My 2 cents

It has always been my understanding that QDROs are not restricted to spouses and the orders are not restricted to marital property. Proper QDROs can provide for diversion of some or all of the pension benefits from the participant to persons dependent on the participant (clearest example: children of the participant). Granted, division of separate property would fall outside the scope of a QDRO, which can only deal with the pension rights of the participant.

In the event of an audit, even if one showed check dates for all contributions, a challenge to the date of the final payment could be expected. I don't think there are any requirements for dating contributions that require that all be determined using the same method for any given plan year. The audit challenge would not involve the dates of the other contributions (especially if they were all received by the quarterly due dates, or, alternatively, it is indicated that not all were timely with an attachment and with the discounting suitably adjusted to use the penalty discount rate for the day or two they were late), just the one that makes the difference between meeting the minimum contribution and not meeting it, and the proof would be there to show that it was sent on a timely basis (with good old 2006 Gray Book Question 4 in reserve). In other words, however you report the other contribution dates, it all comes down to the acceptability of recognizing that last payment (which will, inevitably, differ from what the financial statement ultimately shows). If it is a matter of concern, however, even if on all the other Schedule SBs one uses the receipt date, then move all of the dates for this Schedule SB to check date for consistency. And, however handled, be ready to defend the September 13th date.

As may be inferred from my earlier post, it seems to me that using the date received by the fund/trustee is the easiest (and probably safest) approach, but that would not be the way to go if dealing with a situation with severe adverse consequences and there is sufficient proof that the sponsor sent the check or wire transfer on a timely basis. In light of the Gray Book response, it seems clear that showing the payment as having been made on September 13th would be the way to go, even if all of the other contributions shown on the Schedule SB are being reported as of the dates received.

If any HCEs benefit from the window, it would probably become necessary to worry about compliance tests that would otherwise have been passed on a virtually automatic basis. You might find it necessary to separate the covered population into two groups to be tested separately if those eligible for the window include any HCEs. Whether the plan loses status as a frozen plan or not, the testing of the group not getting the window is trivial (since no HCEs in that group are benefitting), and you only need to worry about testing those getting the window, to make sure that it passes coverage. The testing is with respect to those offered the window, not just those taking it.

It's always necessary to worry about an early retirement window passing coverage if any of the eligible group are HCEs, whether the plan is frozen or not. Sometimes the window needs to exclude one or more of the HCEs to be sure that coverage will be passed. I would second Andy the Actuary's caution - watch out if there are any plan improvements if the plan has been frozen since before September 2005. If that exemption is lost, you can't get it back! This could be particularly acute if liberalizing the early retirement requirements were found to lose the exemption, the plan's funded percentage were found to be below 80%, and the plan offers accelerated options that would be subject to IRC Section 436 restrictions. Not much fun offering an early retirement window if the participants can't elect the forms they want, especially if they could before the window. Even tougher to take if an HCE is not eligible for the window but due to reach retirement eligibility in a year or two, the window is adopted, and then when the HCE goes to retire, the choice of taking a lump sum without restriction is gone. We generally would certify AFTAPs for frozen plans, whether exempt from application of IRC Section 436 or not. An actuarial valuation is required every year anyway. How much extra work is an AFTAP certification? It could be relevant for other purposes anyway. Long-frozen plans aren't exempt from the at-risk rules (including possible restrictions on non-qualified deferred comp), are they?

It would be equal to the shortfall if you were to set up a new base this year equal to the shortfall minus the PV of the old bases, but it was noted above that the plan is exempt from establishing a new base (and exempt = a new base is not permitted to be set up). The PV of future amortizations for this year's bases may, in fact, be negative since no new base will true it up.

Gotta agree with Calavera, but please note that the "but not less than zero" is new for the 2012 instructions. My easiest access to the instructions is for 2011 and earlier (which did say that the amortization amount should not be less than $0 but did not address the present value being negative) so I was not aware of the change. So show a $0 outstanding balance but do not neglect to include the positive amortization required for the plan.

