DB Offset Plan

[Blinky the 3-eyed Fish]

First, I would like to reference a portion of Rev. Rul. 76-259 regarding offset plans.

"A separate issued raised by the arrangement considered in this Revenue Ruling is the method of determining whether the accrued benefit of a defined benefit plan in such an arrangement satisfies the requirements of section 411(b)(1) of the Code. Such accrued benefit will be deemed to satisfy the requirements of section411(b)(1) of the Code if each of the following two conditions is satisfied:

(1) the accrued benefit under the defined benefit plan determined without regard to the offset derived from the profit-sharing plan satisfies the requirements of section 411(b)(1) of the Code; and

(2) the offset to the benefit otherwise payable is equal to the amount deemed provided on the determination date by the vested portion of the account balance in the profit-sharing plan (plus the additional amount that would have been provided by any prior distribution from the account balance).

The requirements of the second condition in the preceding sentence will not fail to be satisfied merely because the defined benefit plan states that only a specified portion of the vested account balance will be the offset. Thus, for example, in the case of a contributory profit-sharing plan, the defined benefit plan may specify that the offset is limited to the vested portion of the account balance attributable to employer contributions as determined under the profit-sharing plan."

What I am trying to determine is if it's allowable to offset DB benefits each year by the current year allocations in a DC plan, not the typical offset using the account balance. It seems to me that the first sentence of the fourth paragraph I copied alludes to this being permissible. What do you think?

[AndyH]

Do you mean current allocations without regard to investment return, i.e. no revaluing of the balance each year? If so, I don't think your cite allows that; it's all or a portion of the account balance, which means adjusted for investment return. But maybe I'm mis-reading your question. It is late TGIF after all.

[Guest tcv]

I see how you say you think that sentence covers it, but I think it is a stretch. I am not convinced that it is allowed. You are trying to offset only the annual DB accrual by the equivalent of the DC plan contribution. It just doesn't fit as an offset in my book.

[Blinky the 3-eyed Fish]

Now keep in mind you are allowed to offset by the account balance attributable to contributions made after a certain date (i.e. account balance attributable to PS contributions made after 1/1/2003). In effect, by offsetting each year, you are just moving up the date.

How about them apples? Any relevance?

[Everett Moreland]

I looked at this a few years ago and concluded that it's probably not allowable. The ruling seems to assume there is only one "determination date," not a determination date for each year. If there is only one determination date, the offset DB benefit can be conceived of as accruing over a period of years in the same manner as the DB benefit accrues before the offset. If there is a separate determination date for each year, the offset DB benefit cannot be conceived of as accruing in the same manner as before the offset.

[Blinky the 3-eyed Fish]

Would you change your answer if the DB plan was a cash balance plan?

[Everett Moreland]

I haven't thought about how cash balance plans satisfy 411(b)(1), so don't have a useful response to your question.

[Blinky the 3-eyed Fish]

Actually, I have a determination letter on a cash balance plan that is offset by each year's DC contribution, including a ruling on the demo 6. However, I only have one and am not convinced that it is okay to have this formula (IRS error?) but want to use it again.

Anyone else? (Mike Preston, this is your official call to chime in.)

P.S. I agree with the analysis provide above for a non-cash balance plan.

[Mike Preston]

I am officially on the sidelines on this one until I return from vacation in a couple of weeks. The answer (if there indeed is an answer) involves looking up more cross-references than I have time for at the moment.

However, in brief, should you have a letter, I think you have 7805(b) relief. Therefore, should there be any doubt, get a letter upon adoption. Or at least attempt to do so, letting the client know, of course, that the IRS may not like it, notwithstanding the fact that they evidently have "liked" it in the past.

[Blinky the 3-eyed Fish]

You mean you aren't going to take your laptop and reference materials with you?

[Mike Preston]

Sure I am, I just won't interrupt the vacation for this particular topic!

[Blinky the 3-eyed Fish]

Well then, I hope it rains.

[Mike Preston]

ROF,L.

[Blinky the 3-eyed Fish]

I'm sorry. I don't speak jive.

[Mike Preston]

R(olling) O(n the) F(loor,) L(aughing)

[AndyH]

Mike, I lost the cite reference you gave me way back with your acronyms. Got a new one? I figured you may have had WOW added to it. Not that I want to keep you from vacation though.

[Mike Preston]

Darn if I remember. Easy to find, though. Just fire up Google and enter "acronyms emoticons" and you can find lots of lists. Here's one:

http://www.pb.org/emoticon.html

[Blinky the 3-eyed Fish]

I am officially on the sidelines on this one until I return from vacation in a couple of weeks. The answer (if there indeed is an answer) involves looking up more cross-references than I have time for at the moment.

Mike, I am revising this because of your successful return from vacation. I am still in the dark on this.

[Mike Preston]

As I believe everybody most likely is. I think the "fourth paragraph" you cite in the original message is intended to allow offsets of only a portion of the DC plan, but the implication is that the offset will be inclusive of earnings on whatever portion is being used as an offset.

Maybe it is a facts and circumstances analysis that would allow what you want whenever the DC plan has positive earnings in all years, but results in extra testing in years where the DC plan has negative earnings. Maybe a maximum offset equal to the actual account balance? Consider the DC plan that has an initial contribution of 5% of pay and the earnings in the first year are negative. Your desired "offset" exceeds the DC account balance. That can't satisfy the rules, can it?

I seem to recall that there is an exception available once an amount that would be used as an offset is distributed. In that case, the IRS allows the use of a theoretical continuation of earnings. Such as the case where a plan is offset by another plan but the other plan is terminated and paid out. In that case, the offset is fixed at the amount paid out increased with theoretical interest. This would be the functional equivalent to what takes place when a participant terminates employment and invades the DC balance but is not entitled to an annuity until a later date.

To be honest, I can't think of any reason why the offset would necessarily require an increase for positive earnings, but I don't think you can use an offset that ignores negative earnings.

But try as I might, I can't find anything, yet, on the issue that gives me any comfort at all.

So I'm back to my "get a letter from the IRS" on anything such as this.

Sorry I couldn't find anything more definitive.

[Blinky the 3-eyed Fish]

Thanks for trying.