Mike Preston

You are correct.

Does the 0.002 multiplier really help you all that much?

Surely that disadvantages the one of us with the most advanced case of reg-elbow going in to the competition!

For years prior to the effective date of the final regulations (2008 and 2009), I have been told that some think it is arguable as to whether the vesting percentage applies to the at-risk calculations.

Not to quibble, but.... The reg was adopted 5/20/1976, per my source materials. Further, the darn thing was amended 10/20/2006 so they most assuredly should have caught this error and fixed it at that time. But Larry is correct: there are many references in the regs to both code and other regs that are incorrect.

You are correct. It should.

Again, nobody knows. I think the conservative course of action would be to require the individual to work enough hours to otherwise be credited with a benefit accrual. In the absence of that, you would need to look at the actuarial equivalence and rehire provisions. At the point in time that the individual's benefit is actuariallly adjusted, I think you also get the increased 415 limits. Of course, if they have suspension of benefit provisions, there may not be any actuarial adjustments until the individual is over age 70 and 1/2, so the search through the document may be a tortuous one.

Nobody knows. That is why it is "reserved." Putting her on salary won't have any impact because the limitations on her benefits are based on the participant spouse's employment. Is he still employed? Has his compensation gone up? Use his limitation. At this point, the conservative course of action is to satisfy 415 at the commencement of the benefit stream and again at the new annuity starting date. As you noted, at the later annuity starting date you have to increase the prior payments and this can reduce the lump sum available dramatically.

Yes, you can still do a BOY valuation and use a compensation that is reasonable to establish first year compensation. If you have a salary scale, in addition, in your assumption set you use the salary scale to determine projected compensation to be used in the 404 determination.

If it is truly separate and unrelated, the employer based limitations are applied separately. There are some unusual circumstances that treat entities are related when no rational person would think that they should be, so best to confirm that with somebody who knows the rules.

Interesting. I think I'd just respond that the premiums paid by the plan with respect to the transferred benefit are level: $0 and that it therefore satisfies the regulation.

One step at a time.

I think so.

You aren't sure how to calculate the lump sum that you are funding for?

I have ignored the 105% portion of the example in my writings. As you know, it is no longer applicable.

By a gazillion, unless you are going to try and convince the IRS that you are funding for an annuity. Are you? If not, what is the lump sum you are funding for? And have you compared that to the 415$ limit lump sum at that age?

