Gary

This post was also submitted on the non qualified plan board. A plan sponsor implemented a 412i insurance funded defined benefit plan. The IRS disqualifies the plan and recommends the plan be unwound. The IRS disqualified the plan for failure to meet the coverage tests and for excessive death benefits and excessive deductions. For purposes of t his thread let's assume it is a one participant plan with an annual life insurance premium of $100,000 per year for the past five (2003 through 2007) years for total premiums of $500,000. Regarding the unwinding of the plan, the IRS makes the following settlement proposal: 1. The IRS says the unwinding of the plan will involve treating the plan as if it were always a non qualified plan. 2. corporation retains income of 100k per year for the years in question (2003 through 2007) 3. in 2008 the plan is disqualified and the individual shall receive $500,00 of income and the corporation can take an associated deduction of 500k for 2008. The plan sponsor does not like the above proposal as they consider it double taxation, followed by an extremely high corporate deduction that will create a Net Operating Loss that can never be utilized. As I said the IRS position is that the unwinding of the plan shall be to treat it as if it were a non qualified plan all along. So the question is: Is the above recommendation in conformance with the tax laws related to non qualified plans? Or should (or could) the taxation involve treating each premium as compensation to the participant in the year it was paid and thus result in a corresponding corporate deduction for each year? Please include references in your responses if possible. Thank you.

A plan sponsor implemented a 412i insurance funded defined benefit plan. The IRS disqualifies the plan and recommends the plan be unwound. The IRS disqualified the plan for failure to meet the coverage tests and for excessive death benefits and excessive deductions. For purposes of t his thread let's assume it is a one participant plan with an annual life insurance premium of $100,000 per year for the past five (2003 through 2007) years for total premiums of $500,000. Regarding the unwinding of the plan, the IRS makes the following settlement proposal: 1. The IRS says the unwinding of the plan will involve treating the plan as if it were always a non qualified plan. 2. corporation retains income of 100k per year for the years in question (2003 through 2007) 3. in 2008 the plan is disqualified and the individual shall receive $500,00 of income and the corporation can take an associated deduction of 500k for 2008. The plan sponsor does not like the above proposal as they consider it double taxation, followed by an extremely high corporate deduction that will create a Net Operating Loss that can never be utilized. As I said the IRS position is that the unwinding of the plan shall be to treat it as if it were a non qualified plan all along. So the question is: Is the above recommendation in conformance with the tax laws related to non qualified plans? Or should (or could) the taxation involve treating each premium as compensation to the participant in the year it was paid and thus result in a corresponding corporate deduction for each year? Please include references in your responses if possible. Thank you.

A large law firm provided our firm plan data in order to perform non discrimination testing for their plan for the most recent completed plan year. The law firm has 50 partners. The data has a field for each partner entitled "Gross Compensation". While they call it gross compensation, my inclination is to presume that this is Schedule K1 net earned income since they are partners. Furthermore, the partners each have $30,500 contributed to their profit sharing plan for the plan year ending 3/31/08. Of the $31,500 a portion of such amount is paid by the partner (I presume out of their K1 income) and a portion is paid by "the firm". Since my understanding of a partnership retirement plan is that the employer makes deductible contributions for the employees and contributions on behalf of the partners is derived from their k1 income, it would follow that the so called "firm contribution" would simply be an additional amount of k1 income for the partner to applpy to the profit sharing plan. Any opinions out there on my above analysis of the compensation and profit sharing contribution data in connection with these partners? Thanks.

Does anyone know of any "model" or "sample" AFTAP actuarial certifications that have been published? Thanks.

I agree with your responses. A challenge occurs since the plan has two sub accounts for each participant; a 401k account and a profit sharing account. The 401k account includes the elective deferral portion and the 3% non elective safe harbor portion. This means that we will have to determine the portion that is based on the 401k deferral and exclude it when determining the account balance that is subject to the offset. Thank you.

Can a DB offset plan that is not a safe harbor plan offset the actuarial equivalent benefit from the DC plan, inclusive of the 401k employee deferral account? As long as the plans pass non discrimination of course. Thanks.

