Chapter 4 Flashcards
(123 cards)
1
Q
What benefit does a traditional defined benefit plan provide?
A
A monthly benefit commencing at the participant’s normal retirement date. The benefit is either expressed as a percentage of the participant’s average compensation or as a flat dollar amount.
2
Q
Who must determine the funding requirements of the defined benefit plan?
A
An enrolled actuary (except for an IRC Sec 412(e)(3) fully insured plan). The enrolled actuary must adhere to the minimum funding requirements of IRC Sec 430, the funding-based limits of IRC Sec 436 and the maximum tax deduction rules of IRC Sec 404.
3
Q
Who must determine the funding requirements of the defined benefit plan?
A
An enrolled actuary ( except for an IRC Sec 412(e)(3) fully insured plan). The enrolled actuary must adhere to the minimum funding requirements of IRC Sec 430, the funding-based limits of IRC Sec 436 and the maximum tax deduction rules of IRC Sec 404.
4
Q
What is back-loading?
A
A process where a larger percentage of the normal retirement benefit is accrued during the later years of employment.
5
Q
What service is excluded for purposes of benefits accrual?
A
*Service for years in which the employee performs no service for the employer.
*Service for years in which the employee does not participate in the plan can be excluded; but are not required to be excluded.
A year of service can be based upon the 1000 hour rule; less than 1000 hours; or an elapsed time method (the employee earns a pro-rated year if he or she works less than the full year).
6
Q
What is a QJSA qualified joint and survivor annuity?
A
An annuity for the life of participant with a survivor annuity for the life of the spouse that is not less than 50% percent and not more than 100% of the amount of the annuity payable during the joint lives of the participant and spouse.
7
Q
What is QOSA qualified optional survivor annuity?
A
A QOSA is an annuity for the life of the participant with a survivor annuity for the life of the spouse. If the QJSA survivor annuity % is less than 75%, the QOSA % must be 75%. If the QJSA provides a survivor annuity % that is greater than or equal to 75%; the QOSA % must be 50%.
8
Q
What exceptions are there to the 45 day period for issuing the 204(h) notice?
A
- Plans with less than 100 participants must provide notice at least 15 days prior to the effective date.
- In connection with an acquisition or disposition; the ERISA Sec 204(h) notice period is 15 days prior to the effective date of the amendment regardless of plan size. * With respect to liabilities transferred in connection with an acquisition or disposition; and where the amendment significantly reduces an early retirement benefit or subsidy but not the future rate of benefit accrual; the notice period is 30 days after the effective date of the amendment regardless of plan size.
9
Q
What are the uniformity requirements in an IRC Sec 401(a)(4) safe harbor defined benefit plan?
A
- The retirement benefit formula; form of benefit payment and normal retirement age must be uniform.
- Permitted disparity is deemed to satisfy the uniformity rules.
10
Q
What are the uniform retirement age rules?
A
- The plans benefit formula must provide all employees with a benefit commencing at the same uniform NRA.
- NRA cannot exceed the later of:Age 65; or Five years of plan participation.
- IRS issued regulations which require plans to use an NRA of at least age 62 except under limited circumstances.
11
Q
What is the uniformity concept in db plans?
A
Requires that employees with the same service and salary receive roughly the same benefit; derived from the same formula; to be payable in the same form at the same normal retirement age (NRA). Any subsidized optional benefits must be available to substantially all participants on the same terms.
12
Q
What are the uniformity requirements in an IRC Sec 401(a)(4) safe harbor defined benefit plan?
A
- The retirement benefit formula; form of benefit payment and normal retirement age must be uniform. A normal retirement benefit expressed as a percentage of average compensation or dollar amount must be the same for all employees who will have the same number of years of service at normal retirement. * Permitted disparity is deemed to satisfy the uniformity rules.
13
Q
What are the uniform retirement age rules?
A
- The plans benefit formula must provide all employees with a benefit commencing at the same uniform NRA. * NRA cannot exceed the later of: o Age 65; or o Five years of plan participation. * IRS issued regulations which require plans to use an NRA of at least age 62 except under limited circumstances. The employer can select an NRA lower than 62 (and greater than age 54); but there is a facts and circumstances determination of if the NRA is representative of the typical retirement age of the industry. The burden of proof for this is with the employer. An NRA less than 55 is generally presumed earlier than a reasonable retirement age.
14
Q
What exceptions are there to the 45 day period for issuing the 204(h) notice?
A
An ERISA Sec 204(h); which requires an advance notice to participants of any significant reduction in the rate of future benefit accruals or any plan amendment that eliminates; ceases or significantly reduces an early retirement benefit or subsidy under a pension plan notice; must be issued at least 45 days prior to the effective date of the amendment unless one of the following exceptions applies:
* Plans with less than 100 participants on the effective date of the amendment must provide notice at least 15 days prior to the effective date. * In connection with an acquisition or disposition; the ERISA Sec 204(h) notice period is 15 days prior to the effective date of the amendment regardless of plan size. * With respect to liabilities transferred in connection with an acquisition or disposition; and where the amendment significantly reduces an early retirement benefit or subsidy but not the future rate of benefit accrual; the notice period is 30 days after the effective date of the amendment regardless of plan size.
15
Q
What circumstances do not preclude the use of a safe harbor db formula?
A
- Lower benefits for HCEs do not violate any condition of safe harbor access; including that of uniform normal retirement benefit. * Benefits accrued prior to a fresh start date under a different formula and/or accrual method than that which currently applies are exempt from the uniformity requirements. * Multiple formulas determining benefits as the greater of; or sum of; two or more formulas do not fail safe harbor uniformity requirements if: o Each formula is available on the same terms to all employees. If any formula is not available to any HCEs; it need not be available to all NHCEs;
o The top-heavy benefit formula is applied as required by the plan; and o Each formula separately qualifies for safe harbor treatment; including conformity with uniformity conditions. * The plan may provide for one or more entry dates per plan year. * A subsidized optional benefit form does not fail to be available to substantially all employees if it applies only to a grandfathered group due to a prior amendment to eliminate the subsidized option form prospectively.
16
Q
Describe the payment rules of a de minimis annual benefit of $10,000.
A
It may be paid even if other limitations of IRC Sec 415 are exceeded. The de minimis benefit is proportionately reduced for participants with less than ten years of service; in the same manner as the compensation limit. The de minimis benefit is not available to participants who have ever participated in a defined contribution plan of the employer. Additionally; the de minimis benefit rule states that no more than $10,000 can be paid in any year. If the employee doesn’t have a high three-year average compensation of at least $10,000; the employee will not be able to receive the value of the de minimis benefit as a lump sum.
17
Q
Which three conditions must apply to make a plan at-risk ?
A
- The plan assets (generally reduced by credit balances) are less than 80% of the plans funding target; computed using the generally applicable actuarial assumptions as described above;
- The plan assets (generally reduced by credit balances) are less than 70% of the plans funding target; computed using at-risk actuarial assumptions.
- Have more than 500 participants
18
Q
What is excluded for purposes of benefits accrual?
