Dougsbpc

We administer a DB and PSP where a participant in both plans died earlier this year. He was still working at the time of death and therefore had not begun receiving benefits from either plan. however, he was over age 70 1/2 and had begun RMD's a few years ago and had not taken the 2007 RMD by the time he died. The surviving spouse is 51% primary beneficiary to his pension benefit and his three children are together the remaining 49% beneficiaries. In the PSP the surviving spouse is 100% primary beneficiary. Our understanding is that the beneficiaries in both plans will be required to receive the RMD's as they would have been calculated had the participant lived (i.e. the same way they were determined in the past). This because he did not receive his 2007 RMD before he died. Now next year the RMD would be calculated based on the oldest beneficiaries life in the DB and the life of the surviving spouse in the PSP. Does anyone disagree with this?

Mike, Thanks for the reply. I did see your reponses to a prior QDRO post (quite enlightening) and was able to find the Brown case. In our client's case, the rate of future benefit accruals will not increase substantially so the non-frozen seperate interest method will not have a dramatic impact. She is happy to provide one-half of the marital interest. She just didnt want to continue the plan if her future benefit accruals would be subject to an unfair award to the AP. I could see how a young executive may have much larger benefit accruals in future years and the AP is provided with some of that increase. What about a small plan? What would prevent a company owner from terminating a DB at the time of divorce and establishing a new plan in a few years? This would not make sense unless there was an increased rate of future benefit accruals.

Without the consideration of other assets? I could see how the participant could elect to give up more than 50% of pension benefits. Although we havent seen one, I would think this is somewhat common when non-liquid assets are involved in the division of joint assets. For example, the participant takes the house (which represents more than 50% of joint assets) in exchange for more than 50% of the participants current and maybe future pension benefits. For the sake of discussion, suppose the participant's pension benefit represents all joint assets, they were married on the effective date of the plan and divorced as of 12/31/2006 (the close of the plan year). If the participant's accrued benefit was $5,000 on 12/31/2006 why would the alternate payee be entitled to more than 50% of $5,000 payable at the participant's NRD if the participant continued to accrue benefits after 12/31/2006?

Yes. This is a hypothetical question but there will be a QDRO soon. We know they will have to follow the terms of the QDRO, but are not certain as to how it could be written. Specifically, the client would want to terminate the plan now if the alternate payee would benefit from an on-going plan. In other words, could it be written in such a way that the alternate payee is entitled to a portion of the participants FUTURE benefit accruals AFTER they file for divorce?

Suppose a DB client has a two participant DB covering just husband and wife. They filed for divorce Dec. 1, 2006. The wife (the major bread winner here) wants to continue the DB plan but not if the AP (her former husband) would continue to benefit from her participation. I wouldnt think the alternate payee continues to benefit in a DB. For example, suppose the participant has an accrued benefit of $5,000 as of the date they file for divorce. I would think the AP would be entitled to xx% of the $5,000 accrued benefit payable at the participants NRD. If the AP requested a lump sum distribution now, I would think he would be entitled to xx% of the PRESENT VALUE of $5,000 which would be payable at the participants NRD. Agree? Also, are the benefits usually determined as of the date they file for divorce or the date the divorce is finalized? Thanks much.

Blinky I try to convince those with floor offset plans to pool the employer contribution that is used for the offset. If they are not willing to do that then they may be stuck as you indicated. If you have a 40(k) plan, convince them to self-direct salary deferrals and pool the profit sharing.

Of course the big wild card is the required interest rate used to determine lump sum distributions. If one partner leaves early, is younger and the rate is low, he/she will get a windfall and the remaining partners will get a haircut. Question: as long as you have a small non-pbgc plan that has existed at least three years, is there anything wrong with the partners agreeing between themselves to terminate the plan if one partner leaves? The idea being they may be able to allocate any excess assets in a way that may allow benefits to closely match what was "contributed" over the years. This of course only if any excess assets are allocated in a non-discriminatory manner. They could then adopt a new plan in the next year.

How about allocating the costs on PVAB's? If it is a small plan this would be the fairest way would'nt it?

There is a service that will allow an automatic rollover of a participant that cannot be found. Generally, they will not accept a benefit over $5,000 unless the plan is terminated. They then hold the benefit and periodically attempt to locate the participant. I believe their fees can be paid either by the employer or from the participant's benefit.

I know this was discussed a long time ago, but it is an interesting topic. I agree that salary should be paid. However, suppose you have this scenario: A Corporation sponsors a DB plan that covers the 100% owner (only employee). Suppose he has always worked more than 1,000 hours and always will. Furthermore, he established his high 3 year average prior to adopting the DB plan. In the first year of the plan there were no profits to pay him a salary as his pension contribution is high. Is he considered an employee if he draws $0 salary? Can he accrue a benefit? I would think reasonable compensation should include compensation and deferred compensation.

Suppose you have a volume submitter DB that was adopted 1/1/2002. The plan meets all of the requirements in the instructions. If the plan terminates 1/1/2008 and is submitted shortly thereafter, does it still qualify for the user fee exemption?

Suppose you have an existing profit sharing plan with a 1/31 year end. You can amend the plan to add safe harbor provisions as long as it is done more than three months before the plan year end (we are getting close). Do safe harbor notices still have to be provided 30 days prior to this or is there an exception for a plan conversion?

