Defined Benefit Plan Documents Issues

Transcription

1 Defined Benefit Plan Documents Issues Michael Bain, MSPA, CMC Meredith J. Sesser, Esq., Brucker & Morra, A PC Plan Amendments DB/ DC Combination Plans Top Heavy What We ll Cover HCE Determination options Normal Retirement Age Considerations Document options with regards to funding issues, distribution options and elections 1

2 What We Won t Cover Funding calculations Determination of restrictions How to do 401(a)(4) tests How to determine HCEs DB Plan Document Update Announcement , issued January 23 rd, changes the DB pre-approved plan landscape. IRS extended deadline for submission of DB lead specimen plans to February 2, 2015 IRS will now include Cash Balance arrangements in the pre-approved DB program. Higher User Fees apply to submissions made after the original 1/31/14 deadline. See RP An extension of the deadline to execute Form 8905 for Cycle C filers is March 31,

3 DB Plan Document Update DB documents will be submitted in With a 2 year review process, restatements will likely be from 2017 to Employers on an EGTRRA DB document, will stay on that document with proper interim amendments for PPA, Heart, Wrera. Cycle A-B plans will stay on their PPA restatements for now. Cycle C-E plans who execute Form 8905 will stay on their EGTRRA documents with interim amendments. Plan Amendments- Section 436 Amendment Notice extended the deadline for adopting a Section 436 interim amendment to: the last day of the first plan year beginning on or after 1/1/2013. The last day of the plan year for which IRC Section 436 is first effective for the plan; or Due date, including extension, of the employer s tax return for the tax year that contains the first day of the plan year for which IRC 436 is first effective IDP may have an accelerated date. 3

4 Section 436 Amendment DB plans must impose certain benefit restrictions if the plan is underfunded. An IRC Section 436 amendment that eliminates or reduces an IRC Section 411(d)(6) protected benefit does not cause the plan to fail to meet the anti-cutback requirements of IRC 411(D)(6) if: The plan sponsor adopts the 436 amendment by the deadline in Notice ; and The amendment eliminates or reduces protected benefits only to the extent necessary for the plan to meet IRC 436 requirements. Section 436 Amendment IDP and single employer DBs can adopt the IRS model amendment in Notice Options at end of 436 restriction Automatic restart of accruals Retroactive accrual credit No future accruals without an amendment Require an amendment unless restriction solely due to failure to certify by the end of 9 th month. 4

5 WRERA- Worker, Retiree, and Employer Recovery Act of 2008 PFEA amendment deadline extension to the end of the 2009 plan year. Involuntary cashouts allowed for DB plans without participant consent on amounts not more than $5,000 (present value) regardless of whether the plan is subject to the distribution restrictions found in Code section 436. Funding rule relief for single-employer plans allows plans to smooth the value of pension plan assets over 24 months instead of using an averaging method. Transition shortfall relief. A single-employer DB plan will not have a shortfall amortization base as of WRERA provides relief if an eligible plan falls below the applicable percentage (92% for 08, 94% for 09, 96% for 10). Going forward, only the applicable percentage of the funding target is taken into account in determining the shortfall amortization base. Small employer lump-sum distributions, (for a small employer-less than 100 participants), may be calculated using a fixed interest rate of 5.5%. HEART-The Heroes Earnings Assistance and Relief Tax Act Creates Code Section 401(a)(37) and amends USERRA Effective Date- applies with respect to deaths and disabilities occurring on or after January 1, Plan Amendments due by the last day of the first plan year beginning on or after January 1, (Governmental plan deadline is two years later.) 5

6 HEART-The Heroes Earnings Assistance and Relief Tax Act Death During Qualified Military Service. Any additional benefits that may be provided by a plan due to the death of a participant, other than additional benefit accruals, must be provided to the beneficiaries of a participant who dies in qualified military service (e.g., 100% vesting upon death). HEART-The Heroes Earnings Assistance and Relief Tax Act Differential Wage Payments. Differential wage payments provided to participants during qualified military service, are treated as compensation to an active employee, even though the employee may be considered terminated for purposes of taking a distribution, after which elective deferrals must be suspended for 6 months. Optional Benefit Accruals. A plan may opt to provide benefit accruals for a period of qualified military service for participants who die or become disabled during that qualified military service (including elective deferrals based on elective deferrals in prior year). 6

7 Combined Plan Issues Gateway Issues in DB/DC Combo Plans The required DB/DC gateway allocation for NHCEs may not fit with the PS plan s allocation provisions and may require corrective amendments under 401(a)(4)-11(g) to deal with- for example an NHCE who terminates with 250 hours gets a SH contribution, which triggers a TH minimum and DB/DC gateway- but the PS plan document says you have to work 1,000 hours to get an allocation. You will need a corrective amendment to provide this NHCE with the required gateway amount. Note- $1 of CB credit for an NHCE does not provide $1 of gateway. It differs by age. 7

8 Combined Testing Issues The ideal allocation provisions for the PS plan to use for this type of combined tested arrangement is individual allocation groups; no hours requirement and no end of year employment requirement Shareholders get the flexibility within their PS allocation and 401(k) deferral, since the CB plan is a DB plan and a bit inflexible. Combined Testing Issues Normal Retirement Age should generally be the same in both plans to have a uniform NRA. If not the same, will need to use age 65, and if DB is at 62, will need to increase benefits to 65 for testing, a possible software issue. 8

9 Top Heavy in DB/ DC Combo Cash Balance and/or Defined Benefit Plans are generally tested with a PS 401(k) Plan which provides the Top Heavy Minimums. Issues to be aware of: If the Plans are top heavy, it is not possible to use an end of year requirements for the PS contribution- anyone who participates in the DB with 1,000 hours must get the 5% TH minimum even if they terminate before year end. The required PS contributions to the NHCEs are not discretionary as long as the CB plan exists. Top Heavy in DB/ DC Combo Treasury Regulation , M-12 and M-15 provides four alternatives to satisfy TH: Provide the minimum TH benefit to the DB plan. Within the DC plan, provide contributions and forfeitures equal to five percent of compensation for each non-key employee in both plans. Provide 3% to those only in DC plan. What about a person with a DB accrued benefit who is currently excluded? 9

10 Top Heavy in DB/ DC Combo DB TH minimum with a floor offset where the minimum DB is offset by the DC benefit. Contribute some of the TH minimum to both the DC plan and the DB plan, provided the combined benefits are at least equal to the DB TH minimum Remember that the document rules! HCE Determination Highly Compensated Employee - An individual who: Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or For the preceding year, received compensation from the business of more than $115,000 (if the preceding year is 2013 or 2014; $120,000 if the preceding year is 2015), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation. 10

11 HCE Determination Top 20% paid group: may be effective in small plans maintained by professional groups such as law firms and physicians Both plans must elect to use the election or not. Easy to overlook if you primarily work on the DB plan only (like third party actuaries) Is this a qualification issue? Common NRA DB/DC Reminders Common top paid group election Common definition of compensation for fewer errors Uniform eligibility to avoid TH or other anomalies when person enters only one plan. 11

12 RMDs Needs to be an annuity, even if a cash balance plan (no more account balance method) What if participant does not make an election? Forced Rollovers Document can require distributions Rollover or cash out if PVAB under $1,000 Rollover if PVAB < $5,000 Reduces employee count, administrative fees, and difficulty finding people in the future Selection of vendor for Forced Rollovers 12

13 Questions? 13