§#$%! Posted May 3, 2007 Posted May 3, 2007 This a medium-sized DB plan (> 900 participants). We found that there are 8 terminated participants who should have commenced annuity payments years ago. ERISA counsel suggested to self-correct the error by making backpayments (with interest) for those missed payments. My question are: Prospectively, can the participants elect benefit options, even though those backpayments will be made based on the plan's normal benefit form-SLA? Thank you.
AndyH Posted May 3, 2007 Posted May 3, 2007 Prospectively, can the participants elect benefit options, even though those backpayments will be made based on the plan's normal benefit form-SLA? "Can"? How about "must"? If the plan says participants may make an election then they may make an election. You cannot bypass this because of a past error.
Effen Posted May 3, 2007 Posted May 3, 2007 I would defer to your ERISA counsel for the final say, but.... if your plan doesn't contain language permitting retroactive payments, then I don't think you can do it. If it does have the language, I believe you still need the participant (and spouses) consent in order to pay the retro benefit. The IRS has been hot on this issue in the recent year or so. A cleaner way may be to do an actuarial roll-up. Also, watch out for MRD issues which bring major individual tax penalties. Specifically related to your question, yes, you must permit them to elect from the available forms of payment. The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.
SoCalActuary Posted May 3, 2007 Posted May 3, 2007 You should worry about 415 limits here. We had such a plan, where the back payments were affected by the maximum 100% of pay limit, and the client elected with ERISA counsel to get approval from the IRS. Subsequently, the IRS added new reg's to address that back payments should not exceed 100% of pay, unless it was an optional lump sum that reduced future payment limits.
§#$%! Posted May 4, 2007 Author Posted May 4, 2007 Should the retroactive payments be based on the election that participants will elect? Current provisoins do not allow for retroactive payments, but the plan will be amended for the provision. Effen, Actuarial adjustments to those benefits were also proposed but there's one participant who should have started benefits in the early 1990s, and MRDs are also included in the correction. Plus, there are no provisions in the plan for actuarial adjustments for benefits commencing after NRD. SoCalActuary, Lump sum are only available in death only.
Effen Posted May 4, 2007 Posted May 4, 2007 Plus, there are no provisions in the plan for actuarial adjustments for benefits commencing after NRD. Then your plan may have a disqualifying defect... but then again, so do some of the most popular national prototypes on the same issue. If you didn't provide a Suspension of Benefits, then you must provide a roll-up (since you also said your plan didn't allow retro payments until now.) This is a 411(d)(6) issue. You can't just not pay the benefit. You may want to consider VCP if you want to be safe. Since you are amending now for the retro payments, why not make sure the amendment clearly defines how the retro payment will be determined. That way you will control what form it will be based on. Are you also planning on paying the significant excise tax on the missed MRD's the participant will incur when he files his 1040? This plan has some real issues. The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.
SoCalActuary Posted May 4, 2007 Posted May 4, 2007 The participant should not have a 50% excise tax if they did not have effective control of the distribution timing. If the participant is also the plan sponsor or the trustee, they probably will be subject to the penalty. But that is a digression from the topic, and that discussion belongs in the distribution/loans message board.
Effen Posted May 5, 2007 Posted May 5, 2007 SoCal, I'm not arguing your point, but we were involved in a situation where the IRS applied to tax to a "normal" employee in this same type of fact pattern. We were hired after the fact, but I know the IRS collected the tax because the employer paid it for her. This was 10+ years ago so maybe things have changed or maybe she just didn't argue the point since the employer was paying. The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.
§#$%! Posted May 5, 2007 Author Posted May 5, 2007 The employer will reimburse the participant for all excise tax.
masteff Posted May 7, 2007 Posted May 7, 2007 Should the retroactive payments be based on the election that participants will elect? We had a part who was past normal retirement date and kept saying he was sending election forms and never did, finally we sent him backpayments in normal form and applied his election going forward only. That matched closest to plan language at the time. Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now