Workshop 45. Defined Benefit: Ask the Experts

Transcription

1 ASPPA 2016 Annual Conference Workshop 45 Defined Benefit: Ask the Experts Tuesday, October 25, :45 a.m. 12:00 p.m. Government Participants Linda Marshall, Senior Counsel, Chief Counsel, Qualified Plans Branch 1, Internal Revenue Service, TE/GE, Washington, DC (Invited) Harlan M. Weller, Government Actuary, U. S. Department of Treasury, Office of Tax Policy, Washington, DC (Invited) Practitioner Participants Thomas J. Finnegan, FSPA, CPC, QPA, MAAA, FCA, Executive Vice President, CBIZ Savitz, Philadelphia, PA James E. Holland, Jr., FSPA, FCA, MAAA, ASA, EA, Chief Research Actuary, Cheiron, Inc., McLean, VA Marjorie Martin, FSPA, MAAA, EA, Principal, Buck Consultants, LLC, A Xerox Company, Hewitt, NJ

2 AGENDA Introductions Guidance Update What is the status of guidance on automatic approvals? Will there be automatic approval for using an end of year valuation date for small plans? What is your timing for proposing new IRC 430 and 417 tables? What other guidance can we expect? Prepared Questions Floor Questions

3 Prepared Questions Q1 Missing Participants, Required Minimum Distributions, Valuations Plan sponsors availing themselves of VCP to address minimum distribution failures have been instructed to handle missing participants as follows: For affected Participants for whom the Plan does not have a correct address, the Plan Administrator will attempt to locate such Participants using a certified mailing to the last known address. If that method is unsuccessful, additional search methods will include use of a commercial locator service, a credit reporting agency, or other Internet search tools. For those Participants who can be located, the amounts payable will be distributed, and for those who cannot be located the amounts payable will be forfeited, subject to reinstatement and payment if they are subsequently found. From past Blue and Gray Book advice we learned that PBGC generally wants the flat premium money and they want the missing participant assets when the plan is terminated. IRS apparently is ok with excluding these participants from the valuation liability, so PBGC said in 2004 that they would be out of the VRP liability. If there is a spinoff or transfer, however, the money needs to follow the person so that the plan with responsibility upon later termination has the funds to turn over to PBGC even though there has been a forfeiture under the 411 rule. Given that, is it appropriate to assume 0% likelihood of locating them and essentially take them out the liabilities. Is the old 411 rule outdated in light of the missing participant system with PBGC that came along later? Is there an alternative to IRS mandating its use to solve the minimum distribution problem? Q2 Assumption for Determining if an Amendment Increase Benefits A plan does not provide for lump sum benefits and provides for an earliest retirement age of 55. The plan is amended in the middle of the year to provide a lump sum window, allowing all terminated vested participants the ability to commence their benefit immediately in a lump sum, QJSA, QOSA, or the plan s normal form. Since the plan did not provide for this earlier retirement age or for a lump sum, the assumptions used for the 430 valuation did not reflect the possibility of earlier retirement or of lump sums. By the next valuation date, the window will have closed and again the assumptions will not reflect these changes. For purposes of determining if this amendment increases benefits, must the same assumptions be used as for the 430 valuation? In that case, the amendment would have no effect on the AFTAP. If however, it is permissible (or required) to adjust the assumptions to reflect the amendment, the amendment may increase the FT. : The assumptions for 436 calculations must be the same as for the 430 valuation.

4 Q3 Cash Balance Plans with Multiple Formulas A cash balance plan provides for immediate commencement upon termination of employment with the distribution actuarially equivalent to the current theoretical balance. The plan further provides HCEs with a pay credit of $50,000 and all other employees with a pay credit of 5% of pay. For HCEs the Interest Credit Rate is 4% and for NHCEs the interest credit rate is 5%. Gray Book Q&A could be interpreted to treat the resulting implicit early retirement reductions as separate BRFs and, since the reduction for HCEs is less than the reduction for NHCEs, find the arrangement discriminatory. However dealt with a traditional plan. In this circumstance, under a cash balance plan, the accumulation at ERD is the direct result of the benefit formula and appears to meet the exception under 1.401(a)(4)- 4(e)(1)(ii)(A). Would the ability to take distributions at termination of employment be considered a single BRF? Yes. Unlike in a traditional plan and particularly the example in where separate ERFs were detailed for reducing the Normal Retirement Benefit to the Early Retirement Benefit, under a cash balance plan where the immediate benefits are equivalent to the account balance, the account balance and hence the ERB is a direct result of the plan formula, meeting the exception under 1.401(a)(4)-4(e)(1)(ii)(A). Q4 Calendar Year Data Election If a plan with a July 1, 2014 to June 30, 2015 plan year uses the calendar year data election that uses calendar year 2015 as the lookback year under Notice 97-45, is the HCE threshold based on the 2014 threshold of $115,000 or the 2015 threshold of $120,000? Calendar year 2015 becomes the lookback year in this situation. So use the 2015 threshold of $120,000. This allows for uniformity in the HCE determination. For example, consider the average benefits percentage test where plans are aggregated based on plan years ending in a calendar year. If you used different thresholds, you d have some participants who are HCEs in one plan and NHCEs in another. This makes it difficult to apply the test. Q5 Partial Distribution Regulations The final regulation appears to limit the implicit rule to distributions in the form of a lump sum and not other forms such as period certain annuities. Is this correct? Yes

