Mike Preston

I thought I read somewhere that the 401(a)(17) pop-up, since it was not in any way retroactive, requires action to be taken before a benefit increase pursuant to the plan's recognition of the increased limite takes affect. Further, since the increase retroactively is not automatic, one needs an amendment recognize the impact. I'm pretty sure, although I haven't checked, that the increase to the 401(a)(17) limits with respect to years prior to the year beginning on or after 1/1/2002 is something that is an option in the model amendments that the IRS published in 2001-56 (or 2001-57). Hence, there is no automatic pop-up in this situation. If the plan document does not provide for use of compensation in excess of a specific limit, you are precluded from using compensation in excess of that limit for your 412 and 404 valuations. FAS may require something entirely different, based on pattersn, etc. In the first year of such a pattern I would be inclined to limit here, too.

At the risk of suggesting that which has probably already been done, have you read the document? That usually specifies where spousal consent is required. Sometimes the drafters require such consent where otherwise it might not be rquired under the regs.

I know I should just agree, but I really feel that the benefit never gets to the point where it reaches the assignment of income potentiality. Just because it is acrrued under the plan doesn't necessarily mean that if it is eliminated there is an assignment. You have to actually have something before one can get stuck with income by assigning it. And there is no forgiveness at the plan level, either, because 412 doesn't provide for that.

In the case of a PBGC covered plan, I think that resolves it just fine, but at the risk of making a long thread longer, here are a couple of additional thoughts. First, the PBGC regs go on to say that the the alternative to 4041.7(a) is 4041.7(B), which just calls for the elimination of the benefit. No liability being left on the books. It is a pure choice, you can make the plan whole, which you can do in stages, reserving the last monies to be funded until the day of the last check being written or you can execute a 4041.7(B) agreement to forego. So I don't think that it necessarily follows that there must be a 4041.7(a) committment. But if we change the tune slightly to non-PBGC plans, we still have the issue of the underfinded plan on plan termination paying monies out that are less than the promised benefits under the terms of the plan. In a non-PBGC environment, the IRS allows any allocation of the assets in a manner that is non-discrimiantory. Many practitioners argued for similarity in treatment between PBGC and non-PBGC plans. That is, one would pay out the non-owners and then allocate the balance to the owners. But some, such as I, advocate across the board haircuts. The IRS routinely agrees to this, but sometimes plan provisions get in the way. :-( The practitioners that advocate consistency between PBGC and non-PBGC plans frequently cite the potential cost of litigation if a participant were to object to the methodology. Since these have to be non-PBGC plans, by definition they don't usually have a lot of participants and typically there is no critical mass that would give rise to a legal challenge. So I've never seen such a challenge. This would also be an interesting case. But the point I'm trying to make is that there is no assigment of income issue that has ever been raised on these types of cases, either. Just gotta make sure you aren't the one training the IRS auditors who run into this, so there never will be!

I don't disagree with your premises, just the conclusion. I guess it all boils down to what the interpretation of "to the extent funded" is. If the language in the plan, since inception, has provided for the payment of benefits only to the extent funded, then the benefit is never really earned in the income tax sense, or even the 411d6 sense, until it is paid. Of course, in order for the reduction to be excluded from being labeled a 411d6 cutback the reduction (if you want to call it that) must be based on the fact that the plan, on termination, is not sufficiently funded. I think this is a very narrow exception to the 411d6 rules. It is also not a violation of the non-forfeitability provisions of ERISA, I would presume, although I don't have the cite handy, because it is in every db plan I've ever seen. Also, if the requirement would be to fund all accrued benefits, there would be no need for the substantial regulations issued by the PBGC in support of standard terminations. All terminations would be standard terminations by default. I agree that we are talking exceptions to the general rules you appropriately reference. The question is how are those exceptions implemented? I disagree with your conclusion that the implementation is arbitrary and capricious because I see the elimination of those protections only in narrowly defined circumstances, each of which serves a powerful, IMO, policy purpose. The alternative I infer from your comments would be a defined benefit system that is too heavily weighted against orderly termination such that it would provide a big disincentive to the establishment of plans. While I agree that ERISA was established to protect the participants, majority owners are a class that the PBGC has seen its way clear to un-protect a bit, and so has the IRS. That is a long way from arbitrary and capricious, IMO. I think the transfer issue you raise is overridden by the carefully constructed rules of 412. If 412 requires a payment, then a payment must be made. If it doesn't, then it doesn't. I agree that any of the documents that have been mentioned, whether they are called waivers or not, have no bearing on the 412 contributions. That is an entirely separate issue. If I've implied that the "waivers" (I *hate* calling them that, because I don't believe that a participant can waive a benefit) serve to reduce minimum funding requirements I want to set the record straight that I meant no such thing. I suppose it would be an interesting case should a majority owner regret a decision to amend the plan to allocate the remainder in a given manner and bring suit under ERISA for recovery of benefits not paid. I see some support for both sides of that one, so as an expert witness that would be a fun case to be involved in. Interesting discussion.

