RLR

We were notified this week that the auditor and the field actuary have determined that there was a 415 violation due to the MASDs and they trying to come up with the amount needed for correction to offer a closing agreement. Has anyone else had an audit with similar issues or are aware of guidance issued since I first posted this over a year ago? For reference, this is a 100% of compensation limit where there were multiple annuity starting dates.

It's been a year since I posted this, and there has been no movement on getting this audit closed. The field actuary and his supervisor are supposedly working on this this week.

Mike, I emailed Marty Pippens 3/24/2020 and did not get any response from him. I'm sure he is covered up with all the CARES Act legislation, or my email could have gone to his junk mail. Anyway, any other thoughts or suggestions? The audit is still ongoing and according to the auditor, the field actuary has referred this case and another similar one to counsel for review. Thanks.

Has anyone had an audit where the owner was at the 100% of comp limit and took more than one distribution? Owner took an in-service distribution at NRA 62. He rolled over the LS to an IRA. He continued working and his avg comp increased and he accrued additional benefits. At age 65 he elected 12 monthly payments of his accrued benefit with a retroactive annuity starting date to the beginning of the year to be paid from the trust. He subsequently took the commuted value of the annuity payment in a lump sum. Plan was terminated and excess assets were allocated to him. The method we used to account for the MASDs in illustrating that his 415 limit had not been exceeded was from a presentation by Michael Preston and Kurt Piper at the ACOPA Advanced Actuarial Conference in June, 2014. We consider this a good faith effort to comply with 415 when MASDs are concerned. The IRS actuary is challenging the calculation siting Reg 1.415-(b)-1(b)(iii) that requires the plan to actuarially adjust past and future distributions when determining the annual benefit as of a particular annuity starting date. The audit is ongoing. Since the participant is at the comp limit, we don't think an actuarial adjustment is necessary. So, we were wondering if anyone had been through an IRS audit where someone was at the comp limit and there were MASDs. Any comments or guidance would be appreciated.

We have a 401(k) plan with related participating employers. One participating employer (the owner and his wife) is terminating its participation in the plan. Is this a distributable event? I think it is not as the plan did not terminate, one of the employers just terminated their participation in the plan. If it is not, a distributable event, are those account balances still included in the TH test? Any other TH considerations? I think those employees would be included in the 410(b) test. What if it was a multiple employer plan? I would appreciate any guidance/thoughts.

Thanks to everyone who have taken the time to reply to this topic - it has been very helpful!

I really appreciate all the replies. There are 3 NHCE's who worked 1,000 hours but were not there the last day who will be brought into the plan.

This is a CT plan with each person in their own group. My understanding is that the new accrual that is provided by the amendment has to be tested by itself for 401(a)(4).

Thank you for your reply. There would be a few NHCEs included.

Mike, One of the owners terminated before 12/31/17, but worked 1,000 hours and mistakenly received a PS contribution. That is why the client wants to remove the LD requirement and bring in all terminated employees with 1,000 hours. Is your answer the same? Everyone is in their own class and there would not be a cutback in benefits. The amendment is not needed to pass 410(b) or 401(a)(4). That's why I'm having a hard time understanding this. It seems like it would be a discretionary amendment that would have to be adopted before the end of the year. Does an 11(g) amendment really have this much flexibility?

Client has a calendar year SH NE 401(k) plan. PS allocation conditions are 1,000 hours and last day. The client wants to amend the plan retroactively to 1/1/17 to remove the last day requirement since operationally that is what happened. Can we use an 11(g) amendment to accomplish this? If not, is there any other way to accomplish this?

Thanks for all the help!

Okay. I do appreciate the help. One last clarification - in SoCal's example the amendment was done in 2008, but there was no impact on the FT for 2008 since the plan simply went from a frozen status to unfrozen in the same year. SoCal went on to say that the amendment could be fully recognized on the 2011 val. Is it just this particular fact pattern that resulted in only 2 years of adjustments to the cushion (2009 and 2010)?

Thanks for the replies. I'm aware of the 412(d)(2) issue - just trying to get a grip on the number of years the cushion amount has be be adjusted.

Thank you for the comments. What if in my example the amendment was adopted 3/15/14. Which valuations would be affected for the cushion adjustment? Logically, the 1/1/13 cushion would be adjusted along with the 1/1/14 and 1/1/15 cushion amounts. At 1/1/16, looking back 2 years the adoption date of 3/15/14 would be included so the 1/1/16 cushion would be adjusted? That affects 4 years and that doesn't make sense. I'm not understanding something and would appreciate anyone who can help.

SoCal, If a plan's benefit formula is amended from a flat 80% of comp to 100% effective 1/1/13 and adopted 12/30/13, the FT would be effected on the BOY 1/1/13 val. So, would there be an adjustment to the cushion on the vals for 1/1/13, 1/1/14 and 1/1/15?

If an employer amends a SH Match mid-year to exclude contributions to HCE’s – leaving it in effect for Non-HCE’s however – is it still subject to ADP/ACP testing for the year of the change?

Thanks for your reply. I thought that if there was a short taxable year of the ER that the deduction would be prorated, but I'm not sure.

