VeryOldMan

The following formula is provided for computing interest rate for Form 5500: i = 2 x I/( A+B-I), where i= effective rate of return, I= total interest or net gain/loss A=Beginning Balance, B=Ending Balance. It seems to work fairly well but can't find the source or prove it myself. Has anyone else looked into this?

After digesting these comments I am still confused. I went back to the RP and it is concerned only with the effect on participants. The participant in the DB is not affected by the gain or loss since his benefit is the result of an actuarial computation and not a function of investment return. But the Retirement Trust for the DB Plan is affected, it sustains a loss of earnings that can only be determined by examining the actual return in the DB Trust and compensating the Trust for the lost earnings it would have had but for the oversight. Thus the pension plan Trust MUST receive back the principal amount plus actual earnings lost. This is where the RP lets us down, it is only dealing with corrections that affect a participant. The DC Plan gained assets it shouldn't have received but that should not affect any DC participant since the principal amount didn't belong there in the first place and didn't adversely affect the actual earnings the DC plan would have had or allocated to participants. So as I see it, the DC plan returns the principal amount to the DB Plan and I think the Employer or Trustee deposit the lost earnings to the DB Trust. Who gets the gain from the DC Plan is unclear. I like Lou's comment about the greater of method, but how would it be applied if either trust or both had investment losses? I appreciate all comments, hope there are more to come!

My title may not clear, but the situation is thus. I have a situation with a DB covering 2 participants and a corresponding DC Plan. Both plans were terminated in 2019 and distributions due to be completed in 2020. In the DB 415 lump sums were paid to the 2 participants. But on July 1, 2020 the custodian of the investments transferred $4000 from one of the DB accounts to one of the 401(k) accounts. The oversight was discovered Jan 15th and we are trying to correct it. Under the regulations for correcting plan defects it tell us to make a correction that would put in the plan(s) in the same situation has the error not occurred. So for the DB Plan, we need to transfer $4000 from the DC Plan back to the DB Plan. We can also calculate the lost earnings on the $4000 for the months in was not in the DB trust. So if the earnings rate in the DB plan was 6% for the year of 2020, an amount equal to 6% x 50% x$4000 =$120 would also have to be deposited back to the DB plan. What I don't understand is where must the $120 come from? Can the company make a $120 corporate deposit into the DB Plan to complete the correction for the DB Plan? Then there is the issue of the DC Plan, since it also has an operational defect since it accepted $4,000 it wasn't entitled to receive. Let's say the DC Plan earned 13% for 2020 on the $4000 deposit so it earned 13% x 50% x $4000 or $260.00. Who is the $260 paid to? Can the DC Plan pay the $120 back to the DB Plan and keep the rest? What if the DC Plan had a loss for 2020-- would it return $4,000 less the allocable loss and then have the corporation pay the balance. I can't find a good example how to fix this problem. Any insight would be appreciated!

She is excellent and did a great job for us. I like her very much. But this client up in the LA area and wants a local attorney up there. I know there are some good ones up there--I'm an old timer and most of the guys I worked with, like Alex Brucker, Reich, etc. have since retired. I used Bruce Ashton in the past but he may have retired also.

We're looking for a pension lawyer in west LA area on a plan doc issue. Can anyone provide a referral?

Effen--I found another PLR that makes this quite clear and in agreement with your remarks. So TY for the response. For reference the PLR--which is very long-10 pages- is 201147032 and issued Aug 10 2010. I can't attach to this message but you can look it up.

In our plan doc (FIS) the Plan allows the suspense account to release an amount which will be treated as an employer profit sharing contribution, which is a part of the annual addition. Since the profit sharing contribution limitation is 25% of pay, then the maximum amount that may be released can't exceed 25% of the salaries for the participants. This assumes no other annual additions. This puts a considerable constraint on the ability to delete the suspense account in 7 years. Consider a plan with $400,000 of DB excess assets transferred to the suspense account, 2 participants earning $80,000 each and no other additions. 1/7 of $400,000 =$57,143. The maximum amount allocated as a PSP is $40,000, so the most that can be removed is only $40,000. Since the plan doc states that the minimum release is 1/7 of remaining balance, is this an operational defect?