I know this goes without saying, but what the heck. Make sure the DB plan's EGTRRA amendment includes the language that allows rollovers into plan from IRA's.

mbozek, the issue is what makes up a vested benefit and a forfeiture and an assignment. While we are all indoctrinated by the various 411d6 mantras (thou shalt not reduce a participant's benefit, thou shalt not reduce the future rate of accrual of a participant's benefit without advance notice, thou shalt not take away a protected form of benefit unless there are specific regs that allow it) there are a number of exceptions in the code. Probably the one that is most clear revolves around ongoing underfunded plans. One can amend a plan to eliminate benefit options (like lump sums) and/or reduce benefits if one amends the plan, submits the amendment to the DOL and the DOL makes no comments for 90 days. Union plans in declining industries that were significantly underfunded quite a few years back took advantage of this provision somewhat frequently to eliminate some benefit accruals retroactively. There are others. The language in a plan on plan termination serves as one such reduction. Any of these "cutbacks" serve to formally reduce, IMO, the accrued benefit for the purposes you are referencing such as the assignment of income doctrine. You aren't taxed on something you don't yet have under the constructive receipt doctrine as implemented in ERISA plans. So, if the benefit is formally eliminated, outside the direct control of the participant, and with the IRS's blessing, there are no income tax issues. The only reason the IRS was successful in Gallade was that the waiver was effectively under the unfettered control of the plan participant and was not implemented through already existing plan language (benefits on termination are paid only to the extent funded) or through negotiation with the IRS (an amendment during the plan terminatnion process negotiated with the IRS in the process of getting a letter of determination on termination). In fact, the waiver in Gallade was submitted as part of a plan termination to the IRS. The IRS refused to go along with it and that is what led to the IRS taking the issue to court. There are some people who will point back to various IRS representative's "from the podium" statements that benefits which are reduced in this fashion were still "earned" in the 415(e) sense. I firmly believe that position to be wrong and have made my opinions known to those from the IRS who have stated this in the past. Happily, 415(e) is a thing of the past so the issue no longer matters much. In short, the answer to the issues you raise is that the shuffling of monies under the terms of the plan, which result in modified benefits being payable and hence paid from a plan, are not forfeitures or assignments. They are merely a mechanism to determine the correct benefit under the terms of the plan. The correct benefit is what is taxed, not some theoretical amount that might have been paid from the plan if certain things had been different. Here are a couple more examples: floor-offset plans and plans integrated with social security. In both cases the accrued benefit under the plan can be reduced without violation of 411d6. I think there are specific reg cites that allow both of these, just like there is something out there (probably, at a minimum, the LRM's) which support the "to the extent funded" language.

David, the IRS agent was simply wrong. Pension plans have always had the language in them that states they pay benefits on plan termination only to the extent funded. It is not a violation of 411(d)(6) to follow the terms of the plan. In your position, though, where the IRS requests a meaningless amendment in order to carry out the process as you want it to be carried out, the prudent course is to just go along with their suggestion.

