Odd Money Purchase Plan Feature: how does this work?

[PensionPro]

MPP sponsored by a non-profit and administered by large insurance co. Forms of benefit allowable are annuities and lumpsum. Formula is straight 10% across the board.

Here is the unusual part. If a participant terminates due to disability before NRA they receive a disability annuity credit of 10% of compensation until they reach NRA. Seems like a feature you would normally have in a DB plan.

Are there any issues with making contributions based on past compensation in a DC plan, assuming that is what is going on here? Does it create additional testing issues? Is the employer actually making the addl contribution into the plan and paying them out as disability pension benefits taxable as wages and reportable on 1099-R?

Thanks for any insight!

[Bird]

10% of what compensation? Anyway, my guess would be that this is some kind of rider built into the contracts. Hard to imagine extra contributions being made.

[david rigby]

I agree with Bird that this could be a disability rider inside the insurance contracts. However, don't get too concerned about taxable payments, since (almost) all ER contributions to a qualified plan are eventually paid to recipients as taxable comp.

Is the employer actually making the addl contribution into the plan and paying them out as disability pension benefits taxable as wages and reportable on 1099-R?

[PensionPro]

10% of what compensation? Anyway, my guess would be that this is some kind of rider built into the contracts. Hard to imagine extra contributions being made.

10% of the compensation at the time the participant terminates employment. Contributions are made each pay period.

[PensionPro]

I agree with Bird that this could be a disability rider inside the insurance contracts. However, don't get too concerned about taxable payments, since (almost) all ER contributions to a qualified plan are eventually paid to recipients as taxable comp.

Is the employer actually making the addl contribution into the plan and paying them out as disability pension benefits taxable as wages and reportable on 1099-R?

I was specifying taxable as wages as opposed to taxable as pension payments.

[PensionPro]

Having a hard time understanding the mechanics of a rider in the insurance contract since the only contributions/premiums going into the plan/contract are employer contributions according to the formula in the plan document. Maybe you are saying the employer is paying additional premiums outside of plan contributions for the rider and the insurance company (not the plan) is going to make the disability payments? Interesting.

[Effen]

If compensation is zero, how can they receive an allocation without violating the 415 limit?

[Kevin C]

If compensation is zero, how can they receive an allocation without violating the 415 limit?

See 1.415©-2(g). Or course, the plan has to provide for it.

(4)Permanent and total disability of defined contribution plan participant

(i)In general.— Pursuant to section 415©(3)©, if the conditions set forth in paragraph (g)(4)(ii) of this section are satisfied, then, in the case of a participant in any defined contribution plan who is permanently and totally disabled (as defined in section 22(e)(3)), the participant's compensation means the compensation the participant would have received for the year if the participant was paid at the rate of compensation paid immediately before becoming permanently and totally disabled, if such compensation is greater than the participant's compensation determined without regard to this paragraph (g)(4).

(ii)Conditions for deemed disability compensation.— The rule of paragraph (g)(4)(i) of this section applies only if the following conditions are satisfied—

(A) Either the participant is not a highly compensated employee (as defined in section 414(q)) immediately before becoming disabled, or the plan provides for the continuation of contributions on behalf of all participants who are permanently and totally disabled for a fixed or determinable period;

(B) The plan provides that the rule of this paragraph (g)(4) (treating certain amounts as compensation for a disabled participant) applies with respect to the participant; and

© Contributions made with respect to amounts treated as compensation under this paragraph (g)(4) are nonforfeitable when made.

[Effen]

Ya, I knew that.... I was just testing the rest of you....

[Bird]

OK, I don't think it is a rider. It sounds like they are going to make additional contributions based on the rate of pay...unusual, yes, but Kevin's cite shows it is ok.

[PensionPro]

Thanks everyone for the responses. Special thanks to Kevin C for the cite. The plan is using those provisions in the 415 regs.