the new cash balance pre- approved plan document and …the new cash balance pre-approved plan...
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10/17/2016
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The New Cash Balance Pre-Approved Plan Document and Other
DB Document ConcernsJustin Bonestroo, MSPA, EA, CPC, CPFA
President, Actuarial Consultants
Robert M. Richter, J.D., LL.M., APM
Vice President, FIS Relius
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Background
• IRS Announcement 2014-4
– Submission deadline extended to permit “certain” cash balance plans (only for VS and nonstandardized plans)
• IRS encouraged plan sponsors to sign Form 8905
– Certification of intention to adopt a pre-approved plan
– Must have been signed by applicable 5-year cycle deadline
New Rules
• Rev. Proc. 2015-36: General rules for prototype (M&P) and Volume Submitter (VS) plans; permits certain cash balance plans (and ESOPs) in pre-approved plans
• Rev. Proc. 2016-37 (restates Rev. Proc. 2007-44): Modifies the DL program; eliminates 5-year cycle for Individually Designed Plans (IDPs)
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3 Types of Plans
• Master & Prototype Plans (M&Ps)
• Volume Submitter Plans (VS)
• Individually Designed Plans (IDP)
M&P Plans
• Master & Prototype Plans (M&Ps)– Master plan requires a single master trust
– Prototype allows separate trust for each employer
• M&Ps are required to have a basic plan document and a separate adoption agreement (AA)
• IRS approval issued to sponsoring organization is an opinion letter
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Volume Submitter Plans
• Volume Submitter may be formatted:
– To resemble an M&P with a basic plan document and an AA
– To be a self-contained document that appears to be individually drafted (contract style)
• IRS approval issued to volume submitter practitioner is an advisory letter
M&P vs. VS
• Procedural differences:
– M&P only: standardized AAs
– M&P only: minor changes at sponsoring organization level with lower user fees
– M&P only: flexible options at sponsoring organization level
– VS only: minor changes at ER level with lower fees (i.e., Form 5307)
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M&P vs. VS
• Substantive differences:
– VS only: Governmental plans (but no DROP provisions)
– VS only: Election not to participate (if irrevocable and made prior to being eligible)
• Consider exclusion by name: OK on Non-Standardized or VS if plan passes IRC §410(b) using ratio percentage test
Individually Designed Plans
• Plans that are not M&P plans or VS plans
– Can be because of “impermissible provisions” (covered later)
– Can be because the available pre-approved plan is too restrictive as far as optional provisions
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Conversion to Pre-Approved Plan
• Prior to elimination of 5-year cycles for IDPs, one conversion approach was the “intended adopter” category
– IDP adopter executed Form 8905 that it intended to use a pre-approved plan
– Entitled adopter to 6-year cycle
IRS Announcement 2014-4
• Example: Employer has Cycle E cash balance plan and signed Form 8905 before January 31, 2016
– Deadline to restate – unknown at this time
– Form 8905 is just “intention” to adopt pre-approved plan
• Doesn’t require that a pre-approved plan be adopted
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Rev. Proc. 2016-37
• No 5-year cycles for IDPs
• No need to have the “intended adopter” category– Form 8905 no longer applicable
• Sponsor of IDP simply adopts a pre-approved plan– Presumably retroactive reliance back to beginning
of applicable 6-year cycle
Unintended Gap
• Prior example: Employer with Cycle E cash balance plan signed Form 8905 prior to 1/31/16
• What happens if the cash balance plan contains an impermissible provision (next slides)?
– Missed opportunity to get a determination letter
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PRE-APPROVED PLANS:IMPERMISSIBLE
PROVISIONS
Impact of Impermissible Provision
• An Impermissible Provision is a provision that is prohibited in all pre-approved plans
• Plans with these provisions MUST use an IDP
– Beginning in 2017 will only be able to get a determination letter at plan inception and plan termination
– Not required, but advisable, to get a determination letter whenever possible
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Impermissible Provisions (DB related)
• Multi-employer plans (union plans)
• Non-electing church plans
• Failsafe provisions for IRC §401(a)(4) or average benefits test of IRC §410(b)
Impermissible Provisions
• Plans with 401(h) accounts (post-retirement medical)
• DB/K plans
• DB plans with 414(k) accounts
– Rollover accounts are permitted
• Governmental plans with DROP features
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Impermissible Hybrid Provisions
• Hybrid plans with any of the following features are NOT permitted in a pre-approved plan: – A statutory hybrid plan that is not a cash balance formula
(e.g., a pension equity plan)– An interest crediting rate based on a participant’s choice or
a rate that doesn’t satisfy the regulations (1.411(b)(5)-1(d))– An interest crediting rate that is based on actual return of
assets or a subset of assets or rate of return on certain RICs
– Amendment from impermissible to permissible interest credit (because impermissible is protected)
Impermissible Hybrid Provisions
• Hybrid plans
– Conversion from a traditional DB formula unless it’s an A + B conversion
• No wear-away approach
– That use 3% or fractional accrual method
• Must use 133 1/3% method
– That are fully insured (IRC §412(e)(3))
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Impermissible Hybrid Provisions
• Offset provisions unless: – Offset is applied on accumulate basis at annuity
starting date• Cannot offset on year-to-year basis
– Offset meets the safe-harbor requirements of 1.401(a)(4)-8• Except that offsetting of account balances is permitted
– Minimum accrued benefit of 0.5% of comp for each year of credited service
Impermissible Hybrid Provisions
• Offset provisions unless: – Offset is applied uniformly to all participants
– Each participant has a minimum accrued benefit of 0.5% of comp for each year of credited service (cannot be offset)
– The accrued benefits (taken into account the DC plan) are nondiscriminatory and definitely determinable• Must name DC plan and assumptions for conversion
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Other Possible Prohibitions
• An NRA of Social Security Retirement Age solely for purposes of testing age for nondiscrimination tests (effective PY after year of adoption)
• Normal form of benefit as a J&S
– Concern is 415 violations if benefit taken as a lump sum
• There could be others that come up in the review process
Other Prohibitions
• De-risking provisions (Notice 2015-49)
• No NRA less than 55
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Expected Timeline for DB PPA Restatements
Submission
10/30/15
IRS Review 11/1/15 –3/31/18?
Restatements 4/1/18 –3/31/20?
Plan Terminations
• Do terminating plans need to be restated?
– If terminating before next restatement deadline, technical answer is no (see Rev. Proc. 2014-6 §12.06)
– Practical answer: recommended that plan be restated once new pre-approved plans are available, especially if not filing for a DL (i.e., using Form 5310)
– If no submission then employer is using “good-faith” interim amendments with no reliance
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Interim Amendments
• Plans that have interest crediting rate that does not conform to final regulations must be amended by end of 2016 plan year
OTHER CONCERNS
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Practical Problems
• How to handle actuarial adjustments for late retirement
• How to handle RMDs from actively employed owner
• Taking an annuity distribution
• Top-heavy benefits exceeding hypothetical account
Administrative Ease
• Combo plans
• Avoid rarely applicable provisions (e.g., rule of parity; 1-year hold-out rule)
• Unique death benefit provisions (e.g., 1-year marriage rule; divorce revoking designation)
• Other problematic provisions?
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The New Cash Balance Pre-Approved Plan Document and Other
DB Document ConcernsJustin Bonestroo, MSPA, EA, CPC, CPFA
President, Actuarial Consultants
Robert M. Richter, J.D., LL.M., APM
Vice President, FIS Relius