My 2 cents

As if any thought was given to how much information people are able to conveniently handle at one time! We should consider ourselves lucky that we don't have to give the QJSA explanation in six languages, like the instructions that come with new toasters!

If I remember correctly, participants blocked from receiving accruals by Section 415 can be treated for testing purposes as benefiting under the plan.

Based on my understanding of how these things operate, the Company B participants should not have any control over the life insurance policies, which belong entirely to the plan, so they cannot be forced "to surrender the policies". Perhaps they should be given an opportunity to buy the policies from the plan for their full current cash value (and either have them go paid up or take over the premium payments), and if they choose not to, the policies could be surrendered by the plan for the cash value. Buying the policies from the plan should not give the participants any special rights under the ongoing plan. This assumes that the participants were never required to contribute to either the plan or the insurance premiums.

Fine with me! (for what that's worth) Long ago experience with investments that suddenly turned illiquid, especially with respect to plans that were trying to terminate, soured me on the idea for good. Surely there are enough investments out there, no riskier than your everyday equity fund, to make many "alternate investments" a bad idea for qualified retirement plans. Feel free to invest your IRA in them if you are feeling lucky (but watch out for liquidity issues when it's time for minimum distributions!). Still seems as though a normal REIT (if one wants real estate in the plan's portfolio), sold in established markets, would be more prudent than a private REIT that is going to be illiquid for a period of time.

Is there such a thing as an illiquid qualified asset?

Not an investment expert or a lawyer, but is it not true that the selection of an investment of this sort is subject to fiduciary standards? Will the decision maker(s) be prepared to defend the prudence and diligence of the process that led to the decision to buy a currently illiquid, non-publicly traded REIT? Fiduciaries do not get much sympathy when challenged when they point to high expected returns when the investment turns out to be poor. Why is the financial advisor suggesting this investment? How do the expected returns and volatility compare to those of equity investments in established companies? How does buying this investment instead of a publicly traded REIT do a better job of diversifying the investments?

Any extracontractual offer to the participant should clearly state something to the effect that the offer is not some sort of admission of guilt. Any extra money to be paid under such an offer would presumably be taxed as ordinary income and would not be eligible for rollover, right?

It was certainly not my intention to imply that mbozek was suggesting any kind of threat. I was just taken aback by the idea that an annuity purchase would not be an option because of its cost. Annuity purchases are the default option when a defined benefit plan terminates (however likely it may be that individual participants will opt for a lump sum and not have an annuity purchased).. Going back to the idea that the participant is threatening to derail the plan termination because they don't think their benefit is as large as it should be, I am not sure that offering a cash incentive or something else outside the plan to accept the plan benefit as is and to elect to receive it as a lump sum will work. I may be wrong, but such an offer seems to me likely to make them even more suspicious. Why can't the sponsor just say "Here is a statement showing what you are entitled to and an election form. Make an election by [date] or an irrevocable annuity will be purchased on your behalf." and then do it. Assuming that the benefits have been double checked and the plan administrator is confident that they are correct. I presume that the participant was given a Notice of Plan Benefits months ago and the notice said what to do if the participant felt that the information shown was not correct. Wouldn't that represent a benefit determination, so that the time for appealing would have run from then? If the notice was given out in 2013 (using 2013 417(e) rates) and said that changes in those rates could increase or decrease the lump sum payable, but the actual 417(e) rates are to be based on levels in 2014 (reducing the lump sum), that should be clearly communicated to the objecting participant with a statement that the amount quoted in 2013 is not protected in any way. Assuming no plan provisions to the contrary.

Concerning the final comment in the above post: It is noted in the original post that the benefit is worth more than $5,000. Consequently, the participant has the absolute right to demand that an annuity be purchased, and the sponsor, to complete a standard termination, has no alternative but to comply if the participant does not want to waive the right to have an annuity purchased instead of being paid a lump sum, without regard to any potential extra cost. Threats or attempts at coercion to persuade the participant to not choose an annuity must be avoided (as must any reprisals, especially if the participant is any employee, such as termination or even substandard performance ratings or pay increases), since any such pressure would create a situation where the participant would surely win any resulting litigation (interference with ERISA rights). Ask any government official dealing with pension plans, and you will basically be told that when it comes to properly completing a standard plan termination, money is no object. The annuity provider cannot be selected based on price, participants have rights that must be protected, etc.

