412(i) Query

[Blinky the 3-eyed Fish]

No, I haven't gone to the dark side, but I do have a curiousity question on how to fund terminated participants to comply with the level annual premium payment rules of a 412(i) plan.

Let's say a person enters the plan, works 1,000 hours and then quits all in the same year. How would you fund his benefit in a 412(i) plan considering I can think of 3 possibilities?

1. His premium is based on his PVAB of the CSV at retirement and only one payment is made on the basis that he is no longer "participating" in the plan after the one year (i.e., funding the entire benefit in one year).

Ex: CSV at NRA = 10,000; assume 3% guaranteed rate and 20 years to retirement so the PVAB = 5,537, so funding is 5,537

2. Project his benefit to NRA as if he is an active participant and fund the level premium for that year based on ILP method. No funding the next year since he's not active.

Ex: Proj benefit CSV is 200,000 / Annuity factor of 27.6765 = 7,226 funding needed this one year.

3. His projected benefit is his accrued benefit. His projected CSV at NRA is funded for until NRA in level payments.

Ex: Proj CSV = 10,000 / 27.6765 = 361 funding each year until retirement.

So which would you choose and why?

[mwyatt]

Assuming this is an EOY question, what about vesting (just to add another wrinkle).

[AndyH]

New Darth, didn't a

curiousity question

kill the cat?

[Gary]

My feeling is as follows:

I'll assume that the funding meets the incidental death benefit requirements.

It would be funded based on level premiums until normal retirement such that you are targeting an accumulated (or cash value) at normal retirement that would provide for his pension at NRA.

So if the person quits after one year thenhis accrued benefit is equal to the cash value of the policy, subject to 415.

Of course plan provisions would determine distribution options such as:

1. lump sum

2. policy itself

3. use cash value to purchase an immediate or deferred annuity.

[Blinky the 3-eyed Fish]

I am a simple person so help me out Gary and pick from the above 1, 2 or 3, unless your version is something different. I could take your comment to mean 2 or 3.

As for the other comments, assume no life insurance, assume the person is 100% vested, don't worry about the distribution options and thanks for the New Darth comment.

[Belgarath]

I think it's actually closer to 1. So the benefit at retirement is (x). A level premium to the annuity policy, based upon a guaranteed interest rate and number of years to fund the required cash value at retirement produces a premium of (pick a number - let's say $5,000) which is paid into the annuity policy. And his accrued benefit is then the cash surrender value of that policy.

At least that's how I understand it. Gary, is that what you are saying?

[Blinky the 3-eyed Fish]

The reason I don't like #1 is because you can get vastly different numbers based on a person terminating one day later than another.

For example, when the premium is determined one person is terminated that day and one person is active, but ends up terminating the next day. Clearly the person who is active will have their premium determined as if she will continue that active status. In my little example assuming they are the same age with the same projected benefit, the person terminated would receive $5,537, while the person active for one more day will receive $7,226. That's flies in the face of fairness and logic.

[mwyatt]

Hey Blink:

You're thinking too much here (as I say tongue in cheek). You should just look at your nice pinky ring and think about all of those commissions you'll be collecting off of the annuity contract, and not bother yourself with these pesky details...

Seriously, you bring up a pretty interesting point with your question. We all know what the reality would be in a regular DB plan (PV of what you accrued, adjusted for vesting). I sure don't know the answer since I've steered clear of 412i plans (most of the people I've run into promoting these plans I wouldn't wish on anyone I know), but I would think that you would at least have a floor of what's due being what would be owed if the plan sponsor didn't fall prey to the siren song of wicked awesome deductions to fund the DB plan. And BTW, what happens in the case of partial/non vesting? How are these forfeitures taken into account in the scheme of things?

[Guest Carol the Writer]

Well, for anyone who's interested, I have returned from my gall bladder surgery. At the time that I left there was some discussion about top-heavy 412(i) plans requiring a Schedule B, under certain circumstances. We anyone be so kind as to provide me a cite for this, so that I can begin researching this?

As always, thanks in advance for any help that anyone may offer.

[Belgarath]

1.416-1, M-17. Hope it went well!

[Guest Carol the Writer]

The gall bladder surgery went well, thank you. And thanks for the reference!

[AndyH]

wicked awesome deductions

sure makes my favorites list.