I have a DB case with a $1,500,000 surplus and 2 participants. The plan has been terminated and we are doing a 4980 direct transfer to a new QRP which is a profit sharing plan. Based on the 415 limit of $57,000 AA limit, and a reasonable investment posture of cash, money markets and short term bonds, the balance after 7 years is still over $500,000. The plan doc for the QRP says the balance in the suspense account reverts back to the Employer. What I am unclear on is the penalty rate 7 years from now. Is it 50% or 20% or something else, given regulatory posture can change over time. Is it better to take the 20% rate now and forego the QRP entirely?

Thanks all--much appreciated.

In Orange County. Need to do a attorney for a VCP project.

Can anyone recommend an attorney in southern California area? Need to correct a document flaw

If a participant's accrued benefit is at the 415 limit, the Lump Sum will be limited to the 5.50% lump sum calculation. My question : in this plan all other forms of payment are actuarially equivalent to the QJSA ( which is the actuarial equivalent of the normal form-SLA) and are not limited by the 5% calc, thus the lump sum would have a much lower relative value; but if the mortality and interest assumptions plan rates were used, all benefit options would have the same actuarial value. Our plan uses a 5% interest rate and 94GAR for AE. Is it appropriate to report 100% relative value here? It seems reporting a 50% relative value for the lump sum is just not right.

Thanks to all for your input.

As a followup, it seems unclear how to amend another db plan that might come into the controlled group and also require special limiting language. Should each plan state that the aggregate 415 limitation would first be applied in their plan? If any have experienced this issue, esp with predecessor employers/controlled group issues and written special language, it would be instructive us all.

Thanks, after further review and working it out, I see that you are correct.

Assume an employer sponsors 2 defined benefit plan, running concurrently, and the Plan document for Plan A states that "the aggregate 415 limitation for all pension plans shall first be applied to Plan A"; and Plan B also says the aggregate 415 limitation shall first be applied in Plan A". Assume further that in Plan A that the computation of the Annual Accrued Benefit, before taking into account the "aggregate 415 limitation", would be X. And in Plan B it would be Y. The aggregate 415 limitation is Z, and assume further that X+Y > Z. In preparing the valuation and benefit computation, including lump sums payable, my interpretation of this provision is that X is limited to Z-Y. Is this correct? Is there another possible interpretation?

Before PPA a late contribution creating a FD for a plan year was added to the plan assets for the following year funding computations. Not clear as how PPA changed this rule? I have a pension plan that had a funding deficiency (FD) in 2018 plan year due to a late contribution of $30,000, which was deposited in Dec 2019. For the 2019 plan year the valuation date is changed from EOY to BOY. Under 4(A)(ii), should the late contribution be included as a plan asset for funding purposes for 2019? SB instructions say not to include such contributions in line 2(a) [ market value of assets] or 2(b) [Actuarial Value of plan assets].

A question is raised regarding the impact of an increase in the 415 limits for a frozen plan. Situation is as follows: Sole Prop pension plan, 10% per year of service formula. At 12/31/18, participant has 6 years of participation and 18 years of service. Comp is $160,000 and accrued benefit is $11,000 per month ( eg 60% x $220,000 dollar limit). The plan is frozen 3-15-2019 before accruing 1,000 hours. The 2019 415 limit is increased from $220,000 to $225,000. The question is what is the benefit used for the FT for 2019? The regs under 430 state that the FT is based on the benefit that has been accrued, earned or otherwise allocated to yrs of service prior to the first day of the plan year. The regs further say that the TNC is based on the benefit that has been accrued, earned or allocated to service from the 1st day of the plan through the val date, which in this case would be the freeze date. The regs are silent with regard to the impact of 415 changes in the dollar limitation. My interpretation is the benefit for the FT is $11,250, e.g. increase in the dollar limit goes to the FT. Any opinions?

