415 Brain Cramp

[mwyatt]

Potentail client contacted us interested in establishing a one-man DB plan. Currently age 60, would run for five years w/ NRA of age 65. Salary and past salary well over max limits, more than 10 Years of past service.

Originally ran a proposal w/ the following 415 limits:

Lesser of $180,000 x 5/10 participation, $225,000 High 3 limit (over 10 Yos) so no proration.

Client was interested; in further discussions as to prior plans etc., admitted that had a DB plan in the past back in the 80s. No hope of locating specifics other than a LS payout of $140k at the end of '88.

Went through the 415 final regs for guidance (multiple annuity starting dates). W/O guidance, considered figuring benefit equivalent of payout using 94GAR @ 5.5%, payable at age 65 for offset. Also checked against 1983 IAM @ 5.0% (common assumptions during 80s). Seemed that 94GAR @ 5.5% provided higher offset, so would go with that amount. Benefit came out to a little under $3000/mo at age 65.

However, just realized now that there was participation under prior plan. Client said plan had been in effect for 5 years in past.

So now think that the limit should be:

Lesser of $180,000 x 10/10 - $3,000 x 12 offset, and $225,000 - $3,000 x 12 offset, which actually results in a higher allowable benefit than originally contemplated under initial proposal.

Any comments or anything I'm missing? Have basically no hope of getting prior plan document, but I thought "worst casing" the offset seemed to be in line with the final 415 regs (although I know that the MASD stuff got pulled).

[Dougsbpc]

Mwyatt,

We went through this before. Our actuary had us do the following:

Assumed monthly benefit as of pior plan distribution: $3,000

Date of prior plan distribution: 12/31/2001

Start of new plan: 01/01/2004

NRD in new plan: 12/31/2008

$3,000 X 2001 APR / 2008 APR X 1.06^7 = $5,494

Then $15,000 - $5,494 = $9,506 is maximum benefit in new plan.

In our case, to be conservative we used a benefit formula that produced an $8,500 monthly benefit.

[mwyatt]

Thanks for the input Doug, although here the only piece of data that I'm being provided is the lump sum received (no info on what the accrued benefit amount was or the NRD of the prior plan).

What I was also focusing on was the fact that under the original scenario, I was contemplating only 5 Years of Participation between entry date and retirement date in the new plan, hence the 5/10 proration of the dollar limitation. However, with the old plan being in existence that the years of participation in the old plan could be added to the 5 Years in the new plan for proration, then offset of resulting max ben by prior distribution. Appears that we actually would end up w/ a larger, not smaller, max benefit than originally contemplated (although how I can accurately determine the exact amount of offset is a little confusing, given sketchy info at this point on the prior plan).

[tymesup]

Can you substantiate the amount and date of the prior distribution? That there were no other distributions?

Can you substantiate you've got a full five years of participation under the prior plan?

I think there's a thread somewhere that mentions disregarding another plan's benefits if the two companies have some separation in ownership and/or time. It would seem possible you're not allowed to use this other company/plan.

Given this potential client's fact pattern, he should get a large benefit/deduction without the prior plan. I wouldn't push too hard to get more.

[mwyatt]

Not trying at all to get more, just concerned about the prior plan and the offset. Given the ramifications of violating 415, I'm leaning heavily at "worst casing" this whole scenario w/o ruining the holidays.

As far as figuring out the prior plan and its history, was thinking to put my End of the DB World hat back on and think out what possible accrued benefit he could have had w/ that payout in the TEFRA/TRA world and probable lump sum payouts at that time. My natural inclination is to be as negative as possible as to the prior plan (w/ the only data point being the rollover amount which is a known quantity).

My real point is to confirm that I can add the prior plan's years of participation into the reduction on the dollar limit. Would like to keep the funded benefit at the dollar limit prorated by 5, as that contribution is more than satisfactory to the client. Just wanted to make sure that the extra years less the offset is the proper approach for the ultimate limit.

[AndyH]

Mike, you absolutely aggregate the Years of Participation since you aggregate the benefits. I heard JH say this directly a few years ago and I'm certain it can be found in print. And, BTW, I agree with your suggested approach of the most conservative treatment. I don't think it matters what the terms of the prior plan were, just the lump sum amount and date.