I recall once reading in either the Pension Answer Book or the Defined Benefit Answer Book that cash must be contributed for minimum funding purposes and that property can be contributed for contributions in excess of the minimum funding obligation. I am curious if anyone recalss which Q&A that can be found in any of the above publications. On another note, the 5500EZ and the Schedule I Form 5500 both provide a entry for non cash contributions. The thought is that if it is on the FOrm, it would seem that it s/b allowed. In my specific situation the client wants to contribute third parry promissary notes (so they cannot be sold on the open market) and this is probably even more aggressive and not advisable then simply transferring public securities. I will recommend to the client not to contribute these promissary notes. Keep it simple. Thanks.

My general understanding was that if the minimum funding dor a plan were 100k and the maximum were say 150k for 2006 then the client would be required to contribute 100k in cash and they could contribute and deduct an additional 50k by say transferring securities into the plan. This would result in plan assets of 150k and a credit balance of 50k going into 2007. I'm trying to establish if the minimum funding is required in cash and if it is allowed to make contributions in excess of the minimum in property (non cash). Once (and if) the above is established, then would it follow that a non cash contribution be able to include third party promissary notes. Just want to determine if the above is allowed and if my understanding is correct. Not really concerned with application related to PPA at this point. Thanks.

This question applies to the 2006 Plan Year. My understanding is that the minimum funding requirements must be met with cash contributions and that contributions in excess of the minimum funding can be made with property other than money. I could not locate where I had previously found that piece of information and wanted to get other views (and specific citations) in connection with my allegation. I have a particular client that wants to make contributions to his plan in the form of promissary notes from third parties (i.e. not the client's own corporation) that are already in existance. Any views on that? Thanks. Gary

Yes, I will expect the plan to provide immediate lump sums. Thank you.

So for example let's say the cash balance credit is 50k per year. The plan interest credit is the 10-year TCM. If the plan is invested in conservative investments that can consistently meet or exceed the interest credit rate, it would seem that the range set by the minimum target normal cost (projected with likely lower interest credit rates than the segment rates used for discounting) and the 150% funding target should or could potentially, consistently accomodate a funding contribution equal to the cash balance credit. Of course we need that technical corrections to add 50% of the target normal cost to help things more. Does that logic make sense? Thanks.

Thanks. The entity I am referring to is a corporation with many doctor/shareholders. It might as well be a partnership. I don't know of the situation being any different if it were a partnership, except that the k-1 income would need to be divided between plan contribution and plan compensation, which is what they intend to do with gross compensation (divide between plan contribution and W-2 compensation) anyway. Thanks.

Sounds good. This must be stated in the proposed hybrid plans regulations or the proposed minimum funding related regulations. I will look into it. Thanks.

Just to b ack up again for a second. Let's say the accrued benefit is defined as the hypothetical account balance. The target normal cost is the present value of the current year accrual. I don't see why the present value value of the current year accrual cannot simply equal the contribution credit. Or to put another way (and forgive me if this is in the measurement of assets and liabilities proposed regulation) is it explicitly said that for a cash balance plan the credit must be projected forward to normal retirement age at the interest credit rates and then discounted at the segment funding interest rates?

We have a group of doctors, let's say 25 doctors, who want a cash balance plan for 2009. They are interested in contribution class levels of say: 10,000 annual credit 20,000 30,000 50,000 75,000 100,000 So in other words, some doctors will be in the group that receives annual cash balance credits of 10k, others in the 20k class and so on. Now here is where it gets interesting or perhaps too unorthodox. They (the doctors) want to be able to potentially change their contribution credit from year to year. Of course most would stay at the same contribution level each year. So for example, a doctor may want a credit of 50k in year one and then a credit of 75k in year two and then a credit of 30k in year three. Now this can be done with annual amendments before each year. WOuld the IRS strike such a plan design down? Perhaps iIt could be said that it doesn't meet the definitely determinable benefit rules. And then there are the accrual rules. While the benefit may increase by more than 33% from one year to the next, it isn't based on the attainment of a specific age or amount of service, which would presumably violate the backloading rules. Curious to hear comments on this type of cash balance plan design approach. And lastly say the first plan year is 1/1/09 and contributions for a participant total 100k for the year made proportionately throughout the year. Could there be no plan interest credit for 2009 and then have the balance at the end of each year (eg. 12/31/09) be credited with interest on 12/31 of each subsequent year? So in other words the account value as of 12/31/09 would not receive an interest credit and the balance as of 12/31/09 of 100k would be hit with an interest credit on of 12/31/10 based on the amount as of 12/31/09 and so on? Thank you.

