Workshop 22: Defined Benefit Q&A

Workshop 22: Defined Benefit Q&A Kyle N. Brown, Special Counsel, IRS Chief Counsel TE/GE James E. Holland, Jr., Cheiron Inc. Judy Miller, ASPPA/ACOPA

Question 1 Section 401(a)(4): Retroactive Plan Amendments Reg. 1.401(a)(4)-11(g) allows retroactive corrective amendments for purposes of satisfying the coverage and non-discrimination rules. Although the stated purpose is to correct defects, the regulation does not require demonstration of the existence of a disqualifying defect. The regulation requires only that the amendment be nondiscriminatory and that there be no resulting reduction in benefits. In fact, the 1991 401(a)(4) final reg preamble explicitly says (italics added) the retroactive amendment need not be for the purpose of correcting a disqualifying defect : In order to permit employers to make practical choices based on administrative concerns, use of the retroactive correction period is not conditioned on a demonstration that the plan actually failed to satisfy the nondiscrimination requirements. In addition, the correction is not limited to amendments correcting disqualifying defects. The final regulations do require, however, that any retroactive amendment under this provision be nondiscriminatory standing alone and be consistent with the anti-cutback rules of section 411(d)(6). Please confirm that a retroactive amendment can be adopted under -11(g) provided it provides non-discriminatory retroactive benefits to a non-discriminatory group, and does not reduce benefits regardless of whether or not a violation of 410 or 401(a)(4) can be demonstrated.

Question 2 Section 401(a)(4): Plan Termination Excess Assets Allocated a) Calendar DB plan terminates June 30, 2014. Distributions will occur in September 2014. Historically, the DB plan accruals have been tested with the PS allocations. The DB plan doesn t exist on December 31, 2014, so can you still test on an aggregate basis for 2014? Or does the short plan year in the DB, caused by the distributions, preclude the aggregation as the DB and DC do not have the same plan year in 2014? b) Calendar DB plan terminates December 31, 2013. In accordance with plan language, accrued benefits for actives are increased to soak up excess assets. Distributions will occur in November 2014. You have already completed 2013 work/ps allocations and are past 2013 funding deadlines. Could you test the excess asset allocation as 2014 accruals, even though the DB plan doesn t exist on December 31, 2014? How is this test performed?

Question 3 Section 401(a)(4): Testing Cash Balance with Variable Rate of Return The IRS current position is that, when testing a cash balance plan for 401(a)(4) and 401(a)(26), a plan using a variable interest crediting rate must use the most recent crediting rate for projections to determine the accrued benefit at the testing age. The final hybrid regulation in 1.411(b)-1(b)(2)(ii)(G) provides that for purposes of the 133 1/3 accrual rule a plan may assume a zero percent interest rate for projection when the actual interest credit is negative. Is it reasonable to apply this zero % rate for projection for purposes of 401(a)(4) and 401(a)(26)?

Question 4 Section 404: Cushion Amount and High 3-year Average Compensation Participant in non-title IV defined benefit plan earned $50,000 in 2013 and $55,000 in 2014. Average compensation at the end of 2014 is $52,500. Participant s projected average compensation at age 65 exceeds the current compensation limit of $260,000. The employer adopts a new plan effective 1/1/13 that provides a benefit of 8%* years of service. The participant s accrued benefit at 1/1/14 = 50,000 * 1 * 8% = 4,000. The 415 high 3 compensation limit at such date is $5,000 ($50,000/10); The 415 dollar limit is $21,000 ($210,000/10). Section 404(o)(3)(A)(ii)(I) provides that the cushion amount is increased by the amount by which the funding target for the plan year would increase if the plan were to take into account increases in compensation which are expected to occur in succeeding plan years. Section 404(o)(3)(B) provides that In making the computation under subparagraph (A)(ii), the plan s actuary shall assume that the limitations under subsection (l) and section 415(b) shall apply. In applying 404(o)(3)(A)(ii) for 2014, is this participant s projected accrued benefit at 1/1/14 based on $52,500 or $260,000?

Question 5 Section 410(b) Non-discriminatory Classification What goes into the definition of a reasonable classification? Can it be based on a date? For example, a plan eliminated features for anyone hired after December 31, 2013. Is a classification based on employment before or after December 31, 2013 reasonable? Or must the 70% ratio test be passed?

