Gary

My understanding is that if a plan uses the 30-year treasury for lump sums, then with no amendment to the plan it is possible that a participant can get a lump sum less than the 415 limit if the lump sum were based on a life annuity equal to the maximum life annuity for plan years beginning in 2004 or 2005. This would occur if the 30-year rate went above 5.5%. My feeling, to avoid this potential scenario, amend the plan to base lump sums on the lesser of 5.5% or the 30-year rate for 2004 and 2005, then if the participant receives a lump sum based on the maximum life annuity under 415 he will receive the 415 lump sum limit. Any observations? Thanks. Gary.

Thanks for all the input. Clearly, it appears that if done properly this can be an allowable investment and not a PT. However, albeit, it may not be the wisest investment based on all the tax ramifications. GAry

A couple of questions or desire for further clarification based on the above responses. 1. If the plan purchases the property and then sells it to distribute assets as a result of a plan termination, I don't necessarily see why that is a PT? Assuming that it is only a transaction between the plan and an unrelated party. Of course a sale may occur sooner than that too. 2. The participant will not be living in the apartment complex. The plan would receive all rent collection and make all mortgage payments, maintenance payments, etc. 3. If the plan is receiving rent collection, making mortgage payments etc. how is it handled? Are they simply forms of income and expenses? And not considered pension funding contributions? Thanks.

A one-participant/owner plan is purchasing an apartment complex. The plan intends to use plan assets 1) for a down payment, 2) to pay mortgage, 3) to receive rent payments, and 4) ultimately to collect and recognize the capital gain (proceeds) from the sale (or loss for that matter). Questions. 1. In the scenario above, does anyone believe it is a PT? 2. Could the receipt of the rent payments and payment of the mortgage payments be done outside of the plan (say by the owner) and still not be a PT? And the investment would just be treated as an asset with a recognized gain/loss at time of sale? 3. I'm not even sure that the plan can recieve the rental payments and make mortgage payments. I finf it hard to believe it can make mortgage payments and not sure if the receipt of rental payments wouldn't be deemed plan contributions? 4. Does the real estate need to be appraised annually for the 5500 or can it be just valued at cost basis until it is sold? Curious to hear comments. Thanks.

Or to put it another way. I believe the FFC is equal to the FD plus interest, thus resulting in $0 FD and $0 CB at 12/31/2004.

An employer purchased a security for $100,000 with corporate money and now wants to transfer this security into their pension plan to meet the minimum funding requirement of $100,000. My understanding is that cash must be used to meet the minimum funding and that the above is a prohibited transaction. Does anyone have concrete evidence on the above issue? Thanks. GAry

My understanding regarding the exemption rules are that the DOL may grant an exemption from the PT rules if the exemption is a) administratively feasible, b) in the interests of the plan and of its participants and beneficiaries, and c) protective of the rights of the plan's praticipants and bennys ERISA 408(a), IRC4975©(2). So perhaps our one participant/owner plan could qualify and get an exemption?

In addition, my understanding is that since it is a one participant/owner db plan, the plan is not subject to the ERISA PTs, but is subject to the PTs of the IRC. And that if the client made this transaction the consequences are the 15% penalty tax imposed on the disqualified person, but this penalty tax keeps on compounding each and every year, thus it is a big mess. And lastly couldn't the person request an exemption from the PT from the DOL and then proceed with the transaction? Look forward to additional input. Thank you.

A one-participant plan's one participant (owner) wants to buy a home using pension assets. I am not sure if for the down payment only or to make the entire purchase. Then the owner wants to have the home leased with rent payments going into the plan. I believe the plan can invest in the home, but I am not sure they can do so if they are to live in the home as primary residence (although I see nothing prohibiting such). However, I don't believe the rental payments can go the plan unless it is used strictly to meet the plan's funding requirements. Anyone have any thoughts or experience on this sort of thing? Thank you.

