Double Reduction in 415 Limit?

[Dougsbpc]

My question has to do with the treatment of the 415 dollar limit when a prior DB existed.

Supose a one participant DB was established with a NRA of 65. Also, the only participant was 55 when the plan started, always had more than $200k in salary and accrued the maximum benefit under the plan. He participated 5 years and then terminated the plan at age 60 and distributed benefits.

Suppose he then immediately adopted a new DB with a NRA of 65 and wanted to have the maximum benefits. Does he get penalized on the 415 dollar limit simply because he had a prior plan?

We are told that we must subtract the prior plan accrued benefit from the 415 dollar limit and then accrue the benefits over 10 years in the new plan without any consideration of participation in the prior plan. If this is the case, here are his maximum benefits under the new plan:

415 dollar limit: $13,333

Less prior plan benefit: -$6,666

Adjusted limit: $6,667

x 5/10

Max proj benefit $3,333

In this case he will have participated 10 years under two plans but will only be able to receive $10,000......a 25% penalty so to speak.

I've looked under 415(b) and the regs and cant seem to find anything on point.

Anyone have any experience with this?

Thanks much.

[flosfur]

That is not my understanding. He gets the credit for participation under the prior DB plan if the prior DB benefits are to be offset (which must be done if it is a predecessor DB plan, which is the case in your example).

It is a continuation of the predecessor plan with in-service distribution (so to speak) & a break in participation (so to speak), if the successor plan started some years after the predecessor DB plan.

That is how I have always understood & treated it.

[Dougsbpc]

Thanks for the reply Flosfur.

reg section 1.415-8 on combining and aggregating plans indicates that for purposes of applying the limitations of section 410(b), all qualified defined benefit plans (without regard to whether a plan has been terminated) ever maintained by the employer will be treated as one defined benefit plan. We interpret that to include all of 415(b) including subparagraph 5 which explains the application of the 1/10th reduction for the dollar limit. Our actuary disagrees and believes the 1/10th reduction only considers years of participation under the current plan. He could be correct but has not been able to provide us with anything that would indicate we cannot consider participation under the prior plan.

[MGB]

The decision of what the correct benefits are lie with the plan administrator, not the actuary. The actuary has no authority here, other than to determine the proper funding calculation, given the benefits provided by the plan. (This is not actuary-bashing, I am one.)

[flosfur]

Doug:

You should be thankful your actuary did not go one step further and apply the 1/10th rule first and then subtract the accrued benefit under the prior DB. In that case, your client would get nothing after 5 years, Vis:

$Max limit after 5 YOP in the new plan = $6,667 (5/10 * 13,333), which is equal to the accrued under the prior DB - hence zero $Max under the new DB plan.

[flosfur]

MGB:

Do you mean to say you d=o and will certify funding and other calculations (such a maximum lump sum payable) and the other actuaries should do the same!?

An actuary is on the hook for what he/she certifies, so he/she better make sure that the computed benefits do not violate the min/max benefit rules under the law!

Please, please, reconsider your statement and correct it (may be retract it). Otherwise you are going to start a battle between the actuaries and the administrators, especially the small plan TPAs.

I hope your E & O insurer doesn’t get the wind your statement.

[Blinky the 3-eyed Fish]

Who is this actuary? I want a name so he can be stoned by a hoard of pocket protectors. Show him this discussion, put your finger in his face and tell him he is WRONG!

[Dougsbpc]

That's funny.

Seems I cannot conclusively prove to him that we count prior years of participation and he cannot conclusively prove to me that we cannot. What a conundrum hah? Problem is he signs the schedule B.

[MGB]

flosfur,

Why are actuaries "certifying" maximum lump sums available? They have no authority to do so.

I don't understand your question regarding "d=o".

Whatever the actuary is certifying to for funding purposes (which is the only thing the actuary has jurisdiction over) should not constrain the plan administrator from doing their job. It is the plan administrator that certifies the benefits payable from a plan.

[Dougsbpc]

MGB,

As an actuary, do you agree that prior years of participation are counted under the new plan in this case?

[flosfur]

MGB:

Sorry, there was a typo in the first paragraph - it should have read:

"Do you mean to say you do and will certify funding and other calculations (such as maximum lump sum payable) based on the benefits computed by an administrator and the other actuaries should do the same !?"

(When I was drafting the message I kept losing the message in the process of moving the mouse. After it happened the third/fourth time, I gave up on fixing it and sent it without reviewing it).

It might be presumptuous of me - I guess you must not be working in the small plan environment where an actuary is invariably asked to compute lump sums payable to terminating participants as well as payouts on plan terminations (where the S415 maximum lump sum issue may arise for owners and other highly paid employees) .

