Blinky the 3-eyed Fish

It would depend on the document. The step rate approach is most prevalent (and some would say required), i.e. where each year's EOY benefit is the greater of the plan benefit or the prior year's benefit actuarially increased. In that case, I would not redo the increase because you already have set your prior year's benefit. However, I have seen documents that compare the plan benefit to the NRA benefit actuarially increased to the current date, i.e. not a year-by-year approach. In that case, I would use the current rate for the increase. I can see why there is the hang-up, but my point is you have to follow the document and is there something that warrants a month-by-month increase? I would think not.

I would say if you are computing a 7/1/05 amount, you use the rate in effect on 7/1/05. To do anything different would have to contradict your document. That document defines AE, which is a certain rate in effect at a certain time. What it most likely doesn't reference is the rate in effect a month ago. Why do we feel the need to grandfather a rate whose time has come and gone? Fluctuating interest rates are common when they are tied to the 417(e) rate, only the typical change happens annually. Would you grandfather those past rates? Just because it's a monthly change does not call for a change in the methodology of the calculation.

Barring language in the document to the contrary you would use the rate in effect on 1/1/06. It would have to be some bizarre language to come to a different conclusion.

You would just use the interest rate in effect at the time of determination just like if a person was pre-NRA you would do the same thing. What were you thinking you might do?

WDIK, you sound like an... Pmacuff, you probably got the vesting right the first time. Most documents have 0% cash-out provisions so that when a person who is 0% vested terminates, their balance is forfeited. Of course I could be full of... (Memory like an elephant) BTW, the VS doc we use has the same language.

This question has been asked before on these boards if you want to search. No deminimus amount in the statutues. If it cost me $100 per check, I would get a new bank.

The IRS' position for a CB plan is to convert it to an annuity and see if that is more than 0.5%. While I agree that is unofficial and under facts and circumstances, I would be very hesitant to design a plan providing less benefits to more than 60% of the nonexcludables. Elem, only 40% of the nonexcludables needed to have meaningful benefits since it is a 401(a)(26) issue.

Jane, could there be an affiliated service group?

You can file the EZ on a cash or accrual basis but just need to be consistent. If you want to file on a cash basis, that buys you another year of not filing the EZ. However, as many will tell you on these boards, you must file the EZ to file the Schedule P and get your statute of limitations running, so not filing simply because the assets are under $100K is not always the best advice.

I have no issues with a) but I think b) warrants a different response depending on the finer points of how a plan is drafted. There seems to be confusion on what is defined as the “plan rate”. (This is a poorly drafted question in that there is also no mention of a mortality table but I digress.) If the plan’s AE are defined for a lump sum as the lesser of 7.5% or the AIR, then I agree that the AIR is indeed a plan rate. However, if the document is drafted so 7.5% is AE, but of course there is the overriding 417(e) AIR for minimum lump sums, well then I do not hold that the AIR is a plan rate. Consider this wording from Rev. Rul. 98-1: Q-8. How is section 415(b)(2)(B) applied to a benefit under a defined benefit plan that is in a form of benefit subject to section 417(e)(3)? A-8. If a defined benefit plan provides a benefit in a form that is subject to section 417(e)(3), the determination of the equivalent annual benefit is the same as in Q & A-7, Step 1, except that, under section415(b)(2)(E)(ii) , the applicable interest rate is substituted for the 5 percent interest rate under section 415(b)(2)(E)(i). Thus, the equivalent annual benefit must be the greater of the equivalent annual benefit computed using the plan rate and plan mortality table (or plan tabular factor) and the equivalent annual benefit computed using the applicable interest rate and the applicable mortality table. See the bolded part. If the plan rate included the AIR, this would be clearly redundant. Also, 417(e) cannot be a tabular factor, so that too eliminates it for consideration as a plan rate. Now let’s look at the change to 415(b)(2)(E) made by PFEA: (4) LIMITATION ON CERTAIN ASSUMPTIONS.-- Section 415(b)(2)(E)(ii) of such Code is amended by inserting ", except that in the case of plan years beginning in 2004 or 2005, `5.5 percent' shall be substituted for `5 percent' in clause (i)" before the period at the end. Here it is after being inserted into the Code: (ii) For purposes of adjusting any benefit under subparagraph (B) for any form of benefit subject to section 417(e)(3), the applicable interest rate (as defined in section 417(e)(3)) shall be substituted for `5 percent' in clause (i), except that in the case of plan years beginning in 2004 or 2005, '5.5 percent' shall be substituted for '5 percent' in clause (i). That's the only change to 415(b)(2)(E). So my conclusion is that for maximum lump sums PFEA only changed 417(e) rates with 5.5% and 417(e) is not inherently a plan rate unless specifically included in AE.

