Year #10

[Bri]

Got a quick one -

Doctor has had a DB plan for his one-man consulting business since 1/1/2008, and he earns well over any limits to worry about.

So 2017 is going to be his tenth year of participation (nominally defined as 1000 hours), and so once he gets his full 415 limit, the idea is to terminate and have him roll over a lump sum.

The 415 regulations define a year of participation as calculated to fractions of a year.  But they also say the year is credited if the hours are worked.

Should I be interpreting that to say it's a full tenth year of participation as of the moment he gets to 1000 hours?  Or does it mean he has to actually have the twelve months in the bank?  He might get to 1000 hours in June, but if we terminate the plan right at that point, I don't want the surprise that he would only get 9.5/10ths of the $215,000 limit. 

He'd obviously rather go for the full limit, and so if it's legitimate to count 2017 as a full year 10 before the end of the year, he could terminate and distribute before December 31, thus avoiding any 2018 plan year with its additional costs.

Thanks...

--Brian Gordon

[Lou S.]

How does your Plan Document define a Year of Participation? That will be your answer.

[david rigby]

You might also consider whether the 2018 limit might be more than the 2017 limit, and (if likely) whether that might mean a termination of 1/2/18 might be viable.

[FAPInJax]

The last thing they should worry about would be the 2018 valuation costs (since he will presumably be receiving 2+ million in lump sum. Note the comment above regarding the increase in the limit that would become effective 1/1/2018 (his age would not change from 12/31/2017 to 1/1/2018 and it could produce even more money)

 

If I remember correct what the $ limit is for 2017 then a cost of living of only 1.43% would kick it up to 220,000

[CuseFan]

Agree YOP is based on how the plan document credits service. Other thoughts:

Getting the full 415 limit also assumes he is at or past a normal retirement age of at least 62.

Also consider, in addition to potential future 415 dollar limit increases, post-65 actuarial increases. These can be extremely valuable (and generate additional tax deferred contributions) - much more than fixed income returns and many equity returns, despite the "fact" (sic) we all know that doctors are experts at investing! if he wants to invest w/o the worry of how it impacts DB funding, so a post-62/post-NRA in-service (amend plan is needed), pay out and rollover a lump sum so invest more aggressively but continue accruals as long as he's working and has the money to fund.

[Bri]

As for the document, the definition of a YoP (computed to fractional parts of a year) basically mirrors the treasury regulation -

The accrual computation period is defined as the plan year, and the participant has both the hours and is eligible for at least one day during the period, and therefore "The portion of a YoP credited...shall equal the amount of benefit accrual service credited to the Participant for such accrual computation period."

I hadn't really skipped the "check the document" step - because I still got the same question.  Is it a full year of participation as long as the hours are hit within the period?  I'm starting to think, though, that if we terminate on Sept. 30, for example, that just makes it a 9 month accrual period, so that even with 1000 hours, it's definitely only 9.75 years rather than 10.

thanks again....

[Mike Preston]

Most plans call for a full year of benefit accrual service once the hours requirement is satisfied.  Hence, if the hours requirement is 1,000 a participant is credited with a full year once credited with 1,000 hours.  To drive home the point if the plan document is changed, effective 1/1/2017 to provide that the hours requirement is 10 hours, then a participant is credited with a full year once credited with 10 hours.  In such a case, the plan could be terminated 3 days into 2017 and the participant would have 10.00000 years.

Nothing contained in this message is meant to contradict the very good advice written into earlier messages making it clear that it is most likely (although not guaranteed) that the increase in the 415 limit we are likely to experience as of 1/1/2018 argues for termination next January.

[AndyH]

Has anyone studied the impact of the 2018 mortality tables on a 2018 lump sum?

[david rigby]

2 hours ago, AndyH said:

Has anyone studied the impact of the 2018 mortality tables on a 2018 lump sum?

Very rough, about 3.6% at age 62 and 4.4% at age 65.  (Sorry, no one to proof my work, so other review is welcome.)