415 Limit & Segregated Account

[JAY21]

Client (owner) wants to segregate his account in DB plan and he is beyond NRA and plan allows for post-NRA distributions. He does not want to terminate plan due to various illiquid investments in plan that an IRA would not easily hold. Is there any legitimate argument that I can apply 415 limit check only at time of segregation vs. at future distribution date (from segregated account), or must I apply the 415 limit check even on the segregated account when it eventually is paid. I have some concerns that the trust investments might grow enough to exceed his 415 limit sometime down the road.

[Kirk Maldonado]

I think that issue was addressed in the preamble to the final Section 415 regulations that were issued in the early 1980s.

[JAY21]

Thank for the cite Kirk. It appears the preamble to 415 regs state that 415 limits must be applied at ALL times and they clearly address that converting a DB benefit into a segregated account does not make it a DC like account for 415 purposes, and therefore DB 415 limits will still apply to the segregated account. I'll need to monitor 415 limits on the segregated account if client decides to go this route. Thanks for the help.

[Blinky the 3-eyed Fish]

I think some would argue differently if a 414(k) election is made. I am not sure I am one to argue though.

[Kirk Maldonado]

You would have to make a lot of procedural and substantive changes if you wanted to make a valid claim that you have converted the defined benefit plan into a Section 414(k) plan.

[Blinky the 3-eyed Fish]

Not really, as 414(k) language is often written into DB plan documents. Again though, I am not arguing the validity.

[Lynn Campbell]

Would it be OK to terminate the DB Plan, have him sign consent and QJSA forms etc. as applicable and then roll the funds to a new profit sharing plan?? My understanding is that the PS Plan would not need to worry about the 415 limit on the rollover account...

[David MacLennan]

Why worry about what IRS people have said, or what the preamble says, if the document has the needed provisions and a favorable determination letter has been issued? For example, Datair DB GUST prototypes have language that explicitly states the DB 415 limits don't apply to the 414k account, and the Datair prototypes are fairly widely used. And, how can 414k be denied by the regulation preamble? Perhaps there is something I am missing. I think you would have problems, and the preamble would apply, only if the 414k account had some kind of DB guarantee attached (I know the TRA86 PPD prototypes had a guarantee on the 414k account, stating that it was the greater of the 414k and the DB AB). One way to look at the preamble is to note that it never mentions 414k, and note the language "is not converted into a defined contribution plan MERELY because the account is segregated" - I would agree with the preamble that if your document simply allows for the segregated account at NRA and doesn't disavow the DB guarantee, or invoke the DC limits, or reference 414k, then DB 415 limits should apply. The PS rollover Lynn mentioned avoids these issues, but why do that when you can take a stand on 414k!

[JAY21]

Good points Dave. That's interesting that Datair's prototypes have explicit language stating DB 415 limits don't apply. It would appear that Datair has researched the issue and taken a position on this w/supporting language. We don't use Datair, but I'll have to check out the doc language more thoroughly to see there is anything comparable in our volume submitter docs under the 414k langauge.

[Effen]

It would appear that Datair has researched the issue and taken a position on this w/supporting language.

You know what they say about assuming things. Personally, I find the canned documents contain some of the worse language around. The problems the canned documents create are not usually discovered until the plain vanilla client needs a little chocolate sauce put on. Then they realize all the money they saved by going with a cheap document may have just cost them plenty.

[mwyatt]

A little example of "saving" money. Client running a pretty basic DB and PS plan left our firm in 92, and had an insurance broker restate the plan documents using a standardized prototype. Of course this was a small client who was always going to be top heavy. Only problem was that the prototypes in question automatically defaulted that the TH minimum would be provided in BOTH plans, regardless...

This little "savings" ended up in about a $70k hit to the DB plan...

[Blinky the 3-eyed Fish]

To answer Lynn's question, a rollover may not be available if the distribution restrictions apply for him being a top 25 paid HCE.

[mwyatt]

Of course, one must follow the logic that if the early termination restrictions kick in (since the plan is underfunded), then this discussion is moot.

Lynn, what is the funding status of this plan? Are you dealing with excess assets (remember that concept from the 90s folks) or are you just trying to insure that the client won't face that in the future? If so, then the concept of a followup PS plan would be the way to go.

[Lynn Campbell]

mwyatt, I do not have this situation at the moment, I was just making a suggestion. Just for information, though - many of my DB Plans are 1 person plans, so would the funding status be relevant for these plans?

[mwyatt]

Hey Lynn:

If a one-person plan, then definitely establishing a follow up PS plan would be the answer to your solution (since the same assets could flow over to the PS plan). You would need to terminate the DB plan, but your client wouldn't face the problems of trying to roll esoteric assets to the IRA. You should make sure though that you have a defensible market value for said assets, to avoid understating of values.