Dougsbpc

Thanks Socal. One final question. Would a 415 dollar limit be affected by years a plan is frozen? i.e. $14,583 must be earned over 10 years of participation. If a plan is frozen 2 of those 10 years, do we get to count those years?

Suppose you have a 1 participant DB with unit benefit of 8% per year, where the participant will have 10 years of participation at NRA. Furthermore, lets assume he accrues $1,200/mo. each year. If they froze the plan in year 3 and want to unfreeze in year 5, does the 133 1/3 rule apply to his prior accrued benefit or the last increase in accrued benefits before the freeze? They would like to increase the benefit going forward. Thanks much.

Is it really possible to exclude participants from a DB plan when they have been eligible and have accrued benefits in the past? What if the plan is top heavy and the future excluded group are HCE's but not key employees? Wouldnt they have to receive top heavy minimums? In this case there are four junior partners (all in their 40's and each currently have 5% interest but not more than 5%). They are buying into the partnership and will eventually have full ownership. They, as a group, have expressed an interest in not being covered under the DB plan for the next five years. This because much of their incomes are going to buy out current partners and as part owners they are responsible for some of their own benefits. Our understanding was that you could have different benefit levels for different groups of participants, but you could not exclude entirely a participant or group of participants who have already accrued benefits.

What if under the same circumstances the employer had a plan year 6/1/06-5/31/07, tax year of 12/31/06 but paid no salaries until 4/30/07? We still think the entire contribution would be deductible. Revenue ruling 90-105 indicates that any contributions related to compensation paid after the tax year would not be deductible, but only with respect to a 401(k) PLAN.

Yes. I dont think we can have a plan effective date prior to when the business was started. Also these two guys both worked as employees for a large company so there is no predecessor service. Reg 1.404(a)-14© states that if the employer's taxable year does not coincide with the plan year, the deductible limit for a given taxable year is one of the following alternatives: 1) The deductible limit determined for the plan year commencing within the taxable year. 2) The deductible limit determined for the plan year ending within the taxable year. 3) A weighted average of #1 and #2. In this case, it seems as though #1 would allow the full plan year contribution to be deductible in 2006. Anyone disagree with this?

Suppose you have a small company (just two 50% partners in LLC) that starts business June 1, 2006. They already have income of $600K each. The tax year is December 31, 2006. Their plan salary already exceeds $220k each. They could adopt a DB plan with a plan year 6/1/06 to 5/31/07. Question: Given they will have maximum plan salary before 12/31/06, could the DB plan be run on a beginning of year basis? If so, could the full contribution for the 6/1/06-5/31/07 plan year be deducted on the 12/31/06 tax return? It would be contributed by 12/31/06. Thanks.

Thanks for the reply Pensions in Paradise. The loan policy does not specifically say that a cure notice will be issued. However, it states: The committee will attempt to advise the plan administrator approximately one month before the end of the grace period and the participant will be given a chance to pay the missed or insufficient payments.

A 401(k) plan has a loan policy that allows a participant to repay missed loan payments within three months. It also indicates that the employer will inform the administrator of the missed payments and the administrator will allow a cure period for repayments. In this case, the employer did not inform the administrator until eight months had passed after the participant had terminated employment and had made his last loan repayment. A 1099-R was issued but no cure notice was provided. What are the consequences of not providing a notice to the terminated participant before his loan went into default? Are there any penalties? Thanks.

We administer a very simple small profit sharing plan. They are re-locating and would like to terminate the plan and distribute benefits. We feel comfortable terminating this plan without obtaining a determination letter. Does PPA '06 force us to apply for a DL? I would think the plan must conatin the language for PPA '06. How do others handle this situation? Thanks.

Thanks for clearing this up.

Blinky Thanks for your observation. You are right that the actuarial increase would make the two equivalent. I dont think the BFR's will be an issue in this case as the company owner is the only participant. Are you saying that the requirements of 412©(8) will not be satified because the $1,000 accrued benefit payable at age 65 will be less valuable than $1,000 payable at age 64? Wouldnt the actuarial adjustment make it equivalent? Thanks again.

Suppose you have a DB plan with a 12/31/2005 year end that was amended 2/15/2006 to increase the retirement age from 64 to 65 effective for the 2005 year. 412©(8) allows for retroactive amendments as long as 1) It was executed within 2 1/2 months after the close of the plan year. 2) The amendment does not reduce the accrued benefit of any participant as of the first day of the plan year to which it applies. If a participant had an accrued benefit of $1,000 on 1/1/05, he would still have an accrued benefit of at least $1,000 after such amendment. However, his PVAB might be less valuable on 1/1/05 because of another year of discounting. Would this negate the amendment?

