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No more cross-testing, permitted disparity or top-heavy in D.C. Plans


KJohnson
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Treasury put out a press-release regarding Bush's new pension/ira proposals. It can be viewed here:

http://www.ustreas.gov/press/releases/kd3816.htm

Does the budget proposal related to ERSAs affect any other defined contribution plans?

Yes. The proposal includes the following provisions that would greatly simplify the administration of all defined contribution plans:

1. There would be a single test to show that the plan meets the nondiscrimination rules with respect to coverage -- ratio-percentage coverage. Under this test, the percentage of an employer’s nonhighly compensated employees covered under a plan would have to be at least 70% of the percentage of the employer’s highly compensated employees covered under the plan. The other coverage testing alternatives would be repealed.

2. Permitted disparity and cross-testing would be prohibited for defined contribution plans.

3. The top heavy rules would be repealed for defined contribution plans.

4. There would be a uniform definition of compensation for all purposes for defined contribution plans – the amount reported on form W-2 for wage withholding, plus the amount of ERSA deferrals.

5. A simplified definition of highly compensated employee would be adopted under which all individuals with compensation for the prior year above the Social Security wage base for that year would be considered to be highly compensated employees.

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I think MGB's comment from yesterday is still applicable.

http://benefitslink.com/boards/index.php?showtopic=18218

Other items are not affected because they haven't gotten around to them yet.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Besides making comments to the press, no organization has any input into the process yet.

These are only descriptions of what Bush will be including in his proposed budget for 2003-2004. That doesn't even rise to the level of proposed legislation yet. Don't forget, the Administration has absolutely no authority to create law.

Someone in Congress (Portman-Cardin have already indicated they are holding up their reform bill to include this) will take his ideas and draft actual language to introduce in Congress. It isn't until then that the lobbyist organizations will have any affect on the process.

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I knew there was a reason I voted for Bush.

I don't know where ASPA is on this (I suspect they will not be terribly supportive), but it sure does seem to me to be the Actuary's Really, Really Full Employment Act of 2003.

Every single cross-tested plan will become a DB plan.

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Hopefully a very long time. ;-)

No, seriously, if you are serious you should check out the Society of Actuaries, the American Society of Pension Actuaries and the Joint Board for the Enrollment of Actuaries.

At a minimum you are looking at 1 year of intensive study in order to pass the Enrollment Exams, along with a "responsible actuarial experience" requirement which I believe is 2 years. although some of what you have done to date might qualify for the experience requirement.

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There are a number of potential solutions to that problem. Before cross-testing we used to use them pretty effectively. Just because cross-testing is better doesn't mean that the old way has lost all of its effectiveness.

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I have no clue who the people responsible for it are.

Your point is a good one. If we can use this as a springboard to make defined benefit plans more rational, with some flexibility in funding, I think the result would be marvelous. I'm not holding my breath, however.

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well, I voted for Bush last time, but not next time. No way I'll vote for Bush after this..........or Hillary, or Lieberman, or Evans, or Kerry or Gary Hart; certainly not Gephart or Daschle; certainly not Sharpton .............hmmm. Does Ross Perot support this proposal? Maybe Powell will have quit by then and be available?

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As mentioned earlier, the only thing the Bush administration is doing is trying to score politically. The administration's domestic agenda has been lacking with the Iraq crisis, and approval rates have been slipping. Democratic candidates are starting to line up, and for the first time during his pregnancy, Bush is starting to look vulnerable.

What do administrations do when they are becoming vulnerable? They throw out the same stuff the people always want to hear - prescription coverage for the elderly, research for more efficient use of natural resources, toss in some money for AIDS research, throw in some tax cuts, and then top it off with a naive plan about how to shore up worker's retirement. All those issues play well to the general voting public. Issues that the administration has never been concerned with before, but has to be concerned with now or risk losing in two years.

Fortunately Congress will have to pass the laws, but I'm still debating whether 535 idiots is better than just one.

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To put this all in a musical perspective perhaps you should consider the following lyrics while contemplating the future:

"Its the end of the world as we know it and I feel fine" by REM

"You dont need weatherman to know which way the wind blows. "

R. Dylan, Subterranean Homesick Blues.

"Woke up this morning and got myself a beer.

"Woke up this morning and got myself a beer.

"Cause the future is uncertain and the end is always near.

"Let it roll baby, roll."

The Doors, Roadhouse Blues

mjb

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Guest LauraH

I agree with MR's comment . . . I doubt DBs will suddenly come into favor in the absence of cross tested plan designs. Employers don't want investment risk in the market's current environment. Furthermore, a promised benefit at retirement is definitely a turnoff, particularly if you are a small business. No, the whole idea of this proposal providing an attractive alternative to the current DC platter of design options is just baloney.

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Let me start by saying I'm a Bush fan.

But...

I agree the proposal does make the statement (intentional or not) that cross testing is only valid in a defined benefit arrangement. The lack of faith in market performance is sort of contradictory to the proposal of permitting nonguaranteed Social security investment accounts. Although, I realize the social security proposal is intended more for younger people.

However, do you agree that top heavy should be eliminated and account types should be consolidated? I haven't heard an overwhelming reason to keep the different rules for salary deferrals under 401k, 403b, and 457.

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Actually, this is an interesting comment here:

"I agree the proposal does make the statement (intentional or not) that cross testing is only valid in a defined benefit arrangement."

In one sense, maybe the tradeoff of testing on a benefits basis should be the guarantee of the future investment return, which a DB plan does do. In the late 90s 8.5% looked pretty conservative; now, not so sure about this.

What I've been watching for is someone in Congress to reconsider the "standard interest rate" definition of 7.5%-8.5% as promulgated in the 401(a)(4) regs. When codified in the early 90's this looked reasonable. Maybe not so now (try a CT plan at 5% - doesn't look quite as appetizing).

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Additional reading material from Treasury website. Start on page 118:

http://www.treasury.gov/press/releases/rep...luebook2003.pdf

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Pax, thanks for the link. Always best to look at the source and not count on arithmetically challenged reporters to provide the real scoop.

What is unsaid is on page 127 is the application to DB plans. Would integration (er permitted disparity, I'm showing my age) be also eliminated? Would the comp and HCE definitions also carry over to DB plans?

I'm also assuming that the elimination of cross-testing would not only blast out New Comp plans but also eliminate age-based and target benefit plans.

Of course this is all a proposal at this point; many, many issues on the government's plate right now that are more important than tinkering with retirement accounts...

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