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I am posting this for another lady, so hopefully I get all the facts straight! There is a controlled group of 2 companies (each owned by brothers). One of the brothers has decided that he wants his company out of the plan (it has come out of full funding and they do not want to make contributions). An additional complication is that the brothers have each tracked their contributions and presumably earnings. The brother who wants out KNOWS that his assets are greater than the PVAB. First, is there a way (other than a spinoff to get the company out of the plan - including paying off the participants). I do not believe that to be possible. What gets filed with IRS / PBGC IF there is another way??? One potential problem that I pointed out is whether the plan will still pass coverage and I was assured that it should not be a problem. Anything else they should be worried about??? Thanks in advance for any insight.

Thanks for the input. All the information you provided was excellent. HOWEVER, when is the basis recoverable? Imagine a participant who repays the deemed distribution plus interest of exactly $1,000. Generally, a subsequent distribution from the plan of post-tax money would generate tax free return of some portion of the $1,000. The plan does not have any post-tax money. Assuming the participant asks for a distribution of 25% of their balance (100% vested). Do they get to take the $1,000 tax free first OR must they prorate against the entire balance??? Same question for the second one. What happens to the remaining basis in the post-tax source?? Here the participant has a basis bigger than the source balance. Distributing all of the source balance only recovers a portion of the basis (equal to the source balance). When is the remaining basis recovered????

How are administrators handling loans that are defaulted??? For example, consider the following: A plan does not provide for post-tax contributions. HOWEVER, a participant who has taken a loan, defaults on the loan but then decides to repay (for some unknown reason). I believe this repayment is post-tax money which creates a basis in the plan. First, is the repayment prohibited because the plan does not permit post-tax contributions??? Second, IF the repayment is NOT prohibited, then it creates a basis - correct??? When is the basis recoverable??? Another question regarding basis. A plan permits post-tax contributions. The participant does a MAHVELOUS job of investing (in Enron or something) and their contribution of $1,000 is now worth $100. The participant elects to take a distribution of the post-tax money which comes out tax free because his basis of $1,000 covers the distribution. What happens to the remaining $900???? Is it ever recoverable???? Many thanks in advance to any and all respondees!!!!

How are administrators handling loans that are defaulted??? For example, consider the following: A plan does not provide for post-tax contributions. HOWEVER, a participant who has taken a loan, defaults on the loan but then decides to repay (for some unknown reason). I believe this repayment is post-tax money which creates a basis in the plan. First, is the repayment prohibited because the plan does not permit post-tax contributions??? Second, IF the repayment is NOT prohibited, then it creates a basis - correct??? When is the basis recoverable??? Another question regarding basis. A plan permits post-tax contributions. The participant does a MAHVELOUS job of investing (in Enron or something) and their contribution of $1,000 is now worth $100. The participant elects to take a distribution of the post-tax money which comes out tax free because his basis of $1,000 covers the distribution. What happens to the remaining $900???? Is it ever recoverable???? Many thanks in advance to any and all respondees!!!!

Two questions regarding after-tax basis recovery. 1. Plan utilizes separate contract method for basis recovery. Total basis = 1000, separate contract balance = 900. If participant reduces separate contract via distribution to zero, is the remaining basis of 100 lost to participant, or recoverable during some subsequent event? 2. Plan does not provide for after-tax contribution but allows loans. Participant defaults on loan, and subsequently resumes payments, creating basis. In a separate contract environment, when would basis be recoverable?

Two questions regarding after-tax basis recovery. 1. Plan utilizes separate contract method for basis recovery. Total basis = 1000, separate contract balance = 900. If participant reduces separate contract via distribution to zero, is the remaining basis of 100 lost to participant, or recoverable during some subsequent event? 2. Plan does not provide for after-tax contribution but allows loans. Participant defaults on loan, and subsequently resumes payments, creating basis. In a separate contract environment, when would basis be recoverable?

Two questions regarding after-tax basis recovery. 1. Plan utilizes separate contract method for basis recovery. Total basis = 1000, separate contract balance = 900. If participant reduces separate contract via distribution to zero, is the remaining basis of 100 lost to participant, or recoverable during some subsequent event? 2. Plan does not provide for after-tax contribution but allows loans. Participant defaults on loan, and subsequently resumes payments, creating basis. In a separate contract environment, when would basis be recoverable?

412i plans are subject to PBGC but ONLY the fixed portion is my understanding. The variable rate portion does not apply.

Thanks for all the responses. OK. Let me see if I can provide an example and show how it will work. I have a plan with several bases from prior years with total outstanding balances of $3,000. This year's valuation produces an unfunded accrued liability of a negative $5,000. This gets set to zero because under RR 81-213 there is the phrase ".....excess, IF ANY, ....." (emphasis added). A new base is created (assuming no credit balance) equal to a negative $3,000 forcing the plan into balance. Now, different periods for the amortization bases still appear to provide an opportunity to "increase" the credit balance because of the short amortization of the gain base (versus the other bases) Velly interesting!!

