figure 8

C.B., A-5 only refers to benefits that accrue "after the employee's first distribution calendar year." In this case, 2021 is the first distribution calendar year. I don't believe A-5 is relevant here since we're not talking about distributions that accrue after 2021. Otherwise, what would happen if the participant also turned 70.5 during 2021? You'd say that 12-31-22 would be the starting date and not 4-1-22? I don't think so - think it would have to be 4-1-22.

Thanks, Lou. Is there any particular reason why you do it that way? I'm just curious since I've had trouble finding a definitive reason why to do it one way or the other. Also, what would you do about the fact that the 12-31 accrued benefit might not be known by the actuary until the following year (for example, say the formula is based on a percentage of Sch C or K-1 comp that is going to end up under the max comp limit, or even W-2 that's under the max comp limit but it's not reported until after 1-1)? Would it just be paid as soon as possible, but calculated as of 1-1 I guess?

Say a 5% owner is well past 70.5 and starts a plan effective 1-1-19. Vesting is excluded prior to 1-1-19 and NRA is 65+5. 3-year cliff vesting is used, so the owner will first have vested benefits in 2021. Is the initial RMD date 4-1-2022 or 12-31-2021? There are several threads on this topic, but they give different answers, and some are more focused on the benefit amount instead of the starting date. One area of confusion appears to be that people get DC rules mixed up with DB rules. For example, in a DB plan, if an RMD starts at 4-1 with an annual payment, the second RMD is NOT due at 12-31 of that same year. The second RMD is payable at 4-1 each year. I think a second area of confusion is that I'm not sure the IRS gives a clear answer. I can see an argument made for 4-1-22 or 12-31-21. How do others approach this? Thanks.

Thanks, Andy. I've been having trouble understanding how one would justify doing it any other way.

I just wanted to revisit this old thread about when the DC plan NRA is lower than the DB plan NRA. The example posted here was DC NRA is 55 and DB NRA is 65. I'm questioning why you can't increase the DC benefit to the testing NRA at the testing interest rate. When the DB NRA is lower than the DC NRA, you take the DB benefit at DB NRA, and then convert that to a benefit at testing age using testing interest and mortality. If the DB and DC plans have the same NRA, you use testing factors to convert the DC benefit to an accrual, not the DB factors. Basically, it seems like you should always end up using testing interest and mortality to convert to a testing age accrual. So in the example posted here, why would you use the DB assumptions instead of the testing assumptions for those last 10 years? In other words, why not simply use the testing assumptions from current age to testing age for the DC benefit? I bring the topic back up because I haven't been able to find anything that gives me a clear answer. Perhaps there is no clear answer. Perhaps I'm thinking about this all wrong, in which case I'm happy to be enlightened.

Don't be annoyed with the administrator for saying the plan must be restated - they're only following the rules to keep your plan in compliance (though as someone mentioned, the date is technically April 2020, not 2019). You're free to shop around and see what other places would charge to restate. Unless you get quotes from other places, you can't really be sure whether the fee they are charging you is relatively excessive.

I would think that if you're going to divide by years of credited service, you would also divide by an average compensation. Otherwise, you're going to divide their average accrual by the current pay? That doesn't make sense to me. You could be giving everyone 0.5% of average pay each year, but if their comps increase, you'll fail the test.

Thanks for sharing. I had not seen that. Interesting.

That said, you have no control over how someone files their taxes, and you're not their CPA. All you can do is tell them what is allowed and what's not based on your understanding.

My understanding is this is not allowed. I'm not aware of anything contrary to this gray book example, but I could be mistaken: Gray Book 2011-7 Funding: Grace Period Contributions A company has a calendar taxable year and sponsors a pension plan with a calendar plan year. Which of the following combinations are acceptable for a contribution made during the 2010 §404 contribution grace period (January 1, 2011 to September 15, 2011)? a) Deduct contribution in 2010, reflect on 2010 Schedule SB. b) Deduct contribution in 2010, reflect on 2011 Schedule SB. c) Deduct contribution in 2011, reflect on 2010 Schedule SB. d) Deduct contribution in 2011, reflect on 2011 Schedule SB. RESPONSE a), c), and d) are acceptable. IRC §404(a)(6) deems a contribution made after the last day of a taxable year to be made on the last day of a taxable year if the payment is made on account of such taxable year. A contribution is considered to be on account of the 2011 plan year when reported on the 2011 Schedule SB and thus cannot be deducted on the sponsor’s 2010 tax return.

I wonder what would happen with employees who had previously terminated? Say someone terminated with no net benefit in the CB plan. If the offset is later eliminated entirely, do you have to go back in time and look at previous terms who had no net benefits? If so, how far back do you have to go?

Just wanted to revisit the 401(h) part of this question that was originally posed years ago: "None of the partners are hitting their 415 limit. In which case what is the benefit of the 401(h) account -- is it simply that those contributions are made on a deductible basis by the employer and are not taxable to the participant when distributed to pay retiree medical benefits?" Since there wasn't a lot of talk about this, I just wanted to revisit: if someone wants to utilize a 401(h) account for healthcare costs, and they plan to have a solo DB plan as well - is there any reason to steer them away from the 401(h) part? Anything to watch out for? I just haven't dealt with this scenario before. Thanks for any advice.

