Missing Employee Contribution Information in a DB Plan

[richard]

In an old-style contributory DB plan, part of benefit payments to a participant are nontaxable. This is because the participant made after-tax contributions; the amount of these contributions (without interest) is the tax basis in the benefit.

Let's assume the benefit is a lump sum; this avoids the complicated basis recovery rules that I once knew a long time ago.

What happens if neither the employer, the plan sponsor, the plan administrator (who happen to the the same company) nor the trustee (who happens to be an external bank trustee) have the records that show the amount of employee contributions? Who is ultimately responsible if this information cannot be located?

Any suggestions on what to do if the information is truly unavailable. To assume zero contributions would overstate the participant's tax liability. To arrive at any nonzero amount would essentially be a made up number. And salary records for the time that employee contributions were made (over 10 years ago) are unavailable.

Any ideas?

[RCK]

This is a DB plan, so you should have compensation history in order to allow the calculation of benefits. The compensation definition for benefits purposes is probably the same as for employee contribution purposes. And if the definitions are the same, you should be able to recalculate all the employee contributions.

If the definitions are not the same-- that is, contributions are made based on a different definition, then I'd research the extent of the differences. If they are reasonably close, I'd use the research to adjust the benefit definition of comp as need to get my best estimate of contribution definition compensation.

In your question, you did not explicitly mention the actuarial firm that has been doing the cost calculations. If they are different from the sponsor, administrator and trustee, then they should have what you need.

Who's responsible for having the information? Ultimately the sponsor.

[david rigby]

The participant might have some information in the form of W-2's or paystubs. OK, it's not very likely, but no harm in asking.

[richard]

Thank you Pax and RCK. Unfortunately, it's not gonna be simple.

Mandatory employee contributions stopped being made over 10 years ago. Even if we knew the contribution rate back then (documents from that time are not to be found, so far), I suspect that salary information that old is unlikely to be found. (The plan sponsor is a non-profit; payroll records aren't the best.)

The immediately prior actuary (for about 5 years) never dealt with this issue. The actuary before him was an insurance company; the plan sponsor has contacted them and is hoping that they have some records.

Even though we have the accumulated value (contributions plus interest) as of now, I think that trying to reconstruct the original contributions by backing off the historical interest rates will not work --- I suspect there was inconsistency in the interest rate crediting methodology in the past (translated, "nobody has a clue!")

We actually did receive information on actual employee contributions from one participnat! I suspect it was a fluke, and at this time, the client does not want to ask the affected employees (most of whom are actually former employees who terminated vested) for their pay records from 10-20 years ago. Kinda embarassing.

Also, if in fact the plan sponsor is ultimately responsible, what are the consequences? Penalties? Fines? IRS and/or DoL. Disqualification! (Alright, let's be reasonable.)

Thanks.

[RCK]

Let's hope that the insurance company comes up with the information. If not, I'd go back to the current actuary and have them double check the transition file that they received. It obviously had ee contibutions with interest, and it should have had ee contributions without interest too.

Assuming that neither one come up with the data that you need, then:

1. You need to do something to come up with a tax basis for each of the benefit payments.

2. Nobody is going to have any better data than you do.

So, I would do estimates based on a (or several)sample participants. The person for whom you do have data would be a good starting point. The result would be a set of factors that would vary by years in the plan and years since cessation of contributions. Those factors when applied to the contributions with accumulated interest would give you estimated ee contributions.

This is an operational failure, and I'd say that you're doing some form of self-correction. Document what you're doing, making it clear that you have exhausted the possibilities, showing how the estimates are derived, and that the results are reasonable.

[david rigby]

Someone has to make a reasonable attempt at estimating the EE contributions. This suggestion by RCK is a good one, especially if you have any starting point to base this on.

Assuming you are the current actuary/record-keeper, then you should try out a method (or maybe two) for this estimate, and then get the plan sponsor to review and sign-off, preferably in writing.