Good point Mike Also, what if a company simply did not have profits for 3-4 years? Many 401(k) documents (including this one) state that the employer may make nonelective contributions to the trust in one or more installments out of its net profits for such year.

Tymesup Thanks for your comments. In this plan the same benefit formula would be used as prior to the freeze. I think 1.401(a)(4)-5 permits a safe harbor for an amendment that credits benefits attributable to prior years. I believe it allows up to 5 prior years.

Do you mean the amendment to resume benefit accruals? Suppose the full DC account balance were used for the offset but no participant grandfathered accrued benefit was reduced when the plan was frozen. Also both plans are general tested on an accrued to date basis and pass the year benefit accruals resume. The only choice in the document for an offset DB is to offset the benefit by the act. equiv of the vested account balance in the DC plan.

Suppose you have a DB plan that is offset by the employer account balance in a PSP. Then lets say the DB plan is frozen for two years and then unfrozen. When the DB plan is unfrozen can the full employer account balance in the PSP be used as the offset? Keep in mind contributions to the PSP continued when the DB plan was frozen. I would think the DB accrued benefit when frozen would have to be grandfathered otherwise you would have a 411(d)(6) violation. But once benefit accruals resume, could the full account balance be used for the offset provided that offset never reduced the grandfathered accrued benefit from when the plan was frozen? For example, a participant accrues a benefit of $1,000 / mo for 4 years. AB = $4,000 reduced by act. equiv. of PSP account of $900, adjusted AB = $3,100. DB plan is then frozen for 2 years with a grandfathered AB of $3,100. When the plan resumes accruals (after the first year), AB = $5,000, act equiv of PSP account is now $1,400 leaving an adjusted AB of $3,600.

Generally, we find the answer book series to be an excellent first resource on many plan issues. The interpretations seem to be sound and they always provide sites for reference. I recently read something in the Plan Termination Answer Book that surpised me. It read as follows: "Regardless of the magnitude of the operational defect, any defect that occurred outside the statute of limitations can be ignored" It seems to me that a plan could be currently disqualified as the result of a prior operational defect even if it occurred outside the statute of limitations as that defect may lead to a current benefit that is incorrect. Does anyone have an opinion on this?

Salary deferrals to a 401(k) plan are technically considered employer contributions. Does anyone know if salary deferrals are considered employer contributions in a 401(k) plan that may have a horizontal partial plan termination? For example, if an employer sponsors a 401(k) plan and has made substantial profit sharing contributions for years, then quit making profit sharing contributions for the past three years. Are salary deferrals considered employer contributions for purposes of determining whether a horizontal partial plan termination has happened?

Mike, I could not find a cite that directly addresses this. Our inclination is to always have the DC plan (that offsets the DB) to operate like a Money Purchase plan as much as possible (normal form of benefit as annuity etc). I know hardships are not allowed in a MPP.

No. Salary deferrals are not used for the offset. This cannot be done. They would like to be able to withdraw salary deferrals and profit sharing.

A small employer sponsors a defined benefit plan that is offset by employer contributions in a 401(k) plan. They would like to add a hardship provision to the 401(k) plan. Even though a 401(k) plan on its own can have a hardship provision, I dont believe it can when it is being used to offset benefits in a DB plan. Perhaps the plan can allow in-service distributions but only at NRA. Does anyone disagree with this?

Mike, Thanks for pointing out the special document language. We had a chance to review the document and think it may contain the auto 411 language. Here is what it says: No amendment to the plan (including any change in the actuarial basis for determining optional or early retirement benefits) shall be effective to the extent that it has the effect of decreasing a participant's accrued benefit derived from employer contributions. For purposes of this paragraph, an amendment shall be treated as reducing the accrued benefit of a participant if it has the effect of (i) eliminating or reducing any early retirement benefit or a retirement-type subsidy; or (ii) except as provided by Treasury Regulations, eliminating an optional form of benefit, with respect to benefits attributable to years of service BEFORE the amendment. It seems this language may allow an amendment to increase the NRA as long as accrued benefits (or optional forms of benefits) are not taken away with respect to years before the amendment. So perhaps as you mentioned, the participant retains the right to an in-service distribution for benefits already accrued, through the original NRA and future accruals would be payable on the later NRA.

Thanks for all the replies. This is all very helpful. I will check the document to see if it contains the auto 411 language. If so, then it sounds as though the valuation is done based on age 60 NRA, but the participant retains the right to an in-service dist of his accrued benefit earned through the date of the amendment. Effen If a plan used a later assumed retirement age (for example age 59 to age 60), would the participant have to be fully accrued at age 59 or 60 under a fractional accrual method?

This plan was amended for a higher NRA (from 59 to 60) prior to May 21, 2007.

Other than the special ability to increase the NRA under notice 2007-69, could a single participant-owner DB ever amend the plan to have a higher NRA without violating 411(d)(6)? He is already 100% vested and his accrued benefit would be properly adjusted. It appears that simply postponing the ability to have an in-service distribution from the initial NRA to the higher NRA would violate 411(d)(6) and he couldnt do it. Is it somehow possible to preserve the ability to have an in-service distribution at the earlier NRA? Hypothetically, what if the plan did not allow for in-service distributions at NRA? Then could it be done without it being considered a cut back?