My 2 cents

I think a question like this came up at the "Dialogue with the IRS" session at this week's Enrolled Actuaries Meeting. My recollection is that the plan cannot do what is suggested here. There can only be one basis for actuarial equivalence with respect to the requirements of 417(e). Think of it this way - whether there was any expectation of having the plan's definition of actuarial equivalence apply outside of the context of small cashouts, the fact is that the plan did have a definition of actuarial equivalence (which, one presumes, specified the basis for equivalence determinations for payment forms subject to 417(e), including the lookback and stability parameters). To make any changes in that definition would have to be treated as creating grandfathered rights for all circumstances under which the actuarial equivalence provisions with respect to 417(e) would be applicable. Don't forget that the actual distributions might not take place until one is in a different plan year, which would undermine any sort of effort to game the determination of lump sums by choosing a lookback period with the highest possible rates. Would the lump sum lookback period be chosen in order to provide larger lump sums for everyone? It would be abusive to look for ways to save money on the backs of people choosing to receive lump sums. If the choice of lookback period is being made based on illegitimate motives like that, it would serve the sponsor right if everyone got the idea that the sponsor is trying to cheat them, leading to people choosing to force the sponsor to pay for lots and lots of insurance company annuities.

ERISA does not require that people be treated as fully vested upon attainment of age 65. ERISA, which permits normal retirement age to be as late as the later of attainment of age 65 or the 5th anniversary of plan entry, requires that people be treated as fully vested upon attainment of Normal Retirement Age. While it can definitively be stated that this participant is not 100% vested as a result of attainment of normal retirement age, the answer can only be determined by looking at the plan's vesting and early retirement provisions. If the plan defines early retirement eligibility as attainment of age 55 (with no service requirement) or termination of employment within 10 years of normal retirement date (again, with no service requirement) or if the plan provides full and immediate vesting or full vesting upon attainment of age 65 (with no service requirement), then the person would be 100% vested. If there is a 10 years of service requirement for early retirement and vesting is a straight 5-year cliff schedule, then the person would probably be 0% vested.

With respect to question 2, be sure that the rollover does not include anything that must be distributed as an RMD!

Don't really understand how you could, by amending the plans, change the corporate structure from a controlled group to a multiple employer situation. Do you mean that the actual corporate structure has changed from a controlled group to a multiple employer situation? If so, is a plan amendment necessary? I realize that this is not an answer to your actual question.

A defined benefit plan with participant loans! Ugh!

Trying to imagine what would be their reaction if, when the owners want to retire, the plan would not be 110% funded and they would be barred from cashing out without posting enough security to facilitate clawing back part of their distribution!

Just wondering whether this would be a prohibited transaction of any sort, as it seems to be using plan assets directly to benefit one or more plan participants. Dealing with a party in interest or something like that. What fiduciary process was followed to analyze the investments for suitability and prudence? The choice of plan investments would certainly require that degree of care.

I thought that it was not permitted to stop recognition of interest credits, since they are considered to be part of the accrued benefit. If you freeze a traditional defined benefit plan, there would be no question but that the value of the deferred benefits would go up from year to year due to the shortening of the deferral period. How could it be any different for cash balance plans?

A 1099-R would seem to make it even more obvious to the IRS. There is a separate line on the 1040 for reporting what is on the 1099-R. Easier to cross-check one form against the other. Does the employee have a boss? Has the employee been asked by either HR or that boss why he or she is choosing to make life difficult for the sponsor? It is taxable income in any event, so why not just take it? Under tax law, is not reporting it but not cashing the check looked at any more favorably than not reporting it but cashing the check? Just double checking, but is the money pulled from his account whether or not the check is cashed, and not put back under any circumstances?

How is an ADP refund reflected on the W-2 form? Will the W-2 form show the taxable earnings after 401(k) salary reductions based on the amount withheld during the year or after adjustment for the ADP refund? Is it handled through corrected W-2 forms? In other words, if the IRS is carefully comparing the W-2s they receive and what the taxpayers are reporting as income, will there be a noticeable discrepancy? Has the sponsor passed along to the recalcitrant employee that they are reporting to the IRS the reduced 401(k) amounts so the participant can only reflect the lower salary reductions in the income they declare on their 1040?

1. Wouldn't the assets, as transferred from the db plan, all be considered rollovers into the 401(k) plan and thus unrelated to any contribution requirements under the 401(k) plan? 2. Are the db funds being transferred based on participant elections (with spousal consent!) to do so? Otherwise those funds are permanently subject to the QJSA requirements (including payment as an annuity as the default). Or have the rules changed while I was looking at something else?

Pretty sure that the fact that the person was employed for only part of the year does NOT matter. As a non-owner, I think it is just the total paid that year.

