Gary

One participant pension plan has $260,000 in assets from a 401(k) rollover and about $30,000 in plan assets. The individual wants to use $160,000 in cash from the rollover account to purchase a piece of land as an investment. And he also wants to take a loan of $80,000 from the rollover account. 1. It seems from my research that the purchase of land, assuming it is only for an investment and that the individual receives no cinsideration from the transaction (and there is no self-dealing), is an acceptable transaction. 2. It seems that he could take a loan of up to $50,000 or 50% of present value accrued benefit (as allowed by the plan), where the accrued benefit is equal to the sum of the 401(k) account balance and the accrued benefit in the DBPP. Are there any other views on this?

The plan I refer to is a single employer welfare benefit plan. You mention "the rate an insurance company can obtain in the market". How are we defining market in the case of an insurance company? i.e. I presume an insurance company invests their pool of funds in the market, but would the market for an insurance company be conservative, such as greater than 50% in fixed income products of treasuries or corporate bonds? And your point is well taken regarding that say if an insurance company can expect to receive 6% on their funds, then after a reduction for their expenses might only provide a rate of say 4% for the policy contract and so on. Thanks.

Vebaguru, FYI, I was presented with a policy that had a face amount of $9,000,000 for aninsured age 37. I used 4.5% from a report found at the TowersPerrin web site that provides that the maximum statutory valuation and non-forfeiture interest rate of 4.5% for 2004 and 2005 issues of life insurance products. And the 2001 valuation basic mortality table in a report at actuary.org. My understanding is that the CSO 2001 table is derived from the above table. Based on the above assumptions I determined a level premium at age 37 of $85,985. The actual premium is roughly $150,000 per year. The calculated amount is only 57% of the actual premium. Lower than expected, but perhaps not surprisingly less than the 75% rate mentioned earlier due to the fact that the insured is relatively young. Curious to get your observations on the above story if you have a chance. Without trying to get into too much detail I presented some basic components above. One of the big observations I have is what exactly is the applicability of "maximum statutory valuation and non-forfeiture interest rate" to the calculation done above? Thanks.

Thanks for your opinions. What is your rational for choosing an interest rate between 5 and 7%? Is it just an assumption to tie into an approximate rate of return over the life insurance policy duration based on current rates? WOuld you be able to email me or advise me as to where I can obtain the q's for the CSO table you purport to use? I realize the table I specify is an annuity table. While it is different to the CSO table it still does have mortality rates, albeit perhaps not the most appropriate rates. Thank you. My email is gmevorah@waagelaw.com and tel number is 858-657-0246 x223. Gary

I have been presented with a 419 welfare benefit plan. The benefit is only a life insurance policy. 419 says that the employer can deduct the "cost of insurance" and the remaining cost for the premium is considered W-2 income to the participant. The policy is a life insurance policy with a cash value build-up and a guaranteed interest rate of 2% and a higher assumed interest rate (say 6%) in the illustration The actuary must determine the level premium cost of insurance and has the authority to make this calculation using assumptions he deems reasonable. Some of the materials out there on this type of plan indicate that it is expected that 75% of the premium would constitute the cost of insurance. However, based on my calculations it would require close to a 2% interest assumption and an available mortality table to me (namely IAM83). My question does anyone have an opinion (and reason for it) as to what are appropriate assumptions regarding interest and mortality for such an analysis? Thanks.

It does seem like a good approach to use the age 65 & 5 normal retirement age in the calculation of the accrued benefit until the participant has the 16 years of service. Of course the 5 in "65 & 5" means the 5th anniversary of his participation date at the latest, I presume, thus the reason why it isn't an issue if an employee leaves with a a vested benefit and less than five years of service.

A one-participant DBPP has a total of say $125,000 in plan assets, where say $75,000 is due to a rollover from another plan. Therefore, the DB assets for funding is close to $50,000. Is this plan required to file a 5500-EZ in this case? Based on the form instructions I did not ascertain any definitive indication. Thanks.

Point well taken. This plan only has the 2 participants and now the NHCE has terminated leaving the one HCE and it is attempting to pass the alternative flat benefit safe harbor. Funding had always been based on the projected benefit (aggregate method) of 100% of pay for both participants, so it probably hasn't impacted the plan funding funding thus far. After the employee terminated after 3 years of participation and 13 years of CS and my first year of administering the plan, did it occur that there was discrimination to be corrected. Which meant a correction to the accrued benefit for the NHCE and basically it is his terminated accrued benefit. Thanks.