Question 42 of the 2014 Gray Book sort of addressed this question. The unofficial position of the IRS is that the plan document probably should be amended to reference Funding Target instead of Current Liability. The question was whether, if the 110% determination was made for 2012 and 2013 using MAP-21 rates, is it OK to revert to non-MAP-21 rates in 2014? The IRS people unofficially said that it comes down to a matter of plan interpretation, and that "using MAP-21 or not using MAP-21 are both acceptable, but it would not be reasonable to shift back and forth without a compelling rationale." Seems to me that if one had been using MAP-21 and then HATFA was passed, it would be eminently reasonable to use HATFA rates once they became applicable to the plan's funding. I am curious about the back story behind the question. I always thought that sponsors would do whatever they could to let members of the 25-High Club elect the benefits in the form they wanted. Why would the sponsor want to prevent someone from being allowed to do so? That makes me think of a 25-high question: Once one of the 25-highest paid HCEs is cashed out, do they remain in the 25-high HCE group until supplanted by people who were paid even more? It is the 25 highest-paid HCEs of all time from within the controlled group, whether covered by this plan or not, right? Assuming, of course, that you have more than 25 HCEs and former HCEs to begin with.

My view: Purchasing an annuity (as noted above, it must retain the distribution options and factors available under the plan) is the only option, unless she elects to be paid the lump sum equivalent of the benefit as defined by the plan (with spousal consent if the participant is married). Rollovers to IRAs without proper consent are impermissible if the benefit is worth more than $5,000. The annuity will cost more, but under no circumstances would she be entitled to the higher amount it would cost to purchase the annuity. The plan must define the benefit and also the lump sum equivalent thereof. Buy an irrevocable annuity to cover the benefit if the participant will not elect to receive the lump sum equivalent as defined by the plan. No election = default action. The participant has no authority to delay the distribution of benefits to complete the termination. If she is being offered an immediate lump sum, she should have the option to receive an immediate annuity, but if she will make no election and has not reached normal retirement age, it is a deferred annuity that should be purchased. As for the legal action, it is a free country, and you can't stop people from wasting their money on pointless lawsuits. In saying that, I am presuming that you have double checked the benefit calculations for that participant and are prepared to defend them in court.

My suggestions, for what they are worth: Are the appraisal fees paid directly by the plan? The maintenance/landscaping costs? If not actually paid by the plan, it would not be reported as an expense on the Schedule H at all. If paid from rent revenue (for example), the net rent would be what's reported, not the gross. So maybe the hit is on item 2(b)(3) (rent income). I don't think that investment-related expenses of any sort really belong in realized or unrealized gains or losses, even if the expense is related to keeping the value from declining. If they are paid from the plan, it's probably a matter of practice (what does the plan's accountant think?), but I would lean towards item 2(i)(4) ("other"), unless you think that it should be shown as "professional fees" (2(i)(1)). Maybe show the appraisal as professional fees and put the landscaping in other (unless they are REALLY good landscapers). Or perhaps put the maintenance and landscaping into 2(i)(3) (investment advisory and management fees), but while the maintenance and landscaping costs are related to management of the investment, I don't think that is what people usually mean by investment management fees.

Assuming that we are talking about a single employer plan, when is the employer not a fiduciary? It is my understanding that even if another entity has been designated as the plan administrator or trustee, the employer has the authority to replace them, usually at will and retains sufficient control to be considered a fiduciary.

If the plan had already been disqualified, the proceeds would probably not be eligible to be rolled over. One suspects that it would be from the employer as a fiduciary of the plan (and the employer would usually be the plan administrator) that damages would be sought, not from the plan itself.

I find it somewhat touching that the owner has that much faith in his brother's investment acumen.

Please clarify/verify the following points: a. The participant is required to commence receiving benefits as of the time when the 415 compensation limit would be exceeded as a result of application of actuarial increases for deferred commencement. Is that why the person has started receiving benefits? b. The phrase "the monthly payments they should have received" implies that the payments were not begun on a timely basis. Is this so? If it is, then the situation would involve the need for at least voluntary self-correction. c. To clarify - the person was paid retroactive monthly benefits from when payments should have started to the date that they did, and the participant (who is, one presumes, not currently affected by required minimum distributions) received the lump sum value of the future monthly benefits, which was rolled over. This might be helpful for the people who are going to submit comments. If the situation was as described in my item c, I would vote for your choice #1. Treat the catch-up payment as covering a number of months' life annuity payments and don't try to roll it over. But don't take my word for it - check with a tax advisor.

