frizzyguy

If that's the situation it's new to me but I have zero doubt you're right. At least I'm not completely crazy (other than maybe to SoCal) if at one time it was not acceptable. I have several collegues who went to conferences where they had Q & A's with the IRS where they stated you could use the round about way to name groups but not name them individually. That could have been years ago though. I think we'll continue to use it as dumb as it might sound. It really has never been a major issue using the round about way.

According to 1.401(a)(26)-7(b), retroactive correction is the methodology for correcting a failed 401(a)(26) test. We always get corrections done before the contribution deadline. I found a cite from a source that said the IRS has informally stated that self-correcting language is okay and that the deadline is the 15th day of the 10th month but doesn't provide anything other than "informally". I think the contribution deadline makes sense to me so I will continue to use that. That's when we need to have testing done by anyway inorder to use 11(g) for the Profit Sharing plan that we almost always have attached to our DB plans. (Did I just come full circle on 11(g)?) My background has always just been in practice. And we get our tests done before 15th day of the 10th month which is probably why I didn't know that was the deadline but it only makes sense. I hope that helps.

I very much stand by my comment. You go ahead and keep doing that and wait for an audit. The IRS has been very clear that you can say "employees hired in 2005" even if employee X is the only one and you are obviously creating a group for an individual but don't name the individual by name. If you want to take that risk for your client, by all means go ahead. I am just saying you're not supposed to do that. I have seen real life examples, the majority of my work is small defined benefit plans that are not safe harbor. I have seen ERISA attorney's who draft documents for our clients use individuals, and that's their perogative. I have seen others who very much don't. We don't. It's so easy to not do it, why play with fire?

My only point being, call it whatever you want to call it. You can amend this plan to correct it. I would caution you about how you brought in the individual though. You can be creative but you aren't supposed to name individuals to groups in a DB plan like in a DC plan.

I think using the term "11(g)" is throwing everything off. A defined benefit plan can be amended after the fact to increase benefits at any time. Therefore, no special exceptions, such as a 11(g) for plan corrections is needed in order to allow it. I think that's the whole point of 1.401(a)(4)-11(g). 11(g) allows a special exception for a plan that is past the deadline to amend to increase benefits to do so to pass 401(a)(4). A defined benefit doesn't need a special exception like 11(g). Can you add this amendment? Yes. Is it allowed to be added because of 11(g)? No, it's allowed because Defined Benefit plan amend after the fact.

This is a DB plan, would a union really care if their benefits are guaranteed about what kind of investments the plan uses?

My take is that if the design requires an amendment to the benefit formula every year, then I don't see that as a stable design. I would be concerned that the true benefit is not really defined and the employer is making it a discretionary formula subject to the annual plan amendment. I think that's a problem for a DB plan. We are on the same page with this item. I put every year in quotations to mean only because with 30 year treasury rates dropping over the last three years, some plans have amended staff three years in a row. A plan that requires an amendment every year would be a big red no-no in my opinion.

In this particular instance; if the nurse practioners were all hired on the same date and have the same title I think you would need to get very creative to define groups that don't name the nurses individually or discriminate based on age. That doesn't mean it's not possible. What are the compensations and ages? It might be easier to try and get one of the doctors into the plan instead. 3/7 = 42%. To address J4FKBC, I think updating a DB plan "every year" to pass 401(a)(26) is fairly common (in this economy) but that is a very valid point. For instance, I don't think updating cash balance percentages for staff to pass 401(a)(26) on an annual basis (when needed) violates the definitely determinable benefit. Many plans have done that lately. We would love to keep it at one rate but unfortunately the economy and interest rates aren't playing nice! I think the same goes for this instance, the plan was designed with the business planning to stay with four doctors. Then plans changed and the only way to pass was to change plan eligibility. I do want to make one note, by changing "every year" I am referring to a plan with a stable design and not a plan coming up with staff rates after the fact to make it the smallest amount possible...if that makes sense. To bring it a little bit further, I have seen some attorney's who do temporary increases to staff to pass 401(a)(26). I.E. staff get a pay credit of 2.5% but get a pay credit of 3% for 2011 and then back to 2.5% after 2011. For the most part though, I have seen it being an ongoing increase to staff. I.E. staff get a pay credit of 2.5% for years before 2011 and 3% for after 2011. I would be interested to hear what others have seen or are doing.

I definitely agree with the logic but if you can get one done without killing yourself, I would. Giving logic to an IRS auditor makes their brains hurt. I can see it now: "But my checklist says I need the AFTAP?" "But 436 restrictions don't apply." "But my checklist says I need the AFTAP?" "For what though, how does not having one affect the plan?" "But my checklist says I need the AFTAP?" "Can you say something else?" "I need an AFTAP, it's right here on my checklist."

