My 2 cents

Maybe, as I noted before, they didn't bother to file 5500s! Was there no identifying information in the plan termination material they sent you?

Since PPA, defined benefit plans are not required to issue summary annual reports. They are required to issue annual funding notices, but why am I unsure that this sponsor has been doing so?

This, of course, assumes that the sponsor, who may have chosen to ignore the notice requirements, was taking the trouble to file 5500-SFs.

This language is from regulations issued before the enactment of EGTRRA and ought to have been updated by the IRS (who may be considering doing that) accordingly. EGTRRA clearly provides that service in the defined benefit plan does not count for top heavy accruals if no key employee is benefiting under that plan (as would always be the case if the accruals have been frozen, "benefiting" having the meaning of earning benefits NOW). The law refers to "the Plan" (in a way that would NOT bring in other plans in the required aggregation group), so receipt of a defined contribution amount by a key employee would not apparently affect whether the defined benefit plan owed non-key employees recognition of new top heavy service under the defined benefit plan. The provision in EGTRRA only makes full sense when interpreted to mean that a frozen plan that is top heavy may be treated as fully frozen with respect to top heavy minimum benefits. Further, the entire quoted text fails to mention IRC Section 436, and thus gives no guidance as to whether 416 or 436 is to prevail when a top heavy plan is frozen under Section 436. Obsolete language! Action by the IRS to integrate their 416 rules with subsequent changes in the law (EGTRRA and PPA, at least) is nearly 20 years overdue.

My understanding: Line 15 is the AFTAP (which would, to the extent applicable, take into account annuity purchases for non-HCEs during the past two years). Line 16 (an FTAP, not an AFTAP) is only concerned with whether credit balances can be used. The former is net of both the carryover and prefunding balances (unless the percentage prior to subtraction is over 100%, in which case the AFTAP is determined without subtracting the credit balances), while the latter is determined without regard to either annuity purchases or the carryover balance (i.e., reduced only by the prefunding balance). Only the AFTAP determines whether Section 436 limitations on distributions or accruals apply.

"...which seems to reiterate the 3 year rule. must be like when food falls on the floor, there is a time period when it is still edible or has to be pitched." That's what the micro-organisms want you to think! And I am pretty sure that under no circumstances can a participant's current vesting percentage be reduced. So anyone already 100% vested stays 100% vested.

I think that if the person had been 100% vested on the old schedule, no election is needed, since being 100% vested would have to be protected. 3 years or no 3 years.

It is my understanding (for what that's worth) that someone who is 100% vested is 100% vested thereafter, and that a break during which the vesting schedule is made more stringent would not, upon reinstatement, lead to new accruals being vested at less than the 100% already attained. It is also my understanding that HCE status and vesting requirements are completely unrelated. Why would care be needed if the rehired person is an HCE? Vested is vested without regard to HCE status.

1. OK, if that is exactly what happened, it does not sound particularly close to my understanding of what enrolled actuaries are supposed to do. The enrolled actuary determined that the plan's funded percentage was below 60%, freezing accruals, and told nobody for years??? That just doesn't sound right. And does the managing partner have a code section they can cite to back up the assertion that they had no responsibility to tell the participants it was frozen? I am pretty sure that the law and regulations do require proper timely notice to the affected participants by the plan administrator (not by the enrolled actuary, who should certainly work with the plan administrator to help the plan administrator fulfill their obligations under the law). 2. If a plan must freeze accruals due to IRC Section 436, wouldn't that also freeze accruals of top-heavy benefits under 416, or would 416 override 436?

Making a mistake in applying minimum funding rules is what I mean by "bad calculations". Granted that the methods to be followed in performing actuarial calculations are subject to law and regulations, that does not make performing those calculations the same as providing legal advice. Best practices would involve helping to point out things that the plan administrator is supposed to do, but that is not the same as saying that the actuary must bird-dog the plan administrator into doing the right thing or the enrolled actuary becomes liable for the failure. As BG5150 points out, the actuary is not responsible for making sure that the notices were delivered.

Actuaries should not be providing legal advice with the idea that the sponsor or plan administrator can rely on it unless they are also lawyers, and just saying "be sure to discuss this with your legal advisor" ought to be enough to keep the actuary from sustaining any liability for a 204(h) failure even if the actuary offers a draft amendment for the freeze without mentioning the need for a notice (and the client neglects to check with an attorney). It could depend on the terms of the service agreement with the plan sponsor. Under normal circumstances, actuaries are not responsible for making sure that all compliance requirements are met. Malpractice for an actuary would be bad calculations, not failure to warn the sponsor of all the hoops that must be jumped through for an action to be compliant. Good service practice would certainly include warnings (like "be sure to give a timely 204(h) notice!"), but as the actuary is not a fiduciary or the sponsor's legal advisor, the actuary should not be subject to liability for legal malpractice.

