David MacLennan

He may want to take it by Dec 31, or he will have 2 taxable distributions in 2007, as opposed to just one. The amount of the RMD might be lowered to be considerably less than his monthly accrued benefit x 12, if certain distribution options are available under the terms of the plan document, or are added by amendment.

From Treas Reg 1.417(e)-1(b)(1): A QJSA is an annuity that commences immediately. Thus, for example, a plan may not offer a participant separating from service at age 45 a choice only between a single sum distribution at separation of service and a joint and survivor annuity that satisfies all the requirements of a QJSA except that it commences at normal retirement age rather than immediately. To satisfy this section, the plan must also offer a QJSA (i.e., an annuity that satisfies all the requirements for a QJSA including the requirement that it commences immediately). Can't be more clear than that!

I heard (on another bulletin board) from an attendee of the 2006 EA Mtg, that IRS folks said they want a revised Schedule B filed if the correction results in a funding deficiency and the associated Form 5330. If not, then it is OK to just revise the following year's Sch B credit balance, but you should document the correction in the Sch B attachment. You probably thought of this, but does the CL deductible limit under 404a1D help to deduct the overlooked contribution?

Andy, if I can answer for ak2ary, I think he/she was just pointing out that the proposed 415 regs reference prior distributions, not accrued benefits (which may be larger than the actual distribution), when adjusting for prior distributions. I can outline the mathematically correct method to determine the 415 dollar and compensation limit offsets for the 300K prior distribution, if you provide the following: 1) In what year did the prior distribution of 300K occur, and what was his/her age at that time? 2) What is his/her hi-3 comp average for the 415 compensation limit, and which 3 years are these? 3) For what year is the ajusted 415 limit to be determined?

I would like to add that how you determine the offset to the 415 limit for the prior distributions is also not a straightforward issue. This is addressed in the proposed 415 regs but most feel the IRS really got it wrong and hopefully the final regs will provide more acceptable guidance. Common methods used by actuaries in the past also lead to unacceptable head-scratching type results. I wrote a paper in which I (hopefully) gave the correct mathematical approach for adjusting the 415 limits, which you can find on the Society of Actuaries web site (pension section news, Jan 2006). I have to add that I have had zero feedback on my paper from other actuaries, so whether the methods I advocate will gain acceptance by the actuarial profession is not at all clear at this point! Comments, anyone, please!

In Citrus Valley the court opined that 415 does not limit accruals, only actual distributions. I guess that does not give anyone reliance, but it is one more argument to bolster the position that the actual distribution governs. I reproduce below an excerpt (the "respondent" is the IRS): * * * * * * * * . . . . This argument, however, relies on the proposition that section 415 limits accruals. In support of this contention, respondent refers us to section 1.415-1(d)(1), Income Tax Regs. That section requires that the plan provisions of a qualified plan: preclude the possibility that the limitations imposed by section 415 will be exceeded. For example, a plan may include provisions which automatically freeze or reduce the rate of benefit accrual * * * to a level necessary to prevent the limitations from being exceeded with respect to any participant. * * * Respondent concluded that this language indicates that Congress intended section 415 to limit the accrual of benefits. We disagree. There is nothing in section 415 indicating that Congress intended section 415 to limit the accrual of benefits, and the regulation respondent cited does not compel such a result. The regulation's suggestion on how to prevent the plan from paying benefits in excess of the section 415 limits cannot create a limitation on the accrual of benefits that Congress did not expressly enact. Furthermore, we held that all of the plans, except perhaps Fox, funded no more than an amount which would be payable if the plan terminated immediately; therefore, no forfeiture could occur.

I agree the plan is covered. Not because of the multiple-employer aspect, but because as you concluded a software related business is not a professional service under PBGC rules (maybe it can be, but generally I would think no). I think you can have 2 professional service employers sponsoring the same plan and it would be exempt if particpants numbered under 25 at all times. ERISA 4021©(3) mentions this possibility. It it was a single business where the work was somehow related, then the aspect of how much was attributable to physician care would probably come into play.

Were the distributions to his personal accounts or to the corporate accounts? Legal counsel should take the lead on this. I wouldn't give him advice if you are the just administering the plan.

