412(i) carve out arrangement

[Guest saeissler]

There are 412(i)/profit sharing carve out arrangements being presented in the marketplace. It appears that the way the plans are meeting general testing is to calculate the accrued benefit at retirement in the 412(i) plans by taking the guaranteed interest and mortality in the contract, let us say, for example, 3% pre retirement and 1.5% 2000IAM at post retirement, and then comparing this with the profit sharing contribution projected at the mandated 7.5%-8.5% and 1983GAM mortality. My first question is how the folks doing 412(i) plan out there are addressing the most valuable accrued benefit issue (if the participant can take a distribution in the form of a lump sum). My second question is how the rights, benefits, features issue is being handled.

[AndyH]

The most valuable accrued benefit in a 412(i) plan is the salesman's yacht. Sorry, could not resist.

Personally, I think any 412(i) general test is worthless under current guidance. Anybody who sells PS/General tested 412(i) plan combos should be disbarred, de-licensed, and/or locked up.

[Belgarath]

Solely for purposes of providing some starting point for discussion on this (because I'm probably way off base):

I THINK this is addressed in 1.401(a)(4)-9(b)(2)(iv). It seems to me that this follows the common sense logic that a consistent interest rate must be used ("nonstandard not allowed") because to do otherwise "...would inevitably result in inconsistent determinations under the defined contribution and defined benefit portions of the plan." So you'd have to use the 7-1/2% to 8-1/2% on the DB as well.

Second, with regards to the BRF issues - if your aggregation is SOLELY to pass the ABR portion of the general test, then I think you can test the plans separately for BRF's. But if you can't pass either the Ratio test, or the Nondiscriminatory Classification test portion of the Average Benefits test, then they must be aggregated.

So under 1.401(a)(4)-9(a), if the plans are aggregated for coverage testing under 1.410(b)-7(d), then you must aggregate them for BRF testing, subject to the special rules in (b) for combined DB/DC plans. Under the (b)(3) optional rules, the deemed satisfaction of BRF's applies to benefits OTHER THAN an ...ancillary benefit...

Well, guess what, life insurance is an ancillary benefit. So I think you are stuck.

[Guest FLMaster]

First the "general test" is not "worthless" for a 412(i) plan. Reg 1.401(a)(4)-1©(2) states the treasury allows these rules to be interpreted in a "reasonable manner" consistent with the purpose of preventing discrimination in favor of HCE's. No one needs to ponder how the government will interpret these rules. What we need to ponder is how the courts, the Tax Court and the Circuit court will interpet these rules. Witness the "cash balance plan" cases, IBM and Xerox from the 7th circuit. Even though the service had rules in favor of cash balance plans the courts applied ADEA. I have not seen a major case on 401(a)-4 since 1993 but would be interested in looking at one if someone out there has run across an (a)(4) issue. Hope this is helpful.

[AndyH]

A fine argument if one has nothing better to do than fight the IRS in tax court over a 412(i) scheme. Intellectually stimulating perhaps?

[Guest FLMaster]

I am not really sure why it is called a "carve-out" it is really a DB/DC combination. The "consistentcy" rule is the most difficult one to apply under 1.401(a)-4-9(b). No rules, no guidance, not for the feint of heart. Hope this is helpful.