Impact of 436 restrictions on BERF testing

[ak2ary]

Plan A is a DB plan that covers some of the HCEs at a law firm

Plan B is a DB plan that covers some of the NHCEs at a law firm

Plan B's sole reason for being is to be aggregated with plan A to allow plan A to meet 410(b) and 401(a)(4)

Plan A is 100% funded with respect to its AFTAP

Plan B is 65% funded with respect to its AFTAP

Both plans offer lump sums, but in 2008 plan B is precluded from payong them due to 436 restrictions. Does this raise an effective availability issue since Plan A, the plan covering only HCEs can continue to pay lump sums and plan B the plan covering NHCEs cannot?

I suspect it does

[ak2ary]

Just gettin back to the top o the list to see if I can get a response

Anyone???

[Jim Norman]

Just gettin back to the top o the list to see if I can get a response

Anyone???

I'm not aware of any guidance on this yet. My own opinion is that when IRS eventually gets around to thinking about it, I suspect they would consider a BRF issue in this situation. I could easily imagine them requiring DB plans that are aggregated for coverage and non-discrimination would have to be aggregated for the benefit restrictions.

I don't what I would recommend in this situation. Absent further guidance plan A doesn't really have a basis to defer lump sum payments.

[Mike Preston]

I think the smart thing to do is to have a stern talking to with the client. The HCE plan is well funded? The NHCE plan is poorly funded? Even in the absence of the new rules, I'd be concerned that there is a potential for discrimination if the plans were to terminate abruptly. If the firm were to go belly up, and nobody was around to ante up, the plans might be disqualified because of the inability to rectify the problem. That would expose the advisors to lawsuits from the participants (who, being out of a job and familiar with the legal process, might very well decide that they should sharpen their litigation skills at the expense of the advisors who "allowed" the plans to get into this mess in the first place).

I'd seriously consider telling the client to deposit enough to eliminate the restrictions on the NHCE plan or risk untold difficulties that can't be predicted or insulated against at this time due to the newness of PPA. Get an ERISA attorney involved (have one on staff?) to nudge them in the right direction. But at the least, put your CYA on the table.

Of course, the simple solution is to just merge the plans on March 31.

[ak2ary]

I have suggested that this is a completely unsymapthetic set of facts in IRS' mind (and mine for that matter) and that, the IRS would likely argue that it is a BERF issue. Their ERISA attorney is bigger than my ERISA atty and he does not necessarily agree although admits that

a) the staff underfunding has the order of magnitude of a rounding error on the firms books

b) It is entirely possible that the IRS would argue that there is a BERF problem

He was looking for something stronger before he goes to the firms exec committee. I explained there was no guidance and that while the staff underfunding is small in comparison to the firms assets, the senior partners benefits, in their plan, are not and I don't see how to correct this without funding the staff since, as Jim pointed out, 411(d)(6) prevents you from limiting the partners plan. I expect , at the end of the day, the cost of a DQ on the partner's plan will have all the strength he was looking for