MGB

Mary Kay, I don't think the original question was referring to after-tax deductions by the participant, which your answer is referring to. I interpreted the question to be referencing an employer contribution that is not deductible by the employer for whatever reason. I agree with the original answer that the deductibility at the plan sponsor level should have no bearing on whether a participant can roll it over.

Jim, The House bill is similar, but includes an exemption for qualified plan administration. The Senate will not take up the bill until next year. But, what this means is that the SEC knows that the Congress would override any rule they put out next year with the exemption. The whole point is to presure the SEC to put the exemption in the SEC rule to begin with. They are meeting the first week of December to decide whether to put out a rule and what should be in it. It will also have a comment period once released in proposed form.

I, too, am looking for any guidance on this issue. Does anyone know of any PLRs, etc.?

I would think it is the following: (PV of annuity certain for the duration) minus (PV of a temporary life annuity for the same duration) Of course, which mortality table to use in the second part is a very open issue. But, there would also be adjustments to both of the above for other types of default risk, so that this gross approach may not produce the correct answer.

I was referring to the first statement (the UCL calculation in the original draft of the law would not have been applicable to non-PBGC plans). However, the statement applies to both situations because there is no reference to a limitation on non-PBGC plans for any of these rules now.

Isn't there a rule that if the payment is any frequency other than monthly, that you must adjust the dollar maximum?

Because they are nonhighly, the plan must be funded, but it will not be a tax-favored trust (earnings will be taxed). When the participants are vested in their benefits, they are taxed on them, even though they do not have access to the money. Yes, you can do this, but it is not a very efficient way to provide retirement benefits.

Blinky's description is correct, and has been discussed by Holland at professional meetings in exactly this context. A once-per-year annuity is allowable. The plan would have to allow for it. However, it may be that your "high-25" language already does. It would need to be looked at very carefully. I do not think it would need to be an alternative form of payment that is electable. For example, assume the normal form is 10yrs certain and life and that there is no optional form of a straight life annuity. In this case, the plan would still have to pay the restricted amount in a straight life annuity form. And, that is not one of the forms available to a regular retiree. In this case, the language of the "high-25" restriction would suffice to produce the straight life annuity payments. It is within that language that you need to pick through. Does it describe a "monthly" annuity or point to the straight life annuity (presumably monthly) that is a regular option? Or, does it just have general language (taken from regulations) restricting to a straight life annuity? In the second case, I think you can pay yearly through an administrative interpretive decision.

Although I never noticed that rule before, now that I've read M-3, I agree with Relius' methodology.

Note from the historical development that CODAs originated with the profit sharing contribution at the end of the year. That is why 401(k) ended up as a feature within profit sharing plans and is not applicable to other qualified plans.

That is not true. They have been around since the 1950s. There were quite a few cash-or-deferred arrangements (CODAs) at large companies. Most were focused on the profit sharing contribution at the end of the year, rather than a salary deferral. For example, all of the big auto companies were doing this. The profit sharing was allowed to be taken in cash or deferred, thus the origin of the "CODA" moniker. However, salary reduction was beginning to show up, too. Here is an exerpt from Chapter 11, "Cash of Deferred Plans Under Section 401(k)", Legislative History of CODAs, pg. 186, from Pension Planning, by Allen, Melone, Rosenbloom and VanDerhei, 8th Edition, Irwin Publisher: "Before 1972, the IRS provided guidelines for qualifying cash option CODAs in a series of revenue rulings. In essence, more than half of the total participation in the plan had to be from the lowest paid two-thirds of all eligible employees. If this requirement was met, employees who elected to defer were not considered to be in constructive receipt of the amounts involved, even though they had the option to take cash. Salary reduction plans satisfying these requriements also were eligible for the same favorable tax treatment. In December 1972, the IRS issued proposed regulations stating that any compensation that an employee could receive as cash would be subject to current taxation even if deferred as a contribution to the employer's qualified plan. Although primarily directed at salary reduction plans, the proposed regulations also applied to cash option profit sharing plans. As the gestation period for ERISA was coming to an end, Congress became increasingly aware of the need to devote additional time to the study of the CODA concept. As a result, ERISA included a section providing that the existing tax status for CODAs was to be frozen until the end of 1976. Plans in existence on June 27, 1974, were permitted to retain their tax-favored status; however, contributions to CODAs established after that date were to be treated as employee contributions and, as a result, were currently taxable. Unable to meet its self-imposed deadline, Congress extended the moratorium on CODAs twice; the second time, the deadline was extended until the end of 1979. The Revenue Act of 1978 enacted permanenet provisions governing CODAs by adding Section 401(k) to the IRC, effective for plan years beginning after December 31, 1979. In essence, CODAs are now permitted, as long as certain requirements are met. This legislation, in itself, did not result in any significant activity in the adoption of new CODAs. It was not until 1982, after the IRS issued proposed regulations in late 1981, that employers began to respond to the benefit-planning opportunities created by this new legislation. By providing some interpretive guidelines for Section 401(k), and by specifically sanctioning salary reduction plans, the IRS opened the way for the adoption of new plans and for the conversion of existing, conventional plans." (I get really irked every time I hear that "the father of the 401(k)" created the first CODA in 1982...many of us worked on them long before that.)

