David MacLennan

Yes I agree the account balance method only makes sense for partial lump-sum distributions, and the document must allow for the partial lump-sums. Interesting question is whether you can avoid doing distribution forms every year, by somehow electing a series of partial lump-sums determined by the individual account method . . . but I suppose that could be considered an annuity and therefore ineligible under the regs (although the amount of each future payment is generally not knowable).

So Cal - I posted before I saw your #1. We had the same thought. Like your suggestions. Re #3, is there a spouse? Even if the spouse never got any W-2, some feel that unpaid service counts for 415 Years of Service (put it in the document and submit it for approval). This could use up approx $4 of assets for every $1 of W-2 paid to the spouse now, depending on age, etc.

When did the plan become overfunded? If he is at the 100% limit, the participant should have commenced annual payments in the amount of the 415 limit as soon as the plan became overfunded, as this does not impact the 100% of pay limt. How much percentage-wise is the overfunding? The annual payments may still substantially help the overfunding, but it may take time. Interesting question is whether such annual payments can be rolled over to an IRA - seems like they could be if they were made pursuant to a partial lump-sum distribution election each year. The lump sum of th 415 100% limit goes down by approx 3%/year, so things are getting worse. Another option: invest in non-publicly traded assets and heavily discount them per Rev Rul 59-60 (submit the form 5310 for a blessing). Don't disqualify the plan - there's always a better way to go, in my opinion. May want to consider getting a new attorney.

The account balance method for DB plans is in the 1987 proposed regs (quoted in one of the posts above - not buried at all and quite clear!) and was left alone in the 2001 modifications. Not to mention, all those plan documents that were approved since 1987, and probably the LRM's had the language too. Also, from the final regs: "For a plan that satisfies the parallel provisions of the 1987 proposed regulations, the 2001 proposed regulations, the 2002 temporary and proposed regulations, or these final regulations, a distribution will be deemed to satisfy a reasonable good faith interpretation of section 401(a)(9)." This leaves no room for doubt on whether the account balance method can be used up to 2005 (as long as the document permits). The final regs are not silent on this issue at all, they clearly allow for it up to 2005. As a one-man operation, it's easy to miss something, but I just don't see an argument here for an opposite opinion. It seems to be one of those issues that has "spooked" people and revealed the natural conservatism of the profession.

From the bottom of page 14 of the final regs: "A number of commentators requested that the final regulations provide the rule in prior proposed regulations that allowed minimum distributions from a defined benefit plan to be calculated using the rule for defined contribution plans in ' 1.401(a)(9)-5. The primary argument for allowing this level of flexibility in calculating distribution amounts from year to year is to allow employees to adjust to changed circumstances. The rules in these final regulations allowing a change in distribution form upon retirement or plan termination, and at any time when distribution is in the form of a term certain only, address this need." Given the above statement in the final regs, I don't see how one can argue that the account balance method is not allowed for 2004 and 2005. The IRS is acknowledging in the final regs that it was a calculation method under prior proposed regs, are they not? Since the final regs retain the account balance method in the year of a lump-sum distribution, we know that the above statement is not referring to that narrow application. MGB and others on this post, am I missing something?

On Question 1, the spouse contribution is treated like an employee. I don't see how it can be otherwise, looking at the IRS instructions. Andy is there some inconsistency or problem you see in doing it this way? Re Ques 2, I'm not a CPA, but I would think the loss would be permitted. The Sch C and IRS instructions give details on how to handle losses. On quick review of the instructions, it looks as though the loss is deducted on page 1 of the 1040, unless some of the investment in the business activity is not "at risk", in which case the loss is treated as deduction for the business in the following year.

Partly Cloudy - Did the speaker at the 2003 EA Mtg have some justification for that conclusion? I was trying to say that it is not a black and white issue, and that most pension consultants / actuaries don't act as advocates for their clients in the fullest sense.

