SRM

Bob DB, The Academy of Actuaries Pension Practice Council has issued a Practice Note titled "Selecting and Documenting Investment Return Assumptions". This might provide some insight into one method utilized to select a reasonable interest rate assumption. AAA Pension Practice Note

The proposed cash balance regulations would have required a minimum gateway to test a cash balance plan on a benefits basis (assuming the broadly available exception is not met). But since the proposed regs were withdrawn, albeit for other reasons, I do not think the minimum gateway requirements would apply.

I think it can be done as long as its ASG's but not controlled groups.

Consider a controlled group of companies A, B, C, D, E and F. Each company has a separate 401(k) plan (no HCE in any plan) and separate investment providers for each plan. If an employee of company A transfers to company B, can the employee's loan in Plan A be transferred to Plan B (trustee to trustee transfer not a rollover or distribution) if the employee's remaining balance remains in Plan A? Clearly the plan documents, loan programs, and promissory notes would have to contain appropriate language and plan sponsors or trustees would have to accept the tranfers, but is this possible under regulations and code?

Affiliated Service Group of companies A, B, and C Company A Profit Sharing Plan has a short year from 4/1/04 - 12/31/04 Company B Profit Sharing Plan has a short year from 7/1/04 - 12/31/04 Company C Defined Benefit Plan has a full year from 1/1/04 - 12/31/04 Can these plans be aggregated for coverage and non discrimination for the years ending 12/31/2004? Reg §1.410(b)-7(d)(5) Same plan year requirement - Two or more plans may not be aggregated and treated as a single plan under this paragraph (d) unless they have the same plan year. Does anyone see an wiggle room to argue that have the same plan year end is the same as have the same plan year for purposes of aggregating plans? Or are the 1/1/05 - 12/31/05 plan years the first years that can be aggregated?

IRS field directive

I believe that you are stuck with a required aggregation group (at least for 4 years unless the top heavy regs are amended) and top heavy minimums in the DC plan because of the regulation that you quoted. Is it possible for the non-key HCEs to become key (are these HCE officers or could they own more than 1%)? If it is possible, then you could avoid the top heavy minimums in the DC plan by having the minimums only provided to non keys and the only participants in the DC plan would be key employees.

Thanks for the confirmation and great case citation.

100% corporation owner and spouse participate in a DB Plan. Two other unrelated employees participate in DC Plan. Plans are aggregated for coverage and non discrimination. There is concern that the DB plan is not covered by ERISA (and participants not afforded the antialienation protections of ERISA) since the plan doesn not benefit employees other than the 100% owner and spouse. Agreed? If the child of the owner becomes a participant of the DB Plan (she is the only other employee of company besides owner, spouse and two unrelated employees), is the DB plan now covered by ERISA (and the participants afforded the antialienation protections of ERISA)? A strict reading of ERISA Reg §2510.3-3 seems to indicate that only an individual owner and spouse are not considered employees for purposes of determining coverage under Title I of ERISA.

Can anyone confirm the following annuity purchase rate? 5% interest 1983 Individual Annuity Mortality (Male) Projected to 2000 with Scale G At Age 62 = 155.9645 (monthly) Any response would be appreciated.

Thank you for the response. I am a little confused by the last part of your message regarding not merging the plans and perhaps the last part of my message was misleading. The situation is a multiple employer plan (with a single asset pool available to pay all benefits) will become a single employer plan at some date in 2004. Can the plan continue with separate ADP tests for each employer through the end of the transition period or must the plan have a only single ADP test as of the date of the transaction?

Company A and Company B are unrelated (not members a controlled or affiliated service group) but are both participating employers in a calendar year 401(k) Plan. Since this plan is a multiple employer plan separate ADP tests have been prepared for each company in prior years. Company A will be acquiring Company B during 2004. Questions: Is the 410(b)(6)© transition period available in this situation? Can separate ADP tests be performed for each company for 2004 and 2005? Or does the fact that this is a single plan and not separate plans for each company preclude the use of the transition period? The closest analogy that I have considered is a situation where two unrelated employers sponsor separate plans with the plans merging on the date of the transaction. In that situation, I do not believe that the transition period is available and the adp testing for the merged plan for year of the transaction must consider employees of both employers (for at least the portion of the year after the transaction).

My understanding is that ESOPs can not be aggregated with Non ESOP plans and Non ESOP portions of plans for coverage and non discrimination testing with the exception of calculating the average benefits percentage test. A company sponsors an ESOP (actually an ESOP and a Money Purchase ESOP) and a Cash Balance Plan. It appears that the plans have been aggregated for general testing purposes for the Cash Balance Plan (since testing the benefits in the Cash Balance Plan alone does not resemble anything close to a passing test). I will be getting more information (such as what was submitted with the determination letter), however I do not believe that this is permitted according to the 410 and 401(a)(4) regs. Agreed?

Is this ESOP a Money Purchase Plan? If not, how was the 4.91% allocation arrived?

Assuming that the owner should receive an allocation under the provisions of the plan, then the contribution should be made. For 415 purposes, the contribution may be treated as an annual addition in the year made if it is made 30 days after the due date of the employer's tax return (§1.415-6(b)(7)(ii)). The amount may also be deductible in the following year. What is the plan sponsor's tax year?

ERISA Section 4045 authorizes the PBGC to recover the portion of lump sum amounts distributed in the 3 year period prior to distress termination that are greater than the life annuity that would have been paid if elected instead of the lump sum. Does the PBGC frequently use this authorization? The plan in question is a small plan (13 monthly retirees and 6 vested terms) that has offered lump sums for a long period of time. The vested term wanting a lump sum is not a decision maker with the plan sponsor (not an hce, owner, key, etc.). The lump sum is not being asked for in anticipation of a distress termination which may or may not occur in the next year. Any thoughts or experience would be appreciated. The current thought is to pay the lump sum but caveat it with a cite of ERISA Section 4045 indicated the PBGC ability to recover certain amounts.

