Gary

The plan I am referring to has a Corbel document and in the document it has a section entitled: 4.2 Participant's Salary Reduction Election 4.2 (d) reads: "For each Plan Year, a Participant's Deferred COmpensation made under this Plan and all other plans of the Employer maintaining this Plan shall not exceed, during any taxable year of the Participant, the limitation imposed by Code Section 402(g), as in effect at the beginning of such taxable year." So the above appears to imply for the Plan Year beginning 12/1/07, that the deferrals for that Plan year (12/1/07 to 11/30/08) can not exceed the 402(g) limit as in effect at the beginning of such taxable year. Meaning that the deferrals from 12/1/07 to 11/30/08 cannot exceed the 402(g) limit for the 2007 tax year. In other words that the deferrals cannot exceed $15,500 for the PLan Year 12/1/07 to 11/30/08. Of course perhaps it means that from 12/1/07 to 12/31/07 15,500 can be deferred, if nothing previously deferred for 2007. And for 1/1/08 to 11/30/08 the same 15,500 can be deferred, as long as no additional amounts are deferred after 11/30/08. Any comments? Thanks.

A company implements a 401k plan year with its first plan year being 12/1/07 through 11/30/08. The employee earns compensation of $20,000 for December 2007 and defers $15,500 into the 401k plan for the plan year beginning 12/1/07. The employee is set to earn $20,000 for November 2008. The employee wants to defer $15,500 of the 11/2008 compensation to the 401k plan under the premise that it is within the 2008 tax year limits. Is this permitted? Or is this not allowed under the premise that the deferral limit for the plan year ending 11/30/08 was met back in December 2007 and thus not allowing any more deferrals for that plan year? Thanks.

A pension attorney recently said that there is a provision that plans are automatically frozen as a default. That is, plans can be designed to have an automatic freeze. He is not referring to the AFTAP test in connection with benefit restrictions. I am not talking about making a plan amendment to freeze benefits, but more like a a standard plan provision. Does anyone know what this attorney may be referring to? Thanks.

My understanding is that there have been 4 sets of proposed regulations under IRC 430. The 2nd in the series was on Benefit Restrictions for Underfunded pension plans The 3rd in the series was on Measurement of Assets and Liabilities The 4th in the series was on Determination of Minimum Required COntributions I am not sure, but I believe that the 1st in the series was Mortality Tables for Determining Present Value. Is that correct? And have there been any other proposed regulations under 430? Thanks.

It seems under PPA there are many more required computations and present value calculations. Below I present a scenario and then give my interpretation of the methodology of the applicable present value calculations. I am curious to determine if I am on solid footing. Say we have a new DB plan implemented 1/1/08 for one participant. We will assume he is to receive a lump sum at retirement age of 55 and the participant is currently 45. For minimum funding it appears that the following PVs must be determined. 1. PVAB applying 417e would be based on 430 funding segment rates and applicable mortality 2. Plan has lump sum act equiv of 5.5% and GAR94, thus PVAB using plan rates is based on funding segment rates for deferral period and 5.5% and GAR94 at time of distribution. 3. The 415 lump sum limit would be based on (lowest annuity purchase rate below): a) plan rates of 5.5% GAR94 stated above and same methodology stated above. b) 415 basis of 5.5% and GAR94 (same as determined above) c) 105% 417e basis - which would be funding segment rates for deferral period and 417e minimum present value segment rates and applicable mortality for period beginning at time of distribution For maximum deduction purposes the following PVs are to be determined: The plan allows for lump sum of PVAB at termination. We will assume the participant could receive his AB as a lump sum if he were to leave at end of plan year. So we have the following PVs: 1) Plan lump sum basis is a one year deferral using 1st funding segment rate and then a lump sum beginning in 1 year using 5.5% and GAR94 at time of assumed termination. 2) using 417e - it would be the same as done for minimum funding since the funding segment rates are used for entire period 3. 415 purposes. a) plan basis and 415 basis (GAR94, 5.5%) are the same as plan lump sum basis above. b) 105% 417e basis is based on 1 year deferral using 1st funding segment rate and then use 417e min present value segment rates beginning in one year at assumed termination. For purposes of the above example, the lump sum is the present value of normal retirement benefit (i.e. no early retirement subsidy). So, what do you all think? Thanks.

Thanks Blinky, Regarding item 1. would it be correct in determining earned income as negative 50k (100k GP -150k (loss)) in which there is no SE tax? That's how I originally saw it. The tax people in my firm thought it s/b subject to SE tax based on the GP. In my opinion the GP doesn't have an impact, except to confuse everyone at my firm. And then I would see it as -50k as the income for pension purposes, thus for practical purposes the pension compensation is $0, which would create no minimum funding for the first plan year of 2007, since the benefit is based on compensation. Do we agree on that? Thanks.

