Belgarath

Tom - what if a non-key HC gets a TH contribution? Sal has some discussion of this TH uniformity requirement on pages 9.20 and 9.21, and see specifically page 9.21, 5.d.5) of his 2006 edition. How do you read this? Still no worries, or do you think general testing might be required in certain circumstances?

Here's a link. http://www.dol.gov/ebsa/regs/aos/ao2006-03a.html I agree that purchasing it for the FMV if greater than the CSV is fine. Hard for me to understand how a FMV could be LESS than the CSV.

Ah. Now I know what you are talking about. We have a 17 year old son who is addicted to the blasted show. I retreat to the bedroom to read whenever it comes on.

Is it a calendar year plan? If not, be careful... I ask because I've been seeing a lot of non-calendar year plans lately, so I'm jumpy on these types of questions.

I'll probably regret asking, but who is Jack Bauer? Did the Red Sox get him in a trade?

Issued yesterday, by the way. Of all the stuff I discuss with colleagues in the business, this is the one where I find the fewest clearcut, confident opinions. Understandable, because even the actuaries I've talked to find this a struggle, so for us poor saps who are not so mathematically inclined, it's worse yet. Here's a question that we've been kicking around, that I'll toss out for discussion. Suppose you have a plain vanilla DB plan. No subsidized benefits whatsoever, and all distribution options are actuarially equivalent. And the lump sum using plan assumptions is, say, $100,000. However, due to 417(e)(3), the lump sum actually payable is $120,000. For purposes of the regulation only, is this considered "approximately equal" to the QJSA? On my untutored level, it would seem that this should be disclosed as being 120% of the QJSA. But is that what is required by the regs? Let's say you are using the general disclosure method, with a "chart" that shows the lump sum based upon plan assumptions, and the chart shows, (accurately) that based upon the plan assumptions (which are stated on the chart) that the lump sum is equal to all the other forms of benefit. But there's also an asterisk that says the actual lump sum may be higher depending upon interest rates - would this satisfy the disclosure requirements? Or must there be a specific statement somewhere that the lump sum available under 417(e)(3) is relatively worth 120% of the other benefits? (P.S. the employee benefit statement for a terminated participant that shows a lump sum distribution amount shows the actual, higher, 417(e)(3) lump sum.) It seems to me that the final regs give a corridor of 95% to 105%, and anything outside of this cannot be considered approximately equal to the QJSA. 1. Do you agree that I'm reading this correctly and that this would apply to a lump sum under 417(e)(3)? 2. Am I correct in general, but the 417(e)(3) doesn't fall under this requirement? 3. Am I wrong altogether? 4. If # 1 is correct, then is the general disclosure I outlined acceptable, or must it be more explicit? Thanks in advance - our actuary is going to be discussing this garbage with cohorts at some conference in June, I believe, but I'm just trying to get a handle on it in the meantime for my own edification.

See attached post, which you may find helpful. Andy pointed out that you can still use pre-participation comp averaging, it's just 415 limits that will require the participation comp, once the regs are effective. I have found this subject confusing, as you'll see... http://benefitslink.com/boards/index.php?s...97entry129297