The 5% penalty applies from the date(s) of the applicable contribution(s) to the date(s) of the applicable quarterly date(s). If the 19c discounted contributed is less than the MRC as of the val date, then there is a funding deficiency with excise tax due on the deficiency. It's "OK" to file an SB like this, but the funding deficiency would need to be appropriately addressed.

New plans should generally have a $0 premium the first year (assuming the plan starts with $0 liabilities for everyone at the first plan year beginning date, meaning the participant count for the first PBGC premium is 0). Should be a pretty easy filing to do really quickly.

This might be one of those annoying technicality posts I'm about to make - but my response to the above is "not necessarily." Keep in mind that the 0.5% of pay is not law. Even if a plan offers benefits that are lower than 0.5% of pay, it could still be possible to justify such benefits as "meaningful" and pass 401(a)(26).

Still annoyed with these letters. Felt compelled to come here and reiterate it. This would be like the DOL sending out letters in mid-April telling plan sponsors that they still need to file their 5500. What a waste of time, energy, and paper!

I agree with the peeve. Am also peeved when they send out similarly unnecessary letters relating to plan terminations (for example, a letter saying the Form 501 hasn't been received yet, even though it is well before the non-penalty due date; sometimes it takes a while to get the necessary distribution confirmations to send the Form 501, which is why it's not done yet; it's not a big deal, except that it causes the client some concern that needs to be dealt with).

Not in a CB (or any DB) plan. Unless the document would say so (such as in your "either 1000 hours or employed on last day" example, which, again, is okay since it is more generous than "1000 hours").

I think the either/or approach is okay, because in that case you are granting something more generous than 1000 hours required. You are saying you have to work 1000 hours - but if you don't, you'll still get an accrual if you're there at the end of the year. That seems okay. What wouldn't be okay is just saying "you have to be there at the end of the year." Because someone who worked 1000 hours and quit would not be getting a benefit in that case. Which wouldn't be okay, as is my understanding. Unless you take an elapsed time method approach, which still gives partial credit throughout the year.

I don't believe a CB plan (or any DB plan) can require last day employment. You could have elapsed time method for accruals, in which case you need to be employed at the end of the year to get a full accrual, but even then you would earn partial service for each month (or day or whatever's elected) worked throughout the year.

I don't know if it increases the chance of audit. I know I've done quite a few small PBGC terminations with no determination letter, and plenty of them have not been audited. Actually, I think all or almost all of the audits I've experienced were cases where there was some other red flag. I would doubt it increases the chance of an IRS audit. Would the IRS even get information about PBGC plans that terminate without a determination letter? Maybe they do, but I'd be surprised if that's something they seek out. I am assuming that the plan hasn't had any material changes (besides freeze/termination) since the last determination letter and that the document is in compliance. Given that assumption, think of the 2 likely worst case scenarios: 1. Worst case scenario if no determination letter is done - the plan possibly has a higher chance of audit. 2. Worst case scenario if determination letter is done - the plan has to deal with the cost and time involved with the determination letter process. Which one is worse for this particular client? Personally, if nothing really has changed since the last determination letter and the plan document is in compliance, I don't see much need for a determination letter. But I don't know all of the details about how the plan has been administered and how the document has been maintained since 2012. Obviously if my assumption is wrong, and the plan has had material changes or the document is not in compliance, that could change the story. At the end of the day, I would lay out the pros and cons and risks and leave the decision to the client. Getting the determination letter is probably always (or almost always) the safest route, but sometimes the other route is fairly safe as well.

They do not have to have the same NRA.

Just to be clear - I understand the individually designed stuff is basically no longer an issue. I'm only pointing this out because it's an example of something you're basically stating has been a fact, when in reality it's not. Perhaps it (i.e., a CB plan having more fees than a trad'l DB plan) has been true in your specific experiences, but it's not a truth for everyone. I was just using that as an example of how your experiences (which I assume are very heavily weighted towards trad'l DB instead of CB) are skewing your perspective. I could go on with other things mentioned, but there's really no need to. Trad'l DB is in your blood. It's fine. I'm a CB guy.

I was talking about fees (again, in reference to your first point mentioned: "more expensive to maintain" on account of being individually designed).

Mike, just out of curiosity - if you think of all the DB plans you have worked on in just, say, the last 10 years - what percentage has been cash balance? I could be wrong, but I suspect it is a low number. As I start reading your post here, the very first point you mention - that cash balance plans have been individually designed plans and hence more expensive to maintain - is something I disagree with. That right there is something that's going to vary from firm to firm and client to client. For my clients, they are going to pay the same fees (both setup and annual) whether it's a cash balance or trad'l DB plan. At least it's been this way for the last 4+ years. I understand some firms don't do this though. You have some points, but I do think your viewpoint is skewed based on your own experiences, as is mine.