We have a client that has an LLC. For purposes of this post we will assume that there are two partners and 2 additional employees. The client has a DBPP and 2007 calendar year is their first plan year. Say the LLC does the following 1. Makes a guaranteed payment of 100k to each partner 2. Makes a deductible pension payment of behalf of employees of 20k 3. The net loss of the partnership, after guaranteed payments and pension contribution for employees is 300k in total and 150k for each partner. First of all my understanding is that the pension contribution on behalf of the partners, if deductible, is deducted on the personal tax return of the partners and not on the LLC return. Are we in agreement with that? A few questions regarding the partners and their personal tax returns: 1. Do we agree that the partners pay SE tax on the 100k of guaranteed payments? 2. Do we agree that the partner will show 100k of income on their 1040 from guaranteed payments, which are offset by a loss of 150k for a net income loss from the partnership of 50k? 3. Do we compute the minimum funding based on the GP of 100k? 4. If the minimum contribution for the partner is say 50k, is it non deductible for 2007 (and carried over until a later year) since the net earned income is a loss of 50k? Are there any other interpretations or reference sections? Thanks

I mean "9/15/09" in question 3. The years are flying by.

In preparation for making a deductible limit calculation after PPA a couple of aspects are unclear and are as follows: 1. Plans with less than 500 participants are deemed "not at-risk". Can we still apply the at-rsik assumptions to the computation of the FT and TNC, including the loading factor, under 404? I would presume yes. 2. When computing the cushion amount for a plan that is covered by the PBGC, can increases that are expected to occur under 415(b) be taken into account? What about 401(a)(17)? 3. Are amounts calculated above allowed to be brought to the end of the plan year? For example if the amounts are 100k at BOY and 106k at end of year, can 106k be contributed and deducted if it is made any time during the plan year and up to the due date of tax return? So for a 2008 calendar plan/fiscal year that would mean 106k could be made anytime from 1/1/08 through 9/15/08 (assuming tax return extended to this date). I'm thinking the adjustment to the contributions using the effective interest rate applies to the minimum required contribution and not to the maximum deductible contribution. Thank you.

mwyatt, So one difference from what you indicate and my method appears to be that my 417e calculation uses: pv@ NRD based on the funding segment rates and then discounting back to current age based on the one applicable funding segment rate for the deferral period (that is, if deferred 17 years until lump sum payment, I was using the 2nd funding segment rate to discount the lump sum from NRA back to AA). Where your technique seems to indicate that the pv is valued like an annuity form (i.e. for a payment made after year 20, it is discounted at the 3rd segment rate from time of payment all the way back to AA, as compared to the way I indicate above, where the payment after the 20th year is discounted at 3rd segment rate back to time of lump sum and then discounted at 2nd segment rate from NRA back to AA). Of course the 417e unisex table is used for the lump sum under 417e. Are we on the same page? I wasn't able to arrive at a precise technique in the proposed regs on the above issue. And if the payment is in a one-time lump sum, it would seem that the segment rate applicable to that one time payment would apply (i.e. 2nd segment rate for lump sum deferred 17 years) when discounting from time of payment back to AA. Finally, regarding 415, I would generally apply the same approach, i,e, pv @ NRD (and then discounting from NRD back to AA) using: 1) GAR94, 5.5% 2) plan interest and mortality (in this case GAR94, 5%) 3) 105% APR using 417e Where the lowest APR of the 3 above would be what can be applied to the 415 maximum benefit. Now the big question (not sure if regs address explicitly): When determining 105% of the APR using 417e, for purposes of 415, how is the APR valued? 1) The same way as done for 417e minimum present value above (which would likely be an even lower APR than the traditional 5.5%, GAR94). We have to confirm our agreement of how the 417e min pv is determined; or 2) compute pv @ NRD using 417e unisex table and the 417e segment rates, then discount from NRA back to AA using the one applicable funding segment rate (i.e. 2nd funding segment rate for lump sum deferred 17 years); or 3) another way Thanks.