I have to think that the question implies that the HCE/Key is up against the 415 limit and essentially nothing further can be put iin his or her hypothetical account. Be that as it may, the question makes me wonder if the IRS has attempted to invoke the requirement that plans be intended to be permanent in the past few years. Also, is there any chance that freezing the plan for all immediately after the HCE/Key will stop receiving any further accruals would run afoul of the timing of amendments provision of the non-discrimination regulations (which is a facts and circumstances determination)? Were the plan to terminate, it could be less likely that such issues would be raised (which is not to say that it is likely that they would be raised in the event that the plan were merely frozen).

First, everyone should look at that chart. It is really well done. But the law in this area is in a state of flux, and the chart focuses on the current state of the law. Certainly, many states do not currently allow same-sex marriages and do not recognize same-sex marriages performed elsewhere, but how long can that be expected to continue? A same-sex couple that had been legally married in Massachusetts but who now reside in Pennsylvania has filed a suit against the state of Pennsylvania saying that the Pennsylvania laws that call for them to be denied the status of marriage for state law purposes (such as tax status, ownership laws and all the other laws that provide rights to opposite-sex legally-married couples but not to them) is unconsitutional. What are their chances of prevailing (assuming they are williing to fight long and hard enough)? Justice Scalia (who, let there be no doubt, clearly disapproved of the DOMA decision) explicitly pointed out in his dissent that the same arguments used to determine that DOMA, as a federal law, is unconstitutional can, virtually without modification, be applied to negate any similar state laws. If you haven't seen his dissent, he quoted major parts of the majority's DOMA decision, replacing the word "federal" with the word "state" throughout, noting that the results were as logical and coherent as they were in the DOMA decision (although it was clear that he meant it as a warning or reductio ad absurdum). Will lower courts throw out all state laws prohibiting recognition of same-sex marriages performed in jurisdictions allowing them? If it goes to the Supreme Court, will their ruling differ materially from the DOMA decision? Will states not permitting legal marriages between same-sex couples even be allowed to continue doing so? A lawsuit has been filed in Mississippi seeking to require that state to allow same-sex couples to marry. How will that suit ultimately fare?

It is my understanding, for what it is worth, that one uses as many of the codes as apply, not just one code chosen as the best descriptor. If one is working with (for example) a frozen defined benefit plan using a volume submitter document, sponsored by a member of a controlled group, that had used a compensation based formula prior to the freeze and which is covered by the PBGC, you might show, as codes (please forgive me if I get any of these wrong) 1A, 1G, 1I, 3D and 3H.

If the you are dealing with something like a 1 participant plan for someone at NRA and the objective is to bring the assets up to the amount that would be payable as a lump sum, would the 50% cushion amount, together with the fact that the deduction limit is explicitly not based on the MAP-21 funding relief rates, be enough to get you where you want to be? Remember, just because the minimum contribution won't be enough for such a plan does not mean that you cannot contribute more, probably on a tax-deductible basis. As for the effective interest rate: Expected cash flow = 1 payment at time t=0. My guess is that, by default, since the entire cash flow is within the first 5 years, you get the first segment rate as the effective interest rate. To reiterate, the assumptions used to determine the expected cash flow do not determine what the effective interest rate is.

Please take note that at a recent ABA conference, an IRS associate chief counsel for employee benefits pointed out that the tax code does not mandate spousal coverage at all, and that the sponsors can (except for protected classes like race or gender) carve out whomever they choose. Speaking for himself at the time, he did point out that offering health insurance coverage to opposite-sex spouses but not same-sex spouses invites litigation, but he then said that they would not be litigating over the tax code.

While it may be true that if you use 7.05% to both calculate the expected lump sum payable at t=20 and to discount it that you would get the same answer as using 4.5% to calculate the expected lump sum payable at t=20 and 8% to discount it, that does not make the Effective Interest Rate (for PPA purposes) equal to 7.05%. Step one is construct the expected cash flow, taking into account whatever plan provisions and assumptions are appropriate (i.e., in this case the assumption/plan provision specifiying that lump sums are based on 4.5% interest). Step two is discount the expected cash flow from step one using the applicable segment rates to get the funding target. Step three is find a single interest rate such that discounting the expected cash flow from step one using that single rate gives you the same present value that you got in step two. It is my understanding that this approach to finding the effective interest rate is the approach required under PPA and the regulations.