Question 6 Section 411(b): Flat Dollar Cash Balance Pay Credits It is commonly accepted that cash balance plans must pass 411(b) using the 133 1/3% rule. Generally, this is because the fractional rule and the 3% method both require no more than 10 years of average compensation be used in determining the benefit and most cash balance plans are accumulation plans using compensation for all years. But what about a cash balance plan that has flat pay credits? For example, many cash balance plans provide pay credits of some dollar amount not tied to current compensation. What prevents such plans from using the 3% method? Consider a plan effective 1/1/14 that provides for pay credits of $100,000 annually beginning 1/1/12, for no more than 20 years. Assume further that due to section 415 there would be no accrual in 2014, but there would be an accrual in 2015 causing a violation of the 133 1/3% rule. Since the plan does not use compensation in its benefit formula thereby not violating the 10-year average compensation requirement couldn t such plan pass 411(b) using the 3% method?

Question 7 Section 411: Late Retirement Benefits A DB plan does not provide for suspension of benefits. a) Is the plan required to provide both an interest and mortality adjustment between NRA and the deferred retirement date? b) Is there a benchmark for reasonable actuarial assumptions for this determination? If it is a cash balance plan, can it be the interest crediting rate?

Question 8 Section 411: Plan Rate of Return Interest Credits The final hybrid regulations permit an interest crediting rate based on a subset of plan assets provided the assets are diversified to minimize volatility, qualifying employer securities held in the subset do not exceed 10% of the fair market value (FMV) of the subset, and the FMV of the subset of assets approximates the liabilities of benefits that are adjusted by reference to the rate of return on the subset. The preamble makes it clear that if all other rules are satisfied, there can be different subsets of assets for different participants. If a plan has more than one subset of assets, and each subset is used to determine the interest crediting rate for a different set of participants, is assignment to a particular subset considered a BRF that must be tested under the nondiscrimination rules?

Question 9 Section 415: High 3-year Average Compensation A defined benefit plan with a calendar limitation year incorporates the 415 requirements by reference. If an employee participating in the plan and retiring in 2014 earns more than the 401(a)(17) limit on compensation early in each year, may the plan calculate the participant s high three year average for 415 based on calendar years 2012, 2013, and 2014, even though the 2014 calendar year has not ended at the time that benefits begin? Alternatively, may the plan determine the 415 limit taking into account just the full calendar years that had been completed (2011, 2012 and 2013 for a retirement/ commencement during 2014)?

Question 10 Section 415: COLA Increases after Lump Sum Distribution A participant who is employed past the plan s NRD takes a lump sum distribution of the maximum amount payable under 415 in 2014. The participant is still employed in 2015, and the participant s limit under 415 limit has increased. Can an additional distribution be made based on the increase in the 415 limit? Example: Participant s accrued benefit at NRD in 2014 is the dollar limit of $210,000. Participant takes lump sum distribution equal to value of the $210,000 (using 5.5% interest rate and applicable mortality table per plan provisions). In 2015, the participant is still employed and the dollar limit increases to $220,000. Can an additional distribution of the value of $10,000 be made? Note that section 1.415(d)-1(a)(4)(iii) appears to preclude using the higher dollar limit after a distribution of the entire plan benefit, but provides an exception for an increase in benefits to a participant that could have been accrued without regard to the adjustment of the dollar limitation on or after the effective date of the adjusted limitation.

Question 11 Section 415: Non-safe Harbor 415 COLA Assuming the plan provides for increases to reflect changes in the 415 dollar limit, can the increase for a current year reflect adjustment for the participant s current age rather than the age other benefit distributions commenced under the plan? The safe harbor uses a ratio (1.415(d)-1(a)(6)(ii)), which translates to an adjustment based on the latter, but it is not clear that other approaches are barred. For example, if a participant is age 70 and the dollar limit increases $5,000, can the plan pay the age 70 actuarially increased value of the $5,000 payable at age 65 even though distributions began at age 67? Note that if 415 were not an issue, an adjustment to an additional benefit would typically be based on the date that the additional benefit started, not the earlier commencement date.

Question 12 Section 415: Floor Offset and 415 Which of the following methods for applying 415 are acceptable under a Sequential Offset Arrangement: Approach 1: Apply 415 to the Gross Benefit: Under this approach, the plan s benefit is limited to $210,000 and then reduced by the $20,000 offset to produce a benefit of $190,000. Approach 2: Apply 415 to the Net Benefit: Under this approach, the benefit determined under the plan is $250,000. This is then reduced by the $20,000 offset to get a net benefit of $230,000. Since the net benefit is greater than 415, the participant receives a benefit equal to the 415 limit of $210,000. Is the answer influenced by whether or not the Section 415 limits are applied or not applied in discrimination testing as provided in 1.401(a)(4)-3(d)(2)(ii)? (Please consider the link between 1.401(a)(26)-5, 1.410(b)-3(ii) and 1.401(a)(4)-3(d)(2)(ii)).

