My 2 cents

Concerning the excise tax to be paid: If the termination was admistered properly, the participant was first given a tax notice indicating how the distribution would be taxed if taken as other than a direct rollover and an opportunity to have the distribution rolled directly over to an IRA or another qualified plan, which the participant presumably declined to do, choosing cash instead. Even in plan termination situations, with the exception of really small distributions, the plan administrator must permit the participant to direct that the proceeds be rolled over directly to an IRA of the participant's choice or another qualified plan, and there should have been a place on the election form for direct rollover requests. If the sponsor maintains a defined contribution plan for which the participant is eligible, a normal action would be for the active participant (with spousal consent if the value is over $5,000) to direct that the proceeds from the defined benefit plan termination be rolled over to an account in the defined contribution plan. It is virtually certain that the person had choices to do something other than be paid in cash (unless the amount was really small). The participant was properly warned that being paid in cash would generally result in ordinary income tax plus a potential penalty tax (and that there would be mandatory 20% withholding, which would appear on the 1099-R). So put a code of 1 on the 1099-R and let the chips fall where they may.

My guess: Although the payment of an in-service distribution to an active employee age 56 is permissible because it was made when the terminating plan distributed all of its assets (otherwise it would have been prohibited), I wouldn't think that, being still employed, the participant would qualify for the exemption from the excise tax.

I think that the 2012 limitation year limit on compensation (presumably, the limitation year is the calendar year and not the plan year) would apply to compensation applicable to the plan year beginning in 2012 (i.e., 12/31/12 to 12/30/13). If I understand you correctly, that would be calendar year 2012 earnings. Unless I have succeeded in confusing myself more than everybody else, I think that means that the 3-year average compensation used to calculate the accrued benefit as of the first day of the plan year 12/31/13 to 12/30/14 would take into account the 2010, 2011 and 2012 limitations. If you are using the 2013 calendar year earnings as your "current compensation" for the 12/31/13-12/30/14 plan year, you would apply the 2013 limit to that. So if you are trying to project the accrued benefit to the end of the 12/31/13 to 12/30/14 plan year, you would use the 2013 calendar year earnings, limited by the 2013 compensation limitation. I think that it would be reasonable, in projecting the accrued benefit to the end of the 12/31/13 to 12/30/14 plan year, to take into account the 2011, 2012 and 2013 limitations if the participant at all times earned more than the compensation limit. The 2014 compensation limitation would only begin applying to earnings recognized with respect to the plan year beginning 12/31/14. Did that help (or at least make sense)?

To help clarify your question: Did you say that the earnings for the 12/31/12-12/30/13 plan year equals the compensation during calendar 2012? That would virtually equate to a one-year lag between the plan year and the earnings for the plan year. That is, earnings are defined in terms of the 1 day overlap and not the 364 day overlap? It is my understanding that the limit for the 2012-13 plan year (assuming that the limitation year is defined as the calendar year, as it usually is) would be the 401(a)(17) limit for the plan year beginning in the limitation year (i.e., $250,000, the 2012 limitation, would apply to the 12/31/12-12/30/13 plan year, which, as I understand it, defines the plan year earnings in terms of calendar 2012 compensation). So if the person earned $300,000 every single year, the three year average as of 12/30/13 (and, thus, also as of 12/31/13) would be based on the 401(a)(17) limitations for calendar 2010, 2011 and 2012. Just wondering - and for this assume that we are not talking about someone over the compensation limit - if someone retired effective 12/31/13, with payments starting 1/1/14, would what the person earned during calendar 2013 ever come into play? This is one of the reasons that I personally dislike plans not defining earnings in terms of actual compensation during the applicable period. Non-synchronous earnings definitions don't really line things up too well. But then, I don't think too much of plan years starting on the last day of a fiscal year, either.

Box 7 saying "G" ought to make it clear to the state that they are not entitled to any taxes at this time. No such thing as something qualifying for federal rollover treatement but not for state purposes, is there?

