Rollover into a DB Plan

[Gary]

Say a one person plan has 100,000 rolled into the plan from a prior company 401-k plan at its inception. Clearly the DB funding req. would not incorporate the rolled over amount as part of plan assets.

The question is in future years how might you determine what the value of that rolled over amount is for val purposes if such amount is integrated with all investments?

Any guidance out there?

Thanks.

[Effen]

Seems to me any reasonable method would be fine. Some sort of time-weighted rate of return.

That said, why would someone want to do this? Does the db document account for rollovers? Does the employer want the hassle of tracking them? Is the participant willing to give up all investment control? Seems a little strange, unless it's the owner who is doing it.

[Kirk Maldonado]

This is why most DB plans don't accept rollovers.

[mbozek]

annual benefit attributable to rollovers is determined under reasonable actuarial assumptions. Reg. 1.415-3(b)(1)(iii). Only reason to rollover money to DB plan is to provide for guaranteed income stream at a rate more favorable than ins. co.

[Blinky the 3-eyed Fish]

Mbozek, your analysis of the only reason is for a very limited circumstance. That cite applies to a rollover and the participant takes an annuity distribution. But we all know that 99.99% of participants in plans that allow for lump sums take the lump sum.

The true reasons a participant would rollover into a DB plan are many. We could be talking about the owner of the company. The DB plan could allow for a participant to direct their rollover investment while the general DB assets remain trustee directed. The DB plan could have a professional money manager that the participant would have to manage his rollover. The participant doesn't know a put from a shotput. The participant is as lazy as a sloth. I could go on but need to get on with my life.

[mwyatt]

Well, how about a one-man/small company DB plan that had sponsored a PS/MP plan in the past, but recently set up a DB plan to take advantage of higher EGTRRA limits/repeal of 415(e)? Rather than paying for administration on prior DC plans, he rolls his balances into the new DB plan (and hence only one 5500 filing). Also, could be issues where rather than having prior plan money in an IRA, participant wants to keep in qualified plan.

Easiest way (obviously) is for the rollover money to go into separate accounts.

[mbozek]

Yo Blink: I never said that that there were no other reasons for putting rollover assets in a DB plan but the there are few good reasons to put rollover assets in a DB plan because of investment issues as well as cost of valuation and accounting for non DB assets which dont exist in an IRA. Most fund families and custodians waive fees if assets exceed 50k to 100k. Also IRAs are not subject to 5500 reporting. Finally investment mgrs will accept IRA assets for mangement along with Q plan and base the mgt fee on the aggregate amount. In a 1 participant plan there will be headaches in determining what is the amount of the assets which are attributable to the rollover and how much represents the PV of the DB benefits and what is the surplus or deficit. Perhaps the reason to commingle rollover assets in a DB plan is to fool the IRS when it comes time to cash out the DB benefits.

[Blinky the 3-eyed Fish]

Only reason to rollover money to DB plan is to provide for guaranteed income stream at a rate more favorable than ins. co.

Sorry, I must have taken this too literally.

[Mike Preston]

In a 1 participant plan there will be headaches in determining what is the amount of the assets which are attributable to the rollover and how much represents the PV of the DB benefits and what is the surplus or deficit. Perhaps the reason to commingle rollover assets in a DB plan is to fool the IRS when it comes time to cash out the DB benefits.

Neither is an accurate statement, unless the TPA involved is incompetent.

[Belgarath]

I'll throw in another reason, which isn't uncommon in the small business marketplace. In many states, IRA protection in the event of bankruptcy or lawsuits is limited. If the money is in a DB plan, then there is generally ERISA protection. (I say generally because there is constant sniping at the one person plans) This can be a very big motivation for some folks.

[AndyH]

Right, Belgarath. I was wondering why nobody else mentioned that.

If in fact such protection is legit, and we all know there is some uncertainty about that, I think it's the only decent reason to consider doing this.

[mbozek]

B: Under existing Dol regs and ct decisions, a plan that only has the owner and spouse as participants is not subject to ERISA and assets can be claimed by creditors under st. law. See cases in Pension Answer Book, 2001, Q 4:25. The uncertainty exists in plans which covers both owners and non owner employees as to whether the owner's benefits are protected from creditors under ERISA. The US Supreme ct. will hear a case this term that will decide this issue. I am unaware of any case that has applied ERISA protection from creditors to a non ERISA plan. The only protections from creditors are those that exist under st. law.

[IRC401]

Suppose that someone makes a rollover from a DC plan to a DB plans and that the rolled over amount is converted into a DB benefit and that the employer goes bankrupt at a time that the DB plan is underfunded, does the benefit attributable to the rolled over amount count aginst the PBGC guaranteed amount?

[Mike Preston]

If the PBGC is paying it out, I doubt that they would reach any other conclusions than it does, indeed, count against the maximum. How are benefits partially funded with employee contributions treated? I haven't looked it up, but I don't think there is an exception for employee contributions, and that is precisely what this effectively is. Just part of the decision making process before one take's advantage of the employer's "offer."

[AndyH]

What exactly does "that the rolled over amount is converted into a DB benefit " mean? I would think the answer to the question depends upon the terms of the plan.

[mbozek]

Bank of America did something similar in 1998 when it allowed employees to transfer 401(k) assets to CB plan which were treated as accrued benefits protected by the cutback rule.

[Kirk Maldonado]

Wouldn't the answer be governed by IRC Section 411©? It would seem hard, but not impossible, for the PBGC to impose a different approach for determining the portion of the benefit attributable to employee contributions.