I have some familiarity with Gallade. ;-) The issue was very much as stated. The plan was sufficient and the waiver was intended to divert assets from a participant that would have received them under the terms of the plan had the waiver not been signed. mwyatt, you really have nothing to be concerned with in this case, unless your plan document doesn't have the standard language that I think all plans are supposed to have with respect to the allocation of funds upon plan termination. Essentially, you have two issues to deal with. One is concern for the rules as promulgated by the IRS, the other for the rules of the PBGC. The plan goes about its normal business upon plan termination and allocates the funds, usually "to the extent funded." This satisfies the IRS. That is, there is no waiver or document that is signed that gives rise to the reduced benefits paid to the substantial owners. It just automatically happens according to the rules of the plan. What's the expresson? Oh, yeah: RTFD. (Read the fantastic document.) But then we run smack dab into the PBGC's rules on terminations. More specifically, standard terminations. Here, every participant has to be paid their full accrued benefit under the plan, whether funded or not. That is, the plan sponsor is supposed to make the plan whole in order to satisfy the PBGC's rules under a standard termination. The one exception is the ability of a majority owner to execute what is commonly referred to as a waiver. Well, it isn't really a waiver. It is a document that agrees to "forego receipt of all or part of his or her benefit until the benefit liabilities of all other plan participants have been satisfed." See Reg. 4041.7(B). This is not a waiver in the IRS sense. It is an acknowledgement that they are last in line to receive benefits. It lets the PBGC off the hook, really. I don't call mine "waiver of benefits". I title them "Waiver of PBGC Liability". And, once executed, it allows the plan's provisions to control who gets the money. So, we come full circle. If the plan provides that benefits are paid only to the extent funded, the two concerns are dealt with. In cases like these, there are sometimes 2 or more majority owners (such things as options and marriages can cause there to be quite a few, actually). When this happens, and all the participants other than the majority owners have been paid, the IRS will allow the benefits remaining to be paid in any amount and any manner that the clients want, since they are of course HCE's. Getting the majority owners to agree is sometimes a challenge, though, once they realize what their options are. I think, if memory serves, the relevant cite on this is RR 80-229. While it primarily deals with the non-discriminatory allocation of excess assets, it is also used by some as justification for the allocation amongst the owners at the end. As long as the IRS is approving the termination, you can make an amendment that allocates the remainder any way the client wants, thereby modifying, in effect, the "to the extent funded" language of the plan.

I don't believe it is possible for for the company to be named as a Trustee. As I understand the issue, only those who can assume the role under trust law can step to the plate on this one. Individuals can, as can entities which are appropriately licensed. Unless the company in your case is capable of acting as a trustee for others, I don't think it can do so for the plan. I also think this a matter of state law, so a local law firm should be able to confirm or deny my theory. If the individual is concerned about this, the trustee that is appointed should be a corprate trustee. Should be lots available in the local phone book.

Paul, mbozek's conclusion is correct, you need to hire somebody to review everything as soon as possible. Let me add two additional possibility: 1) you might be able to use the excess to provide additional benefits to those that have recently (in the last few years) been paid out from the plan, and 2) you might be able to use the excess to provide benefits to those who might have earned a benefit had the plan not been frozen. You haven't indicated whether the plan was a PBGC plan. If it wasn't, it is somewhat easier to rescind the termination and use the funds to provide additional benefits to those who never accrued a benefit.

The issue may revolve around a top-heavy requirement for a non-412 plan, such as a profit sharing plan. Let's assujme that is the case. There seems little doubt here that the contribution for the 12/31/01 TH minimum will be made before the filing of the 3/31/02 tax return, so it will be deductible on the 3/31/02 tax return. Does it have to be contributed before 9/13/02? Nobody really knows. I haven't seen anything, ever, that indicates what the drop-dead final due date is for a top-heavy minimum contribution in this case. Everybody agrees, however, that making the contribution on or before 9/13/02 is going to satisfy all rules, whether they currently exist or not.