The company that an enrolled actuary works for DOES NOT provide actuarial services to a plan. Only an individual actuary does. ANY change in the EA signing the B must be treated as a change on the 5500. The IRS has verified and restated this many times. (If you asked Holland today, I guarantee you will get this answer.) The reference in the instructions to the "firm providing services" only applies to the auditors. A firm signs an audit report, not the individual accountant.

Dave, In your latest update, special characters are being created by code sections again. The one I've noticed a couple of times is ( c ) becoming ©.

I do not think there is a problem at all. You are talking purely about a post-NRA adjustment to the benefit. As long as the increase in benefit payable is less than the actuarial increase on the benefit at NRA, then where is the problem? You are allowed to give the actuarial increase, or, if you give less, provide them with a benefit suspension notice. This seems like it will always be less than the actuarial increase (because people have so many years of service in order for this to happen). I don't think you have a problem at all.

I am not clear by what you said that there is a problem. What does the person get if they retire at 65? Are you saying the pre-80 extra accrual pops up at that time? If that is the case, I agree there is a problem. However, your example is talking about an "accrual" that includes $25, which implies another year of service. If this accrual only happens after age 65, then you don't have a problem because it is less than the actuarial increase on 31 years of service x 25 = 775.

FYI, In 9/01, a correction was drafted and there were communications amongst several people involved (I was not involved at the time). However, due to the time that has now passed and changes in personnel involved, I do not know what actually became of dealing with the issue. I am still looking into it. Mark Beilke Director of Employee Benefits Research Milliman USA

Note, too, that a cash balance plan can have an age-weighted formula that would even pass the scrutiny of the court in the IBM case.

I am not sure what you are doing. 1) Spreading costs over one future year of service. 2) Spreading costs over all future service (beyond the one year of accrual). I think (2) would be an unreasonable allocation of costs. I don't know if (1) is an allowable method and you may need to do a formal request for change from the IRS and get their opinion. I don't think it meets the automatic approval.

It is also the date that determines the back-loading test under 411. A person terminating one year prior to that unreduced date better have a pro-rata accrual coming to them at the same date.

$12,000 only applies to the pre-tax deferral. An after-tax contribution is not a "deferral." However, both are included in counting towards the Section 415 limit ("maximum annual addition) of $40,000.

If the the full funding limitation does not apply, then, in my opinion, the EGTRRA provision is not available.

In order to apply this provision you need to answer "What is the full funding limitation under a 412(i) plan?" I don't know the answer to this (I have never seen or know anyone with a 412(i) plan and hope I never do).

Although the economic net effect is that you are making the contribution, in fact you are not making the contribution under your own decision. If it were your decision, then your CPA would be correct on the FICA, but you could still contribute pre-tax if they set this up as a 401(k) account. There are really two completely unrelated events happening here. The company is going to make a contribution to a retirement plan for you. That's nice. (However, there may be questions of whether it is a prudent fiduciary decision to invest it all in your company's stock.) Separately, the company has decided to reduce your salary. That's not so nice. But, they have complete control over what they pay you unless you have an employment contract with them. It just so happens that they are instituting these both at the same time and in the same amount. But, in reality, it is not your salary that is being put into the plan. Yes, this will affect your eligibility for IRAs.

The proper term is "annuity starting date." See the recent (July 16) final regulations under 417(a)(7) defining when you can do this. Depending on the timing of issuing the QJ&S notices in relation to the ASD, this could be a regular ASD, or a retroactive-ASD. The fact that back payments were made does not automatically make it a retroactive-ASD. A retroactive-ASD is a very defined term under these regulations (and cannot be done without explicit language in the plan authorizing it; there are a list of other requirements that also must be met in order to make use of a retroactive-ASD).

Please note: Those are the original versions of the statements (I can't understand why FASB did this). There are a lot of changes since their original versions. For example SFAS 132 greatly amended SFAS 87, but if you read the SFAS 87 on their website, you don't see the amendments. There is a separate listing of changes on the website, but they are only references, not the changes themselves.