So in that case the excess from the 1st Owner spills over to the other 2 which gets pro-rata allocation of that excess until it is fully allocated. That works in this case since the PSP cont is the last source of funds. Thanks.

A 401(k) PSP plan for a PC has 2 owners, both over age 50, one makes $280,000 the other $220,000. There is 1 staff making $30,000 per year. Each owner defers $25,000 ( 401k + post 50) and the PC makes a contribution of 18% to all participants. Both owners want to get to $62,000 limit. The plan document (FIS VS) says that an allocation to a participant that would make his total allocation exceed 415 is allocated to other participantslimited to the 415 limit and the excess is allocated to other participants in proportion to salary. So for Owner with $280,000 would get $62,000, the PSP portion of $50,400 is limited to $37,000 and the remaining $13,400 he can't get .that gets allocated to the other participants. that's where I am stuck.The other owner would get his $25,000 plus no more than $37,000 pep and the balance get allocated to the employee. This seems ok to me but am I missing something here?

My question is how does this apply to a 5% owner?

This is a theoretical question but with possible relevance to one of our clients. Plan A is a db that is has been around for >5 years, has a 10% per year accrual. A is very overfunded, and client wants to adopt a new DB to gain some additional deductions for year X. Plan B is adopted at the end of year X and provides that the 415 limit is first applied to plan B. Plan A is not frozen. As a result the benefit that employee X would have accrued in plan A for year X is now reduced due to the 415 limits. Plan A was not yet amended to state that the 415 limit is applied secondary to the new plan. For the year in question all participants are 5% owners. Is this a 411(d)(6) cutback, since the benefit in plan A for year X was fully accrued the day before plan B is adopted and will now be reduced. My understanding has always been that 415 limitations are not 411(d)(6) issues. 1. Is this 415 restriction considered a 411 issue? 2. If Plan A was also amended in yr X to state that 415 limit is applied secondary to plan B, would that amendment give rise to a 204(h) notice? 3. Does the adoption of the new plan require a 204(h) notice for employees in plan A? Would appreciate some feedback on this one!

The flat benefit formula using the fractional accrual rule--the question I am having is when is the 415 comp limit first applied. Is it to the projected benefit first, or to the accrued benefit. We have a plan document where it is not specified. My interpretation has been that without specific language in the plan as to when it is applied, it seems it should be applied to the projected benefit first since we can't accrue a fractional benefit to something that exceeds 415. In this plan the normal retirement benefit is 300% of average comp for 25 yrs of service at NRA. Consider an employee who is 40 yrs old, NRA 65 and has $300,000 average salary.

Thanks for your post, Andy.

I would like to return to this topic because I can see where the confusion is; "prior accrued benefit" in the notice is the accrued benefit for the year before the changes were made. The notice simply tells the employee that what he had earned before the year in which the plan was changed is his to keep. We had a lively discussion in our office about this topic and would like to pass this on for further discussion to anyone who has interest in this topic. A Plan can be amended at any time during a plan year, and as long as there is adequate notice and the benefits accrued up to the day before the change are protected, there is no issue with 411d6.The amendment can change the benefit formula and/or the accrual features. So that in my example above, the amendment can reduce the pension benefit formula and at the same time liberalize the accrual features, e.g. lower the 1,000 hour requirement to 100, and again there is no issue under 411d6. Lowering the hours to accrue after the amendment doesn't give rise to a change in the protected benefit accrued prior to the amendment. So I could include the 100 hours provision to accrue in the amendment reducing future accruals In effect each such amendment is tantamount to a termination or freeze of the prior "plan benefit structure", and I could have numerous such amendments during a plan year. If anyone disagrees with this, I would like to hear about it. In fact I'd like to a good erisa lawyer about this, if anyone can recommend one.