Blinky the 3-eyed Fish

Would you change your answer if the DB plan was a cash balance plan?

So, flosfur, are we in agreement now that the max lump sum in this case is $622,500?

Now keep in mind you are allowed to offset by the account balance attributable to contributions made after a certain date (i.e. account balance attributable to PS contributions made after 1/1/2003). In effect, by offsetting each year, you are just moving up the date. How about them apples? Any relevance?

First, I would like to reference a portion of Rev. Rul. 76-259 regarding offset plans. "A separate issued raised by the arrangement considered in this Revenue Ruling is the method of determining whether the accrued benefit of a defined benefit plan in such an arrangement satisfies the requirements of section 411(b)(1) of the Code. Such accrued benefit will be deemed to satisfy the requirements of section411(b)(1) of the Code if each of the following two conditions is satisfied: (1) the accrued benefit under the defined benefit plan determined without regard to the offset derived from the profit-sharing plan satisfies the requirements of section 411(b)(1) of the Code; and (2) the offset to the benefit otherwise payable is equal to the amount deemed provided on the determination date by the vested portion of the account balance in the profit-sharing plan (plus the additional amount that would have been provided by any prior distribution from the account balance). The requirements of the second condition in the preceding sentence will not fail to be satisfied merely because the defined benefit plan states that only a specified portion of the vested account balance will be the offset. Thus, for example, in the case of a contributory profit-sharing plan, the defined benefit plan may specify that the offset is limited to the vested portion of the account balance attributable to employer contributions as determined under the profit-sharing plan." What I am trying to determine is if it's allowable to offset DB benefits each year by the current year allocations in a DC plan, not the typical offset using the account balance. It seems to me that the first sentence of the fourth paragraph I copied alludes to this being permissible. What do you think?

Sorry, no cite, but as for the general attorney response, then I am sure they don't make their plan documents effective retroactively to the first day of the plan year even when the business exists. After all, "how can I have a plan effective without a plan document?". P.S. No, I am not bashing attorneys, just the logic of this line of thinking.

Good one. I still disagree with him on the employee aspect.

Can it pass coverage if one of the entity's employees are excluded? If so, then yes, he can excluded them, assuming you aren't using a standardized prototype document. If he changed ownership to his wife, then that definitely wouldn't work if it's a common law state and probably not anywhere else because to avoid the attibution rules under the spousal exception each can't be involved in the others' business.

I know Jim Holland has said, "no compensation, not in the test", but I hadn't heard his comments that expressed that a person is not an employee if there is no compensation. It is such a common occurrence for a small business where both the husband and wife work for the company for one of the two to be paid all the compensation to lessen the SS taxes that I certainly would not understand the position that this person is not an employee. Now, the spouse suddenly showing up as an employee would be a cause for concern, but I have seen it happen with my clients. They just don't report the spouse because there is no compensation. So, IMHO if it is legitimate, that the spouse was working there, then she is an employee.

True.

I would invite you to read Rev. Rul 98-1, specifically Q&A-8 & Q&A-9. Let me know if that changes your answer.

Yes Kirk, that is what I am talking about. I just wasn't sure if the PLR was needed or if there was some other mechanism. I can research the promulgation to determine the process. Thanks.

Does anyone know the process, user fees, etc. for submitting a 457 plan for an tax-exempt organization to the IRS? I am a complete novice when it comes to these, so any information would be useful.

Yes.

Focusing on MGB and Harvey's last comments, I would like to get some thoughts on this situation. The DB document we use for clients provides for the aggregate approach to calculating the actuarial increase for late retirement benefits. I don't necessarily agree with this approach. However, I feel I am stuck following the document, which has an approval letter. Would anyone handle it differently?

I know it's not polite to answer a question with a question, but here goes anyway. Who set this plan up? It appears to be designed to provide the owner with a large DB contribution that will probably cause 404(a)(7) to be violated every year. So, perhaps there is more to the story. Was it set up to use the flip-flop method to avoid the 404(a)(7) problem? Why is the PS contribution necessary? How much more do the NHCE's get in the DB plan if no PS contribution is made?

Pax, I think my prior post covered the bulk of the differences. The suit with the flower is for clowning, the suit without it is for TPA work.

Then what you have here is just a person with 2 employers that aren't related and aren't considered for each others' testing. It would be like you having two jobs, one as a TPA and the other as a circus clown. The plan under the TPA firm would not be worried about your other employment except that you might accidentally wear to work the suit with the flower that squirts water.

Your language references 417(e). We are discussing 415.

Are company A and company B either a controlled group or affiliated service group?

My mistake. I was thinking in-service distributions when I responded. Any one of the choices I posted before can achieve your goal. If the plan currently does not allow for in-kind distributions, you could always amend it to allow for it.

You are correct. So, in this case and using your figures, that maximum lump sum is $622,500.

WARNING! This post is based on my interpretations of logic and is without practical experience. WARNING! That being said, I would argue that the figure depends on how the annuity is paid. I feel that the $120,000 is acceptable if taking the annuity in one annual payment each year. 1.401(a)(4)-5(b)(3)(i)(A) describes the amount to be "A straight life annuity that is the actuarial equivalent of the accrued benefit and other benefits to which the restricted employee is entitled under the plan.." Rev. Rul. 92-76 also discusses the issue, but neither this nor the cite above are specific to your question, so perhaps someone with experience on this matter can add comments.

I am confused. How does the plan doc trump the IRS? You aren't saying the doc specifies the distribution code, are you? But whatever your answer to the above, the plan doc certainly does not "trump the IRS."

You are correct that terminating the plan and allowing for distributions is the way to remove the protected benefit options, but is that really what you want to do? I suppose if you are not concerned with vesting everyone, then it's okay, but I don't know many clients that like to give away dollars when they don't have to. I am not sure what you mean by "...assuming the MPPP allows for in-kind distributions.." First, a MP plan cannot have distributions before NRA. Second, this doesn't matter. So, I think it boils down to simply weighing whether or not you want to: a) terminate the plan and provide 100% vesting b) track separate MP monies transferred for J&S and distribution restrictions c) just make it so that all the monies in the PS plan are subject to J&S and are not available for distribution before NRA. That way you don't have to track the MP transferred dollars. (Note that this is only available if you currently don't have pre-NRA distribution availability in the PS plan. You couldn't take that away now.)

I will ask again how you can satisfy 411(b)(1)? Notice that Rev. Rul. 76-259 is not addressing whether a formula is a safe harbor or not.