A
Service for years in which the employee performs no service for the employer. Service for years in which the employee does not participate in the plan can be excluded; but are not required to be excluded. A year of service can be based upon the 1000 hour rule (the employee must work at least 1000 hours to earn one year of service); less than 1000 hours; or an elapsed time method (the employee earns a pro-rated year if he or she works less than the full year).
19
Q
What are the IRC Sec 411(b) three minimum accrual rules?
A
The 133 .33% rule; the fractional accrual rule; the 3% rule
At least one of these rules must be satisfied by a defined benefit plan in order for the minimum accrual requirement to be met. The actual benefit can accrue more quickly than required by the minimum accrual rules; but cannot accrue more slowly.
20
Q
Of what must the definition of Average Annual Compensation (AAC) for purposes of nondiscrimination testing under IRC Sec 401(a)(4) consist?
A
At least three consecutive 12-month periods; but need not be longer than the employees period of employment. The period of averaging must represent the period in the employees compensation history that produces the highest average compensation. Plans that define compensation histories in terms of fixed 12-month periods may drop the following periods from consideration: * Period before the employee becomes a participant; * Period in which the employee terminates; * Period in which the employee performs no service; and * Period in which the employee performs less than a minimum period of service that is not greater than .75 of full time.
21
Q
How is the 415 dollar limit subject adjusted?
A
- Proportional reduction for years of participation less than ten;
- Actuarial reduction if benefits commence prior to age 62; and
- An actuarial increase if benefits commence after age 65.
22
Q
What is back-loading?
A
A process where a larger percentage of the normal retirement benefit is accrued during the later years of employment. This can cause discrimination issues because the lower paid employees generally have fewer years of service at their time of termination of employment than the more highly paid employees (who tend to be the longer-term employees). As a result; the lower paid employees receive much smaller benefits if the accrual is back-loaded as they never reach the higher benefit level of accrual.
23
Q
Which two conditions must apply to make a plan at-risk ?
A
- The plan assets (generally reduced by credit balances) are less than 80% of the plans funding target; computed using the generally applicable actuarial assumptions as described above;
- The plan assets (generally reduced by credit balances) are less than 70% of the plans funding target; computed using at-risk actuarial assumptions.
- Have more than 500 participants
24
Q
What is excluded for purposes of benefits accrual?
A
Service for years in which the employee performs no service for the employer. Service for years in which the employee does not participate in the plan can be excluded; but are not required to be excluded. A year of service can be based upon the 1000 hour rule (the employee must work at least 1000 hours to earn one year of service); less than 1000 hours; or an elapsed time method (the employee earns a pro?rated year if he or she works less than the full year).
25
What is a QJSA qualified joint and survivor annuity?
An annuity for the life of participant with a survivor annuity for the life of the spouse that is not less than 50% percent and not more than 100% of the amount of the annuity payable during the joint lives of the participant and spouse. A single life annuity is an annuity payable for the life of the participant with all benefits ceasing upon the death of the participant.
26
What is QOSA qualified optional survivor annuity?
A QOSA is an annuity for the life of the participant with a survivor annuity for the life of the spouse. The level of spouse survivor annuity depends upon the level of spouse survivor annuity provided under a plans QJSA. If the QJSA provides a survivor annuity that is less than 75 percent of the amount of the annuity that is payable during the joint lives of the participant and the spouse,the QOSA must provide a spouse survivor annuity percentage of 75 percent. If the QJSA provides a survivor annuity for the life of the participants spouse that is greater than or equal to 75 percent; the QOSA must provide a survivor annuity percentage of 50 percent.
27
What other optional forms of payment may a defined benefit plan offer?
* Period certain and lifetime annuity providing the participant with a fixed annuity for life. Payments end at the later of death or after the minimum number of payments are made. If the minimum number of payments is not made before the death of participant; then the beneficiary receives payments until the minimum number of payments has been made. * Fixed period annuity providing the participant or the participants beneficiary with equal payments at regular intervals for a fixed period of time. * Lump sum payment
28
What are the requirements to be an applicable defined benefit plan ?
* The interest credit must not result in the loss of principal [IRC Sec 411(b)(5)(B)(i)(II)]. An interest credit (or an equivalent amount) of less than zero shall in no event result in the account balance or similar amount being less than the aggregate amount of contributions credited to the account.
* Participants must be 100 percent vested after 3 years of service [IRC Sec 411(b)(13)(B)].
* The accrued benefit of an older participant must be equal to or greater than that of a younger participant that is similarly situated.
29
For purposes of nondiscrimination testing under IRC Sec 401(a)(4); what are the two requirements; one of which must be satisfied by the floor?offset plan?
* The DB plan; on a gross benefit basis (before offset); must satisfy the unit credit plan safe harbor for DB plans under IRC Sec 401(a)(4); including the uniformity requirement for safe harbor access; and the DC plan must independently be nondiscriminatory in amount (either through a safe harbor formula for defined contribution plans under IRS regulation 1.401(a)(4)?2(b) or by satisfying the general test for defined contribution plans under IRS regulation 1.401(a)(4)?2(c)); OR
* The DC plan must satisfy a uniform allocation safe harbor for DC plans under IRS regulation 1.401(a)(4)?2(b)(2); and the DB plan must on a gross benefit basis (the benefit prior to offset by the DC plan benefit) be proven nondiscriminatory by amount according to any safe harbor formula for defined benefit plans under IRS regulation 1.401(a)(4)?3(b)(2) or by satisfying the general test for defined benefit plans under IRS regulation 1.401(a)(4)?2(c).
30
What are the IRC Sec 411(b) three minimum accrual rules?
* The 133 .33% rule which states that any years accrual cannot exceed any prior years accrual by more than one third.
* The fractional accrual rule which states that a participants benefit at normal retirement is earned incrementally over the participants years of service; both past and future.
* The 3% rule; which states that a participants benefit at normal retirement must be earned at a rate not less than 3 percent per year of accrual. At least one of these rules must be satisfied by a defined benefit plan in order for the minimum accrual requirement to be met. The actual benefit can accrue more quickly than required by the minimum accrual rules; but cannot accrue more slowly.
31
What is back-loading?
A process where a larger percentage of the normal retirement benefit is accrued during the later years of employment. This can cause discrimination issues because the lower paid employees generally have fewer years of service at their time of termination of employment than the more highly paid employees (who tend to be the longer?term employees). As a result; the lower paid employees receive much smaller benefits if the accrual is back?loaded as they never reach the higher benefit level of accrual.
32
Highlight the features of a Defined contribution plan
A defined contribution plan places the responsibility for the investment risk on the plan participant. The contributions by the sponsor do not change based on investment performance. The plan sponsor is responsible for providing investment options for participants that should enable them to realize meaningful retirement benefits through appropriate investing for their long-term needs. Defined contribution plans are concerned with enabling participants to make informed decisions regarding which investment risks are appropriate for them and to tailor their own individual investment objectives accordingly.
33
What is excluded for purposes of benefits accrual?
Service for years in which the employee performs no service for the employer. Service for years in which the employee does not participate in the plan can be excluded; but are not required to be excluded. A year of service can be based upon the 1000?hour rule (the employee must work at least 1000 hours to earn one year of service); less than 1000 hours; or an elapsed time method (the employee earns a pro?rated year if he or she works less than the full year).