While enrolled actuaries would normally try to keep their clients' noses clean by telling them what notices are required, when they are required, etc., seeing to it that the plan administrator actually performs its duties in a diligent and competent manner is not really a responsibility of the enrolled actuary (who is, under normal circumstances, NOT a co-fiduciary). Under what grounds would the plan's actuary be held liable for the plan administrator's failure to properly notify the plan participants of an amendment freezing the plan? ESPECIALLY IF THE EMPLOYER, BEING A CPA FIRM, WOULD GENERALLY BE HELD TO A REASONABLE STANDARD OF KNOWLEDGE. Sorry for shouting. Technical point - if the plan's AFTAP falls below 60% (forcing a freeze in accruals), the required notice falls under 101(j), not 204(h). Big penalties for not meeting that requirement too.

It is my understanding that if the participants were not properly notified, then their benefits are NOT frozen. The amendment can take effect only if the required notices are given. Have you requested a copy of the amendment supposedly freezing accruals? The burden of proof should be on the employer.

FOR EVERYONE! May, but don't have to, but if you do, make sure that it benefits the lowest paid as well as the highest. Don't discriminate! Stop thinking of the officers first, as though their interests are all that matter. The favorable tax treatment is there to help take the sting out of spending money on the rank and file.

The problem is that you cannot treat officers and highly paid employees more favorably than the other people (i.e., give officers more favorable rules than required but not the rank and file). That is a first principle of tax-favored retirement plans.

If someone's 1040 says they owe money, don't they have to send that money in when they file the 1040? And the 1040 would, one presumes, include any underpayment penalties. It is when the participant fails to report earnings as reported to the IRS for them on a 1099-R or when the taxes paid during the year are too far below the taxes actually owed (unless there is a suitable underpayment penalty included) that the participant would be hearing from the IRS. Of course, most of us think that the IRS may look askew at a financial institution reporting a non-rollover distribution on a 1099-R with no withholding taken out. So the participant may be more or less OK but not the financial institution issuing the 1099-R. It's when the participant cannot cover the taxes owed that the problems really take flight.

Mistake number one was authorizing the investment house to pay upon participant direction instead of requiring input from the plan administrator (especially if the investment house, as seems apparent, lacks the sufficient expertise to properly handle distributions from retirement plans). It goes without saying that a 1099-R will be issued at the proper time, properly classifying the kind of distribution and showing, perforce, that no taxes were withheld. Coming up with the money to pay the taxes due is the participant's problem (at least initially). As usual, let us not confuse tax withholding and tax liabilities. The participant will have to declare the distribution on his or her tax return for the year and pay any taxes due (including possibly early distribution excise taxes) without there having been any offsetting withholding. That nothing was withheld does not excuse the participant from having to deal with the full tax impact of the distribution received (unless it was rolled over by the participant).

That means if the person terminates and takes a lump sum rollover, all before reaching 70 1/2 but earlier in the year in which they turn 70 1/2, some of the payout represents an RMD and cannot be part of the rollover. The year in which the person reaches 70 1/2 is a year with an RMD.

I think he means "You want to establish less restrictive eligibility requirements for owners and officers but apply the more restrictive normal eligibility requirements to everyone else? You are kidding, right?" Mike, is that what you meant?

For greater clarity, describe the catch-up payment as a single amount equal to the missed payments etc. Calling it a lump sum might lead to confusion. I think that paying the accumulated underpayments with interest in a single amount would be a suitable self-correction. As the participant had retired at NRA, it would not be necessary to consider any options with respect to the ongoing payment option. To the extent that the issue was more than just for the one person, a formal correction filing might be necessary.

This is SOOOO much better than reading regulations!!!

Speaking as someone who pays taxes, not as a tax advisor: 1. Itemizing sales taxes on the IRS filing is NOT in the nature of a reimbursement. It would be a deduction (in lieu of state income taxes?), and may or may not have any bottom-line impact on the overall income taxes to be paid. 2. If the prescription costs are being reimbursed from pre-tax HSA dollars, they cannot also be recognized as tax-deductible sales taxes. I would anticipate that those are limited to sales taxes that have not been reimbursed.

I am not involved in such transactions, but wouldn't things go more smoothly if all of the DB plan's investments were sold outright and the proceeds rolled over to the IRA?

I think you meant to say that the firm does not believe paying for services is necessary. Whatever it is that they provide to their customers, would they be willing to provide it for free to someone who is disinclined to pay them? I hold such employers in contempt! May they suffer the full consequences of their compliance failures!

While it is later still on a Friday afternoon, I don't think that you have to go with 35 years for the prorata step-rate formula to be safe harbor. I still think the formula you originally described ought to be a safe-harbor formula under the 401(a)(4) regulations for defined benefit plans.