FAPInJax

Well, theoretically, a plan paying lump sums at 5% would have values that could only be duplicated by using an effective interest rate of less than the first interest segment (when MAP rates are involved). However, I am not sure that it is permissible to have a result less than the first interest segment regardless. I would guess that you have a very small plan and the population is very old (close to retirement). However, I would still vote for the effective interest rate to be no lower than the first interest segment.

Missed the 'NO'

First, a frozen plan does have to pass 401(a)(26). It is usually accomplished by using the prior benefit structure (enabling proof that the .5% has been met - although that rule is not in the law). You technically only have to bring a single participant into the plan and give them .5% for the current year. However, since your plan is funded to the 160% level, I would just reactivate the plan and switch to a career average of .5% as I do not believe the cost would be onerous (if anything).

My opinion is sure! You have a conversation with your client who is 65 and he tells you that he plans on working for another 5 years. There is no reason not to reflect this information in my opinion.

There is maximum age for a person wanting to start a defined benefit plan.

Well, the key question here is whether the lump sum includes the early retirement subsidy (a plan document issue). Presuming that it does, or you would not have asked the question, the 417(e) rates would apply to early retirement lump sum. For example, a 52 year old with a retirement age of 62 could have a lump sum calculated beginning at 62 (starting in the second tier of interest rates) OR 55 (assuming early retirement at 55, lump sum of early retirement) and now would have several years at the first tier of interest rates.

Generally, answer is to use the option under 404(o) to treat the cash balance plan as though it was at risk. This cause the funding to increase because the valuation of the balances is performed at the age of full vesting. NOTE: The acceleration of the first year tends to cause the second year contribution to be reduced. The alternative is to just pick up the difference in the second year when there will be a funding target and therefore a cushion and larger maximum.

Not sure about Congress BUT a perfect example of how MAP was not the answer - just a temporary bandaid as the range expands. It does appear as though the client did not make a contribution and had quite a bit of benefit payments based on your facts (10% earnings but the assets go down AND the balance increases with earnings but then decreases by the prior year minimum). Possibly they should have considered contributing at least the benefit payments <GG>.

Note that the 'real' rate of return must still ensure the participant receive no less than the total amount of contributions made. Therefore, a negative rate of return could cause a situation where the assets and the balances are out of sync. My opinion is that there is never a forfeiture. The hypothetical account balance is just that - not real. A partially vested participant who is paid 60% of their account balance has the remaining 40% just disappear. It is not applied to other participants.

You are correct that the funding target would fund for the 1/2 of the face amount (actually the funding of the death benefit which could be different). However, you end up with a much larger charge for the insurance than a term cost.

The funding of a DB plan with life insurance requires the inclusion of a mortality decrement and the death benefit is valued as such. This produces a much larger required contribution for the death benefit than a term cost (closer to the actual premium). The use of the life insurance is just a funding mechanism that has a poor rate of return (is another way to look it at). Now, since the employee was hired in 2011, I would have expected a target normal cost for the benefit to be accrued in the upcoming year (in addition to the cushion). I agree with the Effen that the maximum deduction has nothing to do with MAP rates (strictly for minimum). The death benefit is defined in the plan document and usually is the face amount plus the PVAB minus the current value of the insurance contract (but there are several alternative definitions). This death benefit is valued, in the first paragraph, based on the PPA funding rules requiring a proration based on service.

The filing system has the following commentary regarding forms (obviously they do not know the forms are not out <G>) 2012 filings can only be submitted on a 2011 Form 5500 or 5500-SF through December 31, 2012. Beginning January 1, 2013, filings for plans with a plan year begin date in 2012 or 2013 must be submitted on a 2012 Form 5500 or 5500-SF.

Well, let's see. The 415 limit at 57 is as follows (presuming someone will check my math) using 5% and 2011 Applicable. (155.4878 / 172.1770) * 195000 * .783526167 = 137977.83 (11498.15 monthly) Therefore, 1/10 is 1149.82 and the APR at 57 using 5.5% and 2011 Applicable is 163.6075. This creates a lump sum in excess of 188000.

