MGB

Within the next couple of weeks, representatives Portman and Cardin will be introducing (once again) a large pension bill that will include a permanent change to the 30-year Treasury rate references in the law. However, there are huge obstacles to getting change. Participant groups (AARP, Pension Rights Center, etc.) will fight against it because of the effect on lump sums. The PBGC will fight against it because of the effect on premiums and minimum funding requirements. At best, we may only get an extension of the 120% temporary funding calculation this year unless moods change. Organizations such as ERIC, ABC, ASPA, AAA and others continue to aggressively work with the PBGC, IRS, and Congress to move this issue forward.

This must be general tested to see what will pass. You will get a different answer depending on what the plan population is. Why do you think you can only go up to 25%? You can have 100%. The plan contribution in total is limited to 25% of aggregate compensation. Individuals are not limited to this.

You only need to meet the maximum disparity rules if you want to ignore the general 401(a)(4) test. You can have any structure as long as it is general tested.

It depends on how you define "reached their goal." Is it when they have 750k (25% of the 3 million) and don't have to worry about attaining the 10% return anymore (in which case Chip Brown's answer is correct); or is it when the stoppage of new contributions will produce 750k in the future at age 64? In the second case, they attain 25% of their goal after only 3 years of contributions, or about age 27 (I am assuming mr. and mrs. x started at about 24, which you didn't state). 3 years of 6,000 per year will grow to 750k over the following 37 years. (Again, you get slightly different answers depending on if they contribute throughout the year, at the beginning of the year, or end of year.) (I don't need a $2 bill...I used to teach interest theory to actuaries at the university level.)

Yes. Many cash balance plans are being designed with no age; just a 5-year service requirement that coincides with vesting. No whipsaw for anyone. Having said that, the funding assumption of retirement decrements in a DB plan may not reflect such young ages. The IRS has often challenged any retirement decrements that too young. Just because the NRD is 40 for a person does not mean you can fund for it if that produces a larger deduction than using something like 55 to 65.

I could see the IRS objecting because only NHCEs receive tips.

We have also run into insurance companies refusing to provide this information (although they did in the past). I don't understand this. The calculation of the cost makes a comparison of the insurance company rates and the table from PS 58. If they don't provide their rates, how do you know if you are calculating the correct amount?

Although no "penalty" to the FSA, there is the "penalty" of notices to the participants and possibly notice to the PBGC.

Kirk, The issue is with outstanding loans. You could have a loan that was issued a couple of years ago at a rate much higher than 6% (I had one from my 401(k) that I just paid back that was over 8%). Now that the person gets called up, that loan must decrease its interest rate.

I have seen PLRs in the past year or two that have relieved them when there is a real mistake of fact. However, if it just due to paying late, as pax said, not likely.

If you read the actual law, you get the opposite result of the DOL's interpretation and there is a very good argument that you do not need to go to court. Needing to go to court is only from the DOL reversing who has the burden of proof from what the law says. Some law firms may be relying on the law to be more powerful than the the DOL interpretation. Note that it is only an interpretation (soft guidance) by the DOL, not a regulatory dictate.

Isn't there an issue under DOL rules concerning the plan extending credit to the employer? By first paying them from plan assets and later reimbursing, this is the same as a loan from the plan and could constitute a prohibited transaction.

I agree with Pax. I would also add that the actuarial increase requirements are under the Code, so you cannot satisfy benefits required to be paid under the qualified plan with amounts from the nonqualified plan.

No pension plan is required to provide annual statements to anyone...active or terminated. ERISA only requires the plan administrator to provide information when requested in writing from the participant. If the participant has requested the same information in the prior 12 months, the request does not have to be responded to. However, a participant can request once each year and the plan administrator must provide the information, effectively creating an annual statement. However, this is only through requesting, it would not be automatic. There is only one truly automatic statement that must be provided and that is upon termination of employment. But that is only one statement.

The new regs (note that the 1988 regs will be thrown out when the new ones are finalized) do not allow an aggregate approach. I've been in discussions with the reg authors a couple of times and they are adamant that everything is focused on annual calculations. However, I don't think the new regs are very clear on the algorithms for actuarial increases like the 1988 regs were. I disagree that the 1988 regs allow an aggregate approach. Its examples very clearly do year-by-year comparisons. (I am very familiar with those regs because I provided the EA meeting sessions on them a couple of times following their release.)