34
What is a QJSA; qualified joint and survivor annuity?
An annuity for the life of participant with a survivor annuity for the life of the spouse that is not less than 50 percent and not more than 100 percent of the amount of the annuity payable during the joint lives of the participant and spouse. A single life annuity is an annuity payable for the life of the participant with all benefits ceasing upon the death of the participant.
35
What is QOSA; qualified optional survivor annuity?
An alternative to the QJSA that PPA 2006 requires. A QOSA is an annuity for the life of the participant with a survivor annuity for the life of the spouse. The level of spouse survivor annuity depends upon the level of spouse survivor annuity provided under a plans QJSA. If the QJSA provides a survivor annuity that is less than 75 percent of the amount of the annuity that is payable during the joint lives of the participant and the spouse; the QOSA must provide a spouse survivor annuity percentage of 75 percent. If the QJSA provides a survivor annuity for the life of the participants spouse that is greater than or equal to 75 percent; the QOSA must provide a survivor annuity percentage of 50 percent.
36
What other optional forms of payment may a defined benefit plan offer?
* Period certain and lifetime annuity providing the participant with a fixed annuity for life. Payments end at the later of death or after the minimum number of payments are made. If the minimum number of payments is not made before the death of participant; then the beneficiary receives payments until the minimum number of payments has been made. * Fixed period annuity providing the participant or the participants beneficiary with equal payments at regular intervals for a fixed period of time. * Lump?sum payment providing the present value of the participants accrued benefit in a single payment. The lump sum is calculated using the plans actuarial equivalence assumptions. However; IRC Sec 417(e)(3) provides a minimum lump sum value based upon an applicable interest rate and mortality table. The lump sum amount cannot be less than the IRC Sec 417(e)(3) minimum lump sum. IRC Sec 415(b) limits the total lump sum that can be distributed; even if that causes the lump sum to fall below the IRC Sec 417(e)(3) or actuarial equivalent lump sum amounts.
37
What exceptions are there to when an ERISA Sec 204(h) notice must be issued?
An ERISA Sec 204(h); which requires an advance notice to participants of any significant reduction in the rate of future benefit accruals or any plan amendment that eliminates; ceases or significantly reduces an early retirement benefit or subsidy under a pension plan notice; must be issued at least 45 days prior to the effective date of the amendment unless one of the following exceptions applies:
* Plans with less than 100 participants on the effective date of the amendment must provide notice at least 15 days prior to the effective date. * In connection with an acquisition or disposition; the ERISA Sec 204(h) notice period is 15 days prior to the effective date of the amendment regardless of plan size. * With respect to liabilities transferred in connection with an acquisition or disposition; and where the amendment significantly reduces an early retirement benefit or subsidy but not the future rate of benefit accrual; the notice period is 30 days after the effective date of the amendment regardless of plan size.
38
What is the uniformity concept?
Requires that employees with the same service and salary receive roughly the same benefit; derived from the same formula; to be payable in the same form at the same normal retirement age (NRA). Any subsidized optional benefits must be available to substantially all participants on the same terms.
39
What circumstances do not preclude the use of a safe harbor formula?
* Lower benefits for HCEs do not violate any condition of safe harbor access; including that of uniform normal retirement benefit. * Benefits accrued prior to a fresh start date under a different formula and/or accrual method than that which currently applies are exempt from the uniformity requirements. * Multiple formulas determining benefits as the greater of; or sum of; two or more formulas do not fail safe harbor uniformity requirements if: o Each formula is available on the same terms to all employees. If any formula is not available to any HCEs; it need not be available to all NHCEs;
o The top-heavy benefit formula is applied as required by the plan; and o Each formula separately qualifies for safe harbor treatment; including conformity with uniformity conditions. * The plan may provide for one or more entry dates per plan year. * A subsidized optional benefit form does not fail to be available to substantially all employees if it applies only to a grandfathered group due to a prior amendment to eliminate the subsidized option form prospectively.
40
How can the safe harbor benefit formulas be related to the benefit accrual requirements of IRC Sec 411(b)?
* Any benefit formula that satisfies IRC Sec 411(b) by use of the 133 .33% rule is deemed to be a safe harbor formula under IRC Sec 401(a)(4). This is often referred to as the Unit Benefit Plan Safe Harbor and is illustrated below. * A benefit formula that satisfies IRC Sec 411(b) by use of the 3% rule is not necessarily a safe harbor formula under IRC Sec 401(a)(4). * Any benefit formula that satisfies IRC Sec 411(b) by use of the fractional rule may or may not be a safe harbor formula under IRC Sec 401(a)(4). See the Sec tion below concerning the Fractional Rule Safe Harbor.
41
What are the requirements to be an applicable defined benefit plan ?
* The interest credit must not result in the loss of principal [IRC Sec 411(b)(5)(B)(i)(II)]. An interest credit (or an equivalent amount) of less than zero shall in no event result in the account balance or similar amount being less than the aggregate amount of contributions credited to the account.
* Participants must be 100 percent vested after 3 years of service [IRC Sec 411(b)(13)(B)].
* The accrued benefit of an older participant must be equal to or greater than that of a younger participant that is similarly situated. o Similarly situated ? identical in every respect (i.e.; service; compensation; position; date of hire; work history; etc.) o A participants accrued benefit must be measured as an annuity payable at normal retirement; an account balance; or as the current value of an accumulated percentage of final average compensation.
42
Of what must the definition of Average Annual Compensation (AAC) for purposes of nondiscrimination testing under IRC Sec 401(a)(4) consist?
At least three consecutive 12?month periods; but need not be longer than the employees period of employment. The period of averaging must represent the period in the employees compensation history that produces the highest average compensation. Plans that define compensation histories in terms of fixed 12-month periods may drop the following periods from consideration: * Period before the employee becomes a participant; * Period in which the employee terminates; * Period in which the employee performs no service; and * Period in which the employee performs less than a minimum period of service that is not greater than .75 of full time.
43
What limits are placed on the annual benefit under a defined benefit plan?
IRC Sec 415 limits to the lesser of the compensation limit (100 percent of the participants highest consecutive three-year average compensation) or the dollar limit equal to $160,000 as indexed ($200;000 for 2012). The compensation limit is proportionally reduced for participants with less than ten years of service. The compensation limit is not actuarially adjusted for benefit commencement before or after a specified retirement age.
44
What are examples of formulas in unit benefit plans for an employees service years incrementally?
A unit benefit formula assigns a particular benefit increment to each year of an employees service. * Final average pay plan granting 1 percent of such average pay for each year of service; * Final average pay plan granting 2 percent of such average pay for each of the first 10 years of service; plus 2.5 percent of such average pay for each additional year of service; * Plan providing benefit equal to $25 a month for each year of service; or * Integrated plan providing 1 percent per year of service of final average pay to integration level; and 1.65 percent per year of service on average pay above that level.
45
To which unit benefit plans do unit benefit plan safe harbor requirements apply?
* Define the accrued benefit by applying the plan formula to the employees actual compensation and service history; and * Satisfy the 133.33 percent accrual rule.
46
What is required by the unit benefit plan safe harbor for the fractional rule?
* Satisfy the fractional accrual rule of IRC Sec 411(b)(1)(C); and * Determine accrued benefits by fractional rule methodology described above.
