DB Plan restoral?

[No Name]

Client had a one man sole prop DB Plan for 8 years. The benefit was less than the maximum under 415. He retired at age 65 and the plan was terminated 12/31/03. The last FSA year was 2003. He had no earned income in 2003, so was required to make a non-deductible contribution.

Rollover to IRAs with consent and waiver of full lump-sum were in 2004. Again, no earned income in 2004 (he's retired).

I prepared the final EZ w/o Schedule B (no FSA).

He's now 67. He called to ask if we can roll back the termination or start a new DB plan. It would be sponsored by the same company (he's a sole prop using a dba). He says a UNI-K wouldn't be enough deduction if he went back to work.

I can get my brain around "service" under the new Plan, but "participation" has me puzzled.

I'll stop here and see what ideas may be out there.

[SoCalActuary]

Let the sleeping plan lie. Start a new one. The 415 limit is on hi 3 average over all years. The new plan will have one year of participation for 415 limits, ignoring the prior plan benefit. However, I would measure the total 415 limit using the combination of both plans, totalling 9 years in your example, and compare it to the total of the benefits accrued in the current year added to the benefits paid from the prior plan.

By the way, was it absolutely necessary to have a non-deductible contribution? Usually, I try to help avoid such problems whenever possible.

[No Name]

Prior to the termination year, contribution level was $115k or so, and investment performance was sub-par.

The consulting actuary was able to come up with a $26K minimum. I had thought it would be worse.

Since the distribution was less than the accrual, would one convert the lump-sum to an annuity to determine 415 limits? As of what date?

I know, its not your job....

[david rigby]

By the way, was it absolutely necessary to have a non-deductible contribution?

I agree, there was probably a way to avoid this. At this point, it seems to be moot, but maybe not, so have your actuary look at the situation.

[Blinky the 3-eyed Fish]

The annuity is the value of the benefit as of the assumed retirement age in the new plan's valuation.

The new plan will have one year of participation for 415 limits, ignoring the prior plan benefit.

SoCal, I agreed with what you said, but wasn't sure about what you meant by this.

[SoCalActuary]

Blinky: For the first year of the new plan, the 415 limit is based on 1 year of participation, e.g., $1,375 monthly benefit for NRA 62-65.

This is instead of continuing the prior 415 limit, based on combined years of services, then reducing for benefits paid. For example, if old plan had 5 yrs, old 415 limit was 5/10 x $13,750 = $6,875. Benefit paid was $5,000, leaving unused 415 limit of $1,875.

In my example, the total of all 415 limit reductions on the new plan would be:

$13,750 x yrs of participation in new plan, further reduced so that $13,750 - $5,000 is maximum limit in the new plan.

No Name: You should keep a permanent record of the equivalent monthly benefit which was paid using the proper actuarial assumptions for the lump sum distribution taken. this record should show the assumptions used, the normal retirement age, the lump sum amount, and the equivalent monthly benefit paid. Then you could replace my $5,000 example with the actual amount, allowing you to figure the remaining room under 415.

[Blinky the 3-eyed Fish]

SoCal, there the rule that the YOP for the 415 limit is not less than 1, but not a rule that it is 1 for the first year of a new plan. In your first example the current unused benefit available would be $1,875. I agree with your projected calculation. Now there is also a rule that limits unit credit funding to 10% of the 415 limit (a derivative of the small plan audits I believe), which puts your normal cost accrual under that funding method to be a maximum of $1,375.

Is that what you mean?

[SoCalActuary]

I acknowledge simplifying the discussion for the sake of others.

My intent was to show the effect with a new plan only, where the 415 dollar limit at year one is $1,375.

The normal cost issue is based on IRS reasoning that in one year you cannot accrue more than $1,375 monthly benefit without having some past service credits. Thus any new accrual amount over $1,375 must be attributed to past service and subject to amortization as a loss under the unit credit method.

Again, for those less familiar with 415 in operation, the $1,375 is applicable only for a life annuity payable starting between ages 62 and 65, using the 2004 limits.

[David MacLennan]

SoCal, regarding the issue of funding for a benefit accrual larger than 1/10 of the dollar limit, would you give the same answer if the formula was career average? I'm thinking of Citrus Valley. Granted, going down that road is not for the faint of heart, nor for anyone who has only a partial understanding. Clearly the IRS does not "like" it, but they did lose that case and specifically the 1/10 dollar limit issue.

[SoCalActuary]

We have two possible solutions here.

A. Reinstate the prior plan, which would allow a one year accrual that exceeds 1/10 of 415b limit. The type of formula would not concern me, although it is clear that generous final avg pay plans will routinely exceed 1/10 415 limit accrual in a single plan year, while career pay plans (meaning accumulation plans) would have to provide the higher accrual intentionally.

B. Start new plan, which limits the benefit to the years of participation in the plan. This would limit new accrual and the benefit for unit credit funding methods.

By the way, IRS did promulgate rulings after Citrus that state their definition of reasonable funding method. You can disagree with their interpretation, but don't ask me to do so.