DB Plan for Participant Over 70 1/2

[four01kman]

A long-time client has asked whether a defined benefit plan can be established for him and his partner. He is age 72, partner is age 68. They have had a SIMPLE Plan. Can we "terminate" and "freeze" the SIMPLE and create a new DB with a "normal" retirement age of the later of (a) age 65 and (b) 5 years of participation? If so, what issues should we be aware of? (other than ending a question with a preposition)

[MGB]

I don't know anything about SIMPLE plans, so I won't guess at those qustions.

Why are you asking about using 65&5? You could define NRA as anything you want to accomplish whatever you want. There are no restrictions on what the NRA may be. So, obviously the answer to the question is yes. But the real question is "what are you trying to accomplish?"

[David MacLennan]

One issue would be that RMD's start in the year age 70.5 is attained - client should be aware of this. The RMD calculation (final regs are still pending) for a DB plan is based on the benefit, not the assets, so it is important the benefit formula is designed so that the benefit value as much as possible accrues over time in step with the assets. That is just good plan design in general.

Another possible issue is the length of time the plan would be in effect, minimum 3-5 years being a common rule of thumb. However, based on my experience this concern is often overstated and should not deter a client.

If they are funding at the 100% limit, overfunding can be more of a concern, because in that case the lump-sum 415 limit value goes down 3% or so each year, due to increasing age and decreasing value of an annuity payable at that age. So, you must be careful in selecting a funding target and then terminate the plan in a timely fashion, and watch the assets carefully.

[FAPInJax]

You may want to consider putting a cliff vesting schedule in the plan which would eliminate the minimum distributions (no vested benefit) at least for some period of time.

[four01kman]

The object here is to maximize contributions over the next 5 years. There shouldn't be an RMD problem because no benefits are available until NRD is reached (5 years participation). Thanks for the input.

[WDIK]

I think that RMD's are calculated based on the present value of the vested accrued benefit as of the prior valuation date, not when the benefit becomes available. Hence FrankPrager's very good suggestion.

[david rigby]

Correct. NRD not relevant, but vesting % is relevant.

[MGB]

Obviously, if the number of years to NRD is less than the number of years in the vesting schedule, then the NRD does become important. 100% vesting at NRD, regardless of schedule.