Conversion of DC Plan to a DB

[Guest merlin]

I have a client who currently sponsors a target benefit plan. His financial planner has asked for a proposal to replace it with a db plan. If I start the db plan anew I have to start the 10-year 415 phase-in at the same time. But if I convert the tb plan into a db (as permitted by the Corbel db volume submitter document), it would seem that I could count prior participation toward the phase-in. Anyone agree or disagree?

Are there any other issues to be concerned about? What about non-discrimination? Would I now have a db/dc combo that must pass the general test? Or would the conversion date be a fresh-start date and I can look at just the db plan going forward as either a safe harbor or subject to the general test on a stand-alone basis?

Thanks for any thoughts.

[Effen]

415(b)(5) is very clear that you must have 10 years of "participation in the defined benefit plan of the employer". A target plan is not a defined benefit plan and therefore can not be used to satisify the phase in.

Also, I don't believe that you are allowed to "convert" a defined contribution plan into a defined benefit plan. The plan's can be merged, but the defined benefit plan would be treated as a new plan and the target assets would be rollover assets. I think there might be some old Rev. Rulings from the mid 80's that addressed this.

You would only have a db/dc combo for testing if the participants are earning benefits under both plans. Just because you had a dc plan in the past, doesn't mean that you have a db/dc combo for testing.

I would treat the db plan as a new plan and ignore the previous target plan.

[Guest merlin]

Effen,

I always knew you coudn't convert a db plan into a dc, and I always assumed it was the same going in the other direction. But one of the other folks in the office pointed me to the Corbel db volume submitter checklist, and there is an item asking if this is a conversion from a dc plan. I have a call into Corbel for further information. But assuming that it could be done, maybe the application of 415b5 would depend on the treatment of the prior tb assets. If you account for them separately from the db,i.e. to provide add'l benefits,

you have a separate db plan and the phase-in starts with the effective date of the change. If you use the tb assets as an offset, then maybe you could consider the whole entity as one plan and aggregate the participation. Just guessing.

The whole thing may be moot anyway. I did the db proposal on a stand-alone basis and the cost of the plan is > $185000, of which 180000 is for the dr. Quite a jump from his tb allocation.

[david rigby]

Not sure I agree. I think you can convert a DB to DC, or vice versa. See 1.414(l)-1.

http://www.access.gpo.gov/nara/cfr/cfrhtml...26cfrv5_00.html

Subsection (lower case L) reads “In the case of a merger of a defined benefit plan with a defined contribution plan, one of the plans before the merger should be converted into the other type of plan…”

[AndyH]

The "conversion" of a DB into a DC is the termination of the DB and the establishment of a new DC. That is clear, IMO.

Merlin, I researched your 415 question years ago, but I cannot recall the conclusion I reached.

If it helps, I remember Jim Holland's fairly recent response to the question of whether you aggregate years of participation if you were in a db plan, it terminated, and you were in another (of the same employer). His response was that since the benefits from each plan must be aggregated for 415, the years of participation should also be aggregated. In your scenario, you would have had a 415(e) aggregation, but now you have none. So does Jim Holland's logic imply that the answer is no? Maybe. It is at least an argument against aggregating TB and DB years of participation.

[Guest merlin]

pax, what if there is no merger? Andy's opinion is what I remember hearing. Of course I can't remember the source or the venue.

Andy, Jim Holland's comment about aggregating benefits/participation was what I had in mind when I guessd at the application of 415b5. Another 415 mystery. What a surprise. Whose logic prevails? Who knows? The Shadow? More likely Blinky or Mike Preston.

[Effen]

A target benefit plan is NOT a defined benefit plan!

A merger, termination, transfer, conversion, explosion or whatever doesn't change that. I don't see how anyone can reasonably argue that prior participation in a target benefit plan could in any way be considered defined benefit participation.

[david rigby]

This may not be "all inclusive" in analysis, but if a plan can be converted prior to a merger, then it can be converted without a merger.

[IRC401]

Personally, I don't think that conversions from DC to DB should be permitted, but the IRS has been accepting them for years. I am under the impression that BankAmerica converted over $1 billion of 401(k) money into a cash balance plan about five years agoe, and the IRS didn't object. [ The IRS reg. permitting the conversion of a DB plan into a DC plan became obsolete with SEPPA of 1986.]

The IRS is only one agency that deals with DB plans. I have no idea what the DoL or PBGC thinks of conversions.

I have this weakness of looking at the economic reality of a transaction. When a DC plan is converted into a DB plan, the participants are, in effect, buying annuity contracts from the DB plan, which is functioning as an unlicensed insurance company. That doesn't appear to bother anyone else.

In addition, a fiduciary who previously had a duty to (prudently) maximize the return on the account in the DC plan, is now, in effect, engaging in a transaction with plan assets from which it can benefit. That appears to me to be an old fashioned conflict of interest, but there is at least one Circuit Court (and some lawyers and actuaries and accountants) who don't think that it is a prohibited transaction.

Finally, does anyone have any idea what happens if the PBGC takes over the plan? If a sponsor goes bankrupt with an underfunded DB plan that contains former DC money that would have been protected if it were still in the DC plan, and if the PBGC doesn't pick up the tab to the participants' content, is anyone on the hook ???