Salary Deferral DB Plan?

[Christine Roberts]

I seem to recall hearing at a recent ASPA/IRS conference that various proposals were pending to develop a defined benefit plan with a salary deferral feature. Is this true?

[david rigby]

http://www.benefitslink.com/mbmirror/13841.html

[GBurns]

I am also trying to find out if such plans have actually been developed and are available, but there seems to be nothing beyond this reference in the ASPA testimony.

[Erik Read]

Holy Cow Batman - a proposal for a CODA inside a Pension Plan - what a concept (Thrift).... only issue I see is how do you now account for the individual direction inside a plan that has not in the past been able to do that?

Ought to prove very interesting, and if ASPA is starting the rumor mill, then we may just see the result being something we can all really work with and sell!

Keep this string alive, and someone, please call ASPA for details.

[mbozek]

ERead-- There are cash balance plans that allow employees to select investments - Bank of America adopted such a plan in 1998. The employees can chose from 9 investments (the same as the 401(k) plan). ASPA is a little behind the curve-- they are proposing something called a DB-k plan but it won't go anywhere because of (1) revenue loss concerns and (2) policy issues because it would be utilized by closely held businesses to benefit the owners by paying them more comp to deduct as a pension contribution. If it is made revenue neutral, i.e., contributions to a DB-k and 401(K) can't exceed the 402(g) limits, why bother. A participant can always buy an annuity with a lump sum distribution. Last time I looked salary reduction in retirement plans is only available under 414(h)(2) for public employees.

[Erik Read]

Thanks mbozek - I new about the Cash Bal plans, and agree with your other points, part of my message was "sarcastic" - maybe that wasn't so clear.

I think it'll prove interesting to see what they come up with though. New design always interests me.

[GBurns]

mbozek,

What revenue loss concerns and by whom?

If you mean The Treasury Dept (the Govt) all I can say is that that is the same thing I heard when section 125 plans and 401(k) plans came out.

The 401(k) loss concerns were allayed by the realization that the deferral would eventually be taxed for a greater yield because of growth, provided the investments did grow. The section 125 concerns wre never allayed and that is probably why we still have "merely" Proposed Regulations that have not been able to stand up in the Courts, and which has now been aggravated by the Federal Gov. finally, after 25 years, putting in their 125 Cafeteria Plan.

[mbozek]

By the govt obviously--- Since the Gov is going into a deficit condition due to the events of the last year (and drawing down on SS trust funds) there is no way Congress will approve additional incentives to reduce income taxes for high income persons who got their just rewards in last years tax law. Second under Congressional Budget rules all proposed tax legislation is "scored" by the Joint Committe on Taxation to determine its revenue gain /loss over the current year and the next 9 years. Any revenue gain beyond ten years is ignored as too speculative to be calculated ( Remember 1 year ago the govt was going to have a $5.5T surplus over the next 10 years).

[Theresa Lynn]

Not knowing more about the proposal, this reminds me of the old floor-offset arrangements using 401(k) plans to provide an offset against defined benefit plan promised benefits, before the nondiscrimination rules were amended to provide that you cannot condition another benefit on a person making deferrals.

Is the old FOPA idea being resurrected?

[mbozek]

Floor offset plans still exist only now they use ESOP or MP benefits converted to an annuity as the offset to the DB plan benefit.

[Kirk Maldonado]

mbozek:

Doesn't Treasury Regulation Section 54.4975-11(e)(1) pose a difficult problem for ESOPs that are part of a floor/offset arrangement?

[mbozek]

According to news reports Enron had a floor offset arrangement in which DB benefits were reduced by the value of annuity benefits derived from the value of Enron Stock.

[Kirk Maldonado]

I seem to recall reports that Enron's floor/offset arrangement was so ancient that it was grandfathered.

[mbozek]

That's not much comfort to the 20,000 or so Enron employees who had their retirement benefits offset by the value of the Enron stock as it was in 1998. I dont think Enron is the only employer with a grandfathered ESOP plan that can be adapted in a floor offset plan. Besides I think my post said "floor offset plans still exist".

[Kirk Maldonado]

You are right, that is what you said.

However, I was concerned that people might not pick up that nuance, and might assume that those types of floor/offset plan arrangements were still a viable choice.

[mbozek]

Employers are not limited to offsetting DB benefits from qualified plans. Db benefits may also be offset for payments from nonqualified plans such as severance payments, life insurance benefits and even payments received for involuntary separation of US citizen from employment under foreign law. The only restriction on offsets is that the payment must be attributable to some form of compensation, i.e., cant be a payment for personal injuries.