OK, on further looking at the final 415 regulations, the methodology of 98-1 is included in Example 1 on page 108 of the version which is 210 pages long. That is section 1.415(b)-1©(6) ("Adjustment to form of benefit for forms other than a straight life annuity"). But I think it is sort of a red herring, because the original "steps" (from tymesup) included at item 7: "7 - Determine lump sum of 6, using worse of plan factors or 5.5%" which can arguably refer to the offending section of the regulations. However, I think that 7 needs to be modified to say: "7 - Determine lump sum of 6, using worse of plan factors, 417(e) factors or applicable mortality/5.5%" Let's try, using age 65, a maximum benefit, the 2009 mortality assumption (417e-09), and sticking with the 5.25% 417(e) interest assumption of the regulation example, but pushing the benefit up to the point where it just touches the 2009 limitation (195000): 1 - Determine lump sum under plan actuarial equivalence A. I determined that a monthly benefit of $15,859.98 payable at 65 has a lump sum of $2,244,647.96 under plan's actuarial equivalence. (If you prefer the number in annual form it is $190,319.76) 2 - Determine lump sum under 417(e) A. $2,236,873.25 3 - Take greater of 1 and 2 A. $2,244,647.96 4 - Determine dollar limit at age 65, using worse of plan factors or 5% * A. $195,000 (since we are at age 65, no factors come into play) 5 - Determine comp limit A. A number higher than $195,000, so that we are just focusing on the $ limit. 6 - Take lesser of 4 and 5 A. $195,000 7 - Determine lump sum of 6, using worse of plan factors or 5.5% **, *** modified to read: 7 - Determine lump sum of 6, using worse of plan factors, 417(e) factors or applicable mortality/5.5% A. Lesser of: 1) $195,000 / 12 * 141.52905 = $2,299,847.06; or 2) $195,000 / 12 * 141.0388 = $2,291,880.50; or 3) $195,000 / 12 * 138.1321 = $2,244,646.69 The answer is therefore $2,244,646.69 8 - Take lesser of 3 and 7 A. Lesser of $2,244,647.96 and $2,244,646.69, which is $2,244,646.69 But the key to this whole discussion is that this results in a 415(b) dollar limit benefit of $16,250, even though the plan benefit payable was only $15,859.98. So, we can see that the only thing the regulation does is modify the monthly benefit from $15,859.98 to $16,250 that the participant is deemed to be receiving from the plan under 415(b), it is not double reducing the lump sum, as I previously theorized it might be. This basically serves to reduce the ultimate benefit from a second plan being set up down the road being done to theoretically use more of the 415 limit than originally thought of as being used. Things get a bit more fun when 417(e) changes, post-PPA, to the segment rates, but the above methodology is easy to apply. Again, using 2009 rates (a lookback of one month, to Dec 2008) of 4,41%; 4.57%; 4.27%, the middle calculation of item 7 changes from: 2) $195,000 / 12 * 141.0388 = $2,291,880.50; or to 2) $195,000 / 12 * 150.677347 = $2,448,506.89; or And since that is greater than the 3rd calculation it has no effect on the ultimate lump sum payable. It is instructive to look at what happens if the same underlying rates stay in effect for two more years (which I know they won't, but humour me, will ya'?). The factor changes to 132.042442 (based on 417e-11 mortality), which changes the lump sum to $2,145,689.68. Which means that the lump sum *IS* reduced by $98,957.01 and yet the 415(b) benefit being distributed is still deemed to be $16,250. Whew!

Reviewing this in light of Q&A8 from RevRul 98-1, there is one step that has been left out. If the actuarial equivalent of a benefit under the terms of the plan is more favorable than the 417(e) factors in effect, there is a pro-rata reduction in the 415$ lump sum available. So, the question is whether people still use the 98-1 methodology, or, in light of the fact that this issue has not made it into the 415 regulations, can it be ignored? Example from the regs: Monthly benefit under terms of plan: $7,471.33/month Lump Sum under terms of pla: $950,000 Lump Sum under 417(e) of $7,471.33/month benefit: $905,346.2 (I disagree with the factor cited in the rev rul, but that is irrelevant to this discussion) Since 905346.2 is less than 950000, the benefit being "purchased" by the $950,000 is increased by the ratio: 7471.33 * 950,000 / 905,346.2 = 7839.83/month I've always been bothered by this step as it seems to be double penalizing the participant for an actuarial equivalence provision that isn't actually in the plan. Of course, if the 417(e) applicable rates are more generous than the plan's actuarial equivalence, this doesn't come into play.

The way the law is written now, you do NOT lose your high 3 average. I know of no movement afoot to modify this.

