MASD and 100% of Comp Limit

[RLR]

Has anyone had an audit where the owner was at the 100% of comp limit and took more than one distribution?

Owner took an in-service distribution at NRA 62. He rolled over the LS to an IRA.

He continued working and his avg comp increased and he accrued additional benefits.

At age 65 he elected 12 monthly payments of his  accrued benefit with a retroactive annuity starting date to the beginning of the year to be paid from the trust.

He subsequently took the commuted value of the annuity payment in a lump sum. Plan was terminated and excess assets were allocated to him.

The method we used to account for the MASDs in illustrating that his 415 limit had not been exceeded was from a presentation by Michael Preston and Kurt Piper at the ACOPA Advanced Actuarial Conference in June, 2014.  We consider this a good faith effort to comply with 415 when MASDs are concerned.

The IRS actuary is challenging the calculation siting Reg 1.415-(b)-1(b)(iii) that requires the plan to actuarially adjust past and future distributions when determining the annual benefit as of a particular annuity starting date.  The audit is ongoing.  

Since the participant is at the comp limit, we don't think an actuarial adjustment is necessary.

So, we were wondering if anyone had been through an IRS audit where someone was at the comp limit and there were MASDs.  

Any comments or guidance would be appreciated. 

[Mike Preston]

On 3/11/2020 at 8:47 PM, RLR said:

Has anyone had an audit where the owner was at the 100% of comp limit and took more than one distribution?

Owner took an in-service distribution at NRA 62. He rolled over the LS to an IRA.

He continued working and his avg comp increased and he accrued additional benefits.

At age 65 he elected 12 monthly payments of his  accrued benefit with a retroactive annuity starting date to the beginning of the year to be paid from the trust.

He subsequently took the commuted value of the annuity payment in a lump sum. Plan was terminated and excess assets were allocated to him.

The method we used to account for the MASDs in illustrating that his 415 limit had not been exceeded was from a presentation by Michael Preston and Kurt Piper at the ACOPA Advanced Actuarial Conference in June, 2014.  We consider this a good faith effort to comply with 415 when MASDs are concerned.

The IRS actuary is challenging the calculation siting Reg 1.415-(b)-1(b)(iii) that requires the plan to actuarially adjust past and future distributions when determining the annual benefit as of a particular annuity starting date.  The audit is ongoing.  

Since the participant is at the comp limit, we don't think an actuarial adjustment is necessary.

So, we were wondering if anyone had been through an IRS audit where someone was at the comp limit and there were MASDs.  

Any comments or guidance would be appreciated. 

There is a lot of history to this.  Cutting right to the chase, Kurt and I think the best thing you can do is to contact Marty Pippens. He is very familiar with the issue since he was at the IRS when those 415 regs were finalized.  Keep us posted.

[RLR]

Mike,

I emailed Marty Pippens 3/24/2020 and did not get any response from him.  I'm sure he is covered up with all the CARES Act legislation, or my email could have gone to his junk mail.  Anyway, any other thoughts or suggestions?  The audit is still ongoing and according to the auditor, the field actuary has referred this case and another similar one to counsel for review.

Thanks.

[Mike Preston]

Use your telephone.

[ishi]

Wondering if there was any resolution to this situation.  

I have a similar situation involving an active participant receiving RMD payments from a DB plan.  Participant started receiving RMD payments 4/1/2020 at the 415 comp limit, has accrued more benefits during 2020, and subsequently terminated 12/31/2020.   The plan's formula accrued benefit exceeds the 415 comp limit at 12/31/2020, and the lump sum payable 1/1/2021 exceeds the 415 lump sum limit.  Do these amounts need to be reduced to reflect the payments received during 2020?  Is this truly a MASD situation?

[RLR]

It's been a year since I posted this, and there has been no movement on getting this audit closed.  The field actuary and his supervisor are supposedly working on this this week.

[Peter Gulia]

If your client doesn't like the field actuary's approach, perhaps the taxpayer might evaluate (with your and other advisors' advice) the advantages and disadvantages of asking for National Office advice.

Alternatively, if the taxpayer did not consent to extend the statute of limitations, might delay increase the IRS's risks?

[RLR]

We were notified this week that the auditor and the field actuary have determined that there was a 415 violation due to the MASDs and they trying to come up with the amount needed for correction to offer a closing agreement.

Has anyone else had an audit with similar issues or are aware of guidance issued since I first posted this over a year ago?  For reference, this is a 100% of compensation limit where there were multiple annuity starting dates.

 

[cathyw]

Has there been any further action/guidance on this issue in the past 18 months?  I've heard anecdotally from an ERISA attorney who had clients challenged on this issue at audit.  When the client requested that the IRS agent get technical/National Office advice the agent ultimately backed down.

Thanks.