Mike Preston

Depends on your definition of full reliance. If you are talking about "form of document" reliance, the answer is yes. If you are talking about "operational reliance", then you have identified the fact that if your plan doesn't satisfy the coverage rules, the plan can have a problem. But it won't be because the document is faulty. It will be because the person administering the plan didn't understand what tests need to be performed on an operational basis. This would apply to any provision that requires operational testing. The most common besides the coverage rule of 410(B) is ADP testing under a 401(k) Plan. You can have complete compliance with a 401(k) plan only by electing to incorporate the Safe Harbor provisions. Same for ACP testing. In the end, even if you elect options within a qualified plan that are intended to guarantee compliance, you still have to follow the terms of the document in order to have operational compliance. What is the effective difference between following the terms of the document and following not only the terms of the document, but understanding what tests (410(B), 401(a)(4), ADP, ACP) need to be run? Frequently, but not always, you will find that the provisions of the plan that "guarantee" compliance are so much more expensive for the plan sponsor that a non-guaranteed design, even after adding lots of administrative fees for compliance, will be much less expensive to operate. For example, the safe harbor provisions of 410(B) supposedly "guarantee" compliance by forcing the plan sponsor to allocate monies to the accounts of terminated participants. There are very few plan sponsors who would go along with such a scheme if it is explained to them in advance.

Well, I'm not sure that you heard them correctly. In the case of language which is clear and unambigous, there is nothing to interpret, so the Plan Administrator must follow the terms as written. If, however, there is something which has some ambiguity in it, then the Plan Administrator's responsibility is indeed to interpret the document. People try very hard, however, not to draft plan documents with ambiguities. But there is always the possibility that one exists.

It is a general rule that all policies maintained by a trust should have as their beneficiary the Trust, no? To do otherwise risks disqualification, although I guess I can envision cases where it is the apprpriate thing to do. But certainly not if the policies have the potential of exceeding the incidental limits, as in this case.

(7) Meaning of disabled For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require.

It is a fiduciary decision as to whether or not to maintain the insurance. A policy that will pay something in excess of the death benefit allowed under the plan will result in a gain for the trust upon death.

I don't disagree. Why does this cause you any concern?

You'd have to check the document. A compensation cap that impacts those who make $170,000 or more on a pro-rata basis is not likely to upset the IRS very much. So, if the document says that this it the way it is, then there isn't likely to be much recourse.

In general, you may not exclude service in the DB plan for periods before its existence if there was another plan of the employer. There is a small, very difficult to climb through window that allows service before the effective date of a plan to be ignored if it is not with respect to a "predecessor" plan. See 1.411(a)-5(B)(3)(v). It is not for the faint at heart (translation: the client needs to be guided by an ERISA attorney familiar with such matters). If the client starts down that path and then reverses course for any reason, the administrative consequences can be a nightmare. That is not to mention the fact that the IRS, DOL or a disgruntled participant may disagree entirely with the process and the plan sponsor has to spend quite a bit of time and go through the expense of justifyting their choice. In the vast majority of cases, therefore, the existence of your 401k will practically eliminate the ability to ignore service prior to the efffective date of the DB plan.

Even more generally (g), yes, if the plan's formula (or formulas) satisfy the rules such that it (or they) are described as "safe-harbor" formulas under the regulations. What kind of plan do you have? What types of contributions are made? What are the formulas used to determine the allocation of the contributions?

Historically, the IRS has ignored the timing of the contribution when determining the maximum deductible amount. The determination is always at the end of the fiscal year. I wasn't very clear when I said adjusted to the valuation date. What I should have said was that liabilities are calculated as of the valuation date and then, if that date is not the last day of the fiscal year, further adjusted (or adjusted back, if you will) to the last day of the fiscal year. I have no cite for this, but I seem to recall that the adjustment is both a liability and an asset adjustment. Hence, if the assets at BOY are $50 and CL is $100, then both are adjusted to EOY with appropriate valuation assumptions, which may, of course, differ, such that the UCL is not merely $50 adjusted at at single interest rate for a year.

No. Give specifics as to effective date of 401k plan and termination date of 401k plan, if any, and somebody can be more precise.

I thought the IRS gave us rules on calculation of current liability. Didn't those rules specifically call for inclusion of benefit accruals in the plan year, discounted to the valuation date?

Did you intend to post this under 401(k) Plans? What type of plan do you have?

Correct. Note, however, that if there was another plan of the employer then you must also count service while that other plan was in place unless there are unusual circumstances.

True, but the timing of the audit is somewhat critical. The 7/31 plan year will have its 5500 due on 2/28, a scant 2 months after the end of the full calendar year. Even on extension it is due 5/15 a full 5 months before the due date of the calendar year's return (with extension). With this exception, the audit for the 7 month plan year can be performeed with the audit for the 12 month plan year and attached to the 12 month plan year end's 5500, which may not be filed until 10/15/xx+1. Whenever I have run into one of these, the fact that the auditing of the 7 month plan year can be coincident with the auditing of the 12 month plan year has resulted in measurable, although certainly not earth shattering, savings.

