David MacLennan

The auditor is confused. He/she is asking for something that is not allowed by the plan document. Just tell him/her you must adhere to the terms of the document. He is confused because he thinks that the actuarial equivalence definition is a benefit provision. Remind him it is in Section 1 with the definitions and not Section 4 with the benefits. If the a.e. assumptions say to use pre-retirement mortality, that does not mean that the benefit is forfeitable. He is making a mathematical mistake, ignoring the value of the death benefit. In other words, he is only using one side of the probability. You have an uphill battle though, because this auditor and all his/her colleagues at PBGC have probably done this before, so they may be be reluctant to admit an error if it has an impact on their earlier cases.

Very bad idea to put pre-retirement mortality into a document. Who drafted the document? Please chastise them for me. ;-] A complete answer to your question is beyond the scope of the bulletin board format, but NOT increasing with mortality is probably pretty close to the correct answer. So, just use interest.

During the IRS Phone Forum today Sep 21 2011, Andrew Zuckerman, Director of Employee Plans Rulings and Agreements, said the following (my transcript): "The last piece of guidance that I think you would be interested in hearing about deals with the 5500EZ. We are establishing a late filer program. There is no such program in effect as there is with the DOL and their late filer program. So we are establishing one and we are very close to completion on that program." I think the small businesses of America, and plan service providers, owe attorney Alex Brucker a debt of gratitude, as I presume his well drafted 2008 letter to the IRS started the ball rolling on this. This was a glaring inequity against small businesses. I wish Andy Zuckerman had provided more info, such as what years will be eligible and other details, but I guess we will have to wait.

Based on the plan document provisions for lump sums, what are the applicable 417e interest (segment) rates?

Also Kevin, I would be surprised if the informal survey you mention is true among top tier firms, that is, that they make the decision for the client not to file for an FDL. This has nothing to do with fees as your post suggests. Most of my clients with V&S and Prototype plans do not submit for an FDL, and as I said, I have no problem with that. The point is that from a business perspective, I think it would be foolish not to recommend the most conservative approach. Why would one not do so?

Kevin, I don't know how I could be more clear. The IRS will give you a pass on the document, but not the plan, so effectively the Op Ltr is not of much value IMO. You can't get reliance on your amendments unless you submit, which of course you do on the six year cycle.

Well some seem to think that the opinion letter gives reliance and is equivalent to the FDL. Wrong. The reason is that the opinion letter, naturally, only covers the document, not any amendments. Thats why the IRS asks for a complete history of the plan when you offer up the opinion letter as your only so-called reliance - to justify their job they are hoping you don't have a required amendment and can push your client into a CAP and a huge penalty. And the presence or absence of the amendment is not the only issue. The IRS rarely gives us model amendments. Instead we have to provide good-faith amendments. The good-faith amendments that your document provider supplies? They can be picked apart with ease if someone is motivated to do so. The chance they have drafted a perfect amendment is practically zero, especially when the intent of the law often isn't even clear. The FDL, if applied for within the RAP, will allow you to retroactively amend the good faith amendments if the IRS reviewer has any issues. I have no problem if a client does not want an FDL, I just make sure it is documented thaty they are acting against my recommendation and that they realize the plan does not have reliance.

You mean other than one of the two has the client's name on it and the other doesn't?

Based on my lenghtly experience over several restatement periods, there are probably at least half a dozen practical reasons to get a DL. Always recommend to get a DL. If you don't, you are doing a disservice to the client IMO. If your client still doesn't want to get a DL, get it in writing that they are disregarding your advice. Disregard entirely Rev Proc 2005-16 that says the opinion letter and the DL are equivalent for reliance. Note that if you are talking about a piddling profit sharing plan where they are putting $5,000 a year into it, I can see not doing it, but I would still recommend it.

D'oh! I need new glasses. I don't think UP94 was developed as a unisex table. You probably need to blend it 50/50.

Here are the q's attached in xls file. U84_Unisex.xls

"Yes" to your question. In fact I think the participant must be allowed to elect his form of payment at the ASD (NRA in this case), and get spousal consent at that time if he elects non-QJSA (he/she can't make the election now because it is over 180 days). Tell plan sponsor the lump sums are a better option - besides, that is what the participants want.

Based on my experience with DL's, the IRS will not accept the VS opinion letters for a DL. It has happened once or twice to me that the reviewer asked for all documents since inception which meant going back to TEFRA DEFRA REA. Ultimately the IRS reviewer accepted the documents from the past 10 or so years (I just told him earlier documents were not available and it was unreasonalbe to require them).

