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Notes from SunGard Corbel's Advanced Pension Conference

By Dave Baker


This reporter attended a recent three-day conference (Feb. 13-15, 2002) entitled "Unmasking EGTRRA: SunGard Corbel Advanced Pension Conference." The event marked the 20th year in which the annual conference has been held in Orlando. Several hundred people attended the conference, sponsored by SunGard Corbel.

Here is the first installment of my notes from the conference, which may be of interest to pension practitioners. These are only highlights of the extensive oral and written material provided to attendees, but they are points that seem especially interesting or useful.

Catch-Up Contributions

In general the proposed regulations defining catch-up contributions are more complicated than one would like. It may be prudent to delay amending plans to accept catch-up contributions, until the regulations are finalized. Several organizations have submitted comments on the proposed regulations.

The amount of the catch-up contribution available in 2002 is small, anyway: $1,000, in the case of 401(k) and 403(b) plans. But that amount increases by $1,000 each year until 2006, when the annual catch-up amount will be $5,000 per year (before adjustment for inflation). The value of the catch-up contribution feature hence increases each year, making it more likely that plans will want to go ahead and add the feature in the future.

There is no requirement that catch-up contributions be separately accounted for. Indeed, it is generally not possible to know for sure whether an amount is considered a catch-up contribution until the end of a calendar or plan year, due to the way the proposed regulations define a catch-up contribution as being elective deferrals that exceed an otherwise "applicable limit."

The "universal availability" rule can cause headaches where a controlled group is involved; in order for a plan sponsored by a controlled group member to accept catch-up contributions, all plans in the controlled group that allow elective deferrals must be amended to allow catch-up contributions. All participants who are eligible to make deferrals under a plan must be eligible to make catch-up contributions. This rule has caused particular trouble for multi-state employers; it would not be possible for a plan to allow catch-up contributions only for participants in states that have conformed their income tax laws to allow catch-up contributions on a pre-tax basis, for example. Some conservative multistate employers appear to be holding off on catch-up contributions due to a concern that operating them in non-conforming states might even cause "disqualification" of the plan for state income tax purposes.

Matching contributions are not required to be made on elective deferrals that are catch-up contributions, but a practical problem is presented by the fact that one generally can't know for sure whether an amount is a catch-up contribution until the end of a year. Hence when matching contributions are made during the course of a year, it might be necessary to forfeit matches on funds that turn out to be catch-up contributions. Most plans seem to have decided not to make a distinction, and will match elective deferrals whether or not they turn out to be catch-up contributions.

Section 415 Limits

The big news here is that defined contribution plans are no longer limited to annual additions of 25% of compensation; instead the limit is 100% of compensation (or $40,000, whichever comes first), for limitation years beginning after 2001.

One result of the new DC limit is that "working spouses" may come back in vogue. "Lots of spouses of business owners got 'laid off' when the IRA active participant rules came in -- now might be a good time to call 'em back in and give them a raise!" said speaker Craig Hoffman (General Counsel of SunGard Corbel; Jacksonville, FL). He pointed out that the spouse must truly work and earn his or her pay, though, and cautioned that high 401(k) contributions by a working spouse of a highly compensated employee might gum up the ADP test, unless the 401(k) plan uses a safe harbor design.

Speaker Ilene Ferenczy (of Powell, Goldstein, Frazer & Murphy, LLP; Atlanta, GA) pointed out a practical limitation on the new DC limit: the employer needs to have some pay left over from which to take FICA and FUTA withholding, or cafeteria plan deductions; hence it may be prudent to specify that a participant cannot elect to defer 100% of pay, but instead is capped at something like 80% of pay.

Hoffman predicted that "bottom-up QNECs" will be prohibited soon, due to language in the EGTRRA conference report stating that the conferees intend that the IRS will use its authority to address the inappropriate use of QNECs. A bottom-up QNEC could provide the lowest-paid participants with a contribution of as much as 100% of pay under the new rules, rather than being capped at 25% of pay. Hence the ADP test (which is based on the average of contribution percentages) might be satisfied by making contributions to only a few or even just one such lower-paid participant. But a QNEC providing the same dollar amount per non-HCE ("per-capita" QNECs) probably will continue to be allowed, Hoffman said.

The defined benefit limit has been increased as well, in ways that might not be obvious but can have dramatic results. In particular it is no longer necessary to actuarially adjust the limit based on an individual's social security retirement age (65 or more), unless the benefit begins before age 62. Under the old limit a 62-year-old would have been limited to $105,000 annually; under the new limit it is $160,000. Under the old limit a 55-year-old would have been limited to $62,000 annually; under the new limit it is $94,000.

Speaker Ilene Ferenczy commented that in light of those numbers, it is "time to get back in the water" with defined benefit plans.

457 Plans

Speaker Craig Hoffman pointed out that EGTRRA eliminated the rule that coordinated 401(k) elective deferrals with deferrals under a section 457 deferred compensation plan. As a result, an organization that is eligible to sponsor both a 401(k) and a 457 plan is able to provide participants with the ability to defer up to $22,000 per year -- twice the usual $11,000 limit on annual deferrals.

401(k) Plans

IRS regulations provide that one of the conditions for satisfying the financial necessity safe harbor standard for hardship distributions is that a participant must be prohibited from making elective deferrals for a period of 12 months from the date of the hardship distribution. EGTRRA requires the IRS to revise its regulations to shorten that suspension period to 6 months. IRS Notice 2001-56 clarifies that 401(k) plans in general are not required to use the shorter 6-month suspension period (though they may choose to do so), but a 401(k) plan that is designed to meet the 401(k)(12) safe harbor (to avoid the ADP test) is required to use the shorter 6-month suspension period for hardship distributions made on or after January 1, 2002.

Matching contributions to non-top heavy plans are now required to vest under a top-heavy (3-year cliff or 6-year graded) vesting schedule. Speaker Craig Hoffman emphasized that the change is effective for matching contributions made with respect to plan years beginning after 2001; it is not applicable to matching contributions made in 2001 or earlier plan years. But separate accounting for the 2001 and earlier plan year matching contributions would be required, if the plan sponsor wishes to continue to apply the slower vesting schedule to those matches. For simplicity a plan sponsor might choose to apply the new vesting rules even to matches already accrued.

Top-Heavy Rules

The definition of key employee has been revised by EGTRRA to require compensation of more than $130,000 (up from $70,000); speaker Craig Hoffman pointed out the change may present opportunities for non-profit organizations. Plans sponsored by such firms, which have no shareholders and hence do not have "5% owners" who are key employees regardless of their pay, might be no longer top-heavy in 2002 if the chief executive's compensation is $130,000 or less.

Rollover Rules

Although the rollover rules have been greatly liberalized by EGTRRA, such that a 403(b) distribution could be rolled into a qualified plan, speaker Craig Hoffman pointed out that the Code provides no authority for merging a 403(b) plan into a 401(k) plan, or even for terminating a 403(b) plan. Hence a tax-exempt organization wishing to adopt a 401(k) plan to replace its 403(b) plan appears to have no good way to move the 403(b) funds into the new 401(k) plan.

Waiver of User Fee

Speaker Craig Hoffman pointed out that EGTRRA's provision waiving the usual IRS user fee for plan sponsors with fewer than 100 employees (generally only during the first 5 plan years, however) represents a particularly valuable opportunity for a plan sponsor who wishes to adopt an individually-designed plan. The user fee in such a case would have been $700.00.

Part 2

Part 2 of my notes from SunGard Corbel's Advanced Pension Conference is here: https://benefitslink.com/articles/corbelconf2.html (click).

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