Have these accruals been limited because of the application of the 415 limit 10 year proration? It seems that is not what you are saying, rather, the plan is funding over 10 years when the accruals are over, say for example 20 years. There are ways to argue about the former, but I don't think the latter situation can be debated as correct.

I think there will of necessity be a grandfather, since the IRS has issued regs, LRM's, and favorable opinion letters allowing pre-participation comp for the 415 limit.

No, I don't think it is a requirement. But, it certainly does make more sense to have a trust EIN since the trust is a separate entity and is treated differently for tax purposes. On the other hand, Ann 84-40 blesses the use of the employer EIN for the tax forms connected with plan distributions. The IRS wants consistency, so you may not want to try to change practice in mid-stream if this is an established plan. Maybe others have had bad experiences as mwyatt has alluded to, but I have not so far. I always get a trust EIN for new plans, but for takeovers where they have been consistently using their employer EIN I let it be.

The new proposed 415 regs just came out, as has been rumored for months. The run 75 pages on my printer. The new regs address adjusting the 415 limit for prior distributions, and my quick scan indicates they lack thoughtful analysis with respect to the Hi-3 100% comp limit. The new regs appear to adjust for prior distributions by carrying forward the a.e. of prior distributions to the "current determination date" for adjustment of both the $ limit and 100% limit. Lack of special adjustment of the 100% limit ignores that, under the Code, it is not adjusted for age of commencement. Hopefully this will be corrected in the final regs.

I did not know him, but feel compelled to say something here. I always read his posts with great interest because of his in-depth knowledge and the historical perspective he often shared. Sad to hear of his passing.

It's a PT regardless of whether the contribution of property is over and above the 412 minimum (at least if it's an ERISA plan). "Such an in-kind contribution would constitute a prohibited transaction even if the value of the contribution is in excess of the sponsor's or employer's funding obligation for the plan year in which the contribution is made and thus is not used to reduce the plan's accumulated funding deficiency for that plan year because the contribution would result in a credit against funding obligations which might arise in the future." - DOL Interpretive Bulletin 94-3

SoCal, regarding the issue of funding for a benefit accrual larger than 1/10 of the dollar limit, would you give the same answer if the formula was career average? I'm thinking of Citrus Valley. Granted, going down that road is not for the faint of heart, nor for anyone who has only a partial understanding. Clearly the IRS does not "like" it, but they did lose that case and specifically the 1/10 dollar limit issue.

It depends primarily on how the plan document addresses 415 limits and the 414k account, and whether it has a favorable opinion letter to provide reliance. In addition, if the 414k account has any "defined benefit" aspects, such as a guarantee the 414k benefit will not fall below the DB benefit from which it came, then that weakens any argument the DB 415 limits don't apply. Note that this is somewhat of a controversial area. However, Code Section 414k is clear that the DB limits don't apply. 414(k) Certain plans A defined benefit plan which provides a benefit derived from employer contributions which is based partly on the balance of the separate account of a participant shall 414(k)(1) for purposes of section 410 (relating to minimum participation standards), be treated as a defined contribution plan. 414(k)(2) for purposes of sections 72(d) (relating to treatment of employee contributions as separate contract), 411(a)(7)(A) (relating to minimum vesting standards), 415 (relating to limitations on benefits and contributions under qualified plans), and 401(m) (relating to nondiscrimination tests for matching requirements and employee contributions), be treated as consisting of a defined contribution plan to the extent benefits are based on the separate account of a participant and as a defined benefit plan with respect to the remaining portion of benefits under the plan, and

Supreme Court, Keystone vs Commissioner (1993). DOL Interpretive Bulletin 94-3. IRS Announcement 95-14. I don't think the minimum funding is relevent, since any credit to the FSA could reduce future minimum funding requirements. Therefore any non-cash contribution to a pension plan is a prohibited transaction.