47
How must DB and DC plans participating in a floor-offset arrangement be sponsored?
By the same employer; cover the same employees and the offset must be applied to all employees in a consistent manner. The DB plan cannot be a contributory plan (have mandatory employee contributions). The DC plan must offer all employees the same investment options and the same options of pre-retirement withdrawal as the DB plan.
48
How are the minimum required and maximum deductible contributions determined?
In addition the interest rate and mortality actuarial assumptions are now specified by the IRS for all plans. The mandated funding method is similar to the prior unit credit funding method. This method funds the plan as benefits are accrued; which is in contrast to other methods (still utilized by multi-employer plans) that allow for funding based on what is projected to accrue at retirement.
49
What are contribution ranges?
Under the current funding method; contribution ranges can be quite large in any given year. A client can contribute anywhere from the minimum to the maximum each year. The actuary and the consultant must help the client decide what contribution to make to the plan each year. Funding the minimum required contribution each year will likely result in increasing the minimum required contributions for future years and leave the plan under funded when benefits become due. Funding the maximum contribution each year will almost certainly overfund the plan by a significant amount. If the plan is overfunded when it terminates; the overfunding can be subject to a 50% reversion tax if it cannot be allocated to participants without violating the IRC Sec 415(b) maximum lump sum rules.
50
How must DB and DC plans participating in a floor-offset arrangement be sponsored?
By the same employer; cover the same employees and the offset must be applied to all employees in a consistent manner. The DB plan cannot be a contributory plan (have mandatory employee contributions). The DC plan must offer all employees the same investment options and the same options of pre?retirement withdrawal as the DB plan.
51
What happens when the PPA maximum is too high?
* IRS has issued no guidance on deduction limits * Several Issues outstanding * Plans with under 100 lives cannot include the effect of amendments for HCEs in the last two years for purposes of the 50% funding cushion * Several Issues outstanding * PBGC covered plans can include the impact of anticipated COLAs to 401(a)(17) and perhaps 415 in determining cushion * IRS has traditionally considered 401(a)(17) and 415 COLAs to be plan amendments * What does a PBGC covered plan under 100 lives consider for the funding cushion?
52
One of which conditions must be met to comply with the safe harbor requirements?
* The plan is a unit benefit plan; and no participant can accrue more than 133 .33% of any other participant (as a percentage of salary or as a dollar amount). In making this comparison; employees with more than 33 years of service at normal retirement are ignored. * The plan is a flat benefit plan that provides that the minimum normal retirement service for entitlement to full benefit is 25 years. This 25?year minimum relates to the unreduced benefit determined without regard to the IRC Sec 415(b) maximum. * The plan is a flat benefit plan but does not provide that the minimum service at normal retirement for entitlement to the full benefit is 25 years. In this case; the benefit formula is a safe harbor formula only if the plan satisfies an average benefit percentage test (modified from the IRC Sec 410(b) average benefit percentage test) with regard to the benefits accruing for the year. This is the alternative flat benefit safe harbor described below
53
What is the high-25 rule, as it relates to lump sum payment to HCEs?
This provision limits the level of lump sum payments to HCEs who are among the highest 25 paid in the current or any prior year if the plan is less than 110% funded. This restriction is intended to prevent highly paid employees from depleting the trust and creating a situation where assets are not sufficient to make distributions to rank-and-file employees.
54
Describe the timing of a plan's AFTAP certification.
For the first three months of the year the prior year's AFTAP is used. If the actuary has not certified the plans AFTAP within 3 months from the beginning of the plan year; the prior years AFTAP is used and reduced by 10 percentage points. This Presumed AFTAP is used temporarily until the certification occurs. Furthermore; if the actuary has not certified the AFTAP by the first day of the 10th month of the plan year; the AFTAP is deemed to be less than 60% for the remainder of the plan year regardless of what the actual plan assets are relative to the actual plan liabilities.
55
What applies to plans that accrue benefits using the unit benefit plan safe harbor fractional rule; but do not satisfy the other safe harbor benefit formula conditions?
The alternate flat benefit safe harbor. This more lenient standard is similar to the average benefit percentage test of IRC Sec 410(b); although it does not require combining benefits earned from other plans of the employer. For the plan year being tested; the average of the accrual rates for the NHCEs must be no less than 70 percent of the comparable average for the HCEs. All nonexcludable employees are considered regardless of whether they are participants in the plan. (For this purpose; the accrual rates of these nonexcludable employees will be zero since they are not benefiting in the plan.)
56
Who is responsible for creating the asset investment strategy for a defined benefit plan?
The plan sponsor since the plan sponsor is at?risk for asset performance. The asset allocation chosen should be consistent with the employers comfort level for fluctuations in contribution levels from year to year. For example; an aggressive stock allocation will be subject to more fluctuation in value as compared to a conservative bond portfolio and will cause much larger variation in the contribution levels from year to year.
57
What are the uniformity requirements in an IRC Sec 401(a)(4) safe harbor defined benefit plan?
* The retirement benefit formula; form of benefit payment and normal retirement age must be uniform. A normal retirement benefit expressed as a percentage of average compensation or dollar amount must be the same for all employees who will have the same number of years of service at normal retirement. For example; if two participants have identical salaries of $50;000 and were each hired at age 40; they must receive the same normal retirement benefit at age 65. Otherwise; the benefit formula is not uniform. However; the participants could receive different normal retirement benefits if one of them had salary other than $50;000 or was hired either before or after age 40. * The uniformity requirement extends to those employees working beyond NRA. Such an employees accrued benefit must be equivalent; as a percentage of average annual compensation or dollar amount; to that payable at normal retirement to an employee with same number of years of service. * Permitted disparity is deemed to satisfy the uniformity rules.
58
What are the uniform retirement age rules?
* The plans benefit formula must provide all employees with a benefit commencing at the same uniform NRA. * NRA cannot exceed the later of: o Age 65; or o Five years of plan participation. * IRS issued regulations which require plans to use an NRA of at least age 62 except under limited circumstances. There has been substantial debate on this minimum NRA requirement. The employer can select an NRA lower than 62 (and greater than age 54); but there is a facts and circumstances determination of if the NRA is representative of the typical retirement age of the industry. The burden of proof for this is with the employer. An NRA less than 55 is generally presumed earlier than a reasonable retirement age.
59
What are the average annual compensation (AAC) rules?
* Benefits must be determined either as a dollar amount unrelated to pay or as a percentage of average annual compensation. * Accumulation plans (career average plans) may substitute plan year compensation for AAC.
60
Describe the payment rules of a de minimis annual benefit of $10,000.
It may be paid even if other limitations of IRC Sec 415 are exceeded. The de minimis benefit is proportionately reduced for participants with less than ten years of service; in the same manner as the compensation limit. The de minimis benefit is not available to participants who have ever participated in a defined contribution plan of the employer. Additionally; the de minimis benefit rule states that no more than $10,000 can be paid in any year. If the employee doesnt have a high three-year average compensation of at least $10,000; the employee will not be able to receive the value of the de minimis benefit as a lump sum.
61
How are the minimum required and maximum deductible contributions determined?