Andy - I'm unsure if your response means you believe the grandfathering applies to 2006 and 2007 and beyond? Could you clarify? As you know, I have a lot of trouble with this new 415 reg... Also, FWIW, see IRS Notice 2005-87 which extends the 5-31-05 date to a date not earlier than when the final regs are published. (Copied below from CCH) CB-NOTICE, PEN-RUL 17,132G, Notice 2005-87, I.R.B. 2005-50, December 12, 2005. Notice 2005-87, I.R.B. 2005-50, December 12, 2005. Proposed regulations: Grandfather rule: Limitations on benefits: Annual additions: Preexisting plans The IRS has stated that the grandfather rule for preexisting benefits in qualified plans that is currently in proposed regulations addressing the limitations of Code Sec. 415 (see ¶20,261N) will be expanded from May 31, 2005, to a date that is not earlier than the publication date of the final regulations. Plan sponsors adopting new plans and plan amendments during the interim period before the final regulations are published will not be subject to the interpretations set forth in the final regulations regarding benefits accrued prior to the effective date of the final regulations, assuming that the plan provisions are in accordance with statutory provisions and other IRS guidance in effect at the time the new plan or amendment is adopted. Back references: ¶1561, ¶1645, ¶7527, and ¶8210. Part III —Administrative, Procedural and Miscellaneous Section 415 Regulations and Preexisting Plans Notice 2005-87 Purpose This notice provides that when the final regulations under §415 of the Internal Revenue Code are published, the grandfather rule of §1.415(a)-1(g)(3) of the proposed regulations for preexisting benefits in defined benefit plans will be expanded. Background Section 415 of the Code provides various limitations on benefits under qualified defined benefit plans and annual additions under qualified defined contribution plans. The proposed regulations under §415, issued May 31, 2005, provide comprehensive guidance regarding the limitations of §415, including updates to the regulations for numerous statutory changes. The regulations are proposed to apply to limitation years beginning on or after January 1, 2007. Section 1.415(a)-1(g)(3) of the proposed regulations provides a grandfather rule for preexisting benefits under which a defined benefit plan will be considered to satisfy the limitations of §415(b) for a participant with respect to benefits accrued or payable under the plan as of the effective date of the final regulations. This grandfather rule applies only to benefits accrued pursuant to plan provisions that were adopted and in effect on May 31, 2005, and only if such plan provisions meet the requirements of statutory provisions, regulations, and other published guidance in effect on May 31, 2005. Commentators have expressed concerns about the grandfather provision of the proposed regulations. Commentators asserted that plan sponsors should not be required to apply the final regulations before their effective date and noted that the May 31, 2005, date would effectively require them to apply the final regulations retroactively (since any benefit provided by a defined benefit plan adopted after May 31, 2005, or benefits attributable to a post-May 31, 2005, amendment will not be covered by the grandfather rule). Expansion of Grandfather Rule for Preexisting Plans The Treasury and Service intend that, when the regulations under §415 are finalized, the May 31, 2005, date that is in the grandfather rule in §1.415(a)-1(g)(3) will be replaced with a date that is not earlier than the date of publication of the final regulations. Thus, in the interim period before final regulations are published, plan sponsors who adopt new plans and plan amendments will not be subject to the interpretations set forth in the final regulations with respect to benefits accrued prior to the effective date of the final regulations, if the plan provisions relating to §415(b) meet the requirements of statutory provisions, final regulations and other published guidance in effect when the new plan or the new amendment is adopted. Additionally, in the interim period before final regulations are published, plan provisions will not be treated as failing to satisfy the requirements of §415 merely because the plan's definition of compensation for a limitation year that is used for purposes of applying the limitations of section 415 reflects compensation for a plan year that is in excess of the limitation under section 401(a)(17) that applies to that plan year. Drafting Information The principal author of this notice is Kathleen Herrmann of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans taxpayer assistance telephone service at (877) 829-5500 (a toll-free number) between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday Through Friday. Ms. Herrmann can be reached at (202) 283-9888 (not a toll-free number).

This should get you started. Once you digest this, I expect there are a bunch of websites that will give a lot of information. http://www.irs.ustreas.gov/pub/irs-pdf/p560.pdf

And I might add that ERISA Section 3 already referenced by WDIK also in (6) says, "The term "employee" means any individual employed by an employer." But heck, if they won't listen to you, invite them to retain ERISA counsel to confirm your opinion. Usually when they have to start paying for advice, they shut up in a hurry.

Kirk - good point, and I agree with your observation.

FWIW, I understand things a little differently. I don't read the DOL regs (2520.104-46) as requiring a bond purely for purposes of the SPAW requirement. My take is that the audit waiver is independent of the bonding requirement, although they may become interrelated and the normal required 10% bond can assist, as I'll get to in a minute. (b)(1)(i)(B)(2) of that section requires SAR disclosure of the name of the bonding company for purposes of paragraph (b)(1)(i)(A)(2). And the (b)(1)(i)(A)(2) is an "or" if you don't meet the 95% requirement, so if you do meet it, then (A)(2) doesn't apply. If you meet the 95% qualifying asset requirement and the disclosure requirement, then no audit required, and no bond required, for SPAW audit waiver requirement only. Now, assuming plan is subject to Title I, then the normal 10% minimum bonding requirement applies, independent of the audit waiver issue. And if you are bonded for 10%, and your non-qualifying assets are 10% or less, then you are still ok. So assuming you comply with disclosure rules... <or = to 5% in non qualifying assets - no bond required for SPAW purposes. >5% but <or = to 10% in nonqualifying assets - bond would be required. But assuming you have your minimum 10% required bond, still ok. >10% in non qualifying assets, then additional bonding necessary to the extent your existing bond (which might be greater than 10% already) doesn't cover the entire amount of non qualifying assets. Whatcha think?