I remember my grandma telling me you can't defer what you didn't make. Applying it to this situation, I believe it would be nearly impossible to defer more than $10,000 with only $10,000 in salary.

No, that is not correct. PFEA replaced the consideration of 417(e) rates for lump sums for 2004 & 2005. While I didn't pull up the tables I am betting that 71IAM at 7% will yield a lower lump sum than 5.5% 94GAR. See Notice 2004-78. It has a good explanation of the application of the law change.

I don't think not having it change each year is the criterion. But like I said, different people have different opinions on this subject and there is no clear guidance. Your method is one for which I think an argument can be made. As for the PFEA lump sum, no that is not correct. While I don't have access to the Gray Book, I can assure you your AE do not allow you to provide a greater lump sum than 5.5% and 94GAR. I am pretty sure the confusion lies in how the question is presented and answered, but if you post it, I or someone can walk you through it.

Although if you don't have the gateway amendment, you can always create it and do so retroactively as prescribed under -11(g).

Correct that no prospective credit is provided for taking less than the 415, but that too would be the same in your example. Why is the first year of distribution the beginning of the anchor? No prospective credit is given in years where no distribution took place. Under that logic an client that had a very early NRA in the plan and who took out $1 each year would have a much larger Hi-3 LS than a client that didn't take out the $1. I have always understood the Hi-3 LS limit to be potentially decreasing in value so I don't have an issue with not providing "credit" when payments were not utilized in full (or at all).

I agree the past payments that didn't exceed the 100% of Hi-3 limit are not used to offset the maximum lump sum if at a Hi-3 lump sum limit. So the amount of the payment received from the terminated plan in excess of the 100% of Hi-3 would be the only amount in this case that offsets that Hi-3 lump sum limit. So the question on how to do that is one in which you will get varying opinions. Personally, I would convert it to a benefit payable at the current age under the current plan's actuarial equivalents and use that benefit to reduce the Hi-3. For example: Hi-3: 12,835 monthly = 154,020 annually Lump sum received from terminated plan = 300,000 So convert 145,980 to an annuity under 71IAM 7% at current age of 75. Reduce 154,020 by that amount. Determine lump sum by mulitplying reduced benefit * lesser of APR 7% 71IAM or 5.5% 94GAR. Frank, note that you still need to factor in the plan's AE, not blanketly determine the lump sum based on 5.5%

See Rev. Proc. 2003-44.

Sorry. Give a man a fish....

I agree with mbozek. Kman, to your question, they are only ineligible because they aren't there 5 years. Other lawyers there 5 years are eligible. That is a service condition a clearly as can be.

Time? Sure it's possible to run out of money and have a credit balance, but in time the funding method will cause the plan to be fully funded. Barring future experience losses, from any point, you can expect the plan to be fully funded in 5 years (It would seem those pesky amendment bases have to be gone by now). The fact that this client would rather dump his money on you and the PBGC is beyone me, but you can lead a horse to water...

See Rev. Proc. 2003-44.

First, there is no reg that requires a contribution here. However, the combination of the plan being underfunded and there being a huge credit balance has to mean that there are very large amortization bases. Aren't these working to reduce the credit balance each year? Then if the you state that the funding levels are dropping with each LS payout, this would just add to the experience loss for next year. Eventually these factors will eliminate the credit balance and force contributions. Also, 6% may be too high a rate for funding if lump sum payouts are the norm and you are going to have a slew of them in the near future. This client has to be getting killed in PBGC premiums. Isn't that an incentive to put more money into the plan?

Either scenario is effectively merging the DB plan into the DC plan. You cannot just force a rollover into the DC plan. Now while a merger of a DB into a DC is possible it leads to some nonsensical results. You see the DB benefits will still need to have their characteristics in tact. One of these characteristics is that they are DEFINED BENEFITS and cannot be subject to investment losses. So what happens if in a few years if there are losses, a person terminates and wants their money, yet there isn't really a means within the document to contribute to the plan to make up the deficiency? You end up with a big headache is what happens. Is your client just trying to protect their pension or doesn't want them to receive the money for other reasons?

The answer is neither. When determining the TH ratio for plans with different plan years, you aggregate the determination dates that fall within the same calendar year. So in trying to determine if the 401(k) plan is TH for 2004, it's determination date is 12/31/2004, being it's in its first year. Therefore, you are going to use the 8/31/2004 values for the DB plan. If the assets had been distributed by then, well then you have the addback of distributions within the lookback period. As an aside, I understand there are arguments over whether the addback of distributions under a plan termination should go back 1 year or 5 years. I haven't looked into it though as to how the IRS is leaning. That won't affect you this year or next, but in the future you will have to have an answer.

You are as right as rain.