David MacLennan

Husband wife calendar year DB plan. Husband and wife divorce in Sep 2000. Wife's benefit willl be distributed in 2001. Re PBGC coverage, professional employer exemption does not apply here. Substantial owner exemption does not apply either (ex-wife has no ownership in the company). Seems pretty clear that the plan must start paying PBGC premiums and can no longer file a 5500EZ for 2000 and 2001. Has anyone approached this situation differently? Would of course like to avoid all this trouble.

I would be quite surprised if Holland were right on the June 30 PYE example above, if they have a June 30 limitation year. The regs clearly state the dollar limits apply by referencing the limitation year end, e.g., the $140K limit would apply for benefits paid in the 6/30/01 PYE.

I just don't see yet where the problem lies with having a comingled trust. Perhaps I'll try to contact Wickersham, if that's possible. I suppose the commingled trust could in general allow for more errors and mischief, and a lack of absolute certainty for transactions and asset values for a given plan. Still, it seems that if a consistent allocation method is employed it would be reasonable. Especially since Master trusts do the same thing on a larger scale. Regarding an actuary's responsibility raised in the last msg, if the trustee reports the assets to the plan administrator and/or the actuary, why would an actuary have a problem with performing the valuation? Unless fraud or error is suspected, it doesn't seem it is the actuary's business to oversee the trustee's duties.

Different investment objectives are not an issue for these small (1-person) plans (I wouldn't be able or willing to influence a small plan sponsor with regard to their investments anyway!). Given the above, there are no actuarial issues with respect to investment gains/losses - no different from having the DB trust separate, unless I'm missing something. Are there any other reasons why this is a bad idea?

A client of mine has 3 plans, PS, MP, and DB. He wants to consolidate the assets for the 3 plans into a single trust. I have seen this done only once with a combined PS/MP plan trust. I was wondering how common combined plan trusts are for a single employer. Obviously an annual allocation each year would be needed to determine each plan's assets, and the plan/trust documents would need to conform. Any potential problems? Any comments would be appreciated.

Perhaps I've answered my own question. I looked at Form 1120 instruction on the IRS website, and it appears IRS does not want 401k elective deferrals deducted as compensation.

I'm a DB guy and don't work on 401k plans, but need to know the following: Where on a tax return does an employer deduct 401k elective deferrals? Are they treated as compensation, and deducted as such? Or, since they are technically employer contributions arising out of a participant's voluntary salary reduction, are they deducted as employer contributions on a tax return? Assume a corporate tax entity.

I think he's an HCE. You use the rules under 416i, which state to use voting or non-voting stock, whichever gives 5% makes them an HCE. Also, options count as ownership too. Non-voting preferred stock can be excluded for controlled group purposes, but not for HCE test.

Also bear in mind: Elective 401k contributions also count towards the 25% of pay 404a7 deduction limit. For a small employer, the DB ctb is often >25% of comp, so often no other plan is feasible unless one does flip-flop deductions. If you currently have a standardized prototype document, you probably can't have another plan and still have reliance on the opinion letter.

I'm not sure either of your responses address what I want to get at. Or, perhaps the answer to my question is self-evident to other practitioners' thinking, and so you're looking for other issues. Or, maybe I'm just confused! Sdolce - is his benefit really $8,000 when the 415 $ limits go up in later years? This is the question I want to focus on. Why not $6,000 since the plan document, taken in its entirety (i.e., including 415 provisions), says the benefit is $6,000? Harry O - the plan is being frozen by the plan sponsor in an effort to cease all future benefit accruals for actives and terminees (if a reason is needed, let's say the assets dropped precipitously in the last year, and the sponsor wants to limit contributions, something that has happened to many small DB plans). My own opinion is that the sponsor has the right to eliminate all future benefit accruals (TH 416 and certain 401a4 issues excluded) due to increases in 415 limits, as long as these limits are found in the plan document (and they would be of course). It seems the amendment to truly freeze benefits could not simply say the formula is now 0% of AMC (combined with the standard no reduction in AB provision), but would have to specifically cease all future benefit increases, which really cannot be done in many of the prototypes I've seen w/o going outside the elective provisions in the adoption agreement. If the prototype has fresh start provisions, the 0% fresh start w/o wearaway may work, if the document follows the regs and defines the frozen benefit as the benefit to a terminee, and the document says terminees don't get 415 increases, which I think may have been Harry O's thought. Another variation on this theme w/o any presumed amendment of the plan: If 415 was suddenly repealed in its entirety, and if the 415 limits are in the document, I don't think plan sponsors would be on the hook for the benefit cost increase.