I have an EOY valuation for funding and FASB 87 purposes. Assuming that the only decrements considered are interest and mortality - how is the service cost and PBO calculated?? The reason for the question has to do with the presentation of information for FASB purposes. IF I run the valuation as of the beginning of the year (with perfect foresight - knowing what the compensation will be for the upcoming year) versus and end of year valuation - my service cost and accrued benefit at the start of the year are equal. However, the present values are computed one year apart. Is it acceptable to present the service cost for an end of year valuation equal to the present value using interest and mortality (at valuation date) and have no interest adjustment to year end?? OR must the benefit be valued at the beginning of the year with interest and mortality and then brought forward with interest ONLY to the end of the year?? (You would obviously get 2 different numbers and I required all my old clients to have beginning of the year valuations so never got into the issue) Again, any help is appreciated. Thanks in advance.

I have a client with an Entry Age Normal valuation. The assets have increased enough so that the total unfunded accrued liability is negative. I believe this is one of the prohibited situations for a reasonable funding method. An actuary wants to maintain the entry age method and just automatically set the unfunded liability to zero. They claim to have done this in the past. Union negotiations are involved - therefore, they are confident that after the next round of negotiations that the unfunded liability will be positive again - in a year or two. Doesn't the IRS require the change to the aggregate funding method (or something similar) in this situation?? Any help is greatly appreciated. Thanks in advance.

I also have a concern with the 415 amendment. The IRS commented at EA that this was temporary (allowing the user to back off the automatic increase). The new 415 limit is going to be in effect and the plan can NOT maintain the old 415 rules unless there is an extensive amendment to the document detailing how the calculations are to be made.

When valuing an ancillary benefit (for example - vested termination liability from withdrawal) - does the lump sum value of the accrued benefit get valued at the greater of FASB assumptions or GATT??

The new law (Job Creation and Worker Assistance Act - who dreams up these names) has new interest rates which are used for 2002 and 2003 plan years. Specifically, the high interest rate used for deficit reduction calculations (quarterly contributions too) and the interest rate used for PBGC premiums. The PBGC premium is easier because it just changes the 85% to 100% but everything else stays pretty much the same. The other interest rate is used to determine whether quarterly contributions are needed (same for deficit reduction). The question is that one of the effects is to increase the funded percentage. Can this calculation be redone for the 2001 plan year so that 2002 does not require a contribution??? I think the answer is yes but am having trouble finding a cite. Anybody agree???

The latest is that they are supposed to be developing some kind of blended rate from other sources. I vaguely remember seeing something about it being release today??? We are all waiting for the release and Congress has been informed of the problem (but are reluctant (yeah right) to do anything)

My understanding is that you can: 1 Plan year ending in the fiscal 2 Plan year beginning in the fiscal 3 Prorate

I do not know about FASB 132 (it should be the same as their other announcements). I will let more knowledgeable users about 132 provide some commentary. (I will see what I can find in the meantime)

The ABO (Accrued Benefit Liability) is the present value of the accrued benefit (using the Unit Credit cost method). The difference is that it is calculated using NO increase in future compensation levels (this includes assumptions regarding social security, etc.). It is intended to provide information IF the plan is discontinued. The one tricky thing is that the other discounts will show up in the present value (for example turnover, etc.) Hope this helps!!

The system will treat the owner as key for the plan year ending 12/31/2001 because the old rules apply (regarding lookback, etc.) The top heavy testing module should make the determination of the top heavy status for the plan year ending 12/31/2002 based on the balances as of 12/31/2001 BUT invoking the new rules. This should have this owners balances excluded from the test. NOTE: Census for 2001 will still show him as key because he is for 2001 processing. He will become former key (or some other code) when eligibility is first run in 2002. Hope this helps!

Well, guess what I found in some papers on my desk - a brochure regarding 412(i). The name of the company is: CJA and Associates, Inc 401 N. Michigan Avenue, Suite 2510 Chicago, IL 60611 (800) 621-3154 Fax (312) 595-0036 Web site www.cjamarketing.com email:cja@cjamarketing.com Hope this helps!!

I am not aware of a primer per se. HOWEVER, that being said. 412(i) plans are defined benefit plans that are considered funded with insurance. They are subject to MOST of the other qualified plan rules (the big exception being the minimum funding rules). They are subject to the 415 limits both for annual benefit AND lump sums. They are subject to the accrual rules (although in the back of my mind I think they can use the value of the insurance contract - could be wrong) There are some articles in old conferences OR brochures from some of the companies offering the product.

I would attempt to amend the plan to limit benefits while maintaining the beginning of the year valuation date. Changing valuation dates while not difficult is considered a change in funding method (unless they changed the rules again) and you would be limited in switching back. An amendment in subsequent year(s) would not, in my opinion, be a problem.

The plan document controls the definition of compensation and the subsequent benefits generated by the definition. I would strongly doubt that the industry practice (any industry) would be to ignore the plan document and generate fictitious compensation for purposes of benefits.

Your understanding is correct from what I remember as well. It may just be the projection scale and the limited projection period did not make enough difference.

1.401(a)(4)-3(B)(6)(xi) under Example 3 appears to provide your answer. The example provides the top heavy to ONLY non-keys and the formula is acceptable because of the particular top heavy exception. Your example would not even have the top heavy available to different classes - therefore, I would say it is OK