A piece of real estate is sold. The proceeds are placed in an irrevocable trust and the trustees (beneficiaries and buyers) of the trust pay the sellers of the real estate a private annuity. I need help in valuing the annuity. I have seen information pertaining to private annuities and valuation assumptions in 20.2031-7; Valuation of annuities,... (of the regulations) and I also see information about annuities in IRC section 72 and regulations thereunder. What should apply? Specifically what interest and mortality table, from which set of information? What is the scope of applicability of each of the above code and regulations? Thank you. Gary

A piece of real estate is sold. The proceeds are placed in an irrevocable trust and the trustees (beneficiaries and buyers) of the trust pay the sellers of the real estate a private annuity. I need help in valuing the annuity. I have seen information pertaining to private annuities and valuation assumptions in 20.2031-7; Valuation of annuities,... (of the regulations) and I also see information about annuities in IRC section 72 and regulations thereunder. What should apply? Specifically what interest and mortality table, from which set of information? What is the scope of applicability of each of the above code and regulations? Thank you. Gary

I am looking toobtain a copy of the Act itself. Does anyone have access to such? At this point my question is related to maximum lump sum payments. I am not clear if in 2004 the lump sum is based on the 30-yr rate, this new corporate rate or a rate of 5.5%. Thanks.

Does anyone know where the exact IRC authority related to establishing private annuity payments and trusts might precisely exist? For eg. a person sells his home and puts the proceeds in a trust and receives a private annuity. There are actuarial aspects related to the computation of a private annuity, tax aspects relating to the accounting and taxation of such annuities and trusts and legal aspects related to the establishment of such a trust. I am interested in the big picture on this subject, along with the comprehensive (or exhaustive) authority as to how the actuarial calculation is made. Thank you.

Regarding the final regs. Do they provide for the annual recalculation (for an ACTIVE employee over 70 1/2 and required to begin RMD at 4/1 > 70 1/2) of RMD based on PVAB each year and the uniform dist period? ANd does this qualify for eligibility for a change in form of benefit to say a lump sum at actual retirement? It appears to, but it isn't entirely explicit to me. Thanks.

A couple of things. 1. I am not clear when the single life expectancy table is used. It seems that one need only apply the uniform lifetime table when determining RMD from a DB plan. 2. I am aware of converting a DB benefit into an individual account for RMD purposes, but where is it explicitly provided as an allowable method? And where do these transitional rules exist? Thanks for the responses.

Thanks for the response. From your response my understanding is: 1. A participant chooses a form of benefit and elects a benny at the time the RMD begins and that stays in effect permanently. And that an annuity certain (or certain and life annuity) is allowed if the plan provides such and the particpant chooses. And the optional annuity is converted from the normal form based on the plan provisions, but the certain period cannot exceed the period in the uniform life table (for eg. 27.4 for an employee age 70). 2. So what if the RMD prior to 2003 was based on this individual account method? Does the employee prospectively have to choose an option and elect a benny or choose a life only with no benny (i.e. no pre ret survivor annuity applies, the only death benefit is based on the option chosen)? 3. ANd what about when the participant retires and terminates the plan. Does this mean he cannot take a lump sum at that time, since he was receiving an annuity under the RMD? This may be more convoluted than I originally thought. I will have to get my hands on the proposed regs. Thank you