In addition the interest rate and mortality actuarial assumptions are now specified by the IRS for all plans. The mandated funding method is similar to the prior unit credit funding method. This method funds the plan as benefits are accrued; which is in contrast to other methods (still utilized by multi?employer plans) that allow for funding based on what is projected to accrue at retirement.
62
What circumstances do not preclude the use of a safe harbor formula?
* Lower benefits for HCEs do not violate any condition of safe harbor access; including that of uniform normal retirement benefit. * Benefits accrued prior to a fresh start date under a different formula and/or accrual method than that which currently applies are exempt from the uniformity requirements. * Multiple formulas determining benefits as the greater of; or sum of; two or more formulas do not fail safe harbor uniformity requirements if: o Each formula is available on the same terms to all employees. If any formula is not available to any HCEs; it need not be available to all NHCEs;
o The top?heavy benefit formula is applied as required by the plan; and o Each formula separately qualifies for safe harbor treatment; including conformity with uniformity conditions. * The plan may provide for one or more entry dates per plan year. * A subsidized optional benefit form does not fail to be available to substantially all employees if it applies only to a grandfathered group due to a prior amendment to eliminate the subsidized option form prospectively.
63
How can the definition of compensation used by a plan exclude certain types of compensation?
It must be shown under IRC Sec 414(s) that the definition being used is not discriminating in favor of the HCEs.
64
Of what must the definition of Average Annual Compensation (AAC) for purposes of nondiscrimination testing under IRC Sec 401(a)(4) consist?
At least three consecutive 12?month periods; but need not be longer than the employees period of employment. The period of averaging must represent the period in the employees compensation history that produces the highest average compensation. Plans that define compensation histories in terms of fixed 12?month periods may drop the following periods from consideration: * Period before the employee becomes a participant; * Period in which the employee terminates; * Period in which the employee performs no service; and * Period in which the employee performs less than a minimum period of service that is not greater than .75 of full time.
65
What is the high-25 rule; as it relates to lump sum payment to HCEs?
This provision limits the level of lump sum payments to HCEs who are among the highest 25 paid in the current or any prior year if the plan is less than 110% funded. This restriction is intended to prevent highly paid employees from depleting the trust and creating a situation where assets are not sufficient to make distributions to rank-and-file employees.
66
Describe the timing of a plans AFTAP certification.
For the first three months of the year the prior year's AFTAP is used. If the actuary has not certified the plans AFTAP within 3 months from the beginning of the plan year; the prior years AFTAP is used and reduced by 10 percentage points. This Presumed AFTAP is used temporarily until the certification occurs. Furthermore; if the actuary has not certified the AFTAP by the first day of the 10th month of the plan year; the AFTAP is deemed to be less than 60% for the remainder of the plan year regardless of what the actual plan assets are relative to the actual plan liabilities.
67
What limits are placed on the annual benefit under a defined benefit plan?
IRC Sec 415 limits to the lesser of the compensation limit (100 percent of the participants highest conSec utive three?year average compensation) or the dollar limit equal to $160;000 as indexed ($200;000 for 2012). The compensation limit is proportionally reduced for participants with less than ten years of service. The compensation limit is not actuarially adjusted for benefit commencement before or after a specified retirement age.
68
How is the 415 dollar limit subject adjusted?
* Proportional reduction for years of participation less than ten; * Actuarial reduction if benefits commence prior to age 62; and * An actuarial increase if benefits commence after age 65.
69
What are the three sets of actuarial equivalence factors that determine the maximum lump sum under IRC Sec 415(b)?
Under IRC Sec 415(b); the smallest of the amount * Plan actuarial equivalence; * 105% of the value using the IRC Sec 417(e) rates; and * 5.5% and the IRC Sec 417(e) applicable mortality table.
70
What are the IRC Sec 412(e)(3) requirements?
* Plan funded solely by individual or group insurance contracts that are part of the same series;
* Contracts funded benefits using level premiums;
* Plan benefits must be provided only by these contracts and be guaranteed by an insurance company; and
* Participants may not take loans.
71
Describe the payment rules of a de minimis annual benefit of $10000.
It may be paid even if other limitations of IRC Sec 415 are exceeded. The de minimis benefit is proportionately reduced for participants with less than ten years of service; in the same manner as the compensation limit. The de minimis benefit is not available to participants who have ever participated in a defined contribution plan of the employer. Additionally; the de minimis benefit rule states that no more than $10000 can be paid in any year. If the employee doesnt have a high three?year average compensation of at least $10000; the employee will not be able to receive the value of the de minimis benefit as a lump sum.
72
When is PBGC coverage termination permitted?
A single-employer plan subject to PBGC coverage may only voluntarily terminate as a standard termination or a distress termination. A standard termination is permitted only if plan assets are sufficient to cover benefit liabilities.
73
What are the criteria for PBGC coverage distress termination?
One of the following four criteria is met:
1. All members of the contributing sponsors controlled group are being liquidated in bankruptcy or insolvency proceedings;
2. All members of the contributing sponsors controlled group are being re-organized in bankruptcy or similar proceedings;
3. The PBGC determines the plan termination is necessary to allow the employer to pay other debts while remaining in business; or
4. The employer has experienced a decline in the workforce resulting in unreasonably burdensome pension costs and PBGC determine that the plan termination is needed to avoid these pension costs.
74
Which two conditions must apply to make a plan at risk ?
* The plan assets (generally reduced by credit balances) are less than 80% of the plans funding target; computed using the generally applicable actuarial assumptions as described above; and * The plan assets (generally reduced by credit balances) are less than 70% of the plans funding target; computed using at-risk actuarial assumptions. Note that plans with fewer than 500 participants; aggregating all plans of the employer and the employers controlled group; are not subject to the at?risk rules.
75
How are the minimum required and maximum deductible contributions determined?
Using one of a number of allowable actuarial funding methods; as well as other assumptions as determined by the actuary. The Pension Protection Act of 2006 (PPA) changed the funding methodology for single employer plans. PPA specifies that for years beginning after 2007; there is one specified funding method that must be used to determine the minimum required and maximum allowed deductible contribution. In addition the interest rate and mortality actuarial assumptions are now specified by the IRS for all plans. The mandated funding method is similar to the prior unit credit funding method. This method funds the plan as benefits are accrued; which is in contrast to other methods (still utilized by multi?employer plans) that allow for funding based on what is projected to accrue at retirement.
76
What is a funding shortfall?
The excess of the Funding Target over the assets at the valuation date is considered a Funding Shortfall and is amortized over 7 years. The current year contribution requirement will generally be equal to the Target Normal Cost plus the Shortfall amortization. The minimum required contribution can be reduced assuming appropriate direction has been provided to the plans named actuary by any credit balance item. (Credit balance items include the funding standard carryover balance; which is a pre?2008 credit balance; and/or the prefunding balance; which is a post?2007 balance equal to any contributions that the employer has made in excess of the minimum that the Plan Administrator has indicated should impact the prefunding balance). The determination and maintenance of these credit balance items is complex; and beyond the scope of this course.
77
What are contribution ranges?