lund, your basic understanding and your instincts are correct. In an economic environment where significant growth in the underlying investment fund takes place, it will definitely be better for somebody to see that growth take place in an IRA, rather than in a db plan, for just the reasons that you mentioned. Taken to its ultimate extreme, the monies to fund a DB plan are deposited annually, then immediately withdrawn and rolled over to an IRA. If you do that for 10 years, the total funds in the IRA will dwarf whatever might have been accumulated in a DB plan that didn't employ this "strategy". The problem is that the IRS doesn't like this strategy at all, and those who practiced it (and there were more doing this than many people imagine) were recently told to cut it out or their plans would be disqualified. I'm not suggesting that you follow that strategy. Quite the opposite. All I'm doing by relating that story is to show you that your understanding of the financial ramifications is correct. Of course, the whole thing falls apart in years where the investment return is lower than what is expected. In those years, the above mentioned "strategy" will end up reducing the total funds available at retirement. I'm sure this makes sense to you given your grasp of the investment issues. But if you do this precisely once, by terminating your existing plan now, sitting on the sidelines for a few years, and then starting up another DB plan when the economy turns around, the IRS is not likely to claim you are employing the "strategy" described above and if the rates of return you can engineer in the funds is indeed significant, you will be ahead of where you would have been had you merely left the funds in the existing DB plan and invested similarly there. Of course, there are all sorts of "ifs" that go along with the conclusion that you will be ahead in the long run and you should go over them with the folks that currently have your DB plan. Paying now for a little consulting will go a long way to ensuring you are on the right track.

Amend plan to provide that xs assets are allocated to participants up to the 415 limit. Terminate plan. Pay out husband (termination of plan is a distributable event... if it isn't within the document, make it so). File with IRS. Get DL. Pay out spouse.

Are you terminating the plan?

Two things: 1) Of course, this assumes the 417(e) rates are such that they do not force an uptick in the lump sum relative to the plan's actuarial factors. This WOULD be the case, for example, if the plan was making its determination in 2009 using the November, 2008 rates. It WOULD NOT be the case if the plan was making its determination in 2009 using the December, 2008 rates. Even if using the December rates, however, and the minimum lump sum is bumped up a bit, it would still be significantly lower than the 415$ limit at the H3 shown in my example. 2) It is only once the H3 approaches the high end of the allowable scale (around 187713.542 [approx. ] would an individual age 52 with a retirement age of 62 potentially run into 415$ limit issues. The bottom line maximum for somebody age 52 is 1461215.31 (176.08029*8298.57). In conclusion, you don't ever have a 415% limit issue when the ASD is at age 52 when the NRA is at 62, but you have a 415$ limit issue when the lump sum exceeds 1461215.31, whether the cause of that is the increase in lump sum due to 417(e) or otherwise. Note that we don't have final 415 regs on much of this, so others may have different techniques that they have used and successfully navigated an IRS audit or review with.

Let’s take a simple example: H3 at age 52 is $100,000 415$ limit at age 62 is 16250/month Actuarial equiv. Is 94GAR/5% 417/415 is 417e-09/5.5% Benefit payable at age 52, per plan provisions is: 100000 / 12 * 152.15731 * (1.05) ^ - 10 = 778,428 Benefit equates to an immediate annuity using plan rates of: 778,428 / 183.35921 = 4,245.37 Benefit equates to an immediate annuity using 415 rates of: 778,428 / 176.08029 = 4,420.87 Since 4420.87 (the greater of the two) is still miles less than the 415% limit (100000 / 12), there is no cutback due to the % limit. So, let’s check the 415$ limit. At age 52, that amount is $8,298.57, which is miles bigger than $4,420.87, so you are ok there, too. This analysis makes sense as long as you aren’t trying to define a benefit payable at age 62 which exceeds the 415 limits at that age. Some people have tried to do that in the past and most IRS reviewers won’t allow it. If the plan says the NRA is 62 then they will limit the benefit payable from the plan at that age to no more than 100% of the lesser of the 415% or 415$ limit. Obviously, once you limit the benefit payable from the plan at NRA to the 415 limit applicable at that age, in the case of a person who is at the 415% limit at age 62, they are significantly beneath that same 415% limit at a much lower ASD such as age 52. Maybe once you provide numbers we can see where your concern is.

Still confused about H3. How do you reduce an average compensation by an annuity factor? Or, are you saying that you reduce the 100% of pay 415% limit? If the latter, I don't think I usually go through that step. I find it hard to believe that a benefit limited by High 3, deferred for 10 years, will ever bump up against the 415 dollar limit, so I must be missing something fundamental in your description. How about numbers, they always seem to help me understand.