Andy, Your point is right on point. Just a little more info to give though, since you provided a specific remedy. At the end of the plan year in which the participant terminated. The HCE had 13 years of CS and has 20 at NRD The NHCE had 13 years of CS at termination and 45 at NRD. The accrued benefit is based on credited service. So since the HCE has an AB that is 13/20 or 65% of avg comp. I determined that the NHCE should have a pension at least equal to 0.65*.7 or 45.5% of avg comp. Thoughts on the above?

I have a plan with two active participants. They are both non-owners and one participant is HCE and the other is NHCE. Essentially the plan provides a benefit of 100% of compensation at normal retirement and the accrued benefit is based on the projected normal retirement benefit multiplied by the ratio of credited service at determination over credited service at normal retirement. Since it does not require at least 25 years to be fully accrued, it does not meet the safe harbor. And since the HCE has only 23 years of CS at NRD and the NHCE has 45 years of CS at normal retirement, the rate of accrual (and the accrued benefit as a percentage of pay after 3 years of participation) for the NHCE is less than 70% of that for the HCE. At the end of the 3rd year of plan participation for each participant the NHCE terminates. At first blush, it seems a remedy of this would include providing a pension that is (as a percentage of average compensation) 70% of percentage provided to the HCE to avoid being discriminatory in favor of HCEs. That is, an increase in benefits to the NHCE to avoid discrimination in operation. Any observations?

It is only very recently that I have been involved with one-participant plan administration and pension plan investments for such plans in particular. I realize that my knowledge is very limited in this area, thus the reason I am trying to get educated. I apologize if I offended anyone because of my lack of knowledge in this area and my use of capital letters was not an attempt to shout, as I didn't realize (until now) that that is the perception it conveys. Lesson learned and again I apologize if I offended anyone. Please feel free to email me directly if you would like to address any of these aspects further. Since I did not observe a suggested alternative method for accomplishing the investment I stated, I will research on my own. Also, if anyone knows of any suggested reading materials on the subject, I would greatly appreciate such recommendations. Thanks for your patience.

Clients often like to use pension assets to purchase real estate. They ask whose name can be put on the loan application, since they cannot get a loan to the pension plan. Is there any reason why a participant/owner/trustee cannot use his name on the loan app., assuming the investment is otherwise purely for the pension plan? Same question for an employee/non-owner/participant? Thanks.

Apparently others have worked with plans that use NRA = SSRA and that of course results in NRA beyond 65 & 5 so that is inconsistent with comments that NRA must be by 65 & 5. Issue that I am driving at is can an accrued benefit be reduced for commencement at age 65? That is, prorated on a basis where the full accrued benefit is payable at an age above 65 (like 69)?

To summarize what appears to be a legal plan design, not necessarily a desired or safe harbor design, allows for: normal ret age of 69 is ok plan must provide for 100% vested and payable at 65&5 if the employee desires, but the accrued benefit may be pro-rated since it is prior to normal ret under the plan. For eg. if an employee is hired at age 60 and retires at age 65, it would be possible to have a normal ret benefit of $10,000, an accrued benefit of $5,556 (5/9 of normal ret benefit) that is 100% vested (and can be payable) even if the plan had 20% graded vesting schedule with full vesting after 7 years. While the above may be unusual, is the concensus that it is legal? Thanks.

Harry O's response makes sense to me and that was pretty much what I thought. My understanding is that 411(a)(8) has to do with the requirement of 100% vesting or non-forfeitability, not necessarily plan design or accrual requirements.

Since I am beginning my first such valuations I would like to verify a couple of points. 1. OBRA '87 FFL no longer exists. 2. RPA '94 FFL 412 now uses a rate tied to corporate bond rates per PFEA. For eg. for PYB 1/1/2004 the rate used can be from 90 to 100% of 6.55% 3. RPA '94 Unfunded CL 404 - you can use either the rate in 2. above or the old rate based on the 30-year treasury which is from 90 to 105% of 5.25%. Am I correct? Thanks. Also, if the funding rate is in the prescribed range, must that be the rate used for RPA '94 CL or can you just use any rate in that range? And if the rate is just above the range must you use the highest rate in the range or any rate in the range? Thanks much.

Say a cash balance plan does not meet the safe harbor standards that entitles the plan to pay the lump sum as the account balance, thus the lump sum must be at least as great as the present value of the accrued benefit. SO for eg. the situation results in a whipsaw based on projecting the account at 7.5% and a 417(e) rate of 5.5%. The plan provides payment of the account balance upon pre-ret death to the beneficiary. Does the present value of the accrued benefit have to take into account pre-retirement mortality when discounting the NRA lump sum to current age or should it just be discounted using interest only? We'll assume that the plan is silent on this present value calculation matter. Thanks and look forward to various other views and interpretations.

