figure 8

This is what's getting me caught up... From 401(a)(4)-12, definition of testing age: (1) If the plan provides the same uniform normal retirement age for all employees, the employee's testing age is the employee's normal retirement age under the plan. (2) If a plan provides different uniform normal retirement ages for different employees or different groups of employees, the employee's testing age is the employee's latest normal retirement age under any uniform normal retirement age under the plan, regardless of whether that particular uniform normal retirement age actually applies to the employee under the plan. (3) If the plan does not provide a uniform normal retirement age, the employee's testing age is 65. "Plan" refers to the aggregated plans. (1) doesn't seem to apply since you have two different uniform normal retirement ages for all employees. (2) doesn't seem to apply since you don't have different uniform normal retirement ages for different particular employees or employee groups (i.e., all employees have the same two different uniform NRA definitions). But I might just be getting caught up on the word "different," as I'm thinking that means (2) only refers to cases where you have employees that have different NRA definitions than other employees. Which leaves (3) as the choice. But what seems strange about that logic is if you had a case where DC NRA = 62 and DB NRA = 62+5, that means you'd use 65 as the testing age. It seems like (2) "should" make more sense as the choice (take the later of the two). But (2) has that phrase "different employees or different group of employees" that seems to imply that it would be 65 (choice 3) if all employees had the DC NRA of 62 and DB NRA of 62+5. Is this a case where the literal reading does not match the intent?

DC Plan NRA = 65 CB Plan NRA = 65+5 When combining the plans for testing, is the testing age 65 (because there is no uniform normal retirement age, in which case you use 65)? Or is it 65+5 (because there are different uniform normal retirement ages provided, in which case you use the latest nra)? I have always understood the answer to be one thing, but for some reason I'm reading over the code today, reading through discussions, and find myself second-guessing things. It doesn't seem like there should be much controversy on this issue though. Just looking for some reassurance. Thanks in advance.

Thanks, Effen. Yea, I'm on the same page as you here. It would certainly be much better to come up with some sort of job classification breakdown instead of going by hire date.

Agree with the 401(a)(26) issue, though that's an issue with any soft freeze plan as well. But you agree that you could just amend the plan if it fails? Say you start it up for anyone hired before 1-1-14 - so you have 2 groups, pre-2014 hires and people hired in 2014 and later. At some point, say for the 2019 year, you fail testing and need to add more people. You reclassify the 2014 and later group into 2 groups - people hired during 2014 and people hired in 2015 and later, and the 2014 hired group shall consist of eligible employees effective 1-1-19. Assuming all other testing works out, I'm thinking this should be okay. My main reason for second guessing is just because of some of the doubt cast here in this thread.

I know this thread is almost 10 years old, but I wanted to check in on the issue of starting up a new DB plan where no one hired after "x date" is eligible to participate. Soft freezes are common, as it's okay to change the eligibility of a plan to say that "no one shall enter the plan after the soft freeze date." While a soft freeze might not necessarily state anything about date of hire directly, it is, in essence, saying that nobody hired after a certain date will be entering the plan. So what difference does it make if the plan is a new plan or a pre-existing plan when you say no one hired after "x date" will enter? I'm having a hard time wrapping my head around why a soft freeze is okay, whereas starting a new plan saying no one hired after x date shall be eligible to enter is not okay. Furthermore, I would think that classifying a group of employees as two groups - everyone hired before x date and everyone hired after x date - would be a reasonable classification. The way I'm looking at it, the service requirement to enter the plan is 1 year of service, so 410(a) is not being violated because the plan satisfies the minimum service requirements for eligible employees. And no one is being excluded based on their work schedule. So I'm thinking that if soft freezes are okay, then you can exclude people hired after x date for a new plan. But I'm curious to hear what others say. Thanks in advance.

Thanks, Mike. It makes my head hurt, but I see it now. It's sort of like one of those magic eye books - I just have to stare at the IRS language in just the right way for it to become clear.

Thanks. That is reassuring. Was this point that they were clear on regarding all annuitants who are in a plan that's terminating, or was it just regarding someone who is taking RMDs?

