415 Limit and Old DB Plan

[Guest penman]

Got a call from a 57 year old Dr. that wants to put in a DB plan. He is in business for himself and has no employees. I asked him if he ever had another DB plan from a business which he owned and he said "yes" but it was terminated "about" 12 years ago. I told him I need the amount of the benefit he earned under the prior plan to use as an offset to the current maximum benefit limit. He came back and said neither he nor his CPA can find any records.

I am not going to cut corners but I can see how the records could be difficult if not impossible to come by. I don't see how can I do this without the plan document and the amount of his distribution? Anyone had a similar experience? How was it resolved?

[david rigby]

I don't see how can I do this without the plan document and the amount of his distribution?

I agree. Perhaps you can inform the doc that the IRS is pretty sticky about the statutory maximums, and the law is quite clear that the prior plan must serve as an offset. Perhaps this will encourage the doc or his CPA to "locate" those records.

[Guest Steve C]

Don't forget that the prior DB plan affects the 415 limit in a couple different ways - (1) the prior benefit acts as an offset against the max available under a new plan, and (2) participation under the prior plan is used for the phase-in of the dollar limit.

Depending on how long the doc hangs on before retiring, the second item above could well have a more significant impact (giving the doc more reason to search for records).

[SoCalActuary]

12 years ago you had a maximum DB limit of 90k at age SSRA. Now you have 170k at age 62. You could tell the Dr. that you will assume he took the maximum allowed under the old law, and only allow him to fund the difference in the new plan. This should still get you about 4 years of maximum funding in the DB.

If that's not good enough for him, then he needs to get his old records.

[Guest penman]

Thanks all for the helpful feedback.

[Belgarath]

SoCal - I don't really know enough about this to probably even ask my question correctly, but I'll give it a shot.

Basically, I just want to find out - is the method you suggested automatically safe, or is there any bizarre possibility that it won't work? If automatically safe, then it sure seems nice for a safety net on a takeover situation like this.

For example - you mentioned a 90K limit. I understand that this gets reduced if you take it early? So just for the sake of illustration, let's suppose the reduction amounted to $30,000, leaving a $60,000 limit.

When setting up the new plan, do you have to bring the previously distributed amount (based upon the $60,000 figure) forward under some sort of actuarial wizardry, where there's any possibility that the required assumptions could produce an amount higher than the 90K? Or will it never under any circumstances exceed that 90K, so that if you just subtract the 90K from current limit, that you'll always be safe?

Thanks very much, and I apologize if the question makes no sense - if it doesn't, I'll be glad to try to reword it!

[Guest penman]

Actually the 415(b) limit 12 years ago was $115,641.

[SoCalActuary]

Thanks for the research Penman.

I gave you a simplified way to look at the analysis, assuming that the Dr. took the maximum 415 limit at time of termination.

There are some exceptions to worry over.

The person might have had some grandfathered extra amount from before 1986 that exceeded the 1993 limits based on retirement age below 62.

On the other hand, the Dr. might have had 415e fraction reductions, waived some benefits, or otherwise had benefits much less than the 415 limit.

Lacking any better information, you can suggest that the $170,000 minus the $115,641 is probably a safe benefit to fund. If your new plan design is at age 65, then you would have at least 3 years of maximum benefit accruals available. If it is for age 62 or younger, the 115,641 limit at 65 became 75% x 115,641 = 86730.75 at age 62 for someone with SSRA 66. This would leave more than $83,000 of remaining 415 limit at age 62.

[HBActuary]

He can't even find the date and amount of the rollover out of the old DB plan? That along with the effective date of the plan and the date of termination and your basically good to go! If they can't find the date of termination I usually assume it's the year before the year of distribution.

On most of these situations I find that having those prior YOP are VERY helpful in producing higher contributions when funding for a NRA in the new plan that is less than 10 years away.