Yes, there was a typo on your original message, but the intent was clear. Yes, I think what you have proposed seems to be consistent with the proposed regs. However, they are just proposed and therefore, if revised prior to the 2003, you may see some changes.

Unless there are QNEC's. Or if the plan only has HCE's (like a sole participant plan, a very popular option these days). Or, a favorable QMAC.

I'm not sure I understand what the intent is. While I agree that the amount contributed is not subject to an excise tax, I think that it is a bit more complicated with respect to whether the contribution not deducted in the prior year becomes deductible in the subsequent year. That is, the deduction for the 2002 year is determined based on the valuation for the 2002 year. If that valuation indicates that there is a full funding limitation in effect, the mere fact that the total contributed in 2002 was less than the 404 maximum for 2001 won't mean that the carryover (if you want to call it that) is deductible.

I think it depends on the language of the statute. The original statute (before EGTRRA) worked this way, so I don't think the IRS is doing anything unusual with the way they are implementing it, if I understand what they are doing. The language means that there will no longer be any top-heavy accruals. But the old top-heavy accruals don't get less valuable just because of the law change. Maybe instead of a "but", there could have been the word "new" between "make" and "minimum".

If O'Toole stands for such, it then probably also stands for the premise that the Trustees that put plan assets within the reach of such creditors are probably violating their fiduciary duties.

Hi, Jason. From just a few miles down the road (San Ramon), here's ,y $0.02. You can probably get by with only one plan. Most folks in California had planned to merge the money purchase plans into the profit sharing plans when there were combination plans in 2001. However, the California legislature is fighting a pretty big deficit at the moment, and they have not conformed the state tax law to the federal tax law. Hence, it is possible that those folks who merge their plans into one will find themselves with a bigger state tax than they expect. I believe that California will eventually conform, but you may want to avoid the issue by keeping your 2 plans for 2002, unless California actually conforms. Once that happes, there really are very few siutations where there is an advantege to having multiple plans.

My guess would be 3%. And I don't think it is a glitch. I think that is the way it has always been. If someone has a top-heavy minimum benefit of 2% of high-5, then that benefit is 2% of high-5, whenever the high-5 is determined. If you truly want to freeze it, you have to terminate the plan and pay it out.

Do you know if California allows a POA?

Does a power of attorney make the grade? Wouldn't the court need to issue an order giving someone the right of conservatorship? Or is that what you meant by having the documents reviewed by counsel?

MGB, the more I think about this, the more I think that the reference to reasonable and consistent applies to the benefits to include and the methodology of valuation, but not to the interest rate selection. However, I don't think it is necessarily a given that every plan can automatically use the 120% multiplier in the determination of the interest rate under 412(l)(7). It seems like there are a couple of steps that one needs to go through. First, the RPA Current Liability Interest Rate as defined in 412(B)(5)(B) has to be higher than what the 412(l)(7)©(i)(I) rate would have been using the pre-law change multiplier. If, and only if, the RPA rate exceeds the old rate, then one can use a rate as high as 120%. Otherwise, one is stuck with 105%. Unless I'm reading it wrong. But I still feel that whatever rate one ends up with under 412(l) is the rate that is used under 401(a)(4)-5.

See DURANDO v. U.S., Cite as 76 AFTR 2d 95-7464 (70 F3d 548), 11/16/1995.

mbozek: The surviving plan can be left with excess assets. Just not as much as they started with. I am aware of at least 3 reputable firms that each have many transactions on the books. I have acted as a consultant in some cases, to preseve anonymity until client or client's counsel is satisfied with the details. To date, the IRS has not challenged any that I'm aware of. As you point out, this is an area where competent counsel is a must. The transaction is not for the squeamish. At some point, they may bar the door. While not exactly like S-Corp ESOP's, it is felt by some that it is just as unlikely that they will attempt to bar the door retroactively. But there is always a discussion of statute of limitations.

No.