Suppose that your entire expected cash flow consists of a single payment of $X expected to be paid in 19 years. FundingTarget (using your segment rates) = $X divided by 1.08% to the 19th power. Effective Interest rate (single interest rate that produces the same present value) = 8%, by default. You don't give a third segment rate, so let's suppose that the third segment rate is 8.2%. Suppose that your entire expected cash flow consists of a single payment of $Y expected to be paid in 21 years. Funding Target = $Y divided by 1.082 to the 21st power. Effective interest rate (single interest rate that produces the same present value) = 8.2%. Suppose that your entire expected cash flow consists of a payment of 0.5 times $X expected to be paid in 19 years and a payment of 0.5 times $Y expected to be paid in 21 years. Funding Target = 0.5 times $X divided by 1.08 to the 19th power plus 0.5 times $Y divided by 1.082 to the 21st power. You need to solve for a single interest rate that produces the same discounted value. It will probably be very close to 8.1%. The effective interest rate has nothing to do with the interest rates used to project the cash flow, only those used to discount the cash flow. In these examples, note that how one gets $X or $Y is not taken into account in calculating the Funding Target or the effective interest rate. I hope this helps.

It is not a matter of it being impermissible. If you calculate your anticipated cash flow for all future years and then discount the first five years' cashflow at x%, the next 15 years' cashflow at y% and the cashflow anticipated for 20+ years at z% (x%, y% and z% all being positive), and then solve for an interest rate w% that produces the same discounted value, is it possible, for any cash flow not involving negative (imaginary?) numbers to get a w% lower than the smallest of x%, y% and z%? You could come up with an effective rate lower than the first segment rate, but only if the second or third segment rate is less than the first. It all comes down to having to calculate a cash flow and then apply the discount rates to that cash flow. There is no other way to calculate a PPA Funding Target.

As I understand PPA, while you might use anticipated lump sum values based on 5% to get your anticipated cash flow (i.e., if the plan explicitly pays the greater of the 417(e) minimum lump sum and a 5% lump sum), the cash flow must then be discounted back to the present using the applicable segment rates, and you must then solve for a single rate (the effective interest rate) that produces an identical discounted value of that cash flow. I believe that the only acceptable methodology under PPA for determining the funding target is to (a) determine an expected cash flow and then (b) discount that cash flow using the relevant segment rates (or the full yield curve if that is being used). Presuming that you are not using the full yield curve, if you are getting an effective interest rate below the lowest segment rate, your software must either have a bug or lack sufficient sophistication to properly apply the PPA funding rules.

If you don't want to show a negative balance, show an outstanding balance of $0, but in any event, the $10,000 must be charged (and an amortization schedule should be attached to the SB). I don't think that it is permissible under the law or regulations to deem all balances to be $0 and eliminate the existing shortfall amortization bases and shortfall amortization amounts until the adjusted assets equal or exceed the Funding Target and there is no Funding Shortfall. If the $10,000 charge were not applied and the plan were audited, there could be all kinds of issues, since it appears that the IRS's understanding of the spirit of the law is to keep recognizing each amortization amount for 7 years without change unless there comes a time when there is no Funding Shortfall (based on adjusted assets). Conversely, if there is a positive PV but a negative net sum of the amortizations, show the PV as the outstanding balance and a $0 charge (with an amortization schedule attached, perhaps with an added sentence saying that since the net shortfall amortization payment would otherwise be negative, the charge applied is $0).

Unfortunately, it seems to be the case that one can only deem the amortization bases to be $0 when there is no Funding Shortfall (with both the carryover and prefunding balances subtracted from the assets). That, together with the fact that the PPA version of the Full Funding Limitation does not allow you to limit the shortfall amortization payment to the Funding Shortfall can lead to illogical results, I do note that the instructions to the Schedule SB do say that the shortfall amortization payment (sum of prior amounts and amortization of new base, if any) should not be less than $0, so if the net amortization payment would otherwise be negative, you would apparently continue to report that there are bases, give their outstanding balance, but show a $0 amortization amount. If there is a funding shortfall but the plan is exempt from establishing a new base and the present value of the remaining payments for the prior bases is negative, I guess you report the negative number as the outstanding balance and the greater of $0 or the net sum of the ongoing amortization amounts as the amortization amount. So for the plan mentioned in the original post, show an outstanding balance of -$4,397 and an amortization amount of $10,000+.