I would make that a qualifying criteria in finding an auditor. There are definitely auditors out there that would turn an audit around quickly in the first year if it meant recurring work. Also, auditors expect first year audits to come with headaches. Including quick turnarounds.

Haha, I love this comment. Maybe you could borrow from a Universal Whole Life Insurance Policy...BUT WHAT ABOUT THE INSURANCE?!? I would be a little suprised considering the source if there wasn't some validity to this point. The company that sponsors this article has a great reputation and is conservative with what the publish (IMHO) but I am with you guys, I have no idea how there is an incentive. We have been bouncing this one around the water cooler and no one can think of anything. I am very curious though.

I think we got off topic, are loans in a DB plan effected by loans from another plan? Now I'm curious. And not to pile on but loans are not as uncommon from a DB plan as you might think, you just don't see them. I did a wee bit of research and I believe that all plans are aggregated for plan loan rules. I think that they fall under IRC 72(p)(4). I hope this helps.

I have seen accountants who can't see the forrest through the trees make that an honest suggestion.

I am accusing no one of immorality and I deeply apologize if that's how it came across. We advise clients of the option, the only issue isn't immorality, it's that the IRS might not like it. When we have a plan that does this, I tell them some of their options such as, increasing benefits for a spouse, waiting a year or so depending on age and seeing what happens, paying fees out of assets, paying the 50% excise tax or rolling it into a qualified replacement plan. We always caveat the final option that they should get an outside opinion. Because the majority of our excess assets are small (we warn them in years upcoming about overfunding), it generally makes sense for them to pay their final fees with it and then just pay the 50% excise tax and be done with it.

But it is different. Sorry, but you do not understand that one scenario delivers benefits in only the DB plan subject to a single 415 rule, while the other delivers benefits in two separate plans. I think I do get it, I never said anywhere that the benefits have to be given in the DB plan. In the situation I described, roll the money into a new plan. How would you divide the assets? That's all I'm asking. I am saying what I am saying because I think that in an audit situation, I think an auditor might see rolling excess assets to someone who already recieved their maximum DB benefit as a violation of 415 penalty. If I were advising a client and we had explored every single option to the plan, I would tell them they could try and roll them into another plan but they should consult an ERISA attorney to cover my liability. I think that there is a lot of gray in the pension world and that this one fits into that category.

I was discussing this in the office, and this "pre-funding" of the DC plan is what the IRS didn't like in the past. So, while everything "allows" it, it's still "pre-funding" the DC. Also as mentioned, if the excess transfer is large enough, there will not be any additional contributions to the DC plan until the excess is used up, for which a tax deduction has already been taken. So there is no real "abuse", except for the "pre-funding" ("earlier" tax deduction) issue... which may be viewed as "abuse"? Jay has it right here. There is no abuse, except in the minds of those who do not understand it. Sort of like the kid who says "No fair! They got an A on their test because they studied it." I'm well aware of the rules involving excess assets after termination. I just, as I stated earlier, don't think they apply to assets in excess of the 415 limit. I still don't agree but we are all allowed to have our opinions. Have you ever seen this in an audit situation? I'll throw a situation your way and you can tell me how you would handle it. A plan has an owner at the 415 limit and 25 staff members have all been getting .5% accruals and are therefore well below the 415 limit. The plan is overfunded at termination. Does the owner get any of the excess assets? Your scenario is different - allocation of excess DB asset on termination vs transfer of excess asset to replacement plan. In no event do you allocate a dB benefit over the 415 limit. What does that have to do with this transfer? I don't think my scenario is different. Both involve excess assets left at termination that need to go somewhere. One scenario is a solo DB plan at the 415 limit and one is a plan with multiple employees and only one is at the 415 limit.

You can pick in your response, it's just a hypothetical discussion.

I was discussing this in the office, and this "pre-funding" of the DC plan is what the IRS didn't like in the past. So, while everything "allows" it, it's still "pre-funding" the DC. Also as mentioned, if the excess transfer is large enough, there will not be any additional contributions to the DC plan until the excess is used up, for which a tax deduction has already been taken. So there is no real "abuse", except for the "pre-funding" ("earlier" tax deduction) issue... which may be viewed as "abuse"? Jay has it right here. There is no abuse, except in the minds of those who do not understand it. Sort of like the kid who says "No fair! They got an A on their test because they studied it." I'm well aware of the rules involving excess assets after termination. I just, as I stated earlier, don't think they apply to assets in excess of the 415 limit. I still don't agree but we are all allowed to have our opinions. Have you ever seen this in an audit situation? I'll throw a situation your way and you can tell me how you would handle it. A plan has an owner at the 415 limit and 25 staff members have all been getting .5% accruals and are therefore well below the 415 limit. The plan is overfunded at termination. Does the owner get any of the excess assets?