But in the context of a lump sum equivalent of the accrued benefit, the value of the subsidized pre-retirement death benefit would not necessarily be an appropriate part of the lump sum owed to the participant any more than the potential value of a subsidized disability benefit would be. Whether to discount for pre-retirement mortality would be governed by the definition of actuarial equivalence, not by the pre-retirement death benefit. It seems reasonable to me that by electing an immediate lump sum prior to normal retirement age, the participant would be foregoing the value of any further pre-retirement death benefit coverage offered under the plan, just as a participant who meets the service requirements for early retirement but not the age requirements and who is to be paid an immediate lump sum is almost surely not entitled to have the value of any early retirement subsidy (applicable to people who have met both the age and service requirements) included in their lump sum calculations. If that person were to be offered an immediate QJSA benefit prior to eligibility for early retirement (to satisfy the requirements for proper spousal coverage), it would be actuarially equivalent to the accrued benefit payable starting at normal retirement age, not to the subsidized benefit that would have become payable had the participant held off until early retirement eligibility.

If the plan is a defined benefit plan, wouldn't continued payments of non-decreasing periodic benefits payable for at least the life of the participant (increased, as appropriate, for plan cost of living benefits) automatically be considered sufficient to meet the MRD requirements (especially if there are no new accruals to go into effect)? The MRD regulations specify, for defined benefit plans, that paying ongoing lifetime benefits of that sort do meet the regulations. If it is a defined benefit plan, I think you would just continue paying the established 100% J&S benefit (plus applicable changes due to the plan's COLA) without having to perform more than perfunctory calculations (to verify that additional accruals would not affect the amounts payable). Remember, actuarial increases for deferred retirement beyond NRA do not result in additional accruals. Hard-frozen plans (frozen before 9/1/05) that are exempt from IRC Section 436 can certainly recognize deferral beyond NRA through actuarially increased benefits without losing their status.

It is my understanding that death benefits are considered incidental, and that (for example) a plan providing a death benefit equal to the full lump sum value of the accrued benefit can be prospectively amended to reduce the death benefit to a standard QPSA without there being an impermissible cutback (in the same way that a plan can be amended to prospectively eliminate special benefits payable upon a participant's becoming disabled after the amendment). AndyH, did you mean to say that the 415 cite certainly does not mandate what needs to happen with non-415 limited benefits?

Every hour worked in any capacity for any part of the controlled group must be taken into account for purposes of determining if a person, whose current job status makes him or her an eligible employee under the terms of the plan, can now enter. Example: Former union employee transfers to management after at least one year of working more than 1,000 hours as a union employee. That person is eligible for plan entry into the management plan at the next entry date. Every hour worked in any capacity for any part of the controlled group must be taken into account for purposes of determining if a person, whose current job status makes him or her an eligible employee under the terms of the plan, has enough service for vesting. Example: Former union employee transfers to management after at least five years of working more than 1,000 hours per year as a union employee. That person, upon entry into the management plan, is immediately 100% vested (assuming that the management plan has a 5-year cliff vesting schedule), although the accrued benefit at that point may be $0. Service as other than an eligible employee need not be recognized for benefit accrual purposes.

The following is based on my understanding of the various rules: 415 regulations do not allow a full actuarial increase when there are no forfeitures under the plan due to death before commencement (since the theoretical underpinning of an actuarial increase takes into account presumed reallocation among the living members of the theoretical cohort of the benefits/accounts of the members of the theoretical cohort presumed to have died). This really does not directly impact the calculation of lump sums for people being paid lump sums prior to normal retirement age unless their lump sums are being restricted under Section 415, and then only in the calculation of the 415 limit itself. The mortality basis to be used to calculate the plan's lump sum amount is specified in the plan's definition of actuarial equivalence, which either limits assumed mortality to the period after the benefit commencement date or doesn't limit assumed mortality to that period. If the plan provides for actuarial increases and for application of mortality before and after retirement, the actuarially increased benefit being cashed out factors in those theoretical reallocations even if the calculation of the 415 limitations cannot.