I am not sure about the first question. However, the second question is easier, I would usually have the suspension of benefits option in the plan. It has the potential to avoid the problem that the owner gets to 62 with a 415 benefit and decides to keep working. This is a worst case because the remedy for violation is plan disqualification. Now, a plan where I do not have to worry about 415 then I might consider leaving it out (looking forward to other opinions)

There is something in the back of my mind regarding the dollar limit adjustment prior to 62 that is described in terms of the age based on completed months. I recollect an example where the participant was an oddball age for purposes of illustrating the calculations. This would appear to have possible relevance to this discussion if 415 is involved.

This is to be answered by regulations. Well, the ‘old’ way was to value lump sums using the funding segment rates and the applicable mortality table OR the AE (whichever was greater). MAP 21 throws a monkey wrench into the calculations. The segment rates are replaced BUT it is NOT assured that the same methodology holds (due to the relationship between the funding segments and the 417(e) segments being broken). I believe that until the IRS issues some regulations that it is not possible to value lump sums for valuation purposes. One would think they would maintain the same logic but it does not make sense to presume the MAP 21 rates represent future 417(e) rates. Obviously, most small plans would experience that the AE would rules for lump sum purposes but that also does not make sense because we all know lump sums are being paid out under 417(e) rates. There is no protection for the actuary (good faith) at this time IF an AFTAP and / or MRC is produced IF the IRS comes up with regulations requiring a more complex method (which produce a higher MRC and / or lower AFTAP).

The best part, at least in my mind, is that we have decreased contributions required, increased AFTAPS meaning the assets can paid out easier. Someone was not thinking when they put this together (oops - this was Congress <GG>)

My understanding is that there is usually a wrap around a DB and 401(k) document (this being the best way to maintain language necessary for each). Administratively, I do not see a reduction in costs because the 401(k) still has to be administered and then the DB. I agree with the one poster in that I have never seen one in practice but it definitely appears that a 401(k) costs the same or more than 2 plans - 401(k) and DB - separately.

True. A 7% interest rate and 2011 Applicable mortality will actually cause the lump sum to grow by over 9% from 65 to 66 and get progressively larger increases each year.

Your original question was an explanation of an AE increase. The AE increase is design to make a participant not lose or gain from deferring retirement - ie making benefits at different ages equivalent. The old fashioned formula is as follows: Ben65 * N(12)65 / D65 = Ben66 * N(12)66 / D66 * (D66 / D65) producing Ben66 = Ben65 * (a65 / a66) * (D65 / D66) Now most of the time actuaries will eliminate the mortality from the last term and just have a (1+i) adjustment.

No matter when the plan is terminated, plan assets must be liquid. Normally I agree, but there are exceptions in the microplan market, where the sole participant agrees to take distributions in kind. This is especially true when the plan is terminating with assets rolled to a replacement or other DC account. Note that there may be a problem with the real estate devalued and the owner the ONLY participant able to take potential advantage of the increase in the asset.

Delete the employer and they will be gone. All the new imports will be the only data available.

There was an interesting discussion on the ACOPA site regarding this topic. It was basically that a plan provided 5% of compensation the first year and nothing for next nine. Would the plan pass 401(a)(26) as the employees would always have .5% per year? The general consensus if I remember correctly was Yes.

Do I glean from the above that you weren't a "former HCE" in year of termination (2011), for some arcane reason? You deem correct. See 1.414(q)-1T Q&A 4 Separation year 2011 and determination year 2012 and was HCE for either separation year 2011 (No) OR any year after 55th birthday (YES). Doesn't this make them an HCE??

OK. This is what I have gleaned so far: 1 Solo DB plan has PVAB in excess of 415 lump sum Pay owner maximum lump sum and transfer excess assets to DC plan for subsequent allocation (within a 7 year period if I recollect) 2 Regular DB with owner at 415 lump sum and employees Pay everyone out without amending the plan (since all excess monies would be allocated to the employees). Transfer excess assets to DC plan for subsequent allocation to all employees (within the above referenced 7 year period).