Kirk - yes, that is my position. 1.72(p)-1, Q&A-17 is pretty clear on this issue. Now, presumably the determination of whether or not there is a bona fide loan is quite subjective and subject to a facts and circumstances determination, but I'm guessing that a loan to a "disqualified person" is likely to be scrutinized more closely than to a regular rank and file employee.

I do not believe it is a prohibited transaction. The PT exemption requires only that the loan be a bona fide loan when made. The fact that it subsequently defaults should not, IMHO, give rise to PT status. Now, if it is to a "disqualified person" I expect it might be scrutinized more carefully to determine if it is a bona fide loan in the first place, particularly if no payments at all were made. And the regulations provide that if it isn't a bona fide loan, it isn't a deemed distribution but an actual distribution, and then the PT comes into play. But, for example, assuming everything clean, and payments made regularly for 2 years, then his business goes sour and he can't pay and defaults on the loan, I don't see that this is a PT. It's funny, because I had this precise question yesterday, so just spent some time looking into it yesterday morning.

I've got a dumb question. Suppose we take this to an extreme, and say that the payroll messes up and the salary deferral never happens for an entire year. So, taking Immangrum's (and others) approach that the employer is liable to make up the whole 18,000 plus interest (cause if the answer is that the employer must make it up, the amount of the make up contribution shouldn't matter) the employee receives a HECK of a windfall. Here's the dumb question: Can the employer sue the employee to get a return of the salary paid to the employee in error? This would produce a much more equitable result - the employee is receiving a plan contribution plus interest to put him in the same position he should be but for the error. And the employer isn't out a whole bunch of money. (I'm purposely ignoring the complications of taxes paid/withheld for the moment) I just can't shake the feeling that there is something inherently wrong with a requirement that unjustly enriches the employee to this extent, yet I don't know the answer as to how to get around it.

Quick edit - it was by attorneys in a law firm named Bryan Cave - I don't know who actually wrote the article.) Veba - I read an article by Bryan Cave on this back in 2003. They, like every other source I've seen who said it was ok to issue 100% life insurance, rely heavily on the word "or" in 1.412(i)-1(b)(2)(i). Which says, "The plan must be funded exclusively by the purchase...of individual annuity OR individual insurance contracts, or a combination thereof." And in -1(b)(ii) of that section, it starts of with, "The individual annuity OR individual insurance contracts issued under the plan..." They read the use of the word "or" to be a clear indication that the drafters of the regulation contemplated 100% to insurance. I was asked about this argument (in general, not specific to the Bryan Cave article as the question predated the article by a year and a half) back in 2002, and here's an excerpt from my response - and please keep in mind I'm not an attorney - this response was merely to a co-worker. "Purely playing Devil's Advocate here, I could read these regs to permit investment only in life insurance if it suited my purpose to do so. I could not in good conscience make this reading as a CORRECT reading, because I simply do not believe it is correct. If a client and/or their legal counsel were to either call the IRS, or request a PLR, I suspect they would get the same answer that I would give - you can't do it!" Not having any notion whatsoever of the twisted legal system requirements, it would nevertheless seem a bit harsh to make the law firm liable for reading the regulation in this manner. Although aggressive, and was in my opinion a wrong reading, I'm still not sure that it rises to the level of pure negligence. But maybe it does. However, it is possible that they warned their clients, for example, that it was an aggressive stance that might be challenged by the IRS, and the clients went ahead anyway. I'm a little hesitant to assume that just because someone spouts off in an article that their specific advice to individual clients is necessarily the same as what is contained in the general article. That said, I suspect some folks will agree with you and the litigation treadmill will start at some point. Hopefully not too many people actually implemented such plans.

Thanks Janet! I didn't remember this at all. Time to go back and reread the regs. That's one of the things I like best about these boards - helps to keep you on your toes.

By the terms of the loan, no. Payments must be made at lest quarterly. From a practical standpoint, and depending upon the specific dates involved, it might be possible to get close to this as a net effect. If there is a "cure period" it cannot extend later than the end of the calendar quarter following the calendar quarter in which the missed payment is due. So if the loan date is January 2, and the first quarterly payment is due, say, April 2, then your cure period could extend no later than September 30, which is the end of the calendar quarter following the calendar quarter in which the default occurred. I'm not advocating this! Especially since it could be determined that this wasn't a bona fide loan, although I'm a little dubious that it would be taken that far unless it was an owner that they (IRS/DOL) wanted to nail for something else. But certainly possible. My answer would simply be "No, you can't do it."