My understanding is that 411 allows NRA to be 65 & 5 at the latest. And that that date applies to 100% vesting. So for eg. a plan can choose a NRA at say 69 & 5, but would require 100% vesting at 65 & 5. Say the NRB is 100% of compensation, subject to 415 and non discrimination in favor of HCE's And say the accrued benefit is pro-rated on plan participation and say a person participates at age 54, and receives compensation of $75,000 every year in the plan. Then after one year according to the plan his accrued benefit would be 1/15 of $75,000 or $5,000 per year. It would thus follow that at age 65 this person's accrued benefit would be 11/15 of $75,000 or $55,000. If this amount is 100% vested, its it an acceptable accrued benefit? i.e. is it also necessary that the full 100% of pay or $75,000 be accrued at 65? Thanks.

Say a 40 year old, sole owner/participant of a corporation decides to implement a DBPP. He can choose age 65 as normal ret and fund the 415 limits from age 40 to normal ret and then take his distribution. However, what about another approach. Say, instead, the participant chooses age 55 as normal ret, funds the 415 limit and takes a distribution at age 55 and terminates the plan. Then the owner decides to implement another DBPP at age 55 with age 65 as normal ret. Now he gets to fund for yet another 415 benefit payable at age 65. Does anyone have any thoughts or knowledge as to the feasibility and legality of such a strategy? Thanks. Gary

Agreed! However, I have taken the position that a newly implemented plan doesn't qualify as an amendment or at least I have seen nothing explicit on that. Gary the two-eyed person.

A small DBPP has the following: Minimum funding under aggregate method = 13,000 Erisa FFL = 27,000 OBRA FFL = 176,000 RPA FFL = 46,000 Unfunded RPA CL = 60,000 It seems that the minimum funding is 13,000. The FFL = 46,000 The deductible limit can be up to 60,000 under 404(a)(1)(D), thus resulting in a potentially large FSA credit balance. It's a relatively new plan that provided past service credit. Am I missing something or is this interpretation correct? As I haven't had much need to this point to apply the unfunded RPA CL limit. Thanks.

Blinky, Thanks for your thoughts. In reply to your analysis. 1. The plan sponsor wants to amend the plan to increase benefits, but it is outside 412©(8). So the question is, are pratcitioners simply saying "no can do" or has anyone come up with alternatives? 2. You ague against this type of conversion, and your point is well taken, but do you know of any reason that makes it legal or illegal? 3. Regarding this one. It seems that the old MPPP assets are segregated from new DB contributions and are basically like a rollover to the plan. Thus any reason why this would be legal or illegal? This seems much cleaner and more practical then 2. above. 4. Regarding this one. After further thought it seems that whatever was accrued in the traditional plan s/b funded as in a traditional plan with Schedule B and the remaining projected benefit funded with the 412(i) insurance products. Or perhaps the traditional assets can be used to purchase a paid-up annuity contract and the remaning projected benefit funded with the insurance products. Thanks. GAry Basically, the theme is how much latitude (or constraints) is there for actuaries w/r/t plan design logisitics?

A few logistical issues that I am curious as to how other small plan practitioners cope with. 1. 412©(8) - A client is preparing to file their corporate tax return say 8 months after the fiscal (and plan) year. They want to amend pension to meet their goals. How are people handling this? Of course you can't retroactively reduce benefits accrued prior to the date of adoption of an amendment (in addition to proper 204(h) notification, if applicable). 2. Employer wants to convert DBPP to say MPPP as opposed to DBPP termination and MPPP implementation. It appears that a such an amendment may be reasonable assuming all accrued benefits and payment options associated with such accrued benefits are 411(d)(6) protected. And then perhaps continued 5500 filing but now based on MPPP. Any practical thoughts on this? 3. MPPP to DBPP perhaps same as 2. above, but now the Schedule B discloses plan amendment details. 4. Traditional DBPP to 412(i) DBPP. It seems that the 412(i) plan must use insurance products that can fund up to the 415 offset by the estimated benefit funded from the traditional plan's trust assets. Curious to hear some practical feedback if anyone has such to share. Thanks. Gary

Yes, he's an employee that works on commissions. So we go back to the original issue, is it necessary to file 5500 with 0's? Of course it is no crime to file a form with 0s.

A plan with just one employee (thus must file 5500 and not 5500EZ) has $0 compensation and $0 funding in its first year. Is it necessary to file a 5500 with all 0's or can they wait until their first year of actual funding? Thanks.