Harry O, It is not technically correct because the actuarial increase cannot exceed 415 limits. Therefore, when the 415 limit causes you to not give a full actuarial increase, you are not complying with the rules for being able to ignore suspension of benefits. In this case, you technically are suspending benefits, albeit due to the IRS forcing you to, not because the plan was designed to. The IRS pointed out this problem (Rev. Rul. 2001-51) in the context of the new 62 to 65 flat 415 limit under EGTRRA combined with an NRA under 65.

The easiest is to merge the assets and liabilities from the private qualified plan into the governmental plan and provide service under the governmental plan for the prior employment. Very recently (in the last few weeks or couple of months?) there was a private letter ruling where this exact thing occurred (I think it was a hospital being taken over by the government) and they ruled it did not violate the governmental plan from maintaining its governmental status.

Judy, The regs only provide what the IRS expects to be done to follow the regs. It is not providing rules to follow for situations like your plan that doesn't contain these words. That doesn't solve the problem of your plan document being poorly written, ambiguous and not following the regs. Your plan needs to be cleaned up to state exactly what is intended. Also, Pax's calculation may not be correct for your plan. You need to look at the definition of Covered Compensation in the plan, which may not be an exact value like Pax used.

No, it was not repealed. Modifications to exceptions (there are a few) of the tax were made in EGTRRA to allow a contribution up to the unfunded accrued liability to be carried over without an excise tax. See Code section 4972©(6).

Do not confuse the deductible limit for the fiscal year and the contributions. What you are calculating is a deductible limit. You don't need to make the $575,000 contribution to end up with the $300,000 deduction, you only need to contribute $300,000. In fact, if they actually contribute the $575,000 prior to 12/31, they would be subject to an excise tax on the extra $275,000. The bottom line is that they have the same deductible limit as if they had used a calendar year plan from the beginning (assuming that the annual limit is the same for both of the first two years so that prorating between them resulted in the same number). In the second fiscal year, they have to wait until the December valuation to determine their deductible limit for the year...the prorated piece from 1/1/03 to 11/30/03 disappears from the calculations and never gets used. In order to make use of it, you need to always use the proration method rather than basing the limit for the fiscal year on the plan year beginning in the fiscal year. See Revenue Procedure 87-27 which describes the ratio that Blinky correctly used.

Most likely blocked. Whenever the field reviewers see cash balance in the plan, they are supposed to forward to the national office where it will just sit. However, there is always the small probability that your particular reviewer will not send it to national and process it normally (this has happened).

I think it must be refunded, no catch up. The only way to have catch up in this situation is if all participants had the opportunity to make catch up contributions on their own in that plan year. Given that the plan didn't allow it, doing it for this one person would not be allowed.

Yes, this is a situation where you must either pay the person out a distribution for the year or provide a suspension of benefits notice. However, you can only do either one of them if the plan states that. Does the plan have suspension of benefits language in it? If not, it needs to be amended (along with most plans in this country) to provide suspension of benefits when the 415 limits don't work out. Without such language, the participant has an ERISA claim against the plan for the full actuarial increase even though the IRS doesn't allow the higher benefits. One of the two provisions must be in the plan: suspension or payment. The old approach of avoiding suspension by providing an actuarial increase is not technically correct and all plans need suspension language in the document to deal with 415 issues. In particular, now that the 62 to 65 limits are the same, suspension will be more common.

From a national retirement policy standpoint, this is ridiculous. Anyone promoting such cards should be banned from the retirement arena. The high probability of more leakage from the already gruesome outlook of national retirement savings makes me ill.

Johnny, I apologize for the confusion in the Client Action Bulletin that you linked to. I am the author (or primary peer reviewer) of our CABs, but this one was written by someone else in my unit and I did not catch the poorly written phrases that you referred to until after it was released. The person writing it was very familiar with the 457 regulations which the CAB was focused on, but not as well versed in the catch-up regulations which had been previously released. I thought about releasing a follow-up but decided that individual consultants knew enough to clarify to their clients the proper interpretations from the regulations. The language in the CAB reflected the understanding we had from the original law, which was changed when the regulations went in another direction allowing aggregation of only those plans that had an aggregated underlying limit.