Former HCE Def'n

[JAY21]

Employee currently age 64 is considering retiring in 2008 at age 65. She made over 100k in 2004 and 2005 but did not in 2006 and likely not in 2007 either. Plan is under funded and I'm trying to determine if she's a Restricted Employee for lump sum purposes. I see that Former HCE are part of the Restricted Employee def'n but I'm not totally sure she is a Former HCE as the def'n appears a bit more unique than simply being over the 100k threshold in past years. I've inserted a CCH blurb that I'm struggling to interpret correctly.

Given the above facts, and the attached blurb, does she appear to be a Former HCE in both 2007 and 2008 ?

Strategy wise, I'm trying to determine whether she could retire a few months earlier than planned say in 2007 (Plan allows for an ERA after 55 & 10 YOS) and if there is NOT a separation year before her pay out, could she get a lump sum before 12/31/07 (i.e., maybe she's not a Former HCE until 2008 after her separation year). Employer wants her to get a lump sum too so any strategy that might help her not be a Former HCE they would support if it can be done. There are only a few HCEs so a top-25 election doesn't help.

Thanks for any help. Opinions welcomed.

Former_Highly_Comp_EE.pdf

[mwyatt]

From the early termination restriction regs @ 1.401(a)(4)-5(b)(3)(ii):

Restricted employee defined. For purposes of this paragraph (b), the term restricted employee generally means any HCE or former HCE. However, an HCE or former HCE need not be treated as a restricted employee in the current year if the HCE or former HCE is not one of the 25 (or a larger number chosen by the employer) nonexcludable employees and former employees of the employer with the largest amount of compensation in the current or any prior year. Plan provisions defining or altering this group can be amended at any time without violating section 411(d)(6).

Now sidestepping the PPA issues that modify benefit restrictions depending on funding level, looks like if she was in that top 25 group, looks like she's subject to restrictions.

[JAY21]

mwyatt, you might be right, but the thing I'm trying to get at is it seems that a "former HCE" is kind of a defined term of art (not necessarily just someone who was an HCE in a previous year) if I'm reading the CCH blurb correctly. So she "might" not be a "former HCE" to which the (a)(4) section you mentioned applies.

[Andy the Actuary]

Without knowing all the facts and circumstances, I offer the following:

Can the Plan be amended to allow for in-service retirement?

Then, person could take an unrestricted lump distribution as an NHCE and actually retire later. Would this resolve your issues?

Also, Plan could be amended to remove the restriction language. If you obtained a D-Letter on amended plan, then there would be no issue.

[JAY21]

Here's what I think I'm coming up with having reviewed everything:

2007: Not an active HCE since not a 5% owner and 2006 comp less than 100k.

2008: Not an active HCE since not a 5% owner and 2007 comp projected to be less than 105k.

2009: Is a Former HCE since separated in prior year (2008) and was HCE for a year after age 55 (2004-5).

Anyone disagree ? Sounds like you can only be a "Former" HCE if you separated in a prior year as otherwise you are operating under active HCE rules.

[Effen]

I think Andy may be on to something. If this person terminates, I think they would be a Highly Compensated Former Employee, however, while they are active, they are a NHCE. Interesting...

I would explain Andy's point to their ERISA attorney and ask him/her to make the ruling. I wouldn't want to be on record saying it was ok to pay it, but I would explain it to the client and their attorney and let them make the decision.

[JAY21]

Thanks all. Is there any consensus that she can only be a "former" HCE in the year AFTER separation from employment (seems the CCH blurb supports that) so I'm thinking 2007 is window of opportunity for something like the in-service distribution option Andy mentioned or terminate/retire in 2007 and pay out lump sum in 2007 (if we hurry).

[Andy the Actuary]

IRS Reg. 1.414(q)-1T Q&A 4 supports your definition of Former HCE provided employee provides services for employer during the determination year.

[mwyatt]

Don't want to split hairs, but the CCH blurb seems to be defining a Highly Compensated Former Employee, while the ET restrictions in the regs reference HCE or former HCE, which I think are two different animals. In any event, the early termination restrictions are there to prevent a trust fund being drained by the top paid through the payment of lump sums, leaving little else for the rest, so I'd proceed with caution.

If the participant was one of the 25 top paid HCEs or former HCEs (and remember, this bears looking into if the client has been around awhile and is of significant size to see if she falls out of the picture), then the early restriction rules would still apply. Don't think they would have left that type of gaping hole in the semantics, but I'm just an actuary, not a lawyer. When in doubt, have counsel make the call.

[Andy the Actuary]

Back in 1978, the IRS issued proposed benefit statement regulations that addressed benefit statements that DB plan administrators were to provide. The intention was clear -- the regulations were promoting disclosure. However, the regulations had no default effective date or reliance provisions. In short, irrespective of the intentions, there was no legal impetus to comply until PPA came out with some similar requirements.

While I agree with the spirit of MWYATT, it's not really a matter of what the printed word intends but what the words say.