A plan is implemented in 2008 with a calendar year plan year. We'll assume a 1 participant plan. We'll also assume the following: 1st funding segment rate = 5% 2nd funding segment rate = 6% 3rd funding segment rate = 7% 1st 417e minimum present value segment rate = 4% 2nd 417e segment rate = 4.5% 3rd 417e segment rate = 5% Plan rates are 5%, GAR94 (post ret only) Hire Age and Participation Age = 45 NRA = 62 AB 1/1/08 = 10,000 Assumed form of payment at 62 is lump sum Summary of PVAB 1/1/08 for verification: using plan rates PVAB is presumed to be v^17 using the 2nd funding seg rate of 6% for deferral period up to time of lump sum payment at 62 compute pv benefit as a62 using 5%, GAR94 based on 417e min pv v^17 using 2nd funding seg rate of 6% for deferral period up to time of lump sum (payment all at once, thus the 2nd funding segment rate) at 62 compute pv ab as a62 based on 2nd funding seg rate for 3 more years and 3rd funding segment rate, thereafter. 2008 applicable unisex mortality table. Note that I use v^17 using 2nd funding segment rate for entire time of annuity (even after the 20th year, where I would switch to 3rd funuding segment rate if form of payment were an annuity) since the payment is all made at the end of year 17 in a lump sum. SInce th is so much in one thread, Part II will be the 415 lump sum basis, where it is subject to: 5.5%, Gar94 105% APR using 417e methodology plan rates Thank you

Say a first year plan has a 12/31/08 valuation date. It is my understanding that for funding the 24 month segment rates that can be used are those for applicable month, where the applicable month can be December 2008 or any of the four preceding months. So therefore, it would be acceptable to use August 2008 24 mo. segment rates for funding purposes and even if the form of payment is a lump sum. Let's assume the plan lump sum basis is the 417e rate and the 2008 app mortality table. Now let's move on to 415 lump sums. My understanding of the most recent information on this subject (it may have been since superseded) was that the 415 lump sum basis uses GAR94 still and the greatest interest rate of the following: 1. 5.5% 2. plan rates (let's assume they are the 417e rates) 3. the rate that produces a pv that is 105% of the pv using the 417e rates. So, prior to 2008 if the 30 year treasury for the applicable month was less than 5.5%, then the required interest rate would of course be 5.5% For distributions in 2008 (assume calendar year plan year) is the only difference the 417e rate? So for example if the 417e rate was based on the applicable month of December prior to plan year, than for 2008 would the 30 year treasury for 12/07 be replaced with the 417e rates now in force? My understanding is that the 417e rates are now based on transitional rates that combine spot segment rates for a given month (in this case December 2007) and the 30 year tresaury rates. Basically, I am referring to the minimum present value rates now in force (i.e. I don't have access to the specific terminology at this moment). Is my above interpretation accurate or has there been other revisions to the 415 lump sum calculation that I will need to research? Thank you.

In this example the plan year ends 3/31/08. The valuation date is 3/31/08. The first plan year is 4/1/07 to 3/31/08. The former employee did not make a 401k deferral during the plan year and thus had a balnce of $0 as of 3/31/08. The company made a profit sharing contribution of $3,000 for that former employee on 7/1/08 for the 3/31/08 plan year. The employee terminates 8/1/08 and has made no other deferrals, contributions. So based on what I say above the terminated employee could receive a payment of $3,000. That is, his account balance at 3/31/08 ($0), plus receivables for 3/31/08 of $3,000. Does that sound correct? The plan administrator can include any other date he deems necessary as a valuation date for the valuation of participant accounts, but I presume he does not have to and can just go with the 3/31/08 valuation date if desired. Make sense? Thanks.

I think the concepts and application of the concepts are clear. I know I need to read all the available PPA regs to have the necessary background. In terms of actuarial basis, my impression is the following: 417e - is based on the funding segment rates (I believe the transitional segment rates and not the segment rates for a newly implemented 2008 plan?) and the new 417e unisex mortality table 415 - it appears may still be GAR94 and 5.5%? Wasn't sure if it changed for PYB in 2008 Thanks.

Ok, good points. In conclusion it seems to me that I can compute the lump sum at age 65 using 417e basis, with it limited to 415. Of course with small plans this usually means 415 in many cases. One key being that if computed under say 417e (or other non 415 rates that are in plan) then it is computed under segment rate 2 for ten years of payments (years 11 through 20) and segment 3 thereafter. Thanks.

I have a client that sponsors a profit sharing plan with a 401k feature. The plan sponsor manages the investments. 2 vested employees with balances between $1,000 and $5,000 recently terminated. Since the plan does not have individual sub accounts for each participant (but one pooled account) , how would we calculate the amount due the participant? That is, the amount in the plan changes every day, so if we provide a client the portion attributable to the terminated employee based on the account as of say 10/1/08 and the client isn't going to actually make the distribution until a later date, can we lock in the amount based on the value computed as of 10/1? The plan administrative forms, etc. provide for automatic lump sum payment for amounts less than 5k, but requires consent if the amount is over 1k. What is the purpose of consent when the distribution is automatic lump sum? I suppose they want to hear if it is a rollover or a cash payment, etc. Finally, say $2,000 is the non vested portion forfeited. In order for such amount to be used to reduce the next year's contribution do we just keep track of the forfeited amount just like any other account balance and then use it as the reduction in contribution? Of course the same dilemma of changing daily values occurs. Perhaps they can create another suspense account for the forfeited amount? Thanks.