We use a service that our clients HATE. Many can't even retrieve the information. When you are picking a service, make sure it is user friendly on the clients end. Just an FYI. Not quite sure who it is but probably a good question to ask when/if you're picking a provider.

I also heard of the IRS uncertainty in these cases. However, we recently terminated a large DB plan with excess assets. 100% of the excess was transferred to their existing PS plan. The ERISA attorney for the plans was clear that transferring "at least" 25% of the excess reduced the excise tax to 20%, and further, transferring 100% (the "amount transferred" is not subject to excise taxes), resulted in $0 reversion to the employer resulted in $0 excise tax. I think that a large plan not at the 415 limit is pretty cut and dry and doesn't address a plan for a sole participant at the 415 limit. I think that transferring money over the 415 limit, or money that a sponsor isn't allowed to take seems like an exceeded 415 benefit limit and transferring it to a profit sharing plan still wouldn't remedy the situation. You can try it, but you are definitely playing audit roulette. That being said, this happens from time to time and is a mess. Is the sponsor married? Does their spouse want to pick up some part-time work with a great retirement plan? Is the sponsor under 62 and can they delay payment a couple years? If they need the money, they can pay themselves an annuity and allow the plan to change forms of payment down the road. Is the amount of overfunding even worth the headache of administering a DB plan and should they just pay the excise tax? It isn't fun when it happens but many solo db plans want to fund the maximum and invest aggressively and I'm sure most of you agree, we do not give investment advice.

Just to clarify, who gets the death benefit upon the death of the participant with the life insurance? What is the plan definition of a death benefit. If the money goes to the plan to pay benefits, than I don't think it's discriminatory as long as everyone has the same death benefit. Am I correct on this assumption? It sounds like it might be a Universal or Whole Life Insurance Policy that was sold to the plan so that the sponsor could put money in a cash value account on top of his premiums. If it's in the trust and the death benefit goes to the plan, I would think that's allowed as long as the plan doesn't allow him to buy the policy at plan termination because no one else gets an offer to buy life insurance in this case. Purely speculation at this point. I have seen it in plans before set up this way but sadly, or luckily, we didn't win the work.

UPDATE: This is still very much unresolved. The actuary, legal analyst, auditor and auditor's manager have been meeting periodically to discuss this and still nothing has happened. They did ask if there was language in the plan offsetting the benefit is the cash balance plan in a profit sharing plan. I know what you're thinking, did 4 audit professionals from the IRS, after 15 months of audit just ask if this cash balance plan was an offset plan? Yes they did. <SIGH> I just needed to get that off my chest, now to another question. Apparently the manager has issue that the assets, which are over 250k, are all at one bank and FDIC insurance only covers 250k. She said there is a "diveristy of funds issue". I have never heard of this before, have any of you? I looked quite extensively. I even researched the FDIC website and found this page: http://www.fdic.gov/deposit/deposits/insur...html#retirement I don't think DB plans are even covered. I sent it to the auditor and got a response that didn't even address this page. Has anyone ever seen an audit like this before? It's getting really out of control. I was also told that they were most likely going to recommend a DOL audit because of the "diversity of funds issue". Any help would be very much appreciated.

The 415 limit doesn't limit the price of the annuity they are owed. They would get the annuity amount under 415. The 5.5% only limits the benefit payable as a single sum payment to the participant. Since the plan part of a sale, this will probably end up adjusting the sale price of the company to offset the new liability the new company is going to take on to pay for the annuity purchase. The are either going to have to try and go through a distressed termination or rescind and fork over more cash. I know the situation is no fun but I can't think of any out of the box situations that would help here.

I understand the points made thus far but isn't the sponsor the one who inevitably gets in trouble if this information is fraudulent? If you can't get the client to confirm, they will have to see it eventually when they file the form. If an advisor sends me an email saying what they deposits are, we use them. I do agree with Effen though, you're signing and it's your EA number but I have to imagine if the plan got audited and it turns out that those dates and numbers aren't correct that you wouldn't be the one in trouble. Just make sure you hold onto that email!

This is what we've always done. Also, I think it is only possible for Individuals and Sole Propreitors. The tax filing deadline, and therefore, the deductibility only goes to this date.