. In addition, please note that several major db admin systems allow you to record the undeducted contributions as an input item. They will then adjust to assets under 404 and give the proper plan cost.

Remember that the 404 combined 25% limit only applies when participants are in both plans. If you have 40% coverage for 401(a)(26) in a separate DB plan, then you can keep the DC plan for the remaining 60% of the employees. Of course, other issues then arise, such as 410(B) ratios.

You refer to a payment made in 1995. Do you suspect it was in error? I understand the rules at that time as follows: 417(e) required the PBGC interest rate structure and the plan's mortality table for minimum lump sum distributions. If the plan had adopted GATT provisions to be effective on or before the distribution, then the 30 yr Treasury Rate and the blended 83GAM table is used for the minimum lump sum. Your comment suggests that you were concerned with the PBGC tables, and that the plan document included them by reference. At one time the PBGC used the UP84 table with one year setforward for males & four year setback for females. I don't remember exactly when the PBGC changed to 83GAM, but check to see which table was in effect at the time of the distribution you are checking.

One participant plans can use the annual amendment as a defacto profit sharing plan, that changes annual contributions. In DB plans, this can also be done with assumption changes. Money purchase plans that vary rate by more than 15% are subject to criticism, since combined MP & PS plans with no amendments would have at most 15% range yearly. However, in my experience, there have been more than a handful of plans with annual amendments changing benefits. Rarely, they involve rank & file participants. No IRS auditors have made an issue on these plans. When we were requesting FDL's, the IRS has not pursued the issue. The intent to respond to changing business conditions, such as cyclical profits, is sufficient justification for an amendment. Yearly discrimination by intent (as you addressed) is a "facts & circumstances" issue that could cause problems.

Sorry about the last message. It was intended for another question. In answer to your question, the participants have a problem that should be the jurisdiction of the DOL, if they make the case strongly enough. In addition, they have a legal interest that is too small to pay the large legal fees of ERISA attorneys who can make the case well. However, they should at least file a claim against the estate of the deceased plan sponsor.

With one-person plans that have highly cyclical earnings, annual amendments may be needed. Other actions have also been taken, such as changes in assumptions each year for DB plans. My experience over last 20 years shows no negative action by IRS agents either on audit or when asking for FDL. "These observations are personal and may not be applicable to your area" Sorry, just had to throw in the standard disclaimer.