Say a new one participant plan is implemented for 2008. Say the assumed distribution form is a lump sum. The participant is age 55 at plan inception and NRA is 65. So the lump sum would be taken in 10 years based on the plan terms and assumptions. When computing the funding target (subject to a subsequent thorough review of existing regulations): My impression is that I would compute the PV of lump sum at age 65, where the basis is the 417e segment interest rates and the 417e unisex mortality table (assuming these are all finalized or at least proposed). In order to do this the lump sum would be based on an annuity at 65 where the first ten years of payments (65 to 75) are computed using segment 2 rates and segment three rates are used beyond age 75. So let's say the pv at 65 is 200,000. Then the funding target would be the pv of a payment of 200,000 made in ten years and thus it would be v ^ 10 * 200k, using the segment 2 rate. Does the above make sense? As opposed to if an annuiity were the form of payment and the pv would be computed using the funding segment rates and funding mortality tables (not unisex). In conclusion my impression is that the mortality table and the segment rates for 417e purposes is different from 430 purposes. Shortfall Amortization Say a new one participant plan is implemented for 2008, where the participant is age 60 (with 5 years of past service counted) at inception and NRA is 65 & 5. As a result the employee would receive his pension in 5 years. If the participant received a lump sum in 5 years, where the plan were terminated at that time, the question is: Should (or must) the initial funding target be amortized over 7 years even though plan is only expected to be in existance for five years? If it is 7 years, then of course there may be a relatively higher final plan contribution to fully fund the pension. Thanks.

Thanks Don, then I wonder why anyone would set up a VEBA trust if the income is already tax-free? Even if more than a 1 participant plan.

It's a one person C corporation. The one person owns the C corporation. He is the owner and the only employee. Don, I am a little surprised that the investment income is income tax free. That is, people say that they use insurance contracts to avoid taxation on income build up and others suggested the creation of a VEBA (though as you say that doesn't work for a one person plan) to avoid taxation on investment income. That is, people say that the income in a H&W trust that is not invested in insurance and is not a VEBA is taxable. I thought that maybe if the contribution plus income were still less than the deduction limit than the income in that case would not be taxed. And if the contribution were equal to the deduction limit, than additional income would be taxable. Perhaps you can clarify what you said as compared to my alleged perception of how it might work in the paragraph immediately above. Thanks.

I do have the remaining questions below: I am not sure why the contribution by said C Corporation to a H&W plan trust would not be deductible if it is for a reserve for post retirement medical expenses and the amount contributed is less than the limit under 419? I am also interested in knowing if the contribution plus investment income add up to be less than the deduction limit, could the investment income not be taxable? Or is the investment income still taxable? Thank you.

I realize that I am out of my league here posting on an H&W site, being that I am a pension actuary. If anyone knows of some useful and practical resource for a basic understanding of H&W plans, please advise. The resources that I have had, simply include IRC 419, which as I understand it, sets forth (in part) deduction limits to single employer H&W plans. Unfortunately, I was thrown into a little bit of H&W work at the small firm I work at. With that said, I am not sure why the contribution by said C Corporation to a H&W plan trust would not be deductible if it is for a reserve for post retirement medical expenses and the amount contributed is less than the limit under 419? Thanks.

I have not found the answer to the precise question I post in this thread in any other thread, thus the reason why I am posting it in this thread. Thank you.

Thanks so much. I did print out the rev ruling re: the 417e table. I'll check it out. I am surprised that there are different tables for 415 and 417e. And I presume yet other tables for CL and 430. I'm now getting prepared to start the 2008 vals.

Regarding Tymesup's link, his entire link stresses that for adjustments under 415, GAR94 still applies. However, in his very last post, the last paragraph now seems to indicate that the mortality table to be used for adjustments under 415 is the same one as the one used under 417e; meaning NOT to use GAR94. So what is the conclusion regarding the above? Of course GAR94 is a unisex table. The new tables in the IRS final regulations that I have come across for funding seem to have different tables for males and females. So I don't see how this could be used for lump sums or 415 adjustments. I'll search again, but that leaves me with the additional question: What is the mortality table that applies under 417e (after GAR94)? Thanks.

It is my understanding that the IRS has finalized the IRS mortality table. Perhaps it is also referred to as the applicable mortality table. It appears to me that this table is required for funding under 430, lump sums under 417e and maybe current liability purposes too. I will review the regs. What about 415? That is, does the new mortality table apply to actuarial equivalence under 415 for benefits commencing before age 62? And for 415 lump sums? Or is it still GAR94? Thanks.