Although in the large DB plans environment, generally the computation of lump sum payable is not a common occurrence, in my experience, from time to time actuaries are asked by the plan administrators to determine the economic value of pension benefits in divorce cases etc.

So it is not a question of jurisdiction but rather what an actuary is asked to do (and hence certify, albeit not on some legal form, but by signing the correspondence containing the present values).

As far for funding, when contribution deduction is questioned by the IRS because it was based on projected benefits which exceeded the S415 limits, who is going to be on the hook ultimately – the actuary or the administrator? I don’t think the actuary will be able to walk away from it by saying, I relied on the administrator’s interpretation of the S415 rules!! An actuary better know the S415 rules him/her self!

[MGB]

flosfur,

The setup of the original question was completely in the context of "we are being told" how to calculate a benefit from a plan, given a participant terminating and needing a calculation. Nowhere was funding discussed. That implied to me the issue was what benefit the participant can receive. The actuary can obviously provide advice, but it is the plan administrator that is responsible. Any legal obligation here is completely in the realm of the plan administrator.

[Dougsbpc]

MGB

I can see how you would have thought my original question was in regard to calculating a distribution, which will eventually happen when he winds up the plan. Perhaps I should have described it better.

We are a small TPA firm and do not have an in-house actuary. In this case, we mentioned that the annual deductible contribution would be approximately $140,000. When we sent the valuation to our actuary, he indicated the employer would be restricted to a monthly benefit of only $3,333 per month under the new plan, and the resulting annual contribution would be approximately $70,000. He based his explanation on the fact that benefits must be accrued over 10 years in the new plan and that we could not consider any of his participation under the prior plan.

It is true that we always accept full responsibility for the plan. In this case the actuary believes the plan would eventually be over-funded because the participant could only be paid a monthly benefit of $3,333 per month.

[Dougsbpc]

I would like to thank everyone for jumping in on this. It has been extremely helpful.

[AndyH]

Dougsbpc, adding my two cents: You should follow Blinky's advice.

Not that hearsay is authoritative, but Jim Holland said verbally (and it could also be in print-I haven't looked) as clear as daylight at last year's ASPA national conference that since you are aggregating the benefits, you aggregate the years of participation. Period.

[Blinky the 3-eyed Fish]

Well, don't follow it literally. That wouldn't lead to very good relations with this person, especially if you throw objects at him.

[Guest merlin]

I can corroborate Andy's recollection of Jim Holland's comments. Do two hearsays make a certainty? Probably not, but just in case they don't, look at the 415 audit guidelines, part III.G. "For purposes of testing the limtatation on benefits, all defined benefit plans (whether or no terminated) are treated as one plan". If you have to aggregate the benfits you also get to aggregate the participation.

[MGB]

For those that are not old-timers, a little historical perspective is in order. Under Notice 89-45, each change in benefit structure had to apply the ten year participation requirement separately (if I recall, the IRS felt this way prior to the issuance of the Notice, too). For example, if the plan were amended to increase the benefit 20%, only 2% of that increase could be recognized each year in the future. If a participant already had any years of participation prior to the amendment, that is irrelevant.

If a plan terminated and then a new one was later started, that would be considered a change in benefit structure that required a new ten-year phase-in.

Following the issuance of the 401(a)(4) nondiscrimination regulations, the IRS felt that these regulations' application to plan amendments was sufficient to "accomplish the statutory purposes of Section 415(b)(5)(D)." So, they then issued Rev. Proc. 92-42 rescinding the phase-in requirement for changes in benefit structure.

Holland and others are basing their comments on the logic of Rev. Proc. 92-42. There is no longer a phase-in required on changes in benefit structure; therefore, all participation under all plans is appropriate as is done with the limit itself. Obviously, the Rev. Proc. doesn't go through every example (e.g., a terminated plan and a new plan) of the application of the phase-in, and shouldn't need to in order for the logic to apply.

[flosfur]

MGB - the Notice 89-45 did not phase in the actual benefit formula but rather restricted the benefit accrual in any given year to 1/10th of he $Max which is not the same as 1/10th of the increase under the plan benefit formula (20% in your example).

Assume $Max of $90k and a partipant with 9 YsOP has an accrued benefit of only $60k under the existing benefit formula.

The benefit formula is being increased so that it produces an accrued benefit of $90k or more after 10 YsOP. The Notice 89-45 stated that the accrued benefit after 10 YsOP cannot exceed $69k ($60k plus 1/10th of $90k), after 11 years it cannot exceed $78k and so on.