Under the current funding method; contribution ranges can be quite large in any given year. A client can contribute anywhere from the minimum to the maximum each year. The actuary and the consultant must help the client decide what contribution to make to the plan each year. Funding the minimum required contribution each year will likely result in increasing the minimum required contributions for future years and leave the plan under funded when benefits become due. Funding the maximum contribution each year will almost certainly overfund the plan by a significant amount. If the plan is overfunded when it terminates; the overfunding can be subject to a 50% reversion tax if it cannot be allocated to participants without violating the IRC Sec 415(b) maximum lump sum rules. So; it is critical for the consultant to talk to the client about the clients desired contribution level in the future and design and fund the plan accordingly.
78
What is a cash balance plan?
A defined benefit plan that provides the benefit protection of a defined benefit plan with the look, visibility and appreciation associated with an individual account defined contribution plan.
79
How assets be invested to avoid large fluctuations?
By investing the assets in a manner that would provide a fairly consistent return that is close to the assumed interest rate; which may be a specific rate or may be tied to an index.
80
What does the current funding method require of funding shortfalls?
To be amortized over 7 years and the minimum contribution is the target normal cost plus the shortfall amortization. Defined benefit plans can have widely fluctuating contributions from year to year based on asset return and census changes.
81
What is the high-25 rule; as it relates to lump sum payment to HCEs?
This provision limits the level of lump sum payments to HCEs who are among the highest 25 paid in the current or any prior year if the plan is less than 110% funded. This restriction is intended to prevent highly paid employees from depleting the trust and creating a situation where assets are not sufficient to make distributions to rank?and?file employees.
82
Describe the timing of a plans AFTAP certification.
For the first three months of the year the prior years AFTAP is used. If the actuary has not certified the plans AFTAP within 3 months from the beginning of the plan year; the prior years AFTAP is used and reduced by 10 percentage points. This Presumed AFTAP is used temporarily until the certification occurs. Furthermore; if the actuary has not certified the AFTAP by the first day of the 10th month of the plan year; the AFTAP is deemed to be less than 60% for the remainder of the plan year regardless of what the actual plan assets are relative to the actual plan liabilities.
83
What are the implications of restrictions at the various AFTAP funding levels?
Of the four AFTAP?related benefit restrictions under PPA; the most frequently observed restriction deals with the payment of lump sums. A defined benefit plan which pays unlimited lump sums must generally have an AFTAP funding level of at least 80% determined as of the valuation date. If the AFTAP is between 60% and 80%; the otherwise payable lump sum amount is generally limited to 50% of the accrued benefit. Actuaries often target recommended plan contribution levels to ensure assets are sufficient to meet these funding levels. The other three restrictions contained in PPA are plan amendments increasing benefits; forcing a benefit freeze; and plant shutdown benefits. In the first five years of a new plan only the restriction on lump sum payments applies.
84
Who is responsible for creating the asset investment strategy?
The plan sponsor since the plan sponsor is at?risk for asset performance. The asset allocation chosen should be consistent with the employers comfort level for fluctuations in contribution levels from year to year. For example; an aggressive stock allocation will be subject to more fluctuation in value as compared to a conservative bond portfolio and will cause much larger variation in the contribution levels from year to year. Due to market fluctuation which occurred during 2008; many plan sponsors are revisiting their investment strategy with advice from their advisors to develop portfolio allocations that more closely match the funding interest rate assumptions.
85
Highlight the features of a Defined benefit plan
A defined benefit plan promises a definite benefit to participants at retirement age with the plan sponsor and/or trustee generally responsible for selecting the investments. The plan sponsor bears the risk for investment performance in a defined benefit plan. This means that if the investment performance does not meet expectations larger contributions will be required in the future; and if investment performance exceeds expectations the future required contributions will be lower. The primary goal in investing for defined benefit assets is to provide for the benefits that are due to participants. This is generally done by investing in assets whose returns will mirror the assumptions made in the plan to minimize the fluctuations in annual contribution amounts.
86
Highlight the features of a Defined contribution plan
A defined contribution plan places the responsibility for the investment risk on the plan participant. The contributions by the sponsor do not change based on investment performance. The plan sponsor is responsible for providing investment options for participants that should enable them to realize meaningful retirement benefits through appropriate investing for their long?term needs. Defined contribution plans are concerned with enabling participants to make informed decisions regarding which investment risks are appropriate for them and to tailor their own individual investment objectives accordingly.
87
Which two conditions must apply to make a plan at risk ?
* The plan assets (generally reduced by credit balances) are less than 80% of the plans funding target; computed using the generally applicable actuarial assumptions as described above; and * The plan assets (generally reduced by credit balances) are less than 70% of the plans funding target; computed using at?risk actuarial assumptions. Note that plans with fewer than 500 participants; aggregating all plans of the employer and the employers controlled group; are not subject to the at?risk rules.
88
What limitations and exceptions to those limitations exist if an employer sponsors both DB and DC plans covering at least one common employee?
The total deduction for all plans for a plan year may be limited under IRC Sec 404(a)(7). The limitation of IRC Sec 404(a)(7) does not apply if: * The defined benefit plan is covered by the PBGC (most defined benefit plans are covered by the PBGC; although a plan sponsored by a professional service corporation which has never had more than 25 plan participants is exempt from PBGC coverage; plans covering only employees who own at least 10% of the employer (and their spouses) are also exempt); or * The employer contribution (match and nonelective) to the DC plan does not exceed 6% of eligible participants compensation as limited by IRC Sec 401(a)(17).
89
What is the deductible limit for plans that are covered under IRC Sec 404(a)(7)?
For both plans combined is limited to the greater of: * 25% of compensation plus up to 6% of salary to the DC plan (in other words 31% if 6% is contributed to the DC plan); or * The amount necessary to meet DB plans minimum funding requirement for the year; plus a contribution of 6% of salary to the DC plan.
90
Summarize the deductible limit under IRC Sec 404(a)(7).
Equal to the greater of 31% of compensation (25% plus the extra 6%) or the defined benefit minimum (or unfunded funding target; if greater) plus 6% of compensation allocated to the DC plan. Note that elective deferrals under a 401(k) plan are excluded from the limitation of IRC Sec 404(a)(7); since they are always deductible under IRC Sec 404(n).
91
What is a cash balance plan?
A non?traditional defined benefit plan that provides the benefit protection of a defined benefit plan with the look; visibility and appreciation associated with an individual account defined contribution plan. Typically only employer contributions are made to the plan.
92
To what requirements is a cash balance plan subject?
QJSA and QOSA requirements; however; they often allow unlimited lump sum distribution options for increased portability. This may come at an increased cost to the plan. When a defined benefit plan pays only lump sums all participants receive their distribution right away. The lump sum amounts are based on IRS specified interest rate and mortality assumptions unless the plan is an applicable defined benefit plan in which case the lump sum amounts are equal to the hypothetical account balances. A cash balance plan does not generally provide early retirement subsidies.
93
What is the method for determining allocations (pay credits) in cash balance plans?
* Must be set forth in the plan document; * Cannot be subject to employer discretion; and * Must comply with various other statutory and regulatory requirements; such as: o Plan benefits are subject to a 3?year cliff vesting. o The plan may not credit interest at a rate that is higher than a market rate. o Conversions from a traditional defined benefit plan to a cash balance plan after June 29; 2005; are mandated to follow the so?called A+B approach (the benefit at retirement is equal to the sum of the benefit accrued under the defined benefit plan before the amendment (A) and the benefit accrued under the cash balance plan (B)) and to prohibit wear?away of early and normal retirement benefits.