ER adopts a PS plan with a PY 7/1/13 - 6/30/14. Tax year ends 6/30. ER contributes 20% of comp for 6/30/14. Tax year changes to calendar year for 12/31/14, so plan amended and return will be filed for short plan year 7/1/14 - 12/31/14. ER adopts a DB plan 12/31/14. Effective date is 1/1/14 and PY is calendar year. Val date is 1/1 and the MRC is $157,000 and the max is $190,000. Does the short taxable year of 7/1/14 - 12/31/14 affect the amount that can be deducted for the DB plan? There will be no contribution to the PS plan for 12/31/14. Does 401(a)(7) apply since there was a contribution to the PS plan for 6/30/14 and the DB plan is effective 1/1/14? If so, to what time period does it apply? Any guidance will be appreciated. I've been pouring through the ERISA Outline Book and thoroughly confused.

We have a husband and wife DB plan that excludes HCEs that are nonowners. So far the plan has passed minimum participation, but next year there will be 6 additional employees who will be eligible, except for the fact that they are excluded because of their classification. 4 employees will then be needed to pass. The document, which is a Corbel nonstandardized nonintegrated prototype, says that you bring in anyone who is there the last day of the PY first to pass min participation - the fail safe language is elected in the AA. The BPD allows an addendum to the section addressing 401(a)(26) and I would like to change it so that only the minimum number of employees among those who are there the last day of the PY will be brought in beginnning with the lowest paid employee. All employees are HCEs. Does anyone see a problem with that? Also, the document says that an accrual will be provided to certain employees to pass minimum participation, but doesn't describe or define the accrual. Is it implied that they will accue a benefit under the current benefit formula or could they accrue a lesser amount that is "meaningful", like a TH benefit since the plan is TH? Since they are all HCEs, there should be no discrimination issues. Any opinions would be appreciated.

Thank you for your replies - this has been helpful.

Participant dies in 2013. He has been taking RMDs but did not take the 2013 before his death. Spouse receives his 2013 RMD. Plan admin said if deceased participant's acct bal comprised of employer securities was distributed to the spouse as beneficiary in 2013 the taxes on the net appreciation on the employer securities could be avoided. Is this true? The distribution had to be a lump sum that was paid in one calendar year. Does her receipt of her spouse's RMD count as part of her lump sum distribution or is it a separate issue and she can take her lump sum distribution as beneficiary in 2014 and be eligible for the net appreciation exclusion? Obviously time is critical, so any guidance will be greatly appreciated.

Thanks to everyone for the comments so far. There is one owner and currently one participant. The owner is at the 100% of comp limit with 10 yrs of service and participation. EE is not at the 415 limit. Here are the specifics on the owner: DOB 6/4/50 NRD 7/1/12 High 3 avg through 12/31/11 $178,566 High 3 avg through 12/31/12 $187,302 PYE 12/31 Could he take an annual payment of $187,302 and then the commuted value next month? At the 1997 ASPPA conference in the IRS Q&A session, this basic scenario was addressed. The question - ASPA: Individual turns 65 on 11/30/97 and retires on 12/1/97 from a DB plan with the first payment due on that date. The plan year and the limitation year are the calendar year. The participant has accrued the 415 limit. Assuming that the plan language is not contradictory, may the plan pay the participant $125,000 as the 12/1/97 payment and then on 1/1/98 commence monthly payments of 1/12th of the 415 limit? Can the plan pay the commuted value of future benefits on 1/1/98, after the 12/1/97 payment of $125,000? IRS: This would be fine in both cases. If I understand this correctly, the IRS is saying he could take $125,000 in 12/97 and then a lump sum of $1,447,292 (using 5.5% and RP13CU for illustration and age 65 y 1 m). Does anyone agree/disagree? Adding to the dilemma is how our document covers late retirement. It says in part that prior to the actual retirement date, a participant shall be entitled to a retirement benefit payable each subsequent PY equal to the greater of 1. the retirement benefit determined at the close of the prior PY or 2. the AB determined at the close of the PY, offset by the actuarial value of the total benefit distributions, if any, made by the close of the PY. If this means that any distribution in any form that is paid during the PY has to offset the AB paid in the future, then the annuity payment/LS option would not even be available. If I sound confused, I am.

Thank you for your reply. NRA is 62. Could he take a semi annual or annual annuity payment now and roll that to the 401(k) and then next mo. take a LS of the PV of 100% of his benefit and roll that to the 401(k)? What would be the consequences of rolling over a periodic distribution? He is still working and will accrue an additional benefit this year due to higher avg comp.- still under the $ limit.

We have a DB plan and the owner is at NRA, at the 100% of comp. limit and continuing to work. There is currently an excess in the plan and as a means of controlling the excess, he could rollover the PV of his AB to his 401(k) plan. Prior to that, we were wondering if he could somehow take some annuity payments from the plan assuming the document allows for this. Ideally, those payments would go to the 401(k) plan as well, but the regs say that periodic payments cannot be rolled over. I don't really understand the reasoning behind that. Any thoughts on how this can be accomplished without purchasing an annuity and then surrendering it and rolling over the proceeds? Any guidance/suggestions would be appreciated.