I often apply for EIN's for clients using the internet so I can immediately receive the EIN. Recently I've had lots of problems where the applications seem to be rejected for no apparent reason, even though I was carefully following all the Form SS-4 instructions. Usually what happens is they will fax a response saying something is wrong with the application and ask for a response within a week or so. They list about 10 things that could be wrong, but never circle one of the items or otherwise identify the problem. When I fax a response asking what is wrong with the application, I receive no reply. I have some indication that for these EIN's that receive such faxes, the IRS is nullifying the EIN's, but I have not taken the time to verify this for all EIN's. Well, I just got a call from an IRS employee asking "Is this an application for a sole proprietor or for a plan?" I was a bit floored, but quite pleased, that they had called me. After a bit of difficulty communicating the difference between the plan trust EIN and the EIN for a sole proprietorship (needed for Form 5500), she told me that whenever you apply for a sole proprietorship EIN, NEVER check the box "created a pension plan" under item 9 "reason for applying." If you do, they assume you are confused and don't actually want a EIN for the sole prop, but rather want one for the plan trust. She said that such applications are usually rejected and the EIN's issued over the internet are nullified. Checking "created pension plan" under item 9 seems perfectly logical for a sole prop, since you need the sole prop's EIN to file Form 5500. Perhaps others have done the same thing, hence I am posting this info. After more confusion over the purpose of the sole prop EIN and the trust EIN, she agreed with my suggestion to check "other" under Item 9 and enter "required for Form 5500" when applying for a EIN for a sole proprietorship. As to the perplexing faxes I mentioned in the first paragraph, she said that one of the IRS offices (NY I believe, there apparently are 3 that handle EIN's), does that kind of thing. My experience is that in that case you really need to make a conference call with your client (client is needed on the line unless you have Form 2848), call the general IRS number, wade through the various voicemail options to get to business "entity control", and then try to find out if the EIN was issued, etc. And also remember that when you need a plan trust EIN, don't check the box "trust" for type of entity under item 8a. As per the instructions, check "other" under item 8a and write "created pension plan", then under item 9 check the box "created a pension plan". IMO, The IRS should really clean up this form, or the instructions, or how they are processing the applications, to make it more logical. The amount of time you can spend on this can be very depressing.

Earl, could you go into greater detail? Is it a problem because the IRS will continue to expect future deposits? Or, is it difficult to make the paperwork consistent so the IRS doesn't send multiple letters notifying you something is off?

Thanks for all the replies. I came to know about Ann 84-40 in my research on this issue, which blesses the use of the employer EIN for the tax forms connected with plan distributions. Before, I had always thought use of the employer EIN was "wrong" and the use of the Trust EIN was "right." Also, the 2003 Form 5500 Sch R and Sch P instructions seem to bless the use of the Employer EIN on distribution related forms (I don't recall seeing that language on earlier forms, but perhaps it has always been there). Still, I will get a Trust EIN as it seems more proper. I don't think use of the "P" suffix is worth the risk of the possible headache later if the forms are rejected or cannot be generated by today's software. It also seems to be a practice the IRS has abandoned.

Pension plan is making a distribution, the first in approx 10 years. The client and I contacted the IRS to verify the trust tax ID number. The number the client thought was the pension trust tax ID number turned out to be a old number for the C-Corp (they changed to S-Corp status 10 years ago). The IRS ee told us to use the current employer ID number with a "P" appended to the end, and she indicated that such a number is in the IRS database. It appears the IRS at one point issued these numbers with "P" appended to the end of the employer ID number. Or perhaps they never really issued the numbers and it was just a convention for dealing with the often mistakenly blurred separation between the plan and the employer. Is anyone aware of any problems using such a tax ID number, eg, 10 characters rather than 9, or other issues? I will need to file 8109, 945, 1096, 1099, etc. It seems to be an outmoded practice since new trust tax ID numbers are not handled that way.

If it's an immediate gain method you use last year's interest rate to determine the gain/loss, so that's one known exception. It seems the general answer for interest on charges and credits depends on when the change of interest rate is effective, beg of year or end of year (which would be at the actuary's discretion?). Or, is there an IRS promulgation that addresses this?

Here is the link: http://www.groom.com/files/articles/92.pdf The web page with other related links is: http://www.groom.com/articles_display.asp?display=275 Ann 2004-58 pushed back the deadline for compliance to Jan 2006.

Does anyone know what happened to Mike Preston? He has not posted since May 5. I always appreciated his comments.

lgolden - if the participant has taken multiple distributions to the point where the PVAB is only $25,000, then the computation of the 415 100% limit might not be straightforward. I would have someone review it.