Suppose a DB plan is amended to eliminate future benefit accruals (benefit "freeze"). At the time the amendment is adopted (or effective date, if later) A participant in this plan has a benefit governed by the 415 $ limit. For example, suppose his accrued benefit under the benefit formula at the time of the freeze is $8,000/mo, but the 415 $ limit is $6,000/mo. Since his accrued benefit under the formula is $8,000/mo, is he entitled to future benefit increases as the 415 $ limit is indexed, regardless of the benefit freeze? Or, since the 415 $ limits are presumably part of the plan document's provisions, can the benefit "freeze" eliminate entitlement to the 415 $ limit indexed increases?

The waivers can't be used to reduce minimum funding requirements. You can reduce accrued benefits if the DOL approves of the amendment, but I've never tried it or given it any thought. You are probably aware you can retroactively amend the plan (412c8) with the amendment impacting 412 funding if the amendment is adopted within 2.5 months after the plan year end. For what it's worth, the timing re avoiding an audit may be good. At the 2001 EA Mtg last month in DC that I attended, sessions were held by the heads of IRS EP examinations and EP determinations. They stated that audit activity would be reduced greatly (I think 2/3 reduction was the figure mentioned) due to auditors being shifted to review GUST determination letters for the next 2 years.

With respect to the minimum eligibiltiy/participation requirements, you generally have to credit all years of service for eligibility unless one of the 3 break in service rules applies. The problem you are facing it seems is that these minimum rules are expressed in years of service, so that with monthly periods elected for eligibility the document language breaks down or is inconsistent. Your plan document can have any rule regarding eligibility they want (e.g., continuous 6 months, service disregarded for greater than 6 month absence, etc.) as long as the minimum statutory eligibiltiy rules are given as a default. Your plan document would then be structured with 2 gateways for eligibility, the statutory and the plan sponsor selected. Of course, most prototype documents don't do this properly with montly eligibility, and the client may not want the expense of a volume submitter or individually designed plan document. Perhaps a more practical solution may be to always count prior months of service unless the (annual) break in service rule(s) found in the doucment apply. This may be the best interpretation you can do. I don't think the health premiums, etc. create Hours of Service for eligibiltiy, but again the document should address what service is considered for eligibility. Sounds like you have a poor document that needs fixing. I like to warn the client about "operational errors" found during an audit, which will hopefully motivate them to pay for a proper document or amendments.

This is one of the most common problems I've found with my takeover plans. What kind of plan is the other plan? Paired standardized plans may help, if you have them. Otherwise, they need to submit non-standardized prototype or volume-submitter plans to the IRS for favorable determination letters, if they want reliance for either plan. Definitely more expensive with double IRS user fees and 5307 prep fees.

It would clearly be a prohibited transaction for the owner to purchase the REIT from the plan. Have you considered distributing the plan's interest in the REIT to the owner? If it is not publicly traded, the valuation principles of Rev Rul 59-60 apply, and often lead to a steep discount in the value applicable to the distribution. A valuation expert should be contacted to justify and document the valuation of the distribution. Also, I believe there are some UBTI issues with REIT's in pension trusts, but I don't know this area very well.

I agree with your remarks. My point though is that the fundamental idea with "normal" cost is that it should recognize the costs attributable to the current year, not push them into future years. Also, it seems inconsistent to subtract advance contributions from the assets, and not do corresponding treatment for distributions. For these reasons I feel EOY vals, the way they are normally done, have some logical problems. It's mostly an academic issue. But to read SOA periodicals, you would think our work is all scientific and mathematically elegant!

I think a careful reading of Rev Rul 79-237 indicates the charges and credits in the FSA are carried to the end of the plan year of termination (end of plan year meaning Dec 31, not the date the assets went to zero). The Rev Rul wording does not make a clear distinction between the plan termination date and the short plan year end which exists if assets are distributed before the end of the normal plan year, but I believe the Rev Rul must be read with termination date and "normal plan year end" (e.g., Dec 31) in mind, because otherwise other statements in the Rev Rul don't make sense. Hans' msg reminded me of a logical problem I thought of long ago that is applicable to terminees in EOY valuations. As we all know, advance contributions are removed with interest from the valuation assets in EOY valuations. It seems that terminees should also be included, even if they were paid out their benefit, with the assets increased by the distribution amount. Consider the following hypothetical extreme examples: 1) Mr Big has a DB plan for his small business. His employees participate in the plan too. He reaches age 65 Dec 30 at which point he retires and is immediately paid his lump sum. His actuary uses "n" as opposed to "n-1" normal cost amortization with IA method. A large benefit accrual occured for Mr Big in this year. The EOY val is done w/o above mentioned adjustment for terminees. Thus, no normal cost is generated for him this year. His normal cost could be very large, so the plan is "shorted" and potentially left underfunded for the remaining rank in file. This does not seem to be a reasonable funding method to me (lets ignore the 401(a)(4)-5(B) rules since this is a funding method topic not non-discrimination). 2) Mr. Big decides to hire his wife Jan 1. DB plan eligibility is immediate, so she enters on Jan 1. His wife terminates Dec 30, and as above no normal cost is generated. She has received a relatively large benefit due to her age and comp, but does not even appear on actuarial radar. These are extreme examples, but the general idea applies to all terminees. Would love to hear comments.