Question 13 Section 417: Annuity Starting Date and Signed Forms Consider a calendar year plan with an annual stability period. Benefit election forms are sent to a participant in November for an ASD of December 31, 2013. The participant and spouse complete and return the forms to elect a lump sum distribution. Would the relevant interest rates for 2013 or 2014 be used if: a) Signed forms are returned in December 2013, and the lump sum distribution is paid in January 2014 due to reasonable administrative delay. b) Signed forms are returned in January 2014. The ASD is the date all events have occurred which entitle the participant to such a benefit. 1.417(e)-1(b)(3)(iii) says The plan may permit the annuity starting date to be before the date that any affirmative distribution election is made by the participant provided that, except as otherwise provided in paragraph (b)(3)(vii) of this section regarding administrative delay, distributions commence not more than 90 days after the explanation of the QJSA is provided. This would argue for 2013 rates in both cases. However, notes from the Intersector meeting in March of 2013 indicate all events includes the return of signed forms, which would mean the 2014 rates must be used for situation b. How does that not conflict with 1.417(e)-1(b)(3)(iii)?

Question 14 Section 417: Post Required Beginning Date Lump Sum from Cash Balance Plan An owner turned 70 ½ in 2010, and the plan was frozen in 2010. The owner, with spousal consent, waived the QJSA and QOSA, opting instead to receive a period certain annuity calculated by taking his 2009 hypothetical account balance ($202,644) and converting that to a 26-year term certain assuming end of year payments beginning in 2010. The actuarial equivalent is defined as 30-year treasury rate for the year. The 2010 rate was 4.49%. In 2014, the owner is now retiring and wants a lump sum. Is the lump sum: a) present value of 22 remaining payments using the 2014 rate of 3.89% b) present value of 22 remaining payments using the 2010 rate of 4.49% c) Hypothetical account balance based on continuing to credit the 2009 account with interest credits and reduced by the distributions. d) Other? For example, same as a or b but also considering 417e rates.

Question 15 Section 417: Late Benefit Payments A plan uses 417(e) interest and mortality for all purposes. A lump sum payment should have been made in 2011. Now it is 2014. The plan administrator increases the 2011 lump sum amount with interest at the 2011 first segment rate for the period between the 2011 ASD and the late payment date. Is that the correct approach? Should the administrator have applied each segment rate to the present value of payments that were discounted at that segment rate? If 6 years of missed annuity payments were discovered in 2014, how would the single sum makeup payment be determined? Would the plan use 2008 segment rates (first segment for the first 5 years of payments, and second segment for the most recent year s payments)?

Question 16 Section 417: 417(e) Transition Post PPA 1107 Period A plan is amended after the PPA 1107 amendment period to change the interest rates used to determine minimum lump sum payments to the rates required by PPA. Can the plan provide a one-year transition period during which the lump sum is the greater of the amounts determined using the pre- PPA and post-ppa rates, then use only the PPA rates? Or must there be a permanent minimum lump sum based on the benefit accrued at the amendment date based on the pre-ppa rates.

Question 17 Section 430: 436 Restrictions on Accruals and Plan s TNC Consider a calendar year plan. The last AFTAP issued was for 2010. As a result, the plan s AFTAP is presumed to be below 60% on 10/1/11. The plan s 436 language indicates that benefits are not restored and will not resume. For 2012 and 2013, will there be a TNC based on current accruals per 1.430(d)-1(c)(1)(iii)(D) or will the effect of the no restore/no resume language work like a plan defined freeze as opposed to a 436 restriction?

Question 18 IRC 436: Missing AFTAP certification A new actuary takes on responsibility for a calendar year plan in July 2013. The prior actuary completed the valuation and Schedule SB for 2012 in June 2013. However, the prior actuary did not complete an AFTAP certification for 2012. The entries on the Schedule SB indicate that, had an AFTAP certification been prepared, it would have been 75%, and there would have been adequate prefunding balance available to raise the AFTAP to 80%. The new actuary is unsure whether a 2013 AFTAP certification can be prepared without preparing a 2012 AFTAP certification. There doesn t appear to be any requirement to prepare the 2012 AFTAP, but it is not clear whether the deemed reduction in prefunding balance that would have occurred based on the 2012 AFTAP has to be determined and taken into account. Is there a requirement that the 2012 AFTAP ever be prepared?

Question 19 E-sign: Electronic Signatures Are electronic signatures affixed [personally?] by the enrolled actuary to a completed electronic document (e.g., Word or PDF) acceptable for AFTAP Certifications and Schedule SBs? For example, the actuary would scan a signature to a file and upload that file in the appropriate place on the certification or schedule. Alternatively, the actuary would use a commercial product broadly available on the market for adding a signature to a document with a computer or other electronic device.

Question 20 Section 401(a)(9): Lump Sum Payouts for Benefits in Pay Status Is there a moratorium on obtaining a private letter ruling on lump sum payouts for benefits in pay status? If so, is the moratorium based on policy concerns or is there some other reason?