Thanks. I hope that my prior message wasn't interpreted as implying that no audit was required for the MP for the period 1/1 through 7/31. Certainly an audit is required. The question is whether a _separate_ audit is required for the MP plan. I still think that the regulation cited should allow an accountant that is so inclined to do one audit for the 12 month period, iincluding the results of the MP plan for the first 7 months of the calendar year along with the results of the full 12 month year of the surviving plan.

I thought it was 7 months or less, not less than 7 months? Certainly the regulation contemplates the concept of a short plan year brought about by merger. Unfortunately, it isn't precise as to what successive plan years are. Is the 12 month plan year ending 12/31 of the year that includes the 7 month plan year ending when the plans are merged one that counts? I just don't know.

lisbetf, was this a trick question? If it is an individually designed plan, the deadline for amendment and restatement was 2/28/2002, wasn't it? Not 12/31/2002? Or am I misunderstanding your post?

Regulation 2520.104-50 is the official guidance on this issue. Unfortunately, it doesn't lay out a particularly logical pattern in the case of a plan that is merged into another plan in a circumstance as you define. You would have to get your accountants that will do the audit of the resulting plan to agree that they could rely on this regulation and therefore issue an opinion that incorporates both plans' financial results for the first 7 months of the year and the merged plan for the final 5 months of the year. I think they could, but I'm not an accountant.

Plan name changes happen frequently, without change in EIN or Plan Number. Take, for example, a law firm that adds a partner and therefore wants to change the name of the Plan. It has never been a problem. Amending & restating a MP plan into a PS plan, or vice-versa, or amending a PS plan into a 401k, or vice-vesa, also happens frequently. Again, no problems I am aware of.

Assuming Fidelity won't make the change for you, for one reason or another, make sure you document precisely what really happened (your relative never got more than 30k, between the transfer to her checking and the withholding). Then see if her accountant would be willing to report the transaction as including a rollover back to Fideility. While having Fidelity correct the error has to be the "best" course of action, I know quite a few accountants that wouldn't have much of a problem making sure your relative only paid taxes (including excise taxes) on the real distribution that she received.

Check out Q&A 23 from the 1991 Grey Book from the Enrolled Actuaries' meeting: "When using the Projected Unit Credit funding method, what is the correct time to apply the 415 limits? Before or after you pro-rate the service? RESPONSE 23 The reasonable funding method regulations (1.412©(3)-1 (e)(3)) generally require that liabilities be allocated in proportion to the rates of benefit accrual in a plan. The rates of benefit accrual in a plan, and the effect of the §415 limits on these rates of benefit accrual, depends upon the plan provisions, however. For example, a plan may accrue benefits based on an accrual rate until the §415 limits are hit, and then accrue no future benefits. On the other hand, the projected plan benefit, as limited by §415, could accrue ratably over a participant's service to NRA. The normal cost and accrued liability under the Projected Unit Credit method should track the resulting accrual rates under the plan." Now, it sounds like your plan is definitely using the former method, at least insofar as the first year of participation in the plan. Since the impostion of a participation requirement after 1986 with respect to 415, the general rule is that one limits the benefits in accordance with the 10 year phase in. But there is an exception to the 10 year phase in with respect to 1/10 the dollar limit. So, I think it boils down to just what the IRS said in their Q&A, above. What is the actual accrued benefit under the terms of the plan? If the 10 year phase in is ignored to the extent of 1/10th the dollar limit, then the accrued benefit at the beginning of the year is 1/10th the dollar limit and there is no further benefit accrual. Therefore, everything is past service and there is no normal cost. If, OTOH, the 1/10th "free pass" is not implemented in the plan document, the entire accrual in the first year would be normal cost. I would think that most plans would include the 1/10th free pass, so it looks to me like the whole thing is past service and there is no normal cost. But you would have to check the terms of the plan to be sure. Keep in mind that the Revenue Ruling cited was an attempt to limit the recognition of benefits falling into normal cost, where all such benefits were funded over a 1 year period. You don't have such a situation here. But, nonetheless, there is a bias towards putting benefits into past service on a reasonable basis. I would think that "no normal cost" in your circumstance would clearly be reasonable. I'm not sure that a normal cost based on $505.95 and a past service amortization of 1,416.67 - 505.95 would be unreasonable, though. However, I'm not sure I can buy into a normal cost of 505.95 and a past service liability of 1517.85. At least, not since 1987. This brings up enough stuff from long enough ago that I feel the need to caveat it with respect to doing a complete research project. But the above is my off the top of my head reaction.

Unless I am misunderstanding you, that is correct.

No, just use 8% in both pieces.

Whether the participant would complain or not doesn't matter. Pax has it right. The participant statements show contributions which sum to $50k. It also shows earnings for the year which sum to negative $10,000. However, the question is who gets the negative return. In a typical balance forward plan it may just be that the negative return is allocated solely to those people who had balances at the beginning of the year. If this is a new plan, and the plan has that language, you have to punt. At least it is still football season. So, what does the document say?