There's an american actuary in Japan that offers a free shareware program. I've used it a couple of times many years ago and it works. The interface is not very user friendly though. You will want to have a few known factors on hand and try to duplicate them as a way to figure out how the program works. Search on "Lohmann International Associates" and his site will come up.

Does anyone have an opinion about what extent a Form 5310 determination letter provides plan document reliance? A GUST amendment is of course required to get the 5310 favorable letter. The determination letters I have received usually mention the GUST amendment in the letter. If you have a favorable 5310 letter, is it overkill to restate the plan into a GUST document?

Statutory employees cannot participate in their employer's pension plans based on their income since they are not common law employees but rather independent contractors under the Code. (However they are treated as employees for certain purposes. For example, income as a “statutory employee,” is not subject to income tax withholding (but is subject to FICA withholding)). There is one exception though: with respect to income as a statutory employee as a “full-time life insurance salesperson”, they can participate in the insurance company retirement and health plan under the special exception of IRC §7701(a)(20) (other types of statutory employees do not have this exception, and are allowed to establish their own plans, since they cannot participate in their company plans). Therefore, this plan must be established with earned income that is not “statutory employee” income. I agree with your conclusion on the prior administrator's work.

Keep in mind the plan is its own entity and can be sponsored by a successor employer or multiple employers. There is therefore no short plan year. The new entity should adopt a corporate resolution adopting the existing plan. In addition, they should execute a plan document along with the resolution, although this is expensive and is sometimes skipped. I'm not an attorney, but in my opinion it doesn't make sense to not execute a plan document, since otherwise the new entity has not actually agreed to specific plan provisions (PPD attorneys have agreed with me on this point). You would file only one 5500 with the new sponsor EIN, but you would indicate on the form the change of sponsorship in the appropriate line items. I'm not sure if the IRS has addressed how you allocate the deduction, but a reasonable method based on compensation would probably be OK (I seem to remember some IRS promulgation that addresses this, perhaps for spinoffs, multiple employer plans or some other similar situation).

My impression is that DATAIR is the least expensive for small plan DB software, but I could be wrong since I did not do an exhaustive survey. They also may be willing to "strike a deal" if you have a small number of plans to administer (talk to the saleperson - they seem to have some latitude with fees). I've taken over the admin for over a hundred small DB plans, and I would estimate around half of them had prior actuarial valuations prepared using DATAIR, so it is widely used. The software is DOS based with a wannabe windows-like interface, but the interface does seem quite dated now. They claim that eventually this will be replaced with a Windows based system, but they have been saying this for a number of years (their 5500 software is now Windows based so they are slowly making a transition). I have been generally happy with the DATAIR DB software.

The plan document only addresses how the total contribution for the tax year is allocated. It does not specify that in the case of participant directed investments that each individual contribution must be allocated at the time the contribution is made. From a common sense fairness point of view, the document should probably provide for a common trust account to hold advance contributions until they are allocated to individual participants. However, the plan does have a favorable determination letter. The practice does seem discriminatory, even though in a maginal way. An irony is that given this is a doctor plan, and given the investment success of most doctors, the participants would probably be better off without any common trust!

A profit sharing plan has participant-directed investments. The business owner makes his 35K ctb prior to the end of the year to take advantage of tax-deferred investment gain. The employees' contributions are made after the end of the year, when comp, eligibilty, coverage issues, etc. are resolved. Thus, employees don't receive investment gains on contributions to the same extent. Is this practice considered discriminatory?

Greg - Thanks for your input. I did pay more than a "few hundred". I wouldn't describe the underlying data structure as simple, given the relationship between plan sponsor related info, plan info, plan year info, short plan years, complex asset information and transaction handling, etc. Even if it were a simple structure, as with most programming projects the user interface requires the most time and thoughtful design. I wanted an employee with little training to be able to handle the data collection process with the structure the program provides.