5 Q6 Partial Distribution Regulations Is the final regulation intended to allow a plan to calculate the term certain portion of a Social Security Level Income option on 417(e) rules (interest, mortality, and present value of deferred to NRD benefit) while the remainder is determined using the same early and option factors used for the full benefit determination? Is this explicit? If the plan incorporates the 417(e) rules by reference (e.g., to the extent required by IRS regulations, actuarial equivalence is determined using AIR and AMT ), is the plan required to approach the SSLI calculation this way absent an amendment by the end of the 2016 plan year? Yes, we intend the new rule to apply in determining SSLI options and will elaborate on this in the next update to the 417 regulation. In the meantime, it would be reasonable for a plan administrator to interpret the plan either way, particularly in light of the short timeframe between now and January 1 annuity starting dates. Q7 RMD Form of Payment A DB plan is paying a RMD in the form of a life annuity. Upon the death of that participant, what alternatives are there to avoid a forfeiture and pay out the PVAB. [1.401(a)(9)-6 Q&A 14(d)(2)] In a DB plan, the required beginning date is an annuity starting date, so the participant must be paid in the QJSA form, allowed to waive, offered the QPSA instead, and if not taking that, the benefit is paid in the plan s normal form. Thus the death benefit is merely the death benefit determined by the form of selected payment. Q8. Minimum Participation Rule for Frozen Plan A frozen DB plan is not PBGC covered and is top-heavy. Does this plan still need to pass 401(a)(26) testing? If yes, does that means even though the plan was frozen, it still needs to provide meaningful benefit to NHCEs and might need to bring new people in? This frozen DB plan must meet the minimum participation rule for prior benefit structures. It is possible that a mix of current and former employees will meet this requirement. If not, then the plan sponsor would need to bring some new people in. If limited to non-key employees, it is possible that the level of benefit would not need to meet the top-heavy standard. The other alternative is to terminate the plan.

6 Q9. Nondiscrimination high 25 group To determine the top 25 (restricted employees) for a frozen plan, can you include HCEs hired after the plan was frozen? Yes Q10. Nondiscrimination -Gateway A law firm has 43 employees, all eligible and active. 8 equity partners are HCEs. 8 associates are not HCEs. All others are NHCEs. All are eligible to contribute to the 401k and get the safe harbor (match). Associates are excluded from the PS allocation as a class in the plan document but can contribute and get the match, plus get the top-heavy minimum. The client wants to add a cash balance. How can the associates be excluded from the gateway? The Associates receiving top-heavy minimums are benefiting under the Profit Sharing portion of the plan. As such they are required to share in any gateway that may be required. However, if the cash balance plan stands on its own for testing or if the Associates are spun off to their own separate plan which is not aggregated with the cash balance plan or if the combination of cash balance and profit sharing is primarily DB in nature, then the associates would not be required to get a gateway. Q11. Minimum Participation Rule another Frozen Plan A frozen PBGC covered plan has fewer than 50 participants. An exception to 401(a)(26) applies if the plan is not fully funded (sufficient to cover all plan liabilities) based on certain information on Schedule SB that is not reported on that form. How can the plan demonstrate that the exception is available without calculating values based on current PBGC assumptions? Although obtaining the actuary s certification based on PBGC assumptions is the ideal, if the plan is less than 100% funded based on PPA assumptions, it can be assumed that the PBGC values would be higher and the funded percentage less than 100% as well. If the PPA values are more than 100% funded, the

7 result is not clear and additional calculations are in order. It is suggested that an attachment to the Schedule SB document the additional calculations so as satisfy the requirement of the regulations that a timely filed actuarial report evidences that the plan does not have sufficient assets to satisfy all liabilities under the plan Q12. Nondiscrimination: Correcting High 25 Distribution A plan with fewer than 100 participants has a lump sum option. The AFTAP is consistently over 80% but less than 110%. A restricted employee received a lump sum payment. Is there any fix other than to return the lump sum? The EPCRS correction for this error is for the employer to make a contribution to the plan to replace the portion of the distribution that was not eligible for payment. If this will overfund the plan, EPCRS representatives will generally allow the corrective payment to be limited to the amount that gets the plan to 100% funded. The participant is not due any further benefit. Q13. Top-heavy Minimum Document Error A DB and DC plan both say the top-heavy minimum will be provided by that plan (or alternatively under the other plan). What is the best way to resolve this? Amend one of the plans to remove the alternative language. Go directly to VCP; do not Pass Go. Q14. Nondiscrimination: High 25 Limit when Revoking TEFRA Election A DB plan covers owner and staff. The owner made a 242(b) election, so no RMDs. The plan is now underfunded. The owner wishes to revoke the 242(b) election. Is there any restriction on receiving retro RMDs at this time? Revoking the election triggers a requirement to take the RMDs that would have been paid absent the election. The retroactive make-up payments are considered to applicable to the previous years much the same as 415 payments to correct for not starting when benefits reached the participant s three year average are attributed to the prior years.

8 Q15. Determination Letters for CB Plans Does a CB plan falling into Cycle A (which ends 1/31/17) need to sign Form 8905 by 1/31/17 if they intend to adopt a pre-approved plan in the future?? Or do they not need to do anything because Rev Proc didn t say anything about intended adopter or Form 8905 at all? Q 16. Section 415: Three Year Average Pay Must (or may) a plan consider compensation prior to its effective date for section 415 compensation limit average? (Do you need to collect prior comp data?) : The plan must consider compensation prior to the effective date. For example, if pays were $20,000 two years prior, $25,000 one year prior, and then $200,000 in the first year of the plan, you could not use $200,000. You need pay information to calculate benefits for funding and maximum deduction purposes. Q17. Section 415: Plan termination An individual subject to the 415 average comp limit has been receiving payments for 3 years. The plan is terminating. How is the 415 maximum lump sum calculated? : Assuming the form of payment was not a fully subsidized QJSA, in the absence of specific multiple annuity starting date guidance, the maximum lump sum would be the present value of the remaining annuity stream using 5.5% interest and the AMT.