Pension Service Buyback

[Guest fcdeacy]

We have a DB plan with a provision that if a person comes back to work within 5 years they can repay a prior lump sum payout in order to get service restored.

My questions are as follows:

If the person needs to repay $74,000~

Can they pay any of the amount needed with money in their checking or savings account? I am under the impression that they cant since the plan is tax qualified.

If they can pay from personal funds, is there a limit to the amount they can repay from them - Code Section 415 limit of $42,000 per year????

Would this impact how much they can contribute to other plans, like a 401(k) during the same calendar year?

It is my belief that all money they use to buy back service must come from another tax qualified source, i.e. conduit IRA, etc....

Any help you can provide on clearing this up for me would be greatly appreciated!!!!

Thanks

[Guest DBtech]

I think the employee would pay from his own funds to buy back the service, and then have a basis in any subsequent distribution from the plan. I don't think the dollar amount the employee pays back matters.

[J2D2]

I agree with DBTech. I've never seen any restrictions on the source of funds for the buy-back.

[Guest qualified plan]

If the person needs to repay $74,000~

Just curious, but what is the amount of the forfeiture being restored?

[Guest fcdeacy]

Qualified Plan,

No forfeitures are being restored. They are just buying back all service. When the participant left and was paid out, they were 100% vested.

[Guest fcdeacy]

J2D2 & DBtech,

Just for clarification, it doesnt matter where the funds come from to buy back service into a plan?

If so, will this amount have any impact on how much they can contribute to other plans in that same calendar year?

Thanks!

[david rigby]

I smell what we actuaries call "anti-selection". Probably, this plan will experience a loss on this person as more service accumulates. One reason that most plans don't include such provision. I'm not suggesting the plan can or should do anything about it, just an observation.

[Guest qualified plan]

No forfeitures are being restored. They are just buying back all service.

Unless I am missing something here (entirely possible), it appears to me that no pension buyback is needed (or allowed?) here. The participant is entitled to have his service counted with respect to benefits accrued after rehire regardless of any payback. See Treas. Reg. 1.411(a)-7(d)(4)(iii).

[Blinky the 3-eyed Fish]

True, but the person's pension benefit will also be reduced by the value of prior distributions. That appears to be the piece that the participant is trying to "buy back". To then buy back a pre-tax benefit, you would certainly have to use pre-tax dollars, unless the plan allows for after-tax contributions to exist and the participant will have a basis upon distribution. The whole concept is highly unusual. The prior posts were under the guise that this was a forfeiture restoration.

[Guest qualified plan]

fcdeacy, in light of Blinky's comments, could you please clarify your question. Specifically, are you under the impression that the Participant needs to make a repayment in order to receive credit for his prior years of service?

[Guest fcdeacy]

Certainly,

According to the plan:

The participant will lose all prior service accrued upon returning to work unless they repay the lump sum payment they received at or after their original termination. If they decide not to repay, they start over with no service. (Again, they must return to work within 5 years to even be eligible for this option)

The plan is employer contribution only and is tax qualified.

At orginal termination and distribution, the participant was 100% vested and had accrued benefit service to be used in calulating the lump sum benefit.

Does that help?

Thanks again!

[Guest qualified plan]

If they decide not to repay, they start over with no service.

ok, I assume you are answering "Yes" to the question I posed ("are you under the impression that the Participant needs to make a repayment in order to receive credit for his prior years of service?").

In response, I would say that, if your question relates to counting service for vesting purposes under the plan, you are under a mistaken impression.

Blinky, do you agree with my assessment?

[Guest fcdeacy]

Hopefully this clears up your questions:

We have a Tax Qualified Defined Benefit Plan that is strictly employer funded. Under the plan the following provision exists:

"If a participant has lost Benefit Service due to a distribution of his distributable Accrued Benefit in a single sum, his Benefit Service will be restored if he repays the amount of the distribution plus interest compounded annually at the rate of 120% of the federal mid-term rate not later than the earlier of (a) the end of a five (5) year period beginning with the Employee's resumption of employment covered by the Plan or (b) the end of the fifth consecutive ONE Year Break in Service following the date of distribution."

My questions are as follows:

If an employee returns before the 5 year break what types of funds (IRA rollover, personal savings, etc...) can be used to repay the lump sum distribution to get benefit service restored? Does it matter?

If the participant is allowed to use personal savings to repay this amount, is there an annual limit, and does this affect his ability to contribute to a 401(k) in the same calendar year in which he repays the DB plan?

I am having trouble finding the answers to these questions. Do you know off-hand the answer or can you steer me in the right direction?

Thanks for any help you can provide.

[Guest qualified plan]

If a participant has lost Benefit Service due to a distribution of his distributable Accrued Benefit in a single sum, his Benefit Service will be restored if he repays the amount of the distribution

I'm sorry if I am being a pain, but does the above plan provision relate to VESTING or to BENEFIT ACCRUAL under the plan? Thanks.

[Guest fcdeacy]

It is in regard to benefit service only, not vesting service.

To be vested a person must work 1 year.

When they retire we use (years of benefit service X high 5 salary X a factor) to determine there retirement benefit. and of course, they have to be vested.

[Guest DBtech]

These service buy back arrangements are quite common in public employee plans. Another way to structure the buyback would be for the Employer to contribute the amount to the plan--not as a contribution but as transferred assets--and then to work out a side agreement with the employee to reimburse the Employer over, say, a one-year period. Unless the employee rolled-over the original distribution into a tax-favored account, in which case the funds could come from that account. I assume the employee has already spent the original funds.

[AndyH]

Most of my plans have this provision. The advantage to the employee in this situation is that final average compensation can be applied to pre-distribution service if the payment is restored.

Any money can be used and it does create a basis. The plan does not care where the money came from.

And it is not a 415 annual addition or an issue under 404. It is analagous to a rollover within that context.

I researched this a few years ago. I don't recall how or where but these were my conclusions and I have since seen confirming interpretations.

Vesting service is automatically restored I believe (at least in our plans); only benefit service is re-purchased.

These provisions were an attempt to placate GCM 39310. I know some argue that such GCM does not apply to DB plans but that is not a universal opinion.

[Guest fcdeacy]

AndyH-

Thanks for your response, it makes sense to me.

Can you shed some light on whether them buying back service would impact the participants ability to contribute to a 401(k)?

Thanks,

Fred

[AndyH]

Fred, 401(k) deferrals could be affected by only a few things:

Excess deferrals under 402(g). The buyback would not affect 402(g).

Annual additions limit under 415. The buyback would not affect 415.

A nondiscrimination test result. The buyback ..............these tests.

A plan limit on deferrals. The buyback would not ..........

A limit on deductable contributions under 404 The buyback would not .......

None of the things that affect 401(k) deferrals would be affected.