I think the only reasonable interpretation FROM AN IRS VIEWPOINT is that the plan adoption is considered a plan amendment. Although not directly applicable to 404, the 401a4 regs specifically state that the adoption of the plan is to be considered a plan amendment. On the other hand, since the IRS has not issued any guidance, an aggressive position could be taken by the plan sponsor and the sponsor's CPA or tax advisor. Or is it aggressive, really? The common sense interpretation is that "amendment" is NOT the adoption of a plan - it is a mathematical-like abstraction to say amendment = adoption. Certainly the statute could have been more clear, and the IRS could issue regulations promptly. Is that the taxpayers' problem? Is it the taxpayers' role to comply with the so-called "spirit" of the law? Or, to interpret the Code to maximize government revenue? Is it the role of the retirement plan consultant to give the client the conservative answer as if it is the only option? I know how I would answer those questions . . . The risk during an audit would be a possible disallowed deduction, late tax payment with interest and penalties, and excise taxes on the non-deductible contribution. This could involve a considerable amount of money, but the plan's qualification is not at risk.

Jay21, I imagine that the annuity form of payment does not have to be elected, but that the amount of the annual distribution must be greater than or equal to an amount that is actuarially equivalent to one of the permitted annuity forms. The regs discuss how one is allowed to change the annuity payment period, and it looks like only a term-certain type of election with no life contingency can be changed at will. This would seem to allow for a partial lump-sum of any amount greater than or equal to the RMD. This would allow participants some flexibility, w/o locking into some annuity form they don't want (small DB plan participants never (in my experience) elect annuity forms of distribution). I still haven't read these regs carefully, I'm just skimming them. Frank was good to point out that the preamble specifically mentions the account balance method for DB plans: "A number of commentators requested that the final regulations provide the rule in prior proposed regulations that allowed minimum distributions from a defined benefit plan to be calculated using the rule for defined contribution plans in ' 1.401(a)(9)-5." This seems to confirm w/o doubt that the account balance method is grandfathered until the end of 2005.

The final 401a9 regs were issued today (Monday), and my quick speed read indicates there is still no "account balance" method for determining the RMD in a DB plan (unless there is a single sum distribution). Does anyone come to a different conclusion? I know that some feel that the account balance method was never allowed unless there was a lump-sum distribution, but my impression is that it was common practice. For many of my clients, this will increase the RMD by a factor of 2 or 3 times, prompting them perhaps to terminate their plans and start a new DB plan. It doesn't seem like the IRS was concerned with equity between DB and DC plans on this issue. The regs state that employers do not have to comply with the final regs immediately, they can use a reasonable interpretation of 401a9 for the years 2003, 2004, and 2005. Does this mean we can continue with the account balance method until 2006? I suppose the answer is shades of gray based on a risk comfort level, unless it is in the plan doc and one has a favorable letter.

My DATAIR software can output the q's for that table. I could email it to you.

Andy - Re the offset, I believe the offset to reduce the 100% Hi-3 limit should be the actuarial equiv annuity of the lump-sum distribution, the annuity commencing at the age of distribution. You would not make the offset the a.e. annuity commencing at, for example, the NRA.

Complete agreement with Mwyatt on the outrageous PBGC premiums. One thing to add to the original post issue: remember the 100% limit is not adjusted for age of commencement. This sometimes leads to errors with respect to how the prior distribution offsets the 415 limit.

Why worry about what IRS people have said, or what the preamble says, if the document has the needed provisions and a favorable determination letter has been issued? For example, Datair DB GUST prototypes have language that explicitly states the DB 415 limits don't apply to the 414k account, and the Datair prototypes are fairly widely used. And, how can 414k be denied by the regulation preamble? Perhaps there is something I am missing. I think you would have problems, and the preamble would apply, only if the 414k account had some kind of DB guarantee attached (I know the TRA86 PPD prototypes had a guarantee on the 414k account, stating that it was the greater of the 414k and the DB AB). One way to look at the preamble is to note that it never mentions 414k, and note the language "is not converted into a defined contribution plan MERELY because the account is segregated" - I would agree with the preamble that if your document simply allows for the segregated account at NRA and doesn't disavow the DB guarantee, or invoke the DC limits, or reference 414k, then DB 415 limits should apply. The PS rollover Lynn mentioned avoids these issues, but why do that when you can take a stand on 414k!

