New Floor/offset under PPA

[rcline46]

CLient has an existing DC plan and wants to add a DB plan offset by the DC plan. So far so good.

When I load it up - disaster!!! DUH - PPA is a unit credit funding method, and the current balances in the DC plan are greater than the current accrued benefits in the DB plan (even granting the permissible 5 years past for accrual).

So I took a plan which would generate wonderful contributions (in excess of $1,000,000) and instantly get a plan with a maximum contribution of $190,000, and NOTHING for the biggies. Remember they can only accrue 1/10th the max benefit in any year.

Is this correct or is my software suspect?

[Andy the Actuary]

CLient has an existing DC plan and wants to add a DB plan offset by the DC plan. So far so good.

When I load it up - disaster!!! DUH - PPA is a unit credit funding method, and the current balances in the DC plan are greater than the current accrued benefits in the DB plan (even granting the permissible 5 years past for accrual).

So I took a plan which would generate wonderful contributions (in excess of $1,000,000) and instantly get a plan with a maximum contribution of $190,000, and NOTHING for the biggies. Remember they can only accrue 1/10th the max benefit in any year.

Is this correct or is my software suspect?

Wouldn't you, or couldn't you, or shouldn't you set up the DB plan to offset by the theoretical pension attributable to the PS balance arising from PS contributions from the date of inception of the DB plan? This would require some separate accounting of the PS plan or a new PS plan.

[david rigby]

from the date of inception of the DB plan?

... or from the retroactive DB service?

[rcline46]

Setting up from the retroactive DB service still gets me into the PPA problem of benefits accruing this year, especially for the owners. That is how my initial run was done.

A bifurcated (split) profit sharing account might work. It would be most interesting doing a BOY db valuation against an EOY profit sharing contribution which is unknown and discretionary to boot!

There is the possibility of using a 5% Top Heavy contribution in the profit sharing as the ONLY offset. I think that is acceptable under the offset regulations even if the HCEs are getting a bigger contribution (did I mention the profit sharing is a new comparability plan?).

It seems you both are agreeing that PPA does have that unfortunate affect on start-up floor plans with an existing DC plan. No cost for a year or two and BOOM, costs jump in!

[Effen]

Are you aware the IRS is currently "looking closely" at floor offset arrangements? Several attorneys have told me that it has become very difficult to get approval letters and the IRS is even threatening disqualification to some with existing letters. Mostly just saber rattling, but why put your client through it?

Tread carefully and make sure your client understands the risk and is willing to pay your freight.

[tymesup]

Setting up from the retroactive DB service still gets me into the PPA problem of benefits accruing this year, especially for the owners. That is how my initial run was done.

A bifurcated (split) profit sharing account might work. It would be most interesting doing a BOY db valuation against an EOY profit sharing contribution which is unknown and discretionary to boot!

There is the possibility of using a 5% Top Heavy contribution in the profit sharing as the ONLY offset. I think that is acceptable under the offset regulations even if the HCEs are getting a bigger contribution (did I mention the profit sharing is a new comparability plan?).

It seems you both are agreeing that PPA does have that unfortunate affect on start-up floor plans with an existing DC plan. No cost for a year or two and BOOM, costs jump in!

IIRC, TAG opined that you can offset by the whole PS account, none of it, or something in between. I don't see why you couldn't grant past service and offset by future contributions only.

BOY DB and EOY profit sharing would be most interesting. The pattern of gains/losses, too. Under PPA, maybe it's not quite as interesting. Getting your software to behave will give you hours of pleasure.

If you use the 5% TH contrib as the only offset, and you only use prospective contributions, you get to set up three accounts - old money, new TH money and new excess money - giving you more hours of pleasure.

Note there are differing opinions on whether your offset must be uniform and/or whether non-uniform contributions must be in a separate plan altogether. There have been other threads here and one at ASPPA last year right after the ASPPA convention started, IIRC, by Larry Zeller.

Enjoy the reactions from folks receiving an SPD who find out they get no DB benefit. Enjoy the reaction from the biggies when folks who were fully offset start to grow into DB benefits. Enjoy the reaction from the biggies when folks decide to invest their 5% in the riskiest funds available. Heads they win, tails the DB plan loses.

[Blinky the 3-eyed Fish]

Unless you are going to allocate the contribution in the DC plan under an integrated formula or a pro rata formula and offset the DB with the entire amount, heed Effen's advice.

It's easy and allowable to only offset using PS contributons from the effective date of the DB plan as ATA said.

No problem with a BOY val and EOY PS allocations. The PS contribution and account balance growth is simply an assumption as part of the val. Of course you need to run EOY nondiscrimination testing using actual results.

[Blinky the 3-eyed Fish]

It seems you both are agreeing that PPA does have that unfortunate affect on start-up floor plans with an existing DC plan. No cost for a year or two and BOOM, costs jump in!

Not the case at all.

[mphs77]

Does anyone remember what TAG was referring to regarding what portions of the DC Plan may be used for the offset from tymesup's post on 10 Sept 2008?

I know it is a long shot, but I need to take it.

Thanks all

[Dougsbpc]

For what it is worth, we just had an IRS audit of a floor offset DB plan and everything was fine.

In this case, 7.5% of salary profit sharing was allocated to all but one participant in their 401(k) plan every year. The one participant who usually received a 15% allocation was excluded from the DB plan. In addition, the DB plan document had special language indicating that the defined contribution plan offset is the actuarial equivalent benefit resulting from employer allocations of a uniform 6% of annual salary and accumulated earnings for those eligible employees who participate in the Defined Benefit Pension Plan.

I would be curious to hear what others think about carving a 6% of salary contribution offset from the 7.5% contribution allocation.