I don't think so. 13 is the one that deals with changing from an annuity to a lump sum. But it's certainly possible I'm just plain confused about something in general with this Notice. I hope I'm wrong, but I'm not understanding how I'm misinterpreting this section from the Notice (bolded/underlined is my emphasis): The Treasury Department and the IRS intend to amend the regulations under § 401(a)(9) that address the distribution of an employee’s interest after the required beginning date. Those regulations reflect an intent, among other things, to prohibit, in most cases, changes to the annuity payment period for ongoing annuity payments from a defined benefit plan, including changes accelerating (or providing an option to accelerate) ongoing annuity payments. The Treasury Department and the IRS have concluded that a broad exception for increased benefits in § 1.401(a)(9)-6, A-14(a)(4) that would permit lump sum payments to replace rights to ongoing annuity payments would undermine that intent. Accordingly, the Treasury Department and the IRS intend to propose amendments to § 1.401(a)(9)-6, A-14(a)(4) to provide that the types of permitted benefit increases described in that paragraph include only those that increase the ongoing annuity payments, and do not include those that accelerate the annuity payments. The exception for changes to the annuity payment period provided in § 1.401(a)(9)-6, A-13 (as intended to be amended) would not permit acceleration of annuity payments to which an individual receiving annuity payments was entitled before the amendment, even if the plan amendment also increases annuity payments.

Effen, is there a place I can see these comments? The ERISA attorney I talked to said that their practice is currently pretty firm on the stance that basically no one receiving an annuity can convert to a lump sum, even if the plan is terminating. And this is generally speaking for all plans, not just a comment based on a particular plan's document or anything.

Yea, unfortunately I see this as not mattering whether something is elected. A-13 provides for a change from annuity to lump sum, and the Notice seems to say that A-13 can no longer do that. I imagine there are quite a few small plans out there with owners who have RMDs payable as annuities. The intent of the Notice is to put an end to retirees being "cashed out" of plans via lump sum. An owner of a small plan taking an RMD is a totally different situation. Often times these really small plans have no retirees, and it seems silly to require this owner to find an annuity provider when terminating the plan, when he had been intending to do a rollover of his entire remaining benefit at termination all along. Hopefully someone can offer some hope that these people be treated differently when the IRS issues its actual amendment? As of right now, it doesn't look favorable for these small plan RMD-taking owners.

Thanks for the reply. Okay, yea. I know it's technically an annual annuity. I was just trying to do some creative thinking. Regarding your last statement though - how do you see that as the case, given this language from the notice: "The exception for changes to the annuity payment period provided in § 1.401(a)(9)-6, A-13 (as intended to be amended) would not permit acceleration of annuity payments to which an individual receiving annuity payments was entitled before the amendment, even if the plan amendment also increases annuity payments."

The main line I'm hinging on from the Notice is: "The exception for changes to the annuity payment period provided in § 1.401(a)(9)-6, A-13 (as intended to be amended) would not permit acceleration of annuity payments to which an individual receiving annuity payments was entitled before the amendment, even if the plan amendment also increases annuity payments." A-13 refers to the line of the code that allows the annuity payment period to be changed in conjunction with (among other things) retirement or plan termination. I'm just hoping there's something I'm overlooking here.

I'm curious what others think about this example: Small plan, say under 10 participants. But the owner (who is still actively working and running the company) is receiving an RMD each year. He is receiving an annual annuity payment - so just 1 payment each year. The amount increases each year due to ongoing accruals. Even though he receives his payment in one "lump sum" each year, is this Notice saying that, since it's calculated as an annual annuity amount, he's going to have to continue to receive annuity payments once the plan terminates? Unfortunately that's how it's looking to me. That's very disappointing though, because the only reason he's taking annuities now is because it was thought that it could be changed once the plan terminates to a rollover. Also, another question on something not necessarily related to my first situation - this Notice seems to say that the IRS "intends" to make an amendment retroactive to 7-9-15. What about a plan that is terminating right now, and intends to pay people out by the end of the year? Obviously it's a gamble because we don't know when the IRS will actually amend things (or if they will even actually do it as intended), but what if the plan can pay out before any actual amendment goes into place? Would that matter in the eyes of the government?