If the plan has a fully subsidized pre-retirement death benefit equal to the present value of the accrued benefit, would it be unreasonable to say that the value of that death benefit should be excluded from the lump sum payment (i.e., by discounting for pre-retirement mortality and interest)? If the employer chooses to generously provide full pre-retirement death benefit coverage, at its expense (which it is not required to do), why should the participant who is taking a lump sum derive an extra benefit just because they are foregoing that coverage? It is not part of the accrued benefit, after all.

Just speculating here - I don't work directly with 401(k)s. It is my understanding that if a participant is to receive (for example) a distribution of $50,000 and $10,000 is withheld for taxes, to avoid a taxable event, the entire $50,000 (i.e., the $40,000 in hand plus another $10,000 from somewhere) must be rolled over within the 60 days. If only the $40,000 in hand is rolled over, there remains a $10,000 taxable event (for which 100% was, in effect, withheld for taxes). At least I think so. No idea whether one gets the opportunity to put it back where it came from, but presumably the same rule would apply as to the amount needed to avoid a taxable event. Other issues may arise as to whether the plan from which the in-service distribution was paid would allow the participant to return some or all of the distribution. If there is any issue with the plan accepting the money back, the participant should use the money to open some sort of IRA.

Is Key Man insurance something relevant to a pension plan? I had thought that Key Man insurance is there to protect the sponsor in the event an irreplaceable employee were to die. Why handle that in the pension plan?

Isn't employer = plan administrator standard practice? Isn't it impossilbe in any event for the employer to pass off all fiduciary obligations to others (especially since all others designated as fiduciaries serve at the sponsor's pleasure)?

1. Granted that no further 8955-SSA forms will be filed (and this one should show all individuals previously reported on SSA forms as D's), there is no such thing as a "final" SSA form the way that there are final 5500's, is there? 2. If a plan terminates and purchases annuities for terminated participants with deferred benefits, is the annuity purchase considered cause to remove the person from the SSA's database by reporting them as D's? All benefit obligations that had been owed by the plan have now been satisfied, and the participant has personal control with respect to the benefits promised under the annuity. 3. If the Dr is hard to reach, do you still have the authority to file the form on his or her behalf? Presumably (oh, so naive!) the Dr has not shared his or her filing information (especially password) with you. Wouldn't the electronically filed form have to be electronically signed by an employer or plan official?

Amounts payable as lump sums are subject to 417(e) and the terms of the plan. The plan needs to explicitly say if there is to be no pre-retirement mortality in the definition of actuarial equivalence if that is what is intended. If the plan does not call for there being no pre-retirement mortality for actuarial equivalence purposes, pre-retirement mortality should be used for that purpose. Plans that do call for no pre-retirement mortality for actuarial equivalence purposes can and should use no pre-retirement mortality for that purpose. What one can or should do for minimum funding requirement calculations is the subject for a different discussion.

Prior to Windsor, a plan could provide a pre-retirement death benefit (NOT a QPSA!) to a non-spouse beneficiary, although it would not have been required to do so. Prior to Windsor, a plan could be drafted to provide nearly identical benefits in situations where the participant and his or her spouse were of the same gender. There was no requirement that plans be drafted that way, and prior to Windsor, a plan could not treat a same-sex spouse as a spouse, since DOMA clearly stated that for purposes of all federal laws, the term "spouse" would not apply to same-sex couples. So among the things the IRS needs to determine is how far back do plans need to go to reverse "no death benefit payable" decisions involving surviving same-sex spouses of participants who died prior to benefit commencement? My guess is that the IRS has more leeway in situations where nothing was paid to anybody but had DOMA not been there, a same-sex spouse would have received a pre-retirement death benefit. There are plans that allow the election of a joint form of payment only if the joint annuitant was the participant's spouse (which is and was perfectly legal). It would have been a violation of DOMA to have permitted the election of such a form of payment when the participant and spouse were of the same sex. How far back should plans be required to go in offering current retirees with same-sex spouses the opportunity to change their elections (presumably on a prospective basis)? Should it require spousal consent for the annuity form NOT to be changed to a QJSA? Should there have to be any corrective action with respect to retirees who were not allowed to retire under anything other than a straight life annuity (because they were in a legal same-sex marriage) where the retiree has since died? If so, how far back should plans be required to go in identifying people affected? These are the sorts of questions that must be resolved by the IRS before they can squarely address any issues involving retroactivity.