Paragraph c states that it applies to the entire section. But I see your point now - the ERISA attorney is saying the Q&A 3 refers to paragraph b which must be viewed apart from any other paragraphs. That is not just conservative, in my opinion it goes to being unreasonable in the extreme. Ammunition: "if you need to justify your existence, please do it in some other way" (just kidding - everyone is entitled to their opinion!).

What part of the regs are they concerned about? Paragraph c(1) clearly states that where a corporation is wholly owned by the individual, or the individual and the spouse, then they are not employees under Title I.

In the case I was referring to, the sole proprietor was automatically a co-sponsor of the plan due to the standardized document language pulling in common control group members. The CPA decided to take the entire deduction on the S-Corp side. There was some benefit related justification for this, although it may not have been reasonable as the deduction allocation is supposed to be with co-sponsors or common control members. The CPA fell back on what I mentioned earlier, in that the earned income problem is being fixed and this is what would have happened (i.e., deduction taken by the S-corp) if we would have issued a W-2. He felt under audit his argument would prevail (incidentally, he was an auditor for the IRS for many years prior to his CPA practice).

I've seen a CPA do the following when it was too late for a W-2: create a sole proprietor! The S-Corp dividends became self-employment income to the S-Corp shareholder. The CPA said he felt comfortable doing it, as the IRS would probably insist the income was earned income, and they just wanted to remedy an error when it was too late to issue a W-2. I'm not sure if this was entirely cricket, but the CPA seemed to think it would work.

I'd consider it a funding method, mostly equivalent to a EOY val with an asset valuation method of 1+i times BOY assets. I can see where people could call it an assumption, but a different assumption of salary scale for every participant? That strains the English language a bit with respect to the nature of an assumption. I've taken over 1 or 2 small plans that had a asset valuation method of 1+i times prior year's assets.

What problem are you trying to solve? There may be a "creative" solution to your comp problem.

The 0.1 difference is probably from the CPI-U table I have access to, which was rounded to 0.1. I think the 331.3 is rounded after summing the CPI-U quarterly numbers with more decimals.

I think I have this right, but for confirmation I was wondering if anyone else has computed this. For DB plans not reflecting EGTRRA in 2003 valuation, 2003 415 $ limit: ($90,000) * (sum of 2002 3rd Quarter CPI-U) / (sum of 1986 4th Qtr CPI-U) = ($90,000) * 541.8 / 331.2 = $147,228 Rounded to next lower $5,000 mulitple, = $145,000

The answer would be no, in my opinion. Since A and B are members of an ASG, they are treated as a single employer, and you must consider compensation from both A and B. Any exclusion of compensation would have to satisfy non-discrimination rules. Also, by the same reasoning, in determining eligibility and vesting you must total hours from both A and B for ees who were employed by both.

Perhaps you could ask some company, such as Freeerisa.com or Judy Diamond Associates, to query the 5500 records for the info you require at a reasonable cost. The business code and number of participants are disclosed on the 5500. As to whether the plan is frozen, seems you could look at the Sch B info to see if the current liability increase due to changes in accrued benefits during the year was zero or near zero. Another option is to buy the 5500 records from the DOL and create your own database. I did this myself about 10 years ago. If the DOL still provides the data in huge old fashioned magnetic tape reels, as they did 10 years ago (approx 8 reels of tape as I recall), don't even attempt it. It is a BIG job. The data processing guy I hired to read the tape reels and put it into usable form still complains about that task he did for me, even though more than 10 years have passed. By now they probably will give it to you on a CD. My recollection is that the DOL only charged me about $175 for the data.

Yes under 412c8. I believe the amendment should reference two effective dates. With respect to determining minimum funding under 412, the amendment will be effective Jan 1 2003. For determining accrued benefits, of course the effective date must be in 2004 to give the proper notice and to ensure the amendment cannot be misconstrued to reduce anyone's accrued benefit. Under Rev Rul 77-2, the actuary does not have to recognize amendments adopted after the valuation date. A 412c8 election must be signed by the plan administrator (the legal plan administrator, not the TPA), and attached to the Form 5500.