AndyH

I have a takeover DB plan with about 300 participants that has all it's assets with a particular (highly rated) insurance company. The assets were removed from a bank trust company several years ago and placed with this insurance company. At the same time, the plan was amended to remove the trustee (who was the bank) and revoke the trust agreement. This happened before we took it over. Now, if the client is comfortable with the asset management being with the insurer, why should they change the status and put in a trustee? Clearly, if they want outside assets, or perhaps participant loans, those are two reasons. Are there any others? Statute of limitations, perhaps, if a Schedule P isn't filed?

I ran into my first non-trusteed plan fairly recently (a takeover). It was converted from a Trusteed to a non-trusteed. Research made us comfortable that this was ok provided all the money was invested with an insurance company, which it was. There may have been another situation in which this is permissable, which escapes me at the moment. I wouldn't think anyone would have developed such a prototpye if not an insurance company, and then I would think it would be proprietary, available only to their investment customers.

1/1/2002 is getting much closer. Anybody hearing anything about what to expect in terms of timing? I'm concerned about not only cross tested DC plans, but also combination DB/DC plans. Plus, we also have GUST amendments to consider. My guess is another extension of everything, or at least the cross tested stuff. But, just a guess. Insights or thoughts?

David, no. There is no required grandfathering if you are switching from PBGC to GATT. Period. BJ, your first sentence is correct except when you get to except. There is no except. There is no significance to under or over any number, voluntary, or involuntary. The rules are the same. Stop before the except and it's correct. Also, you can continue to use anything reasonable for top heavy purposes. These rules have not changed in quite some time. It has no relationship to 417(e).

No, that is not correct. There is a one year grandfather of the timing of determining the applicable rate, for example if you change from first of the month to first of the year, then you have a greater of calculation for one year, but both on GATT basis. But, if there was a fixed rate for comparison, that can not be eliminated with respect to any accrued benefit.

Bill, I'm inclined to agree with you, but Richard poses a very interesting angle. I can't think of why not.

I suspect there's some mis-communication here. We aren't saying that a plan which currently says lump sums are based upon PBGC rates can pay somebody out on GATT rates (ignoring the existing PBGC language) without the plan being amended, are we? To answer David's question, I don't think it makes any difference if the amount is under or over $5,000. Before amending, you have to use the greater of the current provisions or GATT. It can be amended to use GATT only, but as Harry points out, this amendment cannot eliminate an existing fixed rate.

Can a sponsor of a simple 401(k) plan terminate that plan and establish another plan (e.g. cross tested profit sharing plan), during the same year, or would that violate the exclusive plan requirement, resulting in disqualification of the simple 401(k) plan? It seems clear that a simple K cannot be established where another plan existed and benefits accrued, but my question is the reverse.

This of course presumes that the sponsor is not an S-Corp, sole proprietor, or partnership (with the participant being the owner or partner) and also that the plan document permits loans.

Thanks Tom. Doug, are you in agreement with this? If so, maybe we can get somebody to legislate or regulate this in plain English!

Just to clarify this, is the following correct for a K plan with a PS component?: 1. The ADP and 410(B) testing of the deferrals must consistently test all together or consistently disaggregate the excludables. 2. This does not require consistent treatment of the PS contribution because that's a separate "plan". But, if the excludables are disaggregated for 410(B) testing of the PS component, the same treatment is required for a(4) testing, and vice versa. Are we in agreement on that? I know we've discussed this before, but I'm not sure if that's what we agreed upon or not. The regs in this area could be much clearer.

Tom, could you elaborate on that? What's the basis, the 30 day annual addition rule? [edited-30 was omitted]

Your suspicions are correct. Based upon this definition of compensation, the deferrals and possibly match (if conditioned on deferrals) are being incorrectly handled. This could be a big problem for your employer. It needs to make employees whole.

Monica, I was in this business for 12 years before I ever took an ASPA exam, because I didn't know anything about them at first. Then, they were not pushed by the company I was with. But, I changed companies and the ASPA program was strongly pushed, so I took all of them eventually. To this day I thank the boss who made me take them. To my surprise, I learned a great deal. I also became more valuable and much more informed. I strongly recommend it. The PA exams cover material you should know at a minimum to be in this field. I took the daily val exam last year, and I hear what you're saying. The subject matter was not that easy, and some of it was very dry. But, I am glad that I took it, because I learned quite a bit (I do more work with DB plans than DC plans). So, I'd strongly encourage you to take the PA exams now, then the other ASPA exams in a couple of years. You will be glad that you did.