94
What payout options are available in cash balance programs?
Cash balance programs must offer benefits payable in the form of an annuity at normal retirement age. However; cash balance programs may also offer single?sum distribution options to terminating employees. Generally; the single?sum payout equals a stated amount in the cash balance account if the interest rate is the same as the IRC Sec 417(e)(3) mandated interest rate. After 2007; if the plan qualifies as an Applicable Defined Benefit Plan; the lump sum can equal the account balance even though the interest rate does not equal the IRC Sec 417(e)(3) mandated interest rate. This change eliminated the prior issue where the lump sum payable using the IRC Sec 417(e)(3) rate was in excess of the hypothetical account balance creating funding issues for the employer
95
Who is assuming the risk in a cash balance program?
In other words; the employer is the one assuming the investment risk. If assets underperform the guaranteed rate of return; the employer must either contribute the shortfall to the plan or contribute a piece of the shortfall each year and earn back the remainder by investing to outperform the guaranteed rate. Effectively; the employer is insuring the assets of the plan against investment loss.
96
What are the requirments for successful implementation of a cash balance program?
* Participants must be regularly apprised of their hypothetical account balances. * Hypothetical allocations and interest credits must be correctly added to participants balances. * Generally; single sum distributions are made from the plan to terminating participants. Treas. Reg. Sec 1.417(e)?1(d) imposes mandated interest rates to be used by all defined benefit plans to calculate minimum single sum actuarial present values of participants accrued benefit. Plan sponsors should be aware that distributions that exceed the participants cash balance account are possible; hough PPA included language to address this concern for applicable defined benefit plans making it less likely to occur in practice. * Anti?backloading provisions of the Internal Revenue Code are designed to limit the extent to which plans can postpone accruals to the detriment of short?service employees. Because of the longer interest?crediting period on earlier accruals; many cash balance plan designs actually furnish more generous accruals for earlier years of service; and so would appear to satisfy anti?backloading provisions. However; anti?backloading requirements should be considered when designing the cash balance feature. * Benefits payable from a cash balance plan are limited by IRC Sec 415(b) under the rules for defined benefit plans. * A defined benefit plan cannot be amended if the result is a significant reduction in the rate of future benefit accruals unless the plan administrator provides written notice of the plan amendment to each plan participant. In a conversion of all or a portion of the conventional defined benefit plan into a cash balance plan; there may be a significant reduction in rate of future benefit accrual. If the employer concludes that an ERISA Sec 204(h) notice is required; then the employer must decide whether the complete plan text pertaining to the cash balance feature should be sent to each participant.
97
What are the requirements to meet an applicable defined benefit plan ?
Plans meeting the requirements for an applicable defined benefit plan will avoid the statutory and regulatory uncertainties related mostly to hybrid plans (that is; lack of regulation). Requirements are: * The interest credit must not result in the loss of principal [IRC Sec 411(b)(5)(B)(i)(II)]. An interest credit (or an equivalent amount) of less than zero shall in no event result in the account balance or similar amount being less than the aggregate amount of contributions credited to the account. * Participants must be 100 percent vested after 3 years of service [IRC Sec 411(b)(13)(B)]. The vested percentage applicable to a participant who terminates employment during the first two years of service can be less than 100%. * The accrued benefit of an older participant must be equal to or greater than that of a younger participant that is similarly situated. o Similarly situated ? identical in every respect (i.e.; service; compensation; position; date of hire; work history; etc.) o A participants accrued benefit must be measured as an annuity payable at normal retirement; an account balance; or as the current value of an accumulated percentage of final average compensation.
98
Compare a cash balance plan to traditional DB plan.
A cash balance program derives the amount of a participants annuity at normal retirement age (NRA) from the participants hypothetical account balance; rather than from the participants final average pay.
99
Compare a cash balance plan to traditional DC plan.
A cash balance arrangement provides a more Secure benefits promise to employees because it provides a guaranteed interest credit. Additionally; the participants account in an applicable defined benefit plan cannot fall below the sum of the contributions made for that participant. The amount of benefit received by participants under a cash balance arrangement is based entirely on the terms of the plan document; and is independent of the performance of the underlying plan assets. Cash balance interest credits can be designed to vary according to independent interest indices or cost of living indices.
100
What are FLOOR OFFSET PLANS?
A non?traditional defined benefit (DB) plan using employer? provided benefits from a separately maintained defined contribution (DC) plan to meet some of its benefit obligations. These plans are subject to special nondiscrimination rules under IRC Sec 401(a)(4).
101
How must DB and DC plans participating in a floor?offset arrangement be sponsored?
By the same employer; cover the same employees and the offset must be applied to all employees in a consistent manner. The DB plan cannot be a contributory plan (have mandatory employee contributions). The DC plan must offer all employees the same investment options and the same options of pre?retirement withdrawal as the DB plan.
102
For purposes of nondiscrimination testing under IRC Sec 401(a)(4); what are the two requirements; one of which must be satisfied by the floor?offset plan?
* The DB plan; on a gross benefit basis (before offset); must satisfy the unit credit plan safe harbor for DB plans under IRC Sec 401(a)(4); including the uniformity requirement for safe harbor access; and the DC plan must independently be nondiscriminatory in amount (either through a safe harbor formula for defined contribution plans under IRS regulation 1.401(a)(4)?2(b) or by satisfying the general test for defined contribution plans under IRS regulation 1.401(a)(4)?2(c)); or * The DC plan must satisfy a uniform allocation safe harbor for DC plans under IRS regulation 1.401(a)(4)?2(b)(2); and the DB plan must on a gross benefit basis (the benefit prior to offset by the DC plan benefit) be proven nondiscriminatory by amount according to any safe harbor formula for defined benefit plans under IRS regulation 1.401(a)(4)?3(b)(2) or by satisfying the general test for defined benefit plans under IRS regulation 1.401(a)(4)?2(c).
103
Why combine the disparate DC plans?
To assure a minimum level of benefits to all employees (at a minimum; all participants will receive the benefit promised under the defined benefit plan). For the plan sponsor; a floor offset plan provides the best of both worlds: guaranteeing a minimum benefit for older employees (those close to retirement) and providing more meaningful benefits for younger employees who are many years away from retirement. Keep in mind that the defined benefit plan is more beneficial to older employees; and the defined contribution plan is more beneficial to younger employees. The younger employees will often receive no benefit from the defined benefit plan in a floor?offset situation; as the accumulated value of their DC account balance will more than offset the benefit provided by the DB plan.
104
What are the IRC Sec 412(e)(3) requirements?
* Plan must be funded solely by individual or group insurance contracts that are part of the same series (this can be annuity and/or life insurance contracts); * Contracts must fund benefits using level premiums for all benefits; * Plan benefits must be provided only by these contracts and be guaranteed by an insurance company; and * Participants may not take loans.
105
What is the biggest difference between a traditional defined benefit plan and an IRC Sec 412(e)(3) plan?