I do not believe that you have a group under common control since neither dentist has a controlling interest (80% ownership) in the partnership. There may be an affiliated service group if the partnership and/or the corps. regularly perform services for the each other or are associated with the other in performing services for third parties. There are also some special rules related to the treatment of shared employees (determination of hours and compensation considered for the plans).

What is the ownership makeup of Corporation A and Corporation B? What will be the ownership makeup of Partnership C?

Corporation A sponsors Plan A (a 401(k) PSP). Corporation A is owned by equally by 4 MDs and has other employees. Plan A provides 415 max benefits to the MDs and signicant benefits to employees (assume 10% of comp.). Corporation B sponsors Plan B (a PSP). Corporation B is owned equally by 2 MDs (2 of the 4 owners of Corp. A) and has no other employees. Plan B provides 415 max benefits to the 2 MDs. The only overlapping employee/participants are the 2 owner/employees of Corp. B. Assume that the Plans are operated as if there is NOT an ASG. If it is later determined that there is an ASG, what are the potential issues and problems facing Plan A? Clearly, Plan B has coverage, discrimination, and 415 issues. But, what are the issues facing Plan A? It seems like Plan A has potential 415 issues. It may be possible to include coordinating language between the plans to indicate that any excess is attributable to Plan B. Additionally, Treas. Reg. §1.415-9(b)(3) indicates that under certain circumstances the employers could determine which plan is disqualified. Are there any other issues facing Plan A? Ideally, if it is later determined that there is an ASG and the issues cannot be corrected short of disqualification, the parties involved would like the result to be disqualification of Plan B, but not Plan A (older plan, higher balances, more participants, etc.). I am not looking for an answer as to whether this is an ASG but instead what will happen if it is determined to be in the future. The advice will be to seek a ruling on ASG status but I am considering the future if that route is not taken.

I agree with Blinky. Additionally, if a minimum 0.5% accrual is going to be provided after the offset, then what does the offset really accomplish? Wouldn't you get to the same place with a tiered DB or Cash Balance maximizing the executives and providing a 0.5% accrual to the others without any offset?

Thanks for the responses. The goal of the valuation (funding amount) isn't much of a concern at this point, I was just questioning the mechanics of a valuation under the circumstances. Blinky, considering your comments, it does seems like the last day valuation before final distributions makes the most sense.

There definitely are a number of situations where adding a db plan can greatly increase the owner contribution/benefits without significantly increasing the employee cost. I have seen some impressive results. Are there a lot of lower paid employees? I think a lot of the push towards floor offset plans in the past few years is the great cross testing results derived from the difference in converting a dc allocation at the 7.50% to 8.50% testing rate versus the growth of a cash balance allocation at the recent 417(e) interest rates (around 5%). However, after working with a number of these, I have come to believe that since the cross testing gateway allocations for db/dc plans generally require at least 7.50% of compensation contribution to nhce (between the db and dc), there is usually not that much additional benefit that a floor offset provides than does a regular cross testing db/dc arrangment. Additionally the floor offset has a significant amount of additional complications, such as: 1. IRS scrutiny of 401(a)(26) issues 2. Additional asset and contribution fluctuation concerns - Are the 401(k) Profit Sharing Plan assets trustee or individually directed? If individually directed, what is the db contribution going to be if the 401(k) Profit Sharing assets tank. It's a lot bigger issue if the db is offset than if it isn't. 3. Communication issues...telling a nhce participant that they have a db benefit but that it is really worth nothing (or very little) after the offset. Floor offsets can work great, but make sure that a regular add on db or cash balance doesn't work as well before taking on the headaches of a floor offset.

Plan terminates under standard termination on 1/15/03. All benefits are distributed by 10/15/03. Plan is not fully funded, but substantial owner elects to receive a lesser allocation of assets to enable all other benefits to be paid. Prior years method is EAN and valuation date is 12/31. Rev. Proc. 2000-40 Sec. 6.01(5) indicates that terminated plans can only rely on the Rev. Proc. for automatic changes described in Sec. 4.02. Sec. 4.02 permits a valuation date change to the first day of plan year if assets are greater than present value of benefits as of the date of termination. Question: Is automatic approval available for a change to first day of year (1/1) in this situation? It seems it would not be since assets are less than pvab as of termination date, however does this change considering the treatment of substantial owner's benefit under standard termination? or Is a valuation date 12/31 permitted after the complete distribution of benefits (i.e. 0 assets, 0 liabilities, etc.)?

Question about 404(a)(1)(D)(ii) - Would benefit increases due to EGTRRA amendments be considered as a plan amendment increasing benefits for HCE? I believe that IRS has previously indicated in conferences that cost of living increases in 415 and 401(a)(17) limits are not considered amendments for this purpose, but I am not sure about the EGTRRA law changes and amendments for those changes.

Does the Plan Document specifically indicate that lump sums are calculated based upon nearest age as of 1/1? A client (terminated plan) was recently audited by PBGC and requested the recalculation of lump sums based upon nearest age at the date the lump sum was paid. The client was requested to pay additional amounts plus interest on these lump sums. The Plan had originally paid all lump sums based upon PVABs calculated at 1/1 using nearest age. The Plan Document defined age as nearest age. The PBGC cited: 1. PBGC Reg §4041.28©(2) - lump sums calculated as of annuity starting date. 2. IRC §417(f)(2)(A) and §1.401(a)-20 Q & A 10 - annuity starting date is day lump sum is paid.