YankeeFan

The plan document clearly allows for the escrow arrangement. However, it's not clear from the language in the document if it's at the discretion of the plan sponsor. The document states the following: An Employee's otherwise restricted benefit may be distributed in full to the affected Employee if prior to receipt of the restricted amount, the Employee enters into a written agreement with the Plan Administrator to secure repayment to the Plan of the restricted amount..." I have also contacted the plan document provider but would appreciate everyone's thoughts.

Assuming a participant (who is one of the 25 most Highly Compensated Emplyees) requests a single lump sum that is restricted, does the plan sponsor have to agree to the escrow arrangement? The participant is aware that the single lump sum is restricted but has specifically asked for the plan sponsor to enter into an escrow arrangement. The plan sponsor prefers to deny the participant's request if it is at the plan sponsor's discretion. In addition, who is responsible for the legal fees associated with setting up the escrow arrangement? Can the plan sponsor require that the participant pay these expenses?

I don't have a cite but in the case of a sole proprietor with no earned income for the year, contributions in excess of earned income are not deductible even if the contributions are required to satisfy minimum funding. In this case, there is an exemption from the 10% excise tax. If a sole proprietor is required to make a contribution that is in excess of earned income in order to avoid a funding deficiency, the excess will not be considered in determining nondeductible contributions. In the event the contribution exceeds the required minimum contribution, the amount in excess of the required minimum contribution would be subject to a 10% excise tax. Does anyone disagree with my understanding?

I have generally thought of the AFTAP as a "cash basis" calculation. Current liabilities vs. current assets. We have a sponsor that failed to make their 2007 required minimum contribution, due 9/15/2008. The plan now has an unpaid minimum required contribution (prior accumulated funding deficiency). Sponsor has no intention of making the contribution. Does this effect the current AFTAP certification? Any input is appreciated.

I would like to revisit this topic. Does Notice 2008-30 provide 411(d)(6) relief in the case of plans that did not calculate lump sums using either the Pre-PPA Applicable factors or PPA Applicable factors, whichever produces the greater benefit? For example, assume a plan used the PPA Applicable factors to pay out lump sum during the 2008 plan year. The plan did not pay out lump sums based on the greater of the Pre-PPA Applicable factors or PPA Applicable factors. A plan amendment was executed in January 2009 that adopted the PPA Applicable factors for purposes of calculating benefits subject to 417(e)(3). Should the plan have used the greater of approach (Pre-PPA Applicable factors or PPA Applicable factors) to determine lump sums until the adoption date of the amendment signed in January 2009 or does Notice 2008-30 provide any sort of relief in this case?

Can anyone please confirm what the new PPA deduction limits are for PBGC covered plans for 2008? If you have a DB/DC combination plans, is the new deduction limit: (1) 25% of compensation to the DC plan + the 430 minimum to the DB Plan or (2) 25% of compensation to the DC plan + the 404 maximum to the DB Plan I have a DB plan with $0 minimum 430 funding for 2008, but a significant maximum 404 contribution. If the client elects to make a 25% contribution to the DC plan, can they made a deductible DB contribution? Any input is appreciated.

Thank you for the response . I know that old grudges die hard but I appreciate that you can overlook that I'm a Yankee fan. I'm not the arrogant Yankee fan I once was. I've been humbled a bit this past year as a result of the Yankees missing the playoffs after 13 consecutive appearences. However, I should be back to my old self once the Yankees spend a few hundred million dollars this winter reshaping their pitching rotation.

Thanks for the response. Does anyone see any issues if the plan were designed with a 12/31/07 to 12/30/08 plan year?

Can someone please confirm that it would be permissible to setup a new one participant defined benefit plan for a sole proprietor effective 12/31/07 with a 12/31/07 to 12/30/08 plan year and use the pre-PPA funding rules for the first year. The deduction for the plan year ending 12/30/08 would be taken on the 2008 tax return. This would avoid the use of the PPA funding rules effective in 2008 and result in a larger contribution for the first year.

A client would like to set up a new defined benefit plan for 2008 allowing for the maximum deductible contribution. The client is a sole proprietor with no other employees. The client has past service and very high compensation in prior years. In the case of a new plan in 2008 with no past service benefit, the minimum and maximum contribution would be the same since there is no Cushion Amount. However, if the formula is based upon years of service, then as of 1/1/2008 the accrued benefit would be 1/10th of the 415 dollar limit. The accrued benefit as of 12/31/2008 would remain unchanged from the beginning of the plan year since the participant accrues 1/10th of the 415 dollar limit as of the first day of the plan year. In this scenario, we get $0 as the Target Normal Cost and the minimum contribution is basically the 7-year amortization of the Funding Target. Under the new PPA funding rules, the maximum contribution is equal to the Funding Target, plus the Target Normal Cost, plus the Cushion Amount which is equal to 50% of the Funding Target, all reduced by fair value of assets. Everyone agree so far? Lets assume the plan is designed such that a single lump sum is an optional form of benefit and the normal form of benefit is a single life annuity. My Question: For purposes of determining the Funding Target, it appears that our valuation software uses the plan’s Actuarial Equivalence factor (1994 GAR at 5.0%) to calculate the lump sum at NRA and then discounts back to attained age using the funding segment rates. Does this make sense in the case of a participant who is at the 415 limit? Shouldn’t the lump sum at NRA be calculated using the 1994 GAR Mortality Table at 5.5% and then discounted back to attained age using the funding segment rates? Furthermore, if we used an unreduced 100% joint and survivor annuity as the normal form of benefit, how should the Funding Target be calculated? It appears that our valuation software is using the plan’s Actuarial Equivalence factors (1994 GAR at 5.0%) assuming a 100% joint and survivor annuity as the normal form to calculate the lump sum at NRA and then discounts back to attained age using the funding segment rates. Does this make sense if the plan is designed such that a single lump sum is an optional form of benefit? Any guidance, thoughts and comments would be appreciated.

