Defined Benefit Termination Advice / Dilemma

[Guest JFriedman]

I’m posting this to get some input on behalf of a client.

He has a defined benefit plan which was opened in 2001. This is a small plan (5 participants) and the client is a dentist. The plan was opened and administered by the same actuaries company. He is now terminating the plan and received the paperwork to begin the process. Notice was already given to the participants (15 days before the proposed termination date), amendments were signed, etc.

Here is the question:

With his termination papers he was given an option to terminate with or without an IRS letter of determination. While the paperwork stated that the optional determination letter process is expensive and lengthy, it suggested that he would have to accept some significant responsibility if he elects to avoid the letter process and then gets audited. He discussed this with them, and they basically told him that they discuss the determination letter option as a matter formality, but (off the record) they don’t really advise it due to the additional costs and the fact that the determination letter is basically an audit, so if he gets audited later he would be in the same position as if he elects for the determination letter now. But he may avoid the random audit, if he forgoes the letter, and save some money.

He asked for my opinion and I suggested that he pays the additional fee (roughly $2,500) to have the determination letter since the cost would be tax deductible and he has nearly $900k in the plan, most of which will be going to him and his wife.

He sent in the termination paperwork to the actuary, and was shortly contacted by them to see why he would like to pursue the letter. He explained his concerns and was told that it’s a waste of money and that 99% of theirs client opt not to get the letter. He asked them if there is anything wrong with the plan, they replied that to the best of their knowledge everything is perfect and was signed off by the actuary.

He just called me again asking for guidance on whether to pursue the letter or not. This latest follow-up by them is actually making me more concerned about having him to waive the letter and basically assume future responsibly if it gets audited and some problems with the plan are found.

It seems to me that if there are problems found with the plan during the determination letter process, the actuary would be held responsible, but I don’t have experience with this regards.

Any input would be greatly appreciated, particularly with regards to whether a letter of determination is advisable for him to obtain and with who is responsible should issues arise during the determination letter process vs. forgoing the letter.

Thanks for your time,

J

[Andy the Actuary]

While the determination process is not required, the attornies I work with and I have always recommended it. Most clients do and some don't, but is is strictly their decision. It is surprising that a professional would attempt to talk the client out of the process. Insurance is not a waste just because you never had to use it. I rather have a d-letter to hang my hat on then exact restitution by having to demonstrate that I was advised not to seek a d-letter. I presume this advice was not in writing?

[WDIK]

Is the document an approved prototype?

[PensionPro]

More information here:

http://benefitslink.com/boards/index.php?showtopic=40920

[Guest JFriedman]

Thanks for the quick reply everyone.

I don’t know if the document is an approved prototype (I would assume that it is since the actuary's company is fairly large); reading on this forum, however, I gathered that the amendments to the plans as well as some recent amendments that have yet to be approved are not covered by the pre-approved prototype.

The advice to forgo the letter was not in writing, quite the contrary; the written martial basically makes it my client’s responsibility to forgo the letter having been informed of the consequences. Verbally, however, he was really discouraged from getting the letter. He seems to think that they are too busy and maybe trying to save him some money, but I just don’t know.

Maybe they just don’t want to deal with it or trying to get him to assume responsibility at the time of termination. I just don’t have enough experience with this to have a good idea on their motivation for the recommendation. I would think they would want the extra work, they’re charging him for it.

What's the down side of seeking the letter for my client? The cost of the process and possibly requiring another year of administration fee if the assets are not completely distributed by the end of December? The upside would be that the actuary would be responsible and have to correct any errors. I assume, maybe incorrectly, that the actuary would be responsible for any egregious errors made during the administration of the plan. I think the fees are worth the peace of mind my client would have once he rolls over his distribution…

Any additional input would be appreciated.

Thanks again,

J

[Andy the Actuary]

Sometimes if the amount of plan assets is small (e.g., under $200,000), the sponsor will forego the determination letter process. Once the plan is amended to terminate, it no longer is subject to minimum funding standards for the next valuation year, so administration cost is lightened somewhat, though certain certifications (e.g., AFTAP) may still be required.

The IRS will review other information during the d-letter process than just the Plan document so using an approved prototype, while offering some comfort, does not de facto assure all is acceptable.

If the IRS finds an operational error upon audit and wants to get tough, they will hammer the client. It is then incumbent for the client to decide whether or not he wants to go after the actuary. Sometimes the issues are not cut-and-dry. The client may contend he did not receive appropriate or timely advice. The actuary may have burried such advice in an incomprehensible, undated actuarial report. Q: Was the advice given appropriate and timely? Best to avoid these battles.

[JAY21]

I wouldn't necessarily be suspicious that there is something wrong given the actuarial firm's response. It's likely they just consider an IRS Submission to be a hassle (which they are). Still the actuarial firm certainly needs to be looking out for the client's best interest (not theirs).

[david rigby]

... it suggested that he would have to accept some significant responsibility ...

The plan sponsor will have significant responsibility, no matter what. It's his plan.

I find it surprising that anyone would recommend against a DL filing.

BTW, JFriedman, you stated that this dentist is your client. It may not be relevant to anyone reading here, but your post does not identify the nature of that relationship, and some responses may have assumed a particular relationship. Attorney, accountant, investment advisor, bookie, real estate agent, etc? (Not being nosy, just a comment.)

[Lou S.]

... it suggested that he would have to accept some significant responsibility ...

The plan sponsor will have significant responsibility, no matter what. It's his plan.

I find it surprising that anyone would recommend against a DL filing.

BTW, JFriedman, you stated that this dentist is your client. It may not be relevant to anyone reading here, but your post does not identify the nature of that relationship, and some responses may have assumed a particular relationship. Attorney, accountant, investment advisor, bookie, real estate agent, etc? (Not being nosy, just a comment.)

We advise all of our clients to get a DL upon Plan termination, especially in light of the many required snap on amendments in recent years. That said I do explain to them that it is an expensive and lengthy process and is very a kin to "document insurance". That is you get the letter and the IRS is giving its blessing to the form of your documnet. The general rule of thumb I tell my clients when they as what would I do if it was my Plan is, I would sumbit if any one participant has a balance of $500K or more or if the Plan assets as a whole exceed $1M. I'd would also always request a letter if it was a plan with any non-vanilla options. If the assets are small though, I'm not sure the cost of submission out wieghs the benefit.

More and more the DL process is becoming a voluntary audit as someelse noted. Years ago our DL apps would be aproved with just 1 or 2 minor questions and sometimes without even that. These days we often get a list of 15 to 20 questions they want answered at least half of which we have to point out were inculded and labled in the origial submission package and others that we usually only see upon Plan audit.

[K2retire]

I have worked for 2 TPA firms. One of them (the only one of the two that offered DB plans) REQUIRED all of their clients to get a D letter for their terminations. The other (which offers only prototype 401(k) plans) strongly discourages it.

It is unquestionably very expensive and time consuming. Whether it is worth the time and money depends on the circumstances. Is there anything aggresive about any of the actuarial assumptions or the benefit formula? If the plan were selected for a random audit, what might be uncovered? In case of random audit, would the employer be able to correct and defects that might be uncovered? Could that change over the next few years? Is the plan terminating because the dentist is ready to retire? Can he afford to wait a years or so for the d-letter before taking any distributions?

Has he asked his CPA's opinion?