Gary

A husband and wife company with a pension plan froze their pensions at the end of 2002. They are terminating their plan and have a surplus of about 200k. The husband is already at the 415 limit, but the wife only had three years of service and participation at the time of plan freeze. At the time of plan freeze the wife had an accrued benefit of $60,000 (60% of 3 yr avg comp), but the 415 limit was $30,000 (3 years of service or 30% of avg comp of 100k). In order to absorb the surplus, if the wife could receive a lump sum based on an accrued benefit of $50,000, instead of $30,000, the surplus could be absorbed. The goal would be to keep her accrued benefit, exclusive of 415 at 60,000, but to add two years of plan participation and plan credited service to increase her 415 limit to 50k. This could be accomplished by providing that service and participation accrue for 2003 and 2004, with no additional monetary accruals. This seems like a feasible and allowable amendment, even if the formula is reduced (but includes service through 2004), and preserves the prior accrued benefit. Any opinion on the above approach or accomplishing such an objective?

Ok good comments. So for starters to use an in-service lump sum we need to amend the plan to provide for in-service distributions. Then of course each additional accrual can be distributed as a lump sum in ordr to avoid the "change in period" issues related to paying the future accruals as an annuity. Yes the certain and life with COLA is another option until retirement. Thanks.

Prior to 2006 under the good faith application I determined RMDs based on the account balance method. The final regs seem to indicate that for a DB plan the account bal method is no longer available, thus requiring that the RMD be an annuity amount essentially equal to the vested accrued benefit. With that saif, for one of my clients, the RMD goses from about 40k (under account bal method) to 110k (equal to his accd ben). That's quite an increase to communicate to a client. Is my general impressions on point and any observations out there to add? Thanks.

A thought occurred to me. And then I determined that my thought is not going to fly. However, I am curious to hear the feedback I get regarding my thought. Say we have a one person DB plan and that same person is also in a profit sharing plan. We know that the deduction limit is at least as much as the minimum funding (which is no less than the RPA '94 CL). Say the person has compensation of $200,000 Say it is a new plan and the one person enters the DB plan with 5 years of past service. Say the first year valuation under the aggregate method produces a normal cost minimum funding of $50,000 and a 404 unfunded CL of $100,000. We know the person can contribute and dedut $100,000 to the DB plan. What about contributing $50,000 to the DB plan (to meet minimum) and $50,000 to the DC plan (I suppose we certainly can't go above 25% of compensation)? This results in a deduction of $100,000 which complies with the UCL limit. The obvious benefit to the employer is thus to have more deduction opportunities in the DB plan by only putting in 50k in the first year. I like the idea, but unfortunately, I realize it won't make it past the tight defense of this post. Thanks.

This guy has already taken his $50,000 loan on another investment and says he cannot raise the capital any other way. Somehow, I'm not surprised. Thanks.

I am not going to let the client do anything, but I do want to make sure that I have interpreted the damages of such an action correctly.

A client is the only participant of his pension plan. He wants to take $70,000 in plan assets and invest in a condo. He believes that he can get net proceeds in a couple of years of say $200,000 from this investment. He then asks if he can pay the $70,000 back to the plan plus say another $30,000 of investment return and keep the remaining $100,000. Without going into much detail he claims he would structure it as an investment in a company of $70,000, where the company purchases the real estate and then sells it and gives him thenet proceeds. I don't see this altering what wa stated above, just his attempt at making the transaction seem legitimate. My question is to determine the damages of this clearly PT transaction. For example, I see it as a situation where he in effect takes $100,000 from the plan at the time of the sale of the condo. And therefore, it is conceivable that the PT excise tax could start at 15% of the use of the money. So if the use of the money were estimated at 10%, that would amount to $10,000 in the first year and the first year excise tax would be 15% of $10,000 or $1,500. Of course this would then compound every subsequent year that such transaction is not corrected. And the excise tax wopuld be increased from 15% to 100% if the transaction is not corrected and a DOL letter is received on account of this PT. The above seems like one potential consequence. Curious to hear of other outcomes that people believe would occur. For example, perhaps the entire plan and all prior plan contributions would be disqualified, resulting in corporate taxes for all prior contributions, taxable compensation to the employee and maybe penalties, interest, excise taxes, etc. Or alternatively, what would be the damages if right after the transaction the plan were immediately terminated? Would the $100,000 simply be a part of the accrued benefit that is taxable, end of story? Thanks.

