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