I found the mortality table from Rev Rul 2007-67. Isn't that the applicable mortality table for 2008 w/r/t minimum funding and minimum lump sums and 415 maximum lump sums? Thanks.

For distributions in 2008 and beyond, I have not seen anything that indicates that the interest rate can be less than the pre PPA rate of 5.5% for 415 limit purposes. I haven't found a new applicable mortality table after GAR 94. I need to see if the updated mortality table is provided in the PPA funding regs. Please let me know of any deficiencies in my above comments. Thank you.

I understand what you are saying ak2ary. Adding 50% to the target normal cost solves the issue. I guess for a first year if they let the plan calculate the funding target at beginning of year (inclusive of first year accrual or assuming accrual at beginning of year), then 150% of such funding target would accomplish what is needed for that first year, since the 150% of target normal cost may not be as crucial after the first year of funding due to past accrual leverage. Thanks.

My understanding is that the technical corrections you refer to, will enable a 150% funding target to be based on essentially the end of year amount (or at least allow a beginning of first year funding target)? Thanks.

I was thinking if the plan defines the accrued benefit as the account balance then the present value of the accrued benefit would be the account balance (i.e. first year contribution) under the unit credit funding method. Just a thought. Or perhaps a minimum funding can be derived that if the interest credit rate (say 1 year t bill) is less than the minimum funding segment rates, then the minimum funding is less than the cash balance credit, but the cash balance credit is less than 150% funding target, thus enabling a contribution equal to the cash balance credit in the first year. Any of the above fly? Of course this is prior to taking a crash course on PPA minimum funding. Thanks.

I am in the process of preparing a cash balance plan proposal to be implemented for 2009. The plan will include many doctors who will want to have large credits to the plan. For a first year is it feasible (if the accrued benefit is equal to the account balance) for the first year contribution requirement to be equal to the cash balance credit? I am planning on not having the account receive interest credit until year 2. Under pre PPA I believe it was possible if the actuarial interest assumption was set equal to the interest rate credit. I need to get this assignment done in a couple of days, thus the reason why I cannot do all the research on my own in this short a period and must work with Benefits link. Thank you.

So back to the loaded question "Is a one participant plan (where one participant is the owner) an ERISA plan? WHile many sections of the COde apply, it appears that the answer is "no". Make sense? Thanks.

Yes, the one participant is the owner. It appears that a one participant plan (stated above) is not subject to Title I and Title IV of ERISA. However, I am a little confused. The plan is obviously subject to minimum funding, and QJSA, etc. so how is it exempt from Title I, given that Title I includes those things? Thanks.

Or to look at a DB pension plan with partners and a partnership another way. It seems theoretically that we have a plan that is funded for the employees as one plan. And a separate plan for each partner where each partner must individually fund his own plan (even though it is within the one company sponsored plan) even if assets are aggregated. Individual aggregate funding can certainly handle this type of situation. Does that make sense?

I am not at my office and do not have my resources with me. With that said, I was posed with the question: Is a one participant plan considered an ERISA plan? This question may have been asked in connection with a divorce situation, but nonetheless the question is specific. My off the cuff response is that it is not an ERISA plan since it is not covered by the Title that covers employee benefits protection. I am not just referring to PBGC. Are there any other responses out there to that question? Presumably a little more technical than what I said. Thanks.