A self-employed individual maintains a qualified retirement plan and receives director's fees from XYZ Inc. In addition, this individual also exercises stock options received from XYZ Inc. Lets assume the director's fees total $150,000 for the year while the exercising of the stock options amounts to $100,000 for the year. Lets also assume this individual did not have any business expenses for the year. The individual's accountant prepares a Schedule C for the year reflecting net profits of $250,000. The income shown on Schedule SE is also $250,000 which is the amount subject to self-employment taxes. The accountant's inclusion of the $100,000 on the Schedule C and Schedule SE would indicate that the stock option exercise is Earned Income since it's subject to self-employment taxes. My understanding is that a self-employed individual's Earned Income for pension plan purposes is the income on which self-employment tax is paid (i.e. the amount shown on Schedule SE of Form 1040). Are the amounts received as a result of the stock option exercise considered Earned Income for pension purposes? Should the Earned Income amount equal $150,000 or $250,000?

Not that I'm doubting KennyH's assessment but does everyone else agree as well?

An employer sponsor's a frozen defined benefit plan which allows payment of lump sum distributions as an optional form. The benefit accruals under the plan were frozen prior to 2005. In accordance with 436(d)(4), it appears that the limitations on the payment of lump distributions do not apply. Can someone please confirm this and point out any other issues that should be considered. Lets assume the 2007 AFTAP is 75%. Do you agree that since the plan benefits were frozen prior to 2005, lump sum benefits may be paid in full for the entire 2008 plan year regardless of the 2007 and 2008 AFTAP. In this case, does the 2007 AFTAP even need to be certified prior to April 1, 2008 in order to avoid a limitation on the payment of lump sum distributions? Furthermore, assume the 2008 AFTAP is not certified prior to October 1, 2008. Would the failure to certify to the 2008 AFTAP prior to October 1, 2008 create a limitation on the payment of lump sum distributions?

I'm also curious what software package you folks are using. Any input would be appreciated.

So what happens if the suspension of benefits notice was not issued in a timely manner? In that case, would the plan need to be amended in order to allow for actuarial increases?

An employer sponsors a defined benefit plan under which the plan's benefit accruals are frozen. The plan provisions do not allow an actively employed participant who has attained normal retirement age (age 65) to commence receiving benefits until such participant has terminated employment. Furthermore, under the current plan provisions, the participant’s normal retirement benefit payable upon late retirement is not actuarially increased. Accordingly, the plan’s lack of an actuarial increase provision for participants beyond normal retirement age in conjunction with the fact the benefit accruals are frozen results in the decrease of the value of a participant’s benefit as they continue employment beyond normal retirement age. An employee who is a participant under the plan has attained age 65 and is continuing to work beyond age 65. Under the current plan provisions, this participant cannot commence receiving benefits and will not receive an actuarial increase. Are the current plan provisions in violation of any IRS rules and regulations? Must the plan be amended to either (1) allow for actuarial increases for participants beyond normal retirement age or (2) allow actively employed participants who have attained the plan’s normal retirement age to commence receiving benefits from the plan prior to actual termination of employment?

Lets assume an employer sponsors both a defined benefit plan and a defined contribution plan. Is it everyone's understanding that in the DB plan the client can contribute (and deduct) the greater of: 1) Up to 100% of current liability; or 2) Up to 25% of eligible compensation; or 3) The amount necessary to meet minimum funding (even if it exceeds (1) and (2)) PLUS Up to 6% of eligible compensation in the DC plan (not including 401(k) deferrals)? If you read IRS Notice 2007-28 (Question 9), the answer states that the DB plan deduction is limited to the greater of (1) or (2) above. For example, lets assume the following: a) eligible compensation is 50,000 b) required minimum contribution is 100,000 c) Current liability is 1,000,000 d) Plan assets are 960,000 e) up to 6% of eligible compensation has been contributed to the DC plan Can you contribute and deduct 100,000 to the DB plan or is the DB deduction limited to 40,000 (CL of 1,000,000 less assets of 960,000)?

ak2ary - I also thought these methods were optional, but we started to use Accrudraft plans over the last few years, and they require you to specify a methodology in the plan. Anyway, thanks! Pensions in Paradise - Appreciate the input. An ERISA attorney actually did this amendment for the client and this issue was bought up. The prototype w/amendment was forced on the client by their investment provider who refused to work on a custom document. They didn't want to leave the provider.