Am I interpreting the original post correctly? I understood it to be a given that the child is the properly designated beneficiary under the IRA, so the entire proceeds of the IRA ought to go to the child, and (I hope I do not make this sound unnecessarily negative) it appears that the charity to whom the participant's entire estate was left is looking to find a way to gain possession of some of the IRA as well. The most recent post ended by saying that the IRS might be especially understanding with a charity as the beneficiary, but the charity is not a beneficiary of the IRA. Maybe they meant that the IRS would forgive the estate of paying excise taxes for the unpaid RMDs because the charity would otherwise receive the funds that would have gone to pay the excise taxes. Does it work that way? I certainly agree that the terms of the will do not affect the identity of the IRA's beneficiary. The will is of no effect until the participant has died, by which point the beneficiary of the IRA is a settled issue.

Dare one ask what it is you are trying to do to the participants? This is being done in good faith (excuse the pun), isn't it?

I think that the first payment is due by April 1 of the year following the later of the year in which the person turns 70 1/2 or the year in which they "retire" (which is generally interpreted as separating from service). Was anything paid on or before April 1, 2014?

I was asking what the plan said about how to allocate the assets. I don't think that anyone is questioning whether the participants are supposed to be treated as fully vested. Some of the plans I have seen say to pay for the retirees in full, then (if anything remains) the active participants over normal retirement age, then (again, if anything remains) everyone else. If there is not enough money to cover a category, the benefits in that category are covered prorata and everyone in the later category or categories gets nothing. If the plan is truly silent, then you may be at liberty to allocate prorata to all as you propose. Also, as this is a defined benefit plan, when you refer to PVAB, do you mean on the basis of insurance company annuity rates? Remember that the default course of action is to buy annuities, and you cannot say to anyone that they have to be limited to the annuity that can be purchased by the amount otherwise payable as a lump sum. If you reduce someone's benefit to $X per month, you must give them a choice between a lump sum payment equal to the present value of $X per month or the purchase of an annuity of no less than $X per month (however much more that actually costs). To the extent that some participants exercise their absolute right (by law nobody can so much as try to make them choose otherwise, and if they are married, the spouse also has veto power over a lump sum) to demand an annuity be purchased, the amount available to every participant may have to be reduced further.

It is my understanding that 100% vesting is automatic upon attainment of NRA while actively employed, so if NRA is a flat 65, someone hired at age 64 would be fully vested on his or her 65th birthday (and anyone hired over age 65 would be fully vested in any accruals immediately). As noted, the law says the earlier of the plan's NRA or the later of age 65 or the 5th anniversary of the time of plan entry. So choice #1 in the original post would only be satisfactory if 65 and 5 years of participation occurs on or before the 5th anniversary of plan entry.

Would the old priority categories apply or are you thinking of cutting everyone equally? What does the plan say should be done?

I was presuming that the NHCEs had terminated (else how could they have been paid out?) and that there remained only the owner and the owner's spouse.

Possible 401(a)(4) issue concerning timing of plan termination, since appearance is that ownership may have deferred the termination of the plan until after the nhces had terminated and were paid out, in order to avoid allocating any of the excess assets to them. Timing of amendments is a facts and circumstances determination.

I have some questions/comments: 1. Has the plan actually been disqualified? When? Why? If the plan had been disqualified (for any reason) before the payment was made, the distribution would truly not have been eligible to be rolled over. Remember that merely failing to follow the rules does not automatically disqualify a plan - the IRS must impose that penalty, and they have in place a number of correction methods intended to give sponsors a way out short of outright disqualification. 2. Assuming that the distribution itself was not ineligible to be rolled over, the participant could certainly have taken action to roll over the proceeds within 60 days of payment (recognizing that this could mean that any amounts withheld for taxes would either have to be replaced from other participant funds or some of the distribution would have remained taxable). If the distribution was relatively large, the participant could well have availed him or herself of professional guidance to optimize the tax consequences of the distribution (assuming, again, that the distribution did not have to be treated as ineligible for rollover). 3. Not to deny that there are many plans whose primary reason for existence is to minimize the impact of taxes, the tax-favored treatment is being provided to encourage retirement savings and to encourage companies to provide an element of retirement security to their employees, to reduce poverty and dependence after the working years (not to minimize taxes). What incentive would the government have to provide tax-favored treatment for retirement plans if all that would be accomplished would be to reduce taxes? 4. It is by no means a certainty that future taxes on amounts rolled over to IRAs and subsequently distributed from there will be more favorable than those that would apply if the proceeds were taxed currently, even if the level of annual income at the time the IRA balances are distributed is lower. What if tax rates are raised some day to reduce government deficits? It could happen.