SoCalActuary

Your document allows it. Why not? I had some of these way back in 1985, when someone took 30% as J&S, 30% as 10 CC, and 40% as lump sum.

The owner can certainly add more capital to their business, and can make loans to cover business cash flow. Getting the money back from the business could be a return of principal, repayment of a loan, or sale of ownership shares. But getting a tax deduction for that pension contribution is important. So it matters if, when or how the business can get a tax benefit from that payment. For example, it might come in the form of reduction in accumulated profits (equity) that would otherwise be taxed. Or, it might come as a loss of value on an active interest in the business (so the passive loss rules don't get in the way). Or, it might create a loss position that can be offset against future income. But I would not recommend that it come from a closing business that does not have any tax benefit to the owners. In that situation, you would be converting after-tax equity into pre-tax pension income. Another alternative is to change the plan to require employee contributions, subject to the 401(m) test. Then the owner could make required contributions that create a tax basis for any distributions.

Sometimes, we have been able to go back through distribution records and find that final lump sum payment was made. No one filed the SSA with code D. But this deserves to be discussed with IRS, because it requires individual taxpayer information to be disclosed.

The larger payouts require spousal consent if the payment is not QJSA, and that requires disclosure of relative values. But small amounts under $1,000 can be distributed without consent nor QJSA info.

Generally for a DC plan you can make an easy determination of the benefit to each partner. So the IRS took the simple approach of allocating their cost on their DC allocation of contribution. But DB plans are more complex. In today's funding rules, you can easily determine the target normal cost by participant, but even then you might have to allocate that benefit among multiple participating employers. For really big partnerships, the accounting can be awful, so the IRS took the easy way out here, and stated a position that DB costs are too difficult to allocate consistently, so split it by equity interest. With cash balance formulas, that complexity got a lot easier allowing partnerships to allocate their pension cost more directly. But it is still not an exact accounting procedure, because it fails to deal with over-funding or underfunding.

Well this is an accounting rule within the partnership. If both are equal partners and this is a DB plan, by default they would share the costs based on ownership percentage. You would need a special agreement within the partnership to do otherwise, if I understand the rules correctly.

That would seem obvious if the payout is age related. CB plans would not typically need that proof, IMO.

I like pepper-jack cheese and artichoke hearts with my Whine. My favorite theory is that the govt hires too many actuaries and attorneys, whose job is to make perfect forms which are the enemy of "good-enough" forms.

Very complex issue here. The intent is that a participant get the benefit provided under the plan language for a lump sum. But they might not be able to invest at the interest rates in the plan assumptions, so their lump sum must be based on current interest rates and mortality as regulated under 417e. However, greed must be controlled, so the maximum lump sum is limited further. It cannot exceed a lump sum computed using 5.5% interest rate, or, if less, 105% of the lump sum generated on 417e. That really means nothing unless 417e rates are consistently above 5.5%. And that second limit only applies to plans with 100+ people. Good luck on this first step in DB actuarial work. Lots to learn.

Code section 3405e and the regulations and interpretations are the resources you will need. The original intent - protecting participants from premature taxation - has had new layers of complexity added. So now a participant can elect to keep their funds from distribution, except in a few factual situations. Plan termination is one of those. Amount balance under $5,000 is another. RMD is another. But annuity payments just do not look or act like an eligible rollover distribution.

That completely makes sense. Your "half-hearted explanation" just helped me to understand the thing at a fundamental level. Was there a reason that participants were receiving more lump sums than usual? I thought they could defer for as long as they wanted? Most typically, this occurs when a job change or plan termination event comes up. The participant is not yet ready for living off their retirement funds, but they are forced to take the money. Not all are forced, either. In some situations, the participant is very concerned about leaving their money with old employers and want to have better control over the investments by rolling it into their own account.

Here is a half-hearted explanation of intent in the law: Participants were given lump sum payments and had no good way to avoid the taxation. Congress response was to allow rollover of those funds for future retirement payments. But regular annuity payments are what Congress expected participants to receive from these plans. So there was no reason to delay taxation on the intended purpose of the plans - paying retirement benefits. RMD is just one form of that regular annuity payment. Hope this gives you some understanding of intent here. And welcome to BenefitsLink.

This is well documented in several places, including Sal Tripodi's materials. Short version: The loan was immediately taxable, with premature distribution penalties. The repayments of principal balance created non-taxable basis against future benefit payments. The repayment of interest was generally not deductible, so the participant was putting after tax money into the account to be taxed again. The plan benefit is still intact, and the plan loan is still an asset for funding. This changes only when the trustee declares the loan in default. The total accrued benefit will be offset upon distribution to the extent that the full benefit was not paid. Any outstanding loan balance at distribution is applied against the total benefit.

Mike, it appears that the issue is whether you use the mortality decrement as well. N(12) 65 / n(12) 66 is the description of the PBGC request. 1+i x a 65 / a 66 is what the original poster wants. The math is different only on the issue of lx 65 / lx 66 The deeper argument is whether the age 65 benefit is equivalent to the sum of the death benefit from 65 to 66 plus the annuity from age 66. Since death did not happen, the PBGC wants to throw it out of the balancing equation.

They have authority to interpret laws. That is a different issue.

Yes and no. Yes for discrimination purposes. No for PBGC rules.

Your CB plan document describes the date for measurement of the TH numerator and denominator. That measurement is then used in combination with the other plan. If they ahve different measurement dates, just live with it. Vesting is not the same as accrued benefit. Ignore vesting for this calculation, except for any terminated employees before the measurement date. You can apply the vesting to their benefit if they have already left by that time.

The auditor is wrong in my opinion, since there was no risk of forfeiture from age 65 on. Try to look back thru the 415 regulations for an example of their reasons why late retirement adjustments ignore mortality after NRA. Their reasoning should carry some authority here.

D's? Dx/Dy adjustment for age instead of (1+i) adjustment. It may have been a while since you read the Jordan book.

Effen - it's the deduction limit on the companion DC plan. That is the only upside to this.

Kind thought. Mostly true, but I still get surprised once in a while.

If the plan is underfunded, then the owners are responsible for that condition. Either they make the contributions to achieve sufficient status, or they fore-go benefits. Yes, I know you can force a proration of the total benefits to pay only "to the extent funded", but my real concern is this: it is a decision of the owners how and if they will fund the benefit. If a former partner is entitled to benefits, then I would presume that his equity in the company has already been liquidated at some agreed rate. Subsequent gains or losses on the pension fund are not his problem. Maybe that presumption is wrong, and there is still some issue about the equity of the retiree. That would leave it open for discussion, including renegoiating his payout price.

If you owned both the old corporation and the current sole proprietor business, then all the plans are combined. You want a simple answer, and I respect that wish. But the 415 limits are a career maximum for all your businesses.

Let's add the potential for manipulation of equity in the plan sponsor's books. Banks in particular need to show a healthy balance sheet. Oil companies need to hide profits. But the issue could also reflect timing of the disclosure, decisions of the investment policy, and conservatism of the boards. It could also reflect the potential of expected annuity payments vs lump sums, based on different expected payout schedules. It could even reflect a Financial Economics view of the sponsor's credit ratings, where weak balance sheets justify higher risk. Still, you present an interesting point. Looks like a reason to buy the stock of the plans with the low interest rate and short-sell those with high rates.

New? Last I heard, combo-crosstest plan designs need an experienced actuary, not a veba guy.