In reading the 2006 schedule B instructions, it indicates " The Schedule B does not have to be filed with the Form 5500-EZ. However, the funding standard account for the plan must continue to be maintained, even if the schedule B is not filed" Under What to file (5500-EZ instructions) Note. Effective beginning with calendar plan year 2005, filers of Form 5500-EZ are no longer required to file any schedules or attachments (including the schedule B) with the Form 5500-EZ. Filers, however, must collect and retain completed and signed Schedule B, if applicable. Does this mean the "retained" schedule B must be signed by the due date of the filing? It would be great if it did not matter when the B was signed.

Thanks for the replies. A controlled group exists between the two employers. Therefore, we had the self storage business adopt the plan as a participating employer.

An architectural firm with 5 employees has sponsored a DB plan for 5 years. The 100% owner (an Architect) bought a non professional service employer business (self storage business) with 10 employees. Since the owner has a controlling interest in both businesses, employees of both entities are covered by the plan. Would they still qualify for exemption from coverage? Perhaps we should get a determination from PBGC. I just wonder if "the principal function" of the business is performance of professional services at this point. The storage business now brings in more income than the architectural business.

A small DB plan participant terminates employment October 31, 2005. He requests a lump sum distribution to be paid on April 30, 2006 (a Sunday). The employer agrees to this in writing. The participant completes all benefit elections and provides them to the administrator by April 10, 2006. The administrator provides a letter of instruction for the trustee to make the distribution. However, the trustee does not make the distribution until May 8, 2006. This is only a delay of a week and does not seem like a problem. However, the lump sum benefit (per the document) is based on the 417(e) rate for the month prior to the distribution. If the distribution would have been made by April 30, 2006 it would have been based on 4.73% not 5.06%. The administrator recalculated the benefit based on 5.06% before the distribution was made. Is the trustee in trouble for this slight delay in making the distribution? Thanks much.

Indeed, how can you have a problem if you meet all the applicable criteria based on current law. I cant imagine they would make any 415 rate changes retroactive. Chances are those changes will be effective for plan years beginning in 2007.

In this case the employer would just like to pay benefits after year end. The two month restriction makes changing the plan unattractive. They will most likely just stick with what they have.

Thanks for the replies Here is the only thing I am worried about. Suppose the plan were amended in July to require all distributions be paid after the close of the plan year. The only thing being affected is the timing. Currently, PVAB's would be based on the 417e rate as of last December (4.65%). Suppose an employee terminates in August, has to wait until January 2007 and has PVAB's based on 5.5% (if the rate climbs to that level by this December). That could make a big difference in benefits, although there is no guarantee the rates will not drop to below 4.65% by December 2006.

So, for example, lets say the employer amended the plan to pay benefits after year end. A participant's current accrued benefit is $500 and two years from now he terminates with accrued benefits of $700. Would this mean his benefit would be determined in two parts? $500 upon termination of employment and $200 after the plan year end?

A defined benefit plan has never made benefit distributions to any participant yet. The plan has only existed for four years. The document currently indicates that the present value of accrued benefits shall be paid as soon as administratively feasible after a participant terminates employment. The plan sponsor wishes to amend the plan to pay benefits as soon as administratively feasible after the end of the plan year during which employment termination occurs. Can this be done or would this be considered the elimination of an optional form of benefit due to the change in timing? If it can be done, would a 204(h) notice be required? Thanks much.

Thanks Socal. The employment contract does not specify anything about a promised pension benefit. Would there be anything else about an employment contract that would override the plans ability to be amended prospectively?

This is somewhat related to what Sueczer posted. We administer a 5 participant DB with 3 HCE's and 2 NHCE's. The plan has provided a benefit of 8.25% of average salary for all participants. The employer now wishes to create two groups of participants. Group A will receive 5% and group B 8.25%. The one participant in group A is a 45 year old highly compensated participant. It turns out the group A participant will be terminating employment this year. So the reduction in benefit will mean she will not accrue a benefit this year. Is there anything wrong with doing this given: 1) A 204(h) notice was given in time (prior to 1,000 hours). 2) The plan will pass 401(a)(4). 3) The amendment was properly executed in time. Thanks very much.

We administer a small takeover PSP where the company owner / participant took out a $50,000 loan three years ago. He paid off the loan in full with interest within a year of taking it, however he should have made quarterly payments. As soon as we took over the plan, they received an audit notice. the plan was audited and the loan was determined to be a taxable distribution. I dont believe audit CAP is available because it is not a disqualification issue. Also, it appears no other correction program is available because the plan has been audited. Has anyone had this experience?

Can a DB plan have different definitions of service for benefit accrual and 415 limit? For example, suppose a plan requires 1,000 hours for benefit accrual. A participant will have 9 1/4 years of participation at NRA. The dollar limit would be multiplied by 9/10ths. Could a plan be designed to credit a year of participation for 415 purposes on 1 hour of service? In this case there would be no dollar limitation reduction.