Funding 412(i) Plan in Year of Termination

[Guest PensionNW]

Suppose the accrued benefit in a 412(i) plan is defined as a unit benefit accrual (for example 2% of HC3 multiplied by years of plan participation payable at NRA) instead of the cash surrender values as allowed in 411(b)(1)(F).

The plan is going to terminate and assets will be far below the amount necessary to provide the accrued benefits (lets assume lump sums will be paid).

At this point I figure the plan has two options, but I am looking for a third.

1. Pay the entire accrued benefit to the rank-and-file and short the HCE,

2. Ask for blessing from the IRS to pay the accrued benefit to the extent funded to each participant, rank-and-file and HCE alike as mentioned in 411(d)(3).

Does anyone out there think that one may be able to take a deduction up to unfunded current liability as allowed under 404(a)(1)(D). The problem as I see it is that because section 412 does not apply to a 412(i) plan that one does not calculate current liability for a 412(i) plan (is everyone else out there just as tired of 412(i) plans as I am?)

Any other suggestions regarding how the plan sponsor could make a large deductible contribution when the 412(i) plan terminates?

[AndyH]

Couldn't you "convert" it to a plan that is subject to 412 and then fund up to unfunded current liability?

[Blinky the 3-eyed Fish]

Not to sound condescending, but are you sure you are reading the document correctly? While I have seen 412(i) plans describe the AB this way, when it comes to defining the payout, they also describe that the participant will receive their PVAB, which in turn is defined as the CSV of the contract. It is almost as if defining the AB as the formula in the plan is to have a tangible AB for purposes of nondiscrimination testing. Otherwise, you get into issues that Larry Deutsch wrote about.

Now you say the plan is underfunded, but what factors are you using to value the lump sums?

[Guest PensionNW]

I'm apologize for leaving out this option, I've thought of the conversion as well. I'm just curious if one could do this without the conversion. - Thanks.

[Guest PensionNW]

Hi Blinky: Yes, unfortunately I have read the document correctly. I did not draft it and it is a bit of a mess. It appears that the accrued benefit was defined this way in order to make it easy to combine the 412(i) DB plan with a profit sharing plan in order to perform the general test.

The document defines actuarial equivalence factors as the applicable mortality table and applicable interest factors. The document expressly prohibits lump sum distributions at any time.

If you did not know that this was supposed to be a 412(i) plan, you would never guess it was by reading the document. Heck, the document even contains an investment policy that states that investments must be properly diversified.

Neeto huh?

[Blinky the 3-eyed Fish]

I know what QDROphile would say about that document.

[mbozek]

Are you sure that this plan meets the requirements of 412(i) in that it must be funded exclusively with LI or annuity contracts? Seems to me that requiring diversified investments would take the plan out of 412(i).

[SoCalActuary]

The description of this plan in operation was interesting.

At the LABC, an IRS actuary described audits of a number of 412i plans, including document provisions and plan operations. They found that none of the plans audited met their definition of a 412i as intended in the regulations.

This plan appears to also fail, since the plan benefit is not the cash value of the policy.

On a separate note, the top-heavy benefit would be met by the formula you describe, and you might need to have a side fund for top-heavy, which would require an investment policy.

You probably also have PBGC non-compliance on past premiums, assuming this is a plan sponsor covered by PBGC rules.