I agree that if one does not use any prefunding balance, then no new base would be established, since the assets would exceed the funding target unless one had to offset the assets by the prefunding balance. If it were all carryover balance, you would not need to establish a new base given these values. If the assets were the amount shown as adjusted assets and there were no bases, my comment would stand (except for there being no amounts to waive).

Since I don't work with end of year valuations, I am going to answer as though your numbers are all beginning of year. Easiest solution is to cut the Gordian Knot and waive the Carryover Balance and enough of the Prefunding Balance (assuming you still can) to get the assets up above the Funding Target. Then all of the Shortfall Amounts disappear. I was just grappling with something like this, at least on a theoretical basis, and this is how I think it works: Again, interpreting everything as though on a first day of the plan year basis, you show a Funding Shortfall of $56,680 and a present value of remaining amortization amounts for prior shortfall bases of minus $4,397. Continue the prior shortfall amortizations and establish a new shortfall base for the current year of $61,077 (Funding Shortfall minus PV of future amortization payments for prior shortfall bases), with an annual amortization amount around $10,000. This would bring this year's net shortfall amortization payment to something around $20,000.

Short answer - any insurance company that sells deferred annuities to terminating defined benefit pension plans with lump sum options should be willing to structure the annuities to permit the use of floating 417(e) rates.

As I understand it, what makes it unattractive is the increased risk that demand for lump sums would peak when prevailing interest rates are high, the very time when insurance companies want to hold, not pay out, assets. If the annuities are sold with floating 417(e) rates for lump sums, it would be fairly straightforward for the annuity vendor to make the necessary calculations. Floating rates could possibly be more attractive than fixed, since when interest rates rise significantly the amounts payable would decrease. How would a reasonable rate of return be established? The rate of return earned by the insurer on its entire portfolio throughout the intervening years (on a gross basis without taking into account the cost of the insurer managing its portfolio)? What if there are down years? Would you hold them against the rights of the annuitant? Remember - no elections would have been made by either the participant or the participant's spouse at the time the annuity was purchased (other than perhaps explicitly choosing to effectively defer all option/timing decisions to a later date - if there is no election at all, the annuity must be purchased).

Just out of curiosity - what do you see being done in a for-profit situation when the seller has a not-fully-funded defined benefit plan that they are not in a position to fund up enough to terminate? The seller can't just terminate and distribute the assets unless everyone in the plan gets all that has been accrued (unlike a 401(k) plan where there is always enough money to pay people what they are entitled to).

My understanding is that the annuity has to encompass all benefit options existing under the plan being terminated (including commencement age, optional forms and optional form conversion factors). Insurance companies in the relevant marketplace should be prepared to handle this (but if the plan allows lump sums at retirement, expect to pay more because of the additional risk associated with lump sum rates and cash flow risk). Plans that permit lump sums at any time prior to commencement of benefits are particularly unattractive to insurers offering annuities. Participants currently active can potentially grow into early retirement subsidies even if they don't have the age and service as of the plan termination date. That is, someone with 13 years of service in a plan offering unreduced benefits after 30 years of service would be entitled to an unreduced benefit if they remain employed for another 17 years. If the plan's actuarial equivalence factor for a 100% joint form for a 65 year old participant with a 58 year old joint annuitant is 85%, then if a participant now 45 retires in 20 years and has a spouse then who is 58 and elects a 100% joint form, the purchased annuity must permit them to receive the 100% joint form based on an 85% factor. You may want to work with one of the companies specializing in annuity placements.

That is a recognized problem, due to the extension and the 5500 being filed too close together. Contact the IRS, be prepared to show that the 5558 was timely filed, and, as I understand the problem, you should be off the hook. I understand that the IRS suggests either filing the 5558 earlier than late July or waiting a bit longer to file the 5500 and 8895-SSA. Also, no approval is necessary if the 5558 is timely filed. The IRS has already approved all 5558 filings to extend 5500 and 8895-SSA filings, provided that they are timely submitted. So "approved" is redundant.