My understanding is that as long as you submitted your applicaton by the Mar 1 deadline, you can use the 11- enrollment number after Apr 1, even if you have not received the renewal approval notice.

I agree with SoCal. I would probably even go further and say that even if he was a participant, and even an NHCE, you could change the eligibility to 2 yrs 100% vesting and if he did not have 2 yrs of service (say he went part time after 1 year), he could be effectively kicked out of the plan (preserving any accrued benefit he may have earned of course). But, keep in mind that he may have "Non-Excludable Employee" status under the coverage regs. I believe that if any other employee entered under the 1 year rule, and if he would have entered under the 1 year rule, then he is not an Excludable Employee. At least that is how I remember those regs - double check them for yourself if you think it has an impact in your case.

New individually designed plans can be submitted as on cycle applications, as long as the next regular on-cycle deadline based on the last digit of the EIN ends at least 2 years after the off-cycle filing period during which the plan is submitted. You should submit them by the due date (including extensions) of the sponsor's tax return (the regular RAP). See Rev Proc 2007-44. If eligible, I would submit it now rather than wait up to 5 years, or you may get your first DL 7 or 8 years from now as opposed to 1-3 yrs from now.

I don't think his example necessarily requires a specific interest rate or mortality table. For example, the age 62 415 $ limit is unreduced from age 65, so the amount payable immediately can be greater than the amount payable at a later age. Same with the comp limit at any given age ($ limit was the example here though).

I see where rcline is coming from, but personally I have no issue with the property investment. The real estate is just another investment like any other, and the trutee needs to provide the value. The loan is just a liability.

I've never seen a lump-sum a participant didn't like. For that reason, and because it gives people more choices, I would think it would be popular. However, it is fraught with all kinds of technical issues. The lump sum payout creates MASD issues and most valuable QJSA issues. And you would need a pension genius to draft the document correctly. Could you ignore all the technicalities and just do it (sort of like surgery with a chain saw)? I'm sure it has been done before with no consequence or maybe even with IRS approval, but it is a gamble IMO.

It must be a nonrecourse loan - much harder to obtain nowadays than a couple of years ago. He can't guarantee the loan, or it becomes a PT. For whatever reason, these usually turn out to be bad investments for the plan. That's been my experience with lots of clients who have invested in real estate. Maybe because the client buys for emotional reasons or is not a professional experienced in real estate investment. It also can create asset valuation issues. The mortgage is generally not considered acquisition indebtedness, but be careful, because this exception does not apply under several circumstances. See Code 514©(9)(B).

The document clearly says to NOT interpolate. Plus, the plan sponsor can interpret the document in virtually any way they want, as long as they are consistent.

Here is my understanding of the options: 1) The death benefit can be rolled over to the surviving spouse's IRA. There would be no RMD from the plan in 2010. She would commence her RMD's from the IRA when she reaches age 70.5. If she has already reached 70.5 or over in 2010, she would commence RMD's from the IRA in 2011 (no RMD from the IRA in 2010). The rollover can also be to another plan or distributed to the same plan (if to the same plan, I recommend you "proof" the rollover by making some transaction). 2) Commence RMD's from the plan to the spouse under the "life expectancy rule" by Dec 31 2010. 3) Distribute the entire death benefit from the plan to the spouse by Dec 31 2014 under the "5-yr rule." As always, check plan document provisions for what is allowed. #1 is probably the best option for most people, especially where the spouse is younger. I recommend you tell the client not to rely on your opinion of the options since the rules are complex. Why take the responsibility? If they don't want legal advice, then that is THEIR choice.

Who are the beneficiaries?

Would like to add that giving a benefit to employees in the plan's first year is still no guarantee that the plan timing is not discriminatory. It is just a nod to the regs. On the other hand, to disallow a plan in some future year of the business is absurd IMO, and takes the timing issue too far. Remember the example in the reg was of a plan adopted while a business was "winding down" and so this example is more abusive than if the business had contracted to an owner-only business for the forseeable future. You can certainly submit the plan for a DL with an eff date that eliminates terminated employees from participation (be sure to highlight this issue in the cover letter). Then if the IRS reviewer finds fault you can come back with a benefit for the employees in the first year and see if it is acceptable. This can be problematic for the plan administration if it takes 2 yrs to get a DL, which is not uncommon.

EmmetTrudy - Yes, 100% vested. The benefit has no meaning otherwise.