Method of funding. The premiums paid to an insurance company to fund plan benefits are based solely on contract guarantees. Excess interest or dividend payments will lower future premiums.
106
When is PBGC coverage termination permitted?
A single?employer plan subject to PBGC coverage may only voluntarily terminate as a standard termination or a distress termination. A standard termination is permitted only if plan assets are sufficient to cover benefit liabilities. Benefit liabilities equal all benefits earned by participants through the termination date; including vested and non?vested benefits. Benefit liabilities include early retirement subsidies and certain contingent benefits. A plan with assets insufficient to cover the benefit liabilities may be fully funded through a contribution from the employer in order to qualify as a standard termination unless there is a waiver of benefits from one or more majority owners. This contribution to fully fund the plan would be deductible under IRC Sec 404 as long as it is contributed for the year of termination and in no case later than the date of final distribution of plan assets.
107
What are the criteria for PBGC coverage distress termination?
Distress terminations occur when assets are not sufficient to cover benefit liabilities; and one of the following four criteria is met: * All members of the contributing sponsors controlled group are being liquidated in bankruptcy or insolvency proceedings; * All members of the contributing sponsors controlled group are being re?organized in bankruptcy or similar proceedings; * The PBGC determines the plan termination is necessary to allow the employer to pay other debts while remaining in business; or * The employer has experienced a decline in the workforce resulting in unreasonably burdensome pension costs. The PBGC can determine that the plan termination is needed to avoid these pension costs.
108
What occurs on PBGC coverage termination?
On plan termination; plan assets are allocated based on six priority categories prescribed by ERISA Sec 4044(a). Once all benefits in a particular category are satisfied; plan assets are then allocated to the next lower priority category and the process continues until all assets are allocated or all liabilities are satisfied. When a plan terminates in a distress or involuntary termination and the assets are insufficient to pay guaranteed benefits; the plan goes into PBGC receivership and the PBGC becomes responsible for plan. Note that not all benefits are guaranteed by the PBGC. Following a distress or involuntary termination; all members of the contributing sponsors controlled group are jointly and severally liable to the PBGC for the excess of the value of plans liabilities as of the date of termination over the fair market value of the plans assets on the date of termination. On plan termination; plan assets are allocated based on six priority categories prescribed by ERISA Sec 4044(a). Once all benefits in a particular category are satisfied; plan assets are then allocated to the next lower priority category and the process continues until all assets are allocated or all liabilities are satisfied.
109
What are PPA rules?
* PPA allows a single funding method (unit credit) for minimum funding * Requires use of yield curve for valuing benefits * Minimum contribution is unit credit normal cost plus 7 year amortization of unfunded liability * Max deduction is essentially the amount necessary to bring the plan to 150% funded * Net result is lower minimums and higher maximums than under old law
110
What happens when the PPA minimum is too low?
* Under old law the PPA funding method would have been deemed unreasonable for final average pay plans * Fails to recognize the effect of future pay increases * Particularly inappropriate for small plans since it amortizes gains and losses over 7 years; could cause underfunding at termination * Assuming no pay or limit increases contribution will grow at preretirement interest rate; with increases; it will grow much more quickly
111
What happens when the PPA maximum is too high?
* IRS has issued no guidance on deduction limits * Several Issues outstanding * Plans with under 100 lives cannot include the effect of amendments for HCEs in the last two years for purposes of the 50% funding cushion * Several Issues outstanding * PBGC covered plans can include the impact of anticipated COLAs to 401(a)(17) and perhaps 415 in determining cushion * IRS has traditionally considered 401(a)(17) and 415 COLAs to be plan amendments * What does a PBGC covered plan under 100 lives consider for the funding cushion?
112
What are the sponsors needs/goals/circumstances in a funding policy?
* Cash flow available for plan contributions * Consistency of cash flow * How much can you afford? * Can you afford it consistently? * Can you afford it if it increases 6% per year? * Can you afford it if it increase 12% per year? * Expected actual retirement age for principal * If partnership; expectations upon dissolution of plan or partnership * Likelihood of business sale * What is the likelihood of an early termination of the plan * What if the plan is over/underfunded at the early termination? * If more than one principal; how would funding inequities be dealt with at early termination? * Likelihood of business expansion * Expected staff turnover * You currently have 6 employees; is that expected to remain somewhat constant? * If it is to remain constant; will it be these six (i.e. are these career positions or high turnover jobs)? * If you are expecting growth; do you have any expectation as to size /makeup of your employees in 5 years ? 10 years?
113
Describe front load contributions
* If employer has short earnings horizon; or unsure earnings beyond a few years; may want to take advantage of PPA deduction limits * Careful for plans with chance of early termination due to assets in excess of PV of 415 limit; excise tax problems * Funding Policy should limit deduction to the amount necessary to bring plan assets equal to the total PVFB * Depending on plan design; may want funding policy to fund PVFB for staff only with respect to the benefit they are expected to have accrued by owners NRA
114
What is the 133.33% accrual rule?
* The 133 .33% rule which states that any years accrual cannot exceed any prior years accrual by more than one third.
* The fractional accrual rule which states that a participants benefit at normal retirement is earned incrementally over the participants years of service; both past and future.
* The 3% rule; which states that a participants benefit at normal retirement must be earned at a rate not less than 3 percent per year of accrual. At least one of these rules must be satisfied by a defined benefit plan in order for the minimum accrual requirement to be met. The actual benefit can accrue more quickly than required by the minimum accrual rules; but cannot accrue more slowly.
115
What is the 133.33% accrual rule?
The 133 .33% accrual rule states that any year's accrual cannot exceed any prior year's accrual by more than one third.
116
What is the fractional accrual rule?
The fractional accrual rule states that a participant's benefit at normal retirement is earned incrementally over the participants years of service both past and future.
117
What is the 3% accrual rule?
The 3% rule states that a participant's benefit at normal retirement must be earned at a rate not less than 3% per year of accrual.
118
What amendments trigger a 204(h) notice requirement?
Any significant reduction in the rate of future benefit accruals or any plan amendment that eliminates, ceases or significantly reduces an early retirement benefit or subsidy under a pension plan.
119
What is the 133.33% accrual rule?
The 133.33% accrual rule states that any year's accrual cannot exceed any prior year's accrual by more than one third.
120
In the requirements to be an applicable defined benefit plan, what does similarly situated mean?
Identical in every respect (i.e.; service; compensation; position; date of hire; work history; etc.)
121
What is the fractional accrual rule?
The fractional accrual rule states that a participant's benefit at normal retirement is earned incrementally over the participants years of service both past and future.
122
Can a db plan use a NRA less than age 62?
The employer can select an NRA lower than 62 (and greater than age 54); but there is a facts and circumstances determination of if the NRA is representative of the typical retirement age of the industry. The burden of proof for this is with the employer. An NRA less than 55 is generally presumed earlier than a reasonable retirement age.
123
Can a db plan use a NRA younger than age 62?
The employer can select an NRA lower than 62 (and greater than age 54); but there is a facts and circumstances determination of if the NRA is representative of the typical retirement age of the industry. The burden of proof for this is with the employer. An NRA less than 55 is generally presumed earlier than a reasonable retirement age.