We just tookover a plan that uses a nonstandardized prototype and has a "special amendment" attached which incorporates a new-comp PS allocation (the document sponsor approved the amendment). The plan is TH. Employees are allowed to immediately defer to the 401(k) on their date of hire, but must wait 1-year for a PS allocation. Normally I would use the otherwise excludable rule and only give a 3% TH min to employees with less than 1-year of service. Employees that satisfied the 1-year wait get the gateway minimum. The document does not specifically address the otherwise excludable rule or permissive disaggregation for coverage or testing purposes. Is it okay to use the rule? It should be noted that the document was amended for the final 401(k) regs., and under that amendment it says it is allowable to disaggregate for ADP testing purposes. Any thoughts are appreciated.

We use Relius Administration version 11.1.2 as our valuation software. The software give you an option to apply IRC 404(a)(1)(A)(ii) for purposes of calculating the maximum contribution. When this option is selected, if any three individuals together have more than 50 percent of the total unfunded cost for the plan, then their unfunded costs will be amortized over at least 5 years. I'm curious why the software give you an option to apply IRC 404(a)(1)(A)(ii). I wasn't aware that this regulation is optional. Are there circumstances when the regulation is not applicable? Obviously, in many cases the maximum deduction using IRC 404(a)(1)(d) (150% limitation) is greater than the normal cost applying IRC 404(a)(1)(A)(ii). As such, my question would be irrelevant. However, in situations where the maximum deduction using IRC 404(a)(1)(d) is not available (i.e., new plan), must you apply IRC 404(a)(1)(A)(ii)? I think the answer is yes but why does Relius give you an option?

A non-profit corporation sponsors a defined benefit plan that terminated effective December 31, 2005. The plan has about 30 or so participants as of the current date. The plan was submitted to the PBGC (in a standard termination) and the plan was also concurrently submitted to the IRS for a favorable determination letter. The plan sponsor is still waiting for the favorable determination letter from the IRS. The plan sponsor would like to await approval from the IRS prior to distributing the plan assets. As of the current date, the termination liabilities are greater than the market value of plan assets although the plan sponsor intends to fully fund the plan prior to distribution of assets. The regulations state that terminating plans covered under Title IV of ERISA for the plan year in which the plan terminates are allowed to contribute the amount required to make the plan assets sufficient to satisfy all plan termination liabilities and permit the plan to terminate in a standard termination. (1) Obviously, the plan's minimum funding deadline for the 2005 plan year is September 15, 2006. Since the plan terminated effective December 31, 2005, is 9/15/06 the date by which the plan must be fully funded (on a termination basis)? Is there an opportunity to fund the plan after 9/15/06? (2) Assuming there is no required contribution for the 2005 plan year, can the plan sponsor fully fund the plan some time after 9/15/06 although the plan is not subject to the minimum funding standards for the 2006 plan year?

Background: A plan uses the Unit Credit funding method. The plan is frozen so there is no normal cost. There are amortization charges and credits as well as an additional funding charge. In determining the actuarial gain or loss for the year, we take the difference between the expected unfunded past service liability (not less than $0) and the actual unfunded past service liability (not less than $0). For example, lets assume the expected unfunded past service liability is $0 and the actual unfunded past service liability is $0. As such, there is no actuarial gain or loss base for the year. In this scenario, the balancing equation does not balance. How do you handle such a scenario? Do you simply create a "balancing base" to make your equation balance? If so, is it amortized over 5 years for minimum funding purposes?

Relevant Background Information ---------------------- An employer maintains a defined benefit plan and a defined contribution plan both having plan years ending Febuary 28th. The defined contribution plan is merged into the defined benefit plan as of Febuary 28, 2005. As of Febuary 28, 2005, all participants in the defined contribution plan are 100% vested with the exception of one participant that is partially vested. The partially vested participant terminated in a prior year but has yet to be fully paid out and has not incurred 5 consecutive breaks in service. The defined contribution plan allows for the reallocation of forfeitures upon the earlier of (a) the distribution of the entire vested portion of the participant's account or (b) the last day of the plan year in which the participant incurs 5 consecutive breaks in service. Specific Questions --------------------- Once the plans merged on February 28, 2005, what should have happened to the unvested portion of the partially vested participant's account? Must the unvested portion be reallocated as of February 28, 2005 based upon the profit sharing plan's allocation formula although the participant has not been fully paid out or incurred 5 consecutive breaks in service? Conversely, can the unvested portion be used to reduce future contribution in the defined benefit plan? As such, under this scenario, it is not reallocated to participant's accounts.

In a defined benefit plan that allows lump-sum distributions, would it be permissible for a participant to elect to receive their benefit partially as a lump sum and the remaining amount in the form of a life annuity from the plan? If it is permissible, would the plan need to be amended to allow for this hybird form of benefit?