Say a participant reaches age 70 1/2 in 2003, thus RBD 4/1/2004. He has accd ben at 12/31/2003 of 10,000 per year. The participant will receive his annuity in annual payments. For purposes of this discussion we will assume the employee does not accrue additional benefits and that his spouse is less than 10 years younger. And the employee must begin on 4/1 following 70 1/2, because he is a 5% owner and still an active employee. My understanding of the RMD requirements are as follows. 1. He can receive a payment of 10,000 by 4/1/2004 for the 2003 year and a payment of 10,000 by 12/31/2004 for the 2004 year. 2. The regs say the participant can recieve an annuity over the life of or life expectancy of the participant. Does this mean that instead of 1. above, the particpant can receive 10,000 per year over the life expectancy in one of the tables? So if the table has 27 years, the annuity of 10,000 would be distributed over exactly 27 years (r3egardless of when and if death occurs during that period)? And is it based on the uniform life table or the single life expectancy table? 3. ANd then I believe the regs allow for the accd ben to be converted to a present value, where such value is spread over the remaining life on the uniform life table, and the present value is recalculated each year. So if PVAB were 200,000 at 12/31/03 and the life expectancy were 20, the payment by 4/1/04 (for 2003) would be 10,000 and then another payment of 10,000 would be made by 12/31/2004 for 2004. And then the PVAB at 12/31/2004 would be redetermined and the RMD for 2005 would be based on the PVAB and life expectancy using the uniform life table as of 12/31/2004. And is the PVAB based on the lump sum assumptions under the Plan? Any views on the above interpretations and what others are available. Thank you.

A one participant plan uses the aggregate method in year one and switches to EAN in year two. The dilemma is w/r/t the amort base. Clearly if plan used EAN in year one then initial AL would have 29 yrs remaining in amort period. By changing from aggregate to EAN in year 2, the UAL from the change in method is the only base and is amort over 10 yrs per rev proc 2000-40 for min funding and amort over 10 yrs for max tax. Thus no range. A prior rev proc used 30 - x at time of change, thus in our case it would be 29 yrs, and allow for a meaningful disparity between min and max. Therefore for eg. say participant entered plan at age 50 with NRA of 60. Under aggregate the PVFB is spread over 10 yrs and if plan used EAN the UAL spread over 30 for min and 10 for max. So if Employer used aggregate in year 1 and wants to reduce costs in year two, it would seem reasonable to change to EAN and amort over 29 years, which would be the same path if used EAN in year 1 over 30 years. See the dilemma? Has anyone analyzed and resolved this situation? Thank you. Gary

A plan uses high 3 consecutive year avg for avg comp. If employee earns 50,000 for 2000, 2001 and 2002 can his avg comp decrease? i.e what plan provisions would be necessary for a decrease in avg comp to occur? Thank you.

Say we have a 5% owner receiving a RMD after age 70 1/2 as an annuity. If he actually retires at age 80 would he then be legally allowed to take a lump sum of his accrued benefit? 401(a)(9) gives me the impression that the RMD annuity cannot be increased for such a reason. Any thoughts?

I agree with the responses. However, for my clarification, what is the difference btween the mortality table in rev rul 95-6 and rev rul 95-28? Presumably 95-28 is for RPA calculations.

Say a one person plan has 100,000 rolled into the plan from a prior company 401-k plan at its inception. Clearly the DB funding req. would not incorporate the rolled over amount as part of plan assets. The question is in future years how might you determine what the value of that rolled over amount is for val purposes if such amount is integrated with all investments? Any guidance out there? Thanks.

The accrued benefit would be calculated at the time of the freeze. It should include the account bal projected to normal ret and the normal ret bal converted to an annuity. An exception might be if the accrued benefit is not defined as an annuity payable at normal ret.

A plan uses age nearest birthday as of 1/1 to compute a lump sum in a given calendar year. For eg. if someone were born 8/1/50 and received a lump sum on 8/1/2003, the plan would use an age of 52, since that was the age nearest birthday at 1/1/03. And since the lump sum is the pv of a deferred to age 65 annuity the lump sum is thus less than if they used his exact age of 53 at the time of distribution. Does anyone have any thoughts on this method? And know of any cites addressing such an issue? The Plan is in effect paying a lower lump sum than it appears they should in many situations (about half the time). Thanks.

It would seem to me that he should get the greater of his actual age 70 top heavy benefit or his age 65 actuarially increased benefit in accordance with the regs related to IRC 411(b)(1)(H), if they didn't provide a suspension of benefits notice.