My thoughts echo pax's. How do you know it's not qualified? I'd tell the client the plan needs to be tested, and that there's no guaranty of passing. Get the test fee committed to. Then test it. If it doesn't pass, require the client to engage an ERISA attorney, and have the plan amended to a safe harbor design right away, with a benefit increase, not a decrease, to the extent needed to have it pass the safe harbor standards. Almost anything of this nature can be corrected through the IRS's correction program without disqualification, so I don't think you can reach the conclusion that it's not qualified. I've run into a number of these situations (too many for my preference). I'm not an actuary, so I can't comment on the Schedule B question with authority, but having said that, I don't know of any reason why you couldn't sign a Schedule B if these steps are being taken.

Seems to me these are underutilized for small start-up companies. No consulting firm that I know of wants to talk about them. Brokers don't want them because there's little money. So, I would think that means the only people selling or advocating them them may be pushing for clients to do alternatives. Any programs out there that offer these plans with reasonably objective advice? Anybody out there do business by advising on such programs?

Good point. We have the same concern. Thank you very much. It's good to know how others deal with these same convoluted rules.

Doug, thank you. A couple of things need correcting. First, I said that 120/month is 1% of pay which is obviously not right. But, using the $120/month, I think you'd want to use 120 x 123.02/112.143 to arrive at a NAR of $131.64 instead of the $109.39. That would compare to the MVAR of 132.51. But, and this is the reason for my post, the same analysis at age 65 would produce an MVAR which is less than the NAR, which makes no sense to me. So, I did it your way at first, got results that didn't make sense to me, since the MVAR should exceed the NAR because the lump sum is 6% whereas the testing rate is 8.50%. Our thinking was that this approach didn't properly reflect the lump sum. Thus my question as to how others would do this. If instead we were to take the lump sum, skipping the J&S conversion, projecting it to age 65, that would in all cases produce an MVAR exceeding the NAR. So, that's how we're inclined to do it. Thoughts? With respect to 417(e), I've asked that question here and elsewhere, and the consensus (although not 100%) seems to be that only a fixed rate would be used, not the PBGC or GATT rate. Thank you again for your help. Any further comments would be welcome.

The annual amount would be somehow related to the life expectancy, which would obviously be over more than 10 years. What I was trying to say is that distribution of substantially equal periodic payments payable over 10 or more years, or over a life expectancy do not qualify for rollover treatment. Therefore, they are taxable. 1.402©-2, q&a 5(a), 1.403(B)-2, Q&A 1

The dual IRA idea is a good one. Thanks for the feeback. Regarding the annual payments, one problem is that they are taxable, since they are computed over a period exceeding 10 years, so that defeats the purposes of a lump sum rollover. You are right about the need to get an ERISA attorney involved. I don't think that can be avoided. That's fine for the owner with a big payment, but (among several situations), I have one where the Controller (HCE and our primary contact, of course) isleaving a small company with a lump sum of about $20,000, and he can't take it, and the legal fees would be prohibitive. Plus, who would be responsible for the legal fees? The client, I suppose. Another reason why they should have terminated the plan years ago? I've always been an advocate of DB plans. Now I'm second guessing myself.

Can someone help me with a simple, sample calculation of an general test NAR for a 10C&C normal form and MVAR for a lump sum provision. Let's say testing age is 65, and a participant is 64. The testing period is the current year, so testing service is one year. The person's test comp is $12,000 and he accrues $120/month (1%). The normal form is 10C&C. The plan pays lump sums using UP84 @ 6% with no pre-retirement mortality, so the lump sum value of the accrued benefit at age 64 is $13,926.79. Let's assume we test using UP84 % 8.50%. Can somebody walk me through the normalization of the accrued benefit of 1% on a 10C&C basis to a NAR, and then the normalization of the lump sum to a MVAR? Thanks for any help.

I'm sure I'm not alone in facing a number of problems with small plans with lump sum provisions that cannot meet the 110% funded current liability percentage requirement for a lump sum to an HCE. Does anyone have a solution to this? Does anyone know a financial institution that is informed enough to handle the escrow or bonding requirement at reasonable cost? With the low GATT rates and tanking stock market, this is going to get much worse before it gets better. Most of the plans that I handle that have lump sum provisions have this problem, even the ones that have been at the Full Funding Limit recently! How do you explain this to the small (10-40 employee) client, that's there's not enough money but they can't put the necessary money in? It's been hard enough to convince these clients not to terminate their DB plans in recent years. Now the owners get older, they've provided benefits for employees, but they can't take lump sums! Now I can't justify this ridiculous rule. Any suggestions?

I think some clarification is needed. Is this an unrelated "side" business, so that he's both an employee and has his own business and he makes that much in each? Or, is he a "consultant", treated as a non-employee, and all his income is Schedule C? It's important to determine if he is an employee or not. If he's not, how did he get in the company's 401(k) plan?

In that case, I think you can not count the people in question if the plan has deemed cashout language, or if they have incurred a break in service, but otherwise I think they're participants on account of "retaining credited service".

Very valid point. I should have specified that I was referring to relatively small, closely held companies.