A plan made allocations of 5% of compensation for employees based on their total compensation during the plan year. However, for non discrimination testing we intend to use compensation as a participant only. So for example an employee that earned $100,000 during the plan year received an allocation of 5% of 100,000 or $5,000 (apparently they made an allocation that was more generous than the plan terms for NHCEs). However, since they entered the plan at mid year based on the plan provisions, it seems that for testing we can use their compensation earned while a participant for the half year or $50,000. This results in a non discrimination testing allocation of 5,000/50,000 or 10%, which helps the results for NHCEs. Is this an acceptable method of testing? It seems that participant compensation is a non discriminatory safe harbor adjustment to total compensation. Does anyone know the specific cite in the code and regs that supports this use and method of compensation? Thanks.

I understand what Effen is saying (and it's potential), however, I need to figure out how the process works. Is there a step by step procedural explanation at the PBGC web site? For example do I prepare the form at the PBGC web site and then the client just edits their form at the web site (eg. signatures, etc.) and submits it? Thanks.

We have a situation where we prepare many PBGC filings for our clients. We currently prepare the filing, send it to the client for signature and delivery. Our clients are not prepared nor do they desire to fill out forms electronically or otherwise. However, with the new electronic filing rules to take effect, I am not yet sure how this process can be handled. Is anyone else in a situation like this thought of a technique to handle this?

MWYATT are you saying that the PPA continues the use of 5.5% for PYB in 2006? I will be reviewing the PPA in detail. Thanks.

The PFEA replaced the 30-year treasury rate with a rate of 5.5% when determining maximum benefits under 415 w/r/t lump sum payouts. This meant for lump sums with ASDs during the 2004 and 2005 plan years, a rate of 5.5% had to be used when determining 415 limits. However, my understanding has been that this change was only for the plan years 2004 and 2005 and that for plan years beginning in 2006 the rate for lump sums under 415 reverts back to the 30-year treasury rate. Does everyone agree or does anyone know of legislature that requires continued use of the 5.5% rate? Thanks.

I decided to pull one last arrow out of my quiver. That arrow being "rate grouping". SInce I am working with a DC plan that is being cross tested, there are many different benefit rates and restructuring did not seem advantageous and based on the rate groups the plan did not pass the non discrimination tests. Though there were only about a dozen HCEs that would need to have their allocations limited by small amounts. So I decided to employ rate grouping to see if I could get the plan to pass the tests or at lest make it come closer. The results were vastly improved, as only 3 HCEs would need to have their allocations limited by a little. In using the rate groupings, I varied the ranges for different groups. For example one grouping was based on the range 10.5 to 11.5 and another grouping was based on the range 7 to 7.4. I did not see any restriction against such a strategy. Does anyone know if it is acceptable to vary the ranges? Of course each range met the 5% rule that the endpoint of the range be no more than 5% from the midpoint. Thanks.

Regarding Andy H's responses. His item 2. makes total sense. However, is there a cite that explicitly says this? I didn't come across anything regarding the order of calculations in the regs related to either imputation of permitted disparity (1.401(a)(4)-7) or cross-testing (1.401(a)(4)-8). Regarding item 1. I am referring to the rate groups passing the coverage tests. Of course if the top-paid group election is eliminated then there are many NHCEs (i.e. Associate attorneys) not getting an allocation, who are currently hurting the rate group ratios for the NHCEs who would be moved to the HCEs, thus lowering the rate group ratios of the HCEs and thus enabling the rate groups to easily pass non discrimination. Given that the plan year ended 3/31/2006 can the election for top paid group be removed after the plan year ends? Perhaps IRS 97-45 can help. Thanks.

Thanks. I guess another way of making my point is let's say a plan has an ABP of close to 90% and many employees not receving an allocation are NHCEs earning over 100k, then do those facts support a facts and cicumstance criteria to support using the midpoint between safe and unsafe harbors as a level in which each rate group for ND in allocations must meet? Instead of going the whole nine yards up to and over the elusive higher safe harbor percent. Regarding permitted disparity. For a DC plan must PD be performed on the allocations and then such rates converted to cross tested accruals? Or instead, could the allocations be cross tested to accruals and then apply PD on the accruals? That is, is there a requirement regarding the order of things or is it essentially an option? Thanks

Is a ratio greater than the midpoint between the safe harbor and unsafe harbor a reasonable and prudent target for passing the nondscriminatory classification test when testing for non discrimination in amount of benefits? And when the ABP ratio is close to 90%? And when many of the employees excluded from profit sharing allocations make over $100,000 but are not considered HCEs due to top paid group testing and thus bring down the NHCE ratios? Curious to hear thoughts. Thanks.