Note, I've seen plans where the "restriction" provisions have been removed and the IRS issued a favorable D-Letter.

As my Dad used to tell me when I was pursuing a major league baseball career in the little leagues, "Don't be your own umpire."

The advice to seek a legal opinion is always sound.

[mwyatt]

Andy, I saw documents "approved" during the TRA restatement process (the last time that most small plans had to actually file) that could have contained random pages from the telephone book in the middle. That doesn't mean I'd hang my hat on the DL.

The early termination restrictions are pretty clear IMHO. If you are or were an HCE in that hall of fame class of the "top 25", then you're subject to the restrictions.

[Andy the Actuary]

Andy, I saw documents "approved" during the TRA restatement process (the last time that most small plans had to actually file) that could have contained random pages from the telephone book in the middle. That doesn't mean I'd hang my hat on the DL.

The early termination restrictions are pretty clear IMHO. If you are or were an HCE in that hall of fame class of the "top 25", then you're subject to the restrictions.

Thank you. I have reread 1.401(a)-5(b) and pardon me for being obtuse, but am unable to see the conclusion you just stated. In particular, this section provides "This paragraph (b) does not apply if the Commissioner determines that such provisions are not necessary to prevent the prohibited discrimination that may occur in the event of an early termination of the plan." Doesn't this mean that if the plan is amended to remove the provisions and the IRS issues a D-letter that the Commissioner has so determined?

[mwyatt]

But how are you going to get a DL by 12/31/2007?

[Andy the Actuary]

No, no. This isn't a thumb-wrestling contest. This was simply about the scope and impact of a D-Letter. I had already forgotten about the situation that prompted all this discussion. We'd be lucky to get the 5300₁ filed by 12/31.

Andy T. A.

¹Is that the right form?

[mwyatt]

Hey Andy, not trying to go that way either. I'm just not sure that I'd be going down that road with the interpretation w/o some sort of credible ERISA attorney backing, especially since the original premise was that this is an underfunded plan. Still not sure in my mind if there's any solution here, given that the PPA benefit restriction changes (which apply to all) are going to be in effect on 1/1/2008 for this plan. Of course we have bountiful guidance on all of the PPA issues (and I'm not slagging on the IRS or Treasury either, they've got an impossible situation on their hands).

BTW, anyone heard anything on when they're going to release the 2008 mortality tables?

[JAY21]

For what it's worth the issue is before a competent ERISA attorney. My main issue was to see if it was something worth paying an attorney to look into. I told them there "might" be an argument that for 2007 she "might" not be an HCE or former HCE, but once we're into 2008 we are likely to be restricted by PPA 06 regardless of her status as HCE.

I sure hope there are not 3 categories of HCE's though (Former HCE that's terminated, Formerly HCE but still employed, and HCE). That would be too much fun to deal with.

[Guest lerieleech]

It seems to me like in your case, the person is restricted no matter what position you take.

If you follow the CCH definition, she is restricted because she was an HCE (in the top-25 paid employees) in a year after she turned 55.

If you take the position, as I know some people have, that "once an HCE, forever restricted," then she is also restricted.

I looked into this, and believe the CCH definition is correct. The problem as I see it is that IRS was a bit careless with the terminology. (Surprise, surprise.) By using "former current HCE" as the key term, it used a term which seemed that its definition should be obvious, and didn't need a definition to be spelled out elsewhere.

In fact, the term is defined elsewhere in the same reg, which begins a scavenger hunt to find the actual meaning. The restricted employee language is in 1.401(a)(4)-5, and "former HCE" is defined in 1.401(a)(4)-12, in which it says it is the same as a "highly compensated former employee" as defined in 1.410(b)-9. That one refers you to 414(q), and there you will find the CCH definition.

[tymesup]

...

BTW, anyone heard anything on when they're going to release the 2008 mortality tables?

The 417e mortality table was changed with Rev Ruling 2007-67, issued on or before 11/7. There is at least some doubt whether this table should be applied for 415 purposes.

http://www.irs.gov/pub/irs-tege/rr2007-67.end.pdf

[SoCalActuary]

mwyatt: the IRS has already published their methodology, using the RP-2000 projected with scale AA. The answer should be the 2007 table, adjusted for one more year of mortality improvements. This can be checked against the table to be used for lump sums, which has already been published.

Start with the four tables m vs f, annuitant vs non-annuitant. Blend each gender's tables for the combined table, available for small plans. Then blend the two genders' tables to get the lump sum table for 2008.

[mwyatt]

Thanks SoCal, but I know about the 417 mortality tables (or maybe the consequence of 9 consecutive days of packing and moving w/ 2 small children and a puppy are getting to my head). Was really inquiring about the male and female tables to be used for 2008 funding calculations.

[SoCalActuary]

Same answer. The published tables from May 2007 are the projected values for current liability funding. They were derived from the separate tables in the RP-2000.

The 2008 values will be one year projection forward from the prior table, to the best of my knowledge.