There is (or at least was) a limited mechanism in defined benefit plans where the enrolled actuary can certify that the amount is in excess of the deduction limit, permitting that clause to be invoked. Not sure if it still applies. In any event, I think that one can apply for a private letter ruling as to whether the contribution is deductible. If they say "no", then the clause applies. Ditto for an IRS audit that finds the contribution not to be deductible. Not pretty, but at least the clause is there allowing a partial fix.

Again, I cannot imagine what the IRS could do if a 1099-R was issued with respect to funds escheated to the state. Impossible that a taxable event could have occurred! Is it not the case that when escheated IRA funds are restored to the individual, it can be done so as a direct IRA rollover? If not, why not?

Doesn't it work like this: Participant elects an annuity that meets the distribution requirements (i.e., periodic payments no further apart than 12 months, restrictions on variability of payments, etc.): First payment due 4/1 of year after later of 70 1/2 and retirement (or just 70 1/2 if 5% owner), second payment due after payment interval, ergo no later than 4/1 of next year (or no later than 5/1 of same year if monthly annuity). Participant elects something other than annuity (i.e., individual MRD): First payment due 4/1 of year after later of 70 1/2 and retirement (or just 70 1/2 if 5% owner), second payment due by 12/31 of that same year.

Question 42 of the 2014 Gray Book addressed this. The response to the question (which was primarily about changing which measure would be used from one plan year to another) reiterated the "reasonable and consistent" standard and questioned whether switching between funding target based on HATFA or MAP-21 and no-relief segment rates would be within the parameters of a reasonable interpretation. Clearly, for 2012 years, usual segment rates to MAP-21 rates would not be considered a change at all (ditto for MAP-21 to HATFA for 2013, if HATFA was used, or 2014, if HATFA was not used in 2013). Certainly, since PPA became effective, basing the determination on Funding Target assumptions would, by itself, be acceptable as a proxy for Current Liability. It might not be good enough to just use beginning of year values - that was not good enough in the days of Current Liability. Without anything making the use of HATFA rates inconsistent with prior top-25 determinations, I would not think that there is anything to stop the use of HATFA rates. The usual intention is to permit the lump sums without restriction whenever possible, right? So one should generally strive to use the highest discount rates that would be considered reasonable. At this time, that would call for HATFA rates.

But if their tax refund is delayed, they still have no alternative but to find the money now somehow to make the IRA contribution by April 15 (unless they are willing to refile claiming no IRA deduction).

Just wondering (as someone who does not handle defined contribution plans) - is that kind of provision allowable? And wouldn't 6 months be an awfully short time frame? It all sounds almost like a pretext for allowing in-service distributions when they would otherwise not be permitted. And of course, with respect to the actual question, the standard mantra applies - what does the plan say?

Not a health benefit practitioner, but I can easily imagine the insurer refusing to cover medical expenses for the people being allowed to stay in contrary to the plan provisions/limitations. And, since they would not have been given proper COBRA notice, well, it might not be a pretty sight!

Technically, the assumption in the valuation report is for the "assumed retirement age". Presumably, for each possible retirement decrement date under the assumed retirement age assumption, the valuation calculations are factoring in whatever early or late retirement factors would apply at that date, based on the plan's actual NRA. And one might look to the amendment that changed the normal retirement age under the plan to see what it says (i.e., does it call for a wear-away approach or something else, or does it provide for grandfather treatment for some participants?).

Taking this to mean that one can file the 1040 before the IRA contribution is made and claim the planned IRA contribution as a deduction from income, but if the IRA contribution is not made by April 15th, it is time to file an amended return (and pay the additional taxes and interest).

It would be my expectation that if there is a cut-off for 415 purposes during the plan year of termination, it would be the effective date of plan termination. I would not see either the filing date for the final 5500 or the date on which plan assets are distributed as relevant for that purpose.

I don't work on 401(k) plans, but would the date the 5500 is filed ever matter for this? Answer would probably fall among (a) comp up to termination date, (b) prorated comp based on fraction of year to termination date, or © full year comp.

My point was that if in-service distributions were not allowed before at age 60, changing the normal retirement age to 62 and setting up an early retirement provision granting full vesting (but not allowing in-service distributions) might have been a change that would not have represented a cutback. But apparently, in-service distributions were allowed at age 60 so that wouldn't work.

But can they do so without a bona fide separation from service? The problem arises primarily when distributions are permitted on or after the low NRA without the participant having to separate. The IRS restrictions on early NRAs are there to limit in-service distributions. I don't think the IRS has much objection to permitting earlier distributions to separated participants. You don't see any limitations on how early Early Retirement can be, but to take an Early Retirement benefit, the participant must have separated from service. If the plan does not allow distributions to active employees, even those who have attained NRA, would there be a cutback if NRA was pushed up to 62 but full vesting was granted at 60 (without regard to service) and anyone who terminated on or after age 60 could receive a distribution?