This question is more as an individual looking in from the other end. Is there any principle of law that can force an individual to be a beneficiary of any kind of benefit if he doesn't want it? That just doesn't seem reasonable somehow. Not just for plan money. Is it different if you are a beneficiary under a will? If someone dies intestate? It just doesn't seem "fair" - yes, I know life isn't fair - to be forced to accept something as a beneficiary if you don't want to - plan language notwithstanding. I mean, if the deceased was my brother who murdered my wife or something equally whacko, and I just plan didn't want to receive or be involved with his darned estate or money, isn't there any way out? But I'm no attorney, so I'm interested in the opinions of those who are. The concept of the law forcing someone who doesn't want the money to accept it seems strange to me, although there may well be good reasons for it when it gets to some funky tax manipulations.

I don't know, so this is just conversation. Hopefully the DB wizards will chime in, 'cause I'm curious as to what the answer is. To me, it seems like two separate issues. You have the plan issue, and the minimum distribution issue. And I think your question is more of a plan issue. I see nothing in the RMD regs which indicates that simply multiplying the monthly benefit by 12 and taking it annually is any problem. And maybe they (IRS) didn't even think of this. The plan issue would appear to me to be a potential problem. As a non actuary, it seems like, as you said, the participant would be getting a better "deal" by taking the lifetime monthly benefit (at its higher actuarially increased value, if applicable, over the 1000 accrued as of the freeze date of 2004) as an annual payment. Seems like the present value of 12,000 in hand is higher than the present value of 1,000 per month for 12 months. So it would seem like this would have to be accounted for SOMEHOW - and maybe either the plan language or the actuary would make this adjustment up front so that the annual payment would only be 11,950 or whatever, rather than 12,000. Or perhaps they adjust it on the back end.

Tom, pardon my density (remember "Back to the Future", and the famous line, "You are my density")? I'm not entirely sure what you are asking, so I'll take a stab. Under 1.401(a)(9)-6, Q&A-1©(1), "All benefit accruals as of the last day of the first distribution calendar year must be included in the calculation of the amount of annuity payments for payment intervals ending on or after the employee's required beginning date." So I take this to mean that the monthly benefit accrued on 12-31-05 must be included when determining the RMD. And if the monthly benefit is 1,000, then yes, I believe you can simply multiply 1,000 by 12 and take 12,000 by 4-1-06. And 12,000 every year thereafter, plus increases if required for whatever reason - additional accruals, vesting, whatever... Probably this isn't what you are asking at all.

Gee, thanks! But to take this a little further, since I think I'm starting to see the source of some of my confusion: I think I was mixing the compensation averaging requirements for a 401(a)(4) safe harbor with the 415 limits. So under 1.401(a)(4)-3(e)(2)(i), ignoring the exception in (ii), this averaging must be at least three years, or period of employment if less. So this MUST include pre-participation compensation in the situation I outlined. But under 415, it will soon switch over to participation compensation. So you'll have different compensation for different purposes. Have I got that right? If so, what a drag. Is there any good reason for this, or is IRS going to change the (a)(4) safe harbor so that the comps will be the same for both purposes?

Thanks Andy. Couple of comments. Re#1, can't argue with that! Re#2, although I agree in principle, some documents, particularly prototypes, specify comp averaging from date of employment. Since it appears that the proposed regs may not be relied upon currently, that would sort of stick you between a rock and a hard place until 1-1-07. 3. Good point. This is why I'm not a DB person. 4. Probably beyond what injections can cure. After all, even the miracles of medern medicine have their limitations.

Depends upon what your document says. All the documents that I have seen contain an automatic proration clause for this purpose, but I don't believe it is a REQUIRED provision for qualification.

Thanks for the response. At this point, I have no idea whatsoever why the plan/fiscal year combination generating the question is being considered. It was just a question that came up. Trying to think it through, I suppose that if you take the approach that # 1 is correct, and the 2006 compensation (for whatever reason) is quite low but is expected to bounce back, that you might use this method to achieve a higher average? Say 2006 is 50,000, and 2007 is going to be 200,000, then if you have to include 2006 as "participation comp" your average will be dragged down substantially? May be other reasons as well...