Thanks, mbozek. Yes, I agree with you there, though that issue is not really the part that's being questioned (my original post might have been a little confusing). The issue at hand is that the contributions going on the 2014 SB, when added to the 2014 DC allocations, would be greater than the combo plan deduction limit. However, since they are not actually deducting the full amount of the DB contributions for 2014 (only deducting the amount that takes them up to the combo plan deduction limit - fortunately a good chunk of the contributions was made in January 2015), I think they are in the clear. The more I think about it (and see the responses), the more confident I am. And when I think about it the way that My 2 cents mentions (which is the technically correct way of thinking), it seems pretty clear.

Thanks again, Mike. My 2 cents, good point as well. I was mainly just looking at it as a 31% deduction limit for the company, and then backing into what the max DB contribution could be (given that max DC allocations had already been done). But that's not really the technically correct way to look at it, you're right. I think this makes the case for doing what I'd like to do even stronger.

Thanks, Mike. In this particular situation, the total contribution for the plan year (which exceeds the max deductible for the tax year) would be equal to the cash balance allocations for the plan year, so it seems like an appropriate approach to me (considering the plan would be around 100% funded). But I understand that what seems appropriate to me doesn't make it guaranteed to be okay. I just want to make sure there's nothing out there I'm missing that definitively says, "no, you can't do this."

I think the heart of the matter is really one question - what is a maximum deductible contribution? Is it simply the largest amount that can be deducted for a given tax year, or does it also define the largest amount that can be contributed towards a given plan year? It's called a maximum deductible contribution. I think there's only a limit on what can be deducted for a given tax year. Which means there is no limit as to what can be contributed for a given plan year (though obviously there are repercussions if you exceed the deductible limit). I guess I've never thought about there technically being no limit as to what can be contributed for a given plan year, but I can't think of any reason why it's not true. Anyone disagree with these thoughts?

No worries. I think I'm just thrown cause I don't recall having this situation come up before. I don't see why it shouldn't be okay though.

I think they're fine to deduct from a timing perspective. This would be option c below... 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'm just wondering if it matters that the 2014 maximum deductible limit is exceeded when you look at the 2014 SB contributions. Should be okay as long as they only actually deduct up to the limit, right?

Say we have a DB/DC combo (non-PBGC). Plan comp is $1,000,000. DC allocations are $100,000 (have exceeded 6% of comp). As a result, the DB plan will be limited to a contribution of $210,000 (31% of $1,000,000 minus $100k). However, 25% of comp = $250k. And the DB minimum required contribution is $230k. Since the DB MRC does not exceed 25% of comp, the deductible limit still stands at $210,000. 2014 is the deduction year we're looking at. Say the plan contributed $200k during 2014 for the DB plan. And in January 2015, $50k was contributed. As stated above, the max deduction for the DB for 2014 is $210k. So they can deduct the $200k contributed in 2014 and $10k of the January 2015 contribution as well. The remaining $40k will be deducted from 2015 taxes. But this won't meet the 2014 MRC. So here's what I'm wondering... For plan purposes, can they apply the full $250k in contributions for the 2014 plan year, so that the minimum required contribution is met? In this case, the SB would show $250k contributed for 2014, but the maximum deductible for the year was only $210k. But as long as they don't deduct more than $210k for 2014, all should be good, right? This seems like an obvious, yes it's okay - but I just want to make sure I'm not missing something here. Thanks!

Okay, thanks. Yea, I think determining whether there's an ASG is the key here. I overlooked that above. I'll have to figure that out. I think the other questions above have pretty clear cut answers, if there is no ASG. I just want to make sure I'm not missing anything else.

Also, assume that the 100% owner is not related to anyone who owns the other 60% of the second business.

A business owner owns 100% of his business. No employees. This business also owns 40% of another business. This other business has employees. Neither business has a DB plan. Questions: 1. Do these businesses form a controlled group? 2. Can the business owner set up an individual DB plan through his 100%-owned business? My thoughts are that, no, these businesses do not form a controlled group. The ownership % would have to be at least 80% for that to be the case, but it's only 40%. And as a result, he can set up his own individual DB plan through his 100%-owned business. Thoughts? Thanks in advance.

Thanks, that's what I had been thinking.

Say you have a plan where the owner's benefit is currently not very close to the 415 limit. However, the owner wants to significantly increase the benefit formula. What's the maximum benefit that can be accrued/funded for the current year? Is it based on an accrual of $1750/month ($210k * 1/10 / 12)? Or can it be based on an accrual in excess of $1750/month, as long as the total accrued benefit does not exceed the total benefit allowed by 415?