Defined Benefit Plan Administration

Defined Benefit Plans are unique among Qualified Plans because they require the expertise of an Enrolled Actuary to determine the funding requirement each year. In this requirement, they stand in contrast to Profit Sharing plans, 401(k) plans, and other Defined Contribution Plans that may be administered by an accountant or other professional. The actuary must use complex Actuarial Assumptions and Actuarial Methods to project future benefits expected to be paid from the plan, then determine the amount of contributions that need to be made over the course of active employees' working lifetimes.

Life-Cycle of Plan

The life-cycle of a plan falls into three distinct phases:

1. Plan Startup
2. Ongoing Annual Plan Administration
3. Plan Termination

Typically for a small employer, the entire life-cycle revolves around the retirement of one or more principal employees--generally the owner(s). The details of Startup and Termination are discussed in separate articles, while the ongoing administration is outlined below.

Annual Plan Administration

Annual Data Request

Each year, the collection of annual data needed to perform an annual Valuation of the pension plan kicks off the annual administration process. In the small employer/small plan environment in which business conditions can fluctuate widely, this process typically takes place at or after the end of the year when the employer is in the process of final tax planning for the year. The data to be collected includes:

1. Annual Census Data - includes:
   1. W-2 compensation for the year (see also Compensation Used In Plans)
   2. Hours worked during the year
   3. Date of Termination for terminated employees
   4. Name/Sex/Date of Birth/Date of Hire for new employee
2. Statement of Assets at End of Year (Market Value of Assets)
3. Dates/Amounts of Contributions for the year made to-date.

Also required are the dates/amounts of any benefit distributions made during the year and information about any loans made or loan repayments.

Valuation and Contribution Quote

After receipt of the annual data, an annual Actuarial Valuation of the plan is made using Actuarial Assumptions and Actuarial Methods to project future benefits based on the most recent census data. Most Actuarial Valuations for small plans are run using a Beginning of Year Valuation Date but incorporating the actual pay data for the year since it is available.

Using Actuarial Methods and the applicable law and regulations, the actuary then determines the amount of contributions that need to be made over the course of active employees' working lifetimes, and more specifically, the contribution requirement for the current year.

• It may be possible or necessary to adjust the contribution level by taking into account adjustments in the Actuarial Assumptions or Methods that are used, based on changes in circumstances, outlook, intentions, or objectives of the sponsor.
• Depending on the methods as well as the facts of the particular case, there may be a contribution corridor available between the Minimum Required Contribution and the Maximum Deductible Contribution.
• If the Valuation is performed within 2.5 months after the end of the plan year, it may be possible to amend the benefit formula and to recognize this new amendment in the final Valuation for the prior plan year.

Annual Reports

After all contributions have been made for the prior plan year, the following annual reports are furnished to the plan sponsor:

• Valuation Report - supports the sufficiency and deductibility of the contributions made.
• Form5500 filing, including Schedule B (Enrolled Actuary's certificaiton) - to be filed with the DOL/IRS/PBGC.
• Participant Benefit Statements - for individual participants, communicating to them their benefit in the plan.

In addition, the following may be required:

• From time to time, all plans must amend or completely restate their plan document in compliance with changes in law or regulations.
• PBGC Premium Forms - for payment of premiums by plans covered by the PBGC (see article on the Pension Benefit Guaranty Corporation)
• FAS 87/132 valuation and report - if an accounting valuation is required by a creditor, investors, or auditors.

Individual Benefit Calculations

Finally, if employees have terminated during the prior plan year, Individual Benefit Calculations must be prepared for them to finalize the determination of their benefits from the plan. This will include a lump sum benefit value as of a current date, if the plan provisions allow lump sum distributions. This is the most cost-effective time to process Individual Benefit Calculations--in conjunction with the annual reports. For small plans, this is standard and acceptable administrative procedure.

Annual Timeline

After the end of the plan year, there are strict deadlines that must be met for the annual plan administration:

• 2.5 months - amend plan, if needed
• 7 months - file Form 5500 or file for extension
• 8.5 months - contribution requirement must be met (note also that contributions must be made prior to filing the sponsor’s tax return on which they are deducted)
• 9.5 months - file Form 5500 if extension was filed

These deadlines can be illustrated with the following interactive chart in which you can pick the particular year-end:

Defined Benefit Plan Annual Administrative Calendar
1/1/05	P l a n Y e a r	BOY (Beginning of Year)
12/31/05		EOY (End of Year) 1/31 2/28 3/31 4/30 5/31 6/30 7/31 8/31 9/30 10/31 11/30 12/31
	1
	2
3/15/06	3	deadline to amend plan
	4
	5
	6
7/31/06	7	Form 5500 first due date
	8
9/15/06	9	Contributions due (must be made prior to filing sponsor’s tax return)
10/15/06	10	Form 5500 extended due date
5500 deadlines are adjusted to the next Federal business day if they would otherwise fall on a weekend or holiday

More Info

• IRS article on operating a qualified retirement plan

• Basic fee schedule for direct clients

• Defined Benefit Plan Issues