There is a session concerning DOMA/Windsor scheduled for this year's Enrolled Actuaries Meeting at the end of March. Perhaps the IRS will be striving to get something out by then. Certainly, to the extent that any retroactive actions will be required (there will probably be some), the sooner the better. It seems unlikely that plans' qualification statuses will be jeopardized, especially considering the fact that until a half year ago, most of the actions that will now be mandatory were explicitly proscribed. Short answer - you do not appear to have missed anything. Structuring appropriate corrective action is not that straightforward.

What does the IRS mean when they ask about "unreasonable compensation issues"? Aren't the 401(a)(17) limitation and the 401(k) and 415 limitations sufficient to prevent whatever it is they are concerned about?

Had the plan not terminated, quarterly contributions would have been due 4/15/14, 7/15/14, 10/15/14 and 1/15/15. For what it is worth, It is my understanding that quarterly contributions are not required after the effective date of the plan termination, so the only quarterly amount required would be due 4/15/14. The minimum required contribution for the plan year still needs to be satisfied.

As a general rule, to survive in the modern world, it is a good idea to do what your lawyer tells you to do!

Some aspects of the determination of the rate of return on the SB (presumably as used to update the credit balances) have not been clarified, nor has there been any clarification as to what counts as expenses for Target Normal Cost purposes. It is my understanding that some practitioners, for example, exclude investment expenses from the estimated expenses required to be added to the Target Normal Cost. Presumably, those practitioners would reduce the investment income accordingly. Not sure how insurance premiums (term or otherwise) are handled, but I do agree that if they are paid from the plan assets they would certainly not be considered contributions to the plan, except to the extent that next year's Target Normal Cost is increased in anticipation of the removal of assets to pay premiums next year. In that case, cash contributions next year to cover next year's Target Normal Cost (as opposed to the insurance premiums themselves) would be recognized as contributions.

IRC Section 436 does not apply to governmental plans. The funding rules of PPA do not apply to governmental plans. To the best of my understanding, governmental plans should not adopt good faith interim amendments with respect to either PPA or IRC 436.

I think that in measuring his current benefits against the 415 limit, you calculate what the current plan would otherwise give him and also what the 415 limit would be (taking into account amounts already paid to him) and then compare. I agree that if the employer is the same, the old 3-year average would continue to apply. The following might be oversimplified: Example 1: Current plan (without regard to 415) would pay $70,000 per year. Prior plan distribution normalizes to $145,000. Current 415 limit is lesser of $210,000 or 3-year average. Unless 3-year average is below $210,000, 415 would limit current plan to $65,000. Remember that (as this is not a governmental plan), the $65,000 limits both the accrued benefit and the amount payable from the plan (i.e., the $70,000 is not accrued, even if that is what the formula would call for). Example 2: Same as example 1 but 3-year average is only $150,000. Current plan would be limited to $5,000. Example 3: Same as example 1 but prior distribution normalizes to $120,000. Then the current plan could pay the full $70,000.

Whether one can file a 5500-SF depends on the size of the plan and the nature of the plan's investments. I cannot imagine that just because one has information for a Schedule A for a 5500 filing means that they cannot file a 5500-SF. In fact, wouldn't Schedule A information be provided, in general, for the kind of assets that are fully consistent with qualifying for filing an SF? To the best of my recollection, it is still perfectly acceptable to report plan assets held in an insurance company general account at "contract value" on a 5500 Schedule H, without regard to whether there would be deductions or other adjustments in the event of liquidation of the account.