AndyH

Not me. We always 100% vest in such situation.

Agreed. The testing methodology has nothing to do with the issue. The issue is what does the document say, and if it is unclear you must perhaps view it in the light most favorable to the participants.

Interesting question. If there are two plans and they need not be aggregated, as SoCal said you are clearly exempt from the gateway. If one is top heavy and the minimum is being provided by the other plan does that require aggregation for 401(a)(4)? I don't think so but I'm not sure (I recall a long discussion of this about a year or so ago on the cross testing board). If the plans for whatever reason are aggregated then you must satisfy the gateway unless you can pass on a contributions basis or unless you satisfy one of the exceptions for minimum allocations in the 2001 (a)(4)-8 Cross testing regulations, and that is by no means certain.

No. Only plans that are exempt from PBGC coverage are exempt.

Effen, I think you have a very good point, although I cannot tell you what the answer is. Just an aside about pax' comment about a QDRO "not increasing the value of total payments". Tell that to the PBGC and IRS. I had a QDRO payable to the owner of a company worth about $2,000,000 which was assigned to the spouse using a unisex table per the plan's equivalence definition. Guess what happened to current liability when that benefit converted from 83 Male to 83 Female to people in their 60s? And it is being paid monthly because it is restricted, so guess what the result will end up being? Many more payments.

Blinky, my information came from MGB's earlier comments, so if he is changing his position then that changes mine. I have not had a termination (with this issue applicable) since EGTRRA so I have not independently researched or applied this.

No, it is not limited to PBGC covered plans.

If he is not statutorily excludable, then he must be in the test.

Are there no consequences to persons who intentionally violate 415? Is the consequence merely taxes? And what would happen if the excess were sent to a third party in an owner-employee only plan?

The J&100 annuity might be a good idea, especially if the spouse is young .

My thought is that the participant's accrued benefit does not include the excess. In a DC plan, a 415 excess it must be forfeited or refunded. How is that different in a DB plan?

Actuarial error of course. Isn't that always true? On a serious note, is this plan subject to ERISA's fiduciary rules? I though if a plan got disqualified (at least for certain reasons), the accrued benefits would be taxed to HCEs. Excess assets are not accrued benefits. So, it seems like giving the excess to himself is not much different than giving the excess to somebody else. Maybe go to the track and find a 10 percenter who the client can give the money to temporarily, pay him 10%, have him return 90% and put the rest under his pillow and pay no taxes. Sounds more efficient to me.

The fact that the plan is frozen in the question is perhaps causing some confusion. If you do not benefit during the current year, you are a 0%, whether it is 0/$10,000/1 or 0/$8,000/2 does not matter. If you do not benefit, you are not an "employee" for purposes of the numerator. You are a 0% because you do not currently benefit. Do not pass GO; do not collect $200. You are a 0. In a non-frozen plan, if you benefit, then your rate is the increase in your accrued benefit during the measurement period divided by testing comp divided by testing service, which is generally limited to years either considered under the formula or years you benefited for 410(b) purposes. So, when the plan is frozen you do not benefit, so your testing service does not increase, although if you work you still earn comp so your testing comp may change. So, your numerator is 0 but your denominator may change, but who cares since you are still a 0%.

I could be convinced of that if there a reasonable conversion from a single dollar amount to an annuity, i.e. reasonable interest, reasonable mortality, and reasonable commissions and profits. With a 10-14 year likely time horizon, how can this be?

Me thinks that they are each big fat 0%s. Nobody is benefiting so nobody gets anything above 0%, regardless of the measurement period.

I have taken the prior distribution and accumulated it at the current current liability interest rate, and offset the maximum lump sum by that. This procedure came from an ASPA outline a few years back, the author of which fairly recently confirmed that it was in his opinion still as reasonable a method as any.

Tony, forgetting the 412(i) phrase for a moment, is is appropriate to sell annuities of any type to people in their 70's? Maybe it is. Admittedly, I'm a skeptic. If so, please educate me.

Halfway through CT and up it is, anyway. But I'd take 5:1. And I must admit those Yankee shirts and hats were looking a lot less obnoxious a couple of weeks ago.

Thank you. BTW, we're probably almost neighbors. What state are you in?

Plan has funding deficiency over many years being corrected with foregone earnings. Last time I looked at this, only the required contribution called for by the document was subject to the excise penalty, not interest or foregone earnings. Has anything changed?

Don't take my comment too seriously. I was just having fun with it; I found your descriptions of these people to be amusing. I'm not one to discuss rationally the merits of 412(i) plans because I am totally opposed to them, especially in a situation where the contributions paid might never be recovered from the commissions. Leaving the 412(i) issue aside for a moment, you were considering the right approaches. But I'm not sure you realize that a DB plan that is invested in money market investments is a recipe for disaster. Because an actuary cannot assume a 2% investment return, there will be huge losses resulting which will rapidly escalate the required contribution, and that is not a good idea for unsophisticated financial people in their 70s. If you put the money in annuities or life insurance, there may be commissions and surrender charges which may be designed to outlive the life of the plan, so I would strongly advise against that. Then again, I readily admit my bias. But I've seen lots of people get ripped off. All this being said, there is nothing wrong with presenting the DB combo approach but I think the negatives far outweigh the positives in these circumstances, and if you have any consideration for the client be very careful about what the client is told about a 412(i) approach, in particular the "exit strategy". The best way to look at that is to compare how much goes in to how much might come out.

Now, this is getting even weirder. I guess I misunderstood. Are you saying these two schmos are going to set up a 412(i) plan in their 70s???!!! And the reasoning is that the rates of return are better than they can get under their pillows? Maybe it's me, but this is getting hilarious. "I'm sure their financial advisor has fancier programs than me when dealing with those issues". And I'll bet that he has a yacht and a couple of mansions too. And he'll soon be able to afford a Bentley. Boy was I wrong. A general tested 412(i) combo looks like a great fit. Perhaps a QSERP and a Top Hat plan added in might make these people feel modern enough to buy new clothes! Just don't forget the minimum distributions.

[Well, one or two more thoughts before you go. There is absolutely nothing cheaper about an "annuity only plan"! Are you going to maintain the plan until both die and invest the money in 1% money market rates? Then you will have continuing actuarial fees and escalating contribution levels. Or are you going to purchase annuities? Have you considered the cost of annuities? I think that you will find that they are not much, if any, cheaper than paying lump sums. Time to reconsider. And, Socal, I'm interested in your comment that "The DB/DC combo still gives a better result than a single cross-tested DC." How so with pay of $150,000?

Well, in simple terms, in the situation you describe you seem to have two results, one on a benefits basis and one on a contributions basis. And a 23% allocation rate on a contributions basis means that the value of the accrual is 23% of pay. Now that is calculated using a rate between 7.50% and 8.50% (whatever your testing assumption is), which will amost certainly be higher than the rate used for funding, because the rate used for funding will take into account the rules under 417(e) which will compute the present value somewhere around 5%. But that same reality must be factored into the Most Valuable Accrual Rate part of the general test. Suffice it to say that your client should be presented with a one-PS plan option as an alternative to a DB/DC combo if you wish to properly advise them. IMHO

Hey smhjr, if all of your allocation rates are below 25%, it seems to me that you could achieve similar allocations in one cross tested PS plan. The only 2 plan advantage that I can think of in your situation would be the use of the low 417(e) rates, but that needs to be in your MVAR test anyway. Am I missing something? I see limited use for DB/DC combos unless (1)the desired deduction is over 25% of pay, (2) the DB accrual is large (over the DC limit) for the targeted HCE(s), or (3) you are shafting some HCEs. None of these apply here.