Something new for me to consider! A plan has 6 month eligibility for 401k and 1 year for profit sharing. Say a person begins participation during the plan year for 401k, but as of the end of the plan year still does not participate for PS purposes. My impression is that although the participant is not eligible for the PS allocations they still 1) are required to get the 3% TH minimum (assuming plan is TH of course). 2) The 5% gateway (assume that is the rate provided to meet gateway in this plan) is not required if the employee is not part of the cross testing aspects of the non discrimination testing and is required if the person is to be included in the cross testing to pass ND. Providing the employee with 5% seems like a conservative approach and then the employee can be included in the ND tests on a cross tested basis. Any in agreement? Other views? Thanks.

Thanks again, my misunderstanding. I think the puzzle is solved and resolved for me at this point. This web site makes being a sole or solo practitioner more feasible.

OK, so are we still of the belief that using ABT (not combining for rate groups or ratio testing) alone for passing coverage or non discrimination does not require aggregation for TH testing, accruals? Or is that the part we are not sure about? Thanks.

Andy's response is perfectly clear and is the result I was hoping for. My concern arose because in part 416(g)(2)(A)(i) states that (i) Required Aggregation means (I) each plan of the employer in which a key employee is a participant, and (II) each other plan of the employer which enables any plan described in subclause (I) to meet the requirements of section 401(a)(4) or 410. So since the partners plan has a key employee and we use the Associates' plan by means of the ABT to pass 401(a)(4), since the rate groups do not all meet the 70% ratio test, then I was concerned that this meant that the other Associates' plan was enabling the partners plan to pass 401(a)(4) by means of the ABT. However, from Andy's response, he does not consider using the ABT (as opposed to the ratio test which doesn't itself need the ABT) as meaning "that other plan enabling the partners plan to pass". While I totally understand what Andy says, I just was not able to come to his conclusion with certainty from what is stated in 416(g)(2) above. However, I do understand the distinction between using the 0% accrual rate in the rate group test as compared to if we fully combined plans and used the accrual rates from the Associates' plan if they had any. And lastly my interpretation is that since the plans are not being combined, then for purposes of the ADP and ACP tests, we only use the rates in the partners plan and ignore say the ADP rates of the Associates' plan in the ADP NHCE average? Thanks.

I am not sure if I totally grasp Andy's response so I will try and be more specific. Say the one partners plan does not pass 410(b) by means of the 70% ratio test, but does so by means of the ABT test. I.e. passes safe harbor NDCT percent and ABP tests. Would this require that the plans be aggregated for TH ratio and minimum allocation for both plans? Or alternatively say the partner plan meets the 70% coverage ratio test on its own, but passes 401(a)(4) by means of each rate group passing by means of the ABT, would this require aggregation for TH ratio and minimum allocations for both plans? Thanks, I hope I am more clear.

Going off in a slightly different direction. Though everyone's contributions to this post has helped immensely to this point. Regarding Top Heavy. Say the Partners plan passes 401(a)(4) and 410(b) by using the average benefit test (which of course uses non excludables, including those in the Associates plan), but otherwise does not aggregate with the other Associates plan. By using the ABT to pass 401(a)(4), is it required that the plans be aggregated for Top Heavy testing, and thus minimum allocations? Thanks. Gary

So Cal Actuary Your point is well taken. I still have much to learn. Being that the plan ws not integrated I didn't think permitted disparity was a factor, but it appears that allocation rates can be adjusted based on imputed permitted disparity. Regarding cross-testing, my understanding is that allocations can be converted to an equivalent accrual rate using the accrued to date technique, which uses the total profit sharing (for rate groups) and PS, 401k, 401m for ABT account balances, not counting investment income related to a balance such as a rollover or any other amounts. Bottom line is that since the tests will likely not pass based on the annual method, I can request more data to buy time and then perhaps when I get the additional data I can perform the accrued to date testing and the imputed permitted disparity method. Of course, the plan may be able to pass with just the PD and not having to do the accrued to date, but I don't think I can feel comfortable with PD in one day. So regarding the accrued to date cross testing, I need to get account balance data and I guess prior two year's of compensation for average compensation purposes. I rambling now and am not able to think it through, but perhaps you see where I am trying to go. Curious to get your thoughts if they are not too overwhelming. Thanks

Another thing cropped up and appears relevant. In looking at last year's ND testing for the same client they show allocation rates "with PD" and "without PD". So for example for the HCEs the allocation average benefit percentage without PD is 19.20 and with PD is 21.57. Since it is only 2% or so greater I don't see how it could mean participant deferral (pd) as the participant elective deferrals amount to over 6% on average. Any thoughts? Thanks.

Awesome. Thanks so much, that's a huge help. Of course I will verify these points on my own, but it points me in the right direction.