We're working with a cautious client that needs to better understand how the HCE Rate (for getting the 5%, 6%, 7%, or 7.5% gateway) is determined in a DB/DC combo plan.

We explained that it is the sum of the DB HCE Rate and the DC HCE rate using the testing assumptions.

They understood the DC HCE Rate, no problem.

But the DB is a cash balance plan, and, for example, for one HCE the hypothetical credit to the account is just over 24% of pay. Of course, the DB HCE Rate did not come out very close to 24%. This is causing their question.

To calculate the HCE Rate, we explained that it is not the credit divided by the pay, but it's a conversion from the hypothetical credit by accumulating it to NRD at the current crediting interest rate, converted to an annuity under actuarial equivalence, with that annuity's present value calculated at the testing rate, divided by pay. Note: usually they just start nodding after the actuary says "conversion from the hypothetical" and then they can't remember what they even asked in the first place.

But not this time. We could tell that this client was not convinced. They want to know if the regs or other official guidance can confirm that. I'm looking at 1.401(a)(4)-9(b)(2)(ii) and 1.401(a)(4)-9(b)(2)(v)(E). Is there somewhere else that would spell it out even better?

Attached is an update to the Excel add-in that I created and posted last year. The updated add-in now contains 52 mortality tables. These tables are documented in the attached PDF file.

The attached PDF file gives a short overview of installing and using the custom functions contained in the add-in. These functions have been in use by a good number of different users now for well over a year, and I have not received any negative comments about the ease of their use or the results they generate.

Since over the course of the past year I have had numerous people asking me for the full version of the add-in, I decided to just post the full version on this site and rely on the honor system to get paid by those that choose to use it. Although unconventional (and perhaps stupid), this approach will save me the time from having to respond to individual requests.

Also since last year, I noticed a similar add-in at the following link:

http://www.armontech.com/XLActuary_.html

Obviously, this company put more time and resources into presenting its product in a much more professional manner. This product also does some things that my add-in currently does not. However, if your main use of these add-ins is to simply calculate present values, the key difference between this company's product and mine is the way fractional ages are handled. Armon Technologies, LLC's add-in uses linear interpolation of factors based on integral values, whereas mine uses "first principles" and a Uniform Distribution of Deaths (UDD) approach. The other key difference is cost. Armon Technologies, LLC uses a per-computer annual fee arrangement, and I just use a one-time fee for up to five different users on unlimited machines.

For those that would like to evaluate my add-in:

o Download the attached file named "PENPROG Functions.xls" to a directory called "C:\PENPROG"

o Rename the downloaded file's extension from "xls" to "xll" -- That is, the add-in should be called "PENPROG Functions.xll," but I could not upload a file with that type of extension to this site.

o Follow the instructions in the attached PDF overview file to "install" the add-in into Excel's directory of add-ins

o Experiment using the add-in's functions by reviewing the sample applications Excel file that is also attached

After evaluating the add-in, if you would like to use it in a professional manner, please return a signed copy of the attached license agreement along with a check to my attention at:

Doug Goelz

The Phoenix Benefits Group, Inc.

4232 Brownsville Road, Suite 137

Pittsburgh, PA 15227

phone: 412-881-3435

e-mail: doug.goelz@phoenix-benefits.com

Important Disclaimer1: Before using the add-in to calculate results for a professional purpose, be sure to first review and agree to the terms of the attached software license.

Important Disclaimer2: The add-in and sample application Excel file are being distributed “as is” and with no warranties of any kind, whether express or implied. The user assumes the entire risk of using these files and the validity of the values generated by them. In addition, in no event shall I or my employer be liable for any incidental, consequential, or punitive damages whatsoever relating to the use of the files. Your use or installation of the files indicates your acceptance of these terms. If you do not agree to these terms, then do not install or use the files.

Thanks and if anybody has any suggestions for improving the tool, please let me know.

PENPROG_Functions___Sample_Applications.xls

PENPROG_Functions_Overview.pdf

PENPROG_Functions.xls

PENPROG_Functions_Software_License.pdf

We have a 401(k) that is being terminated. A handful of former employees with balances above $5000 have not responded to requests to complete distribution paperwork. They are not missing, as their addresses are correct. What steps need to be documented before we transfer their assets into IRA accounts?

The custodian will not release the funds until all distribution paperwork has been received, so these few are holding up the whole process for the rest the participants.The former employees have already received multiple mailings with the paperwork.

We have a client who set up a 401k profit sharing plan.

They have about 25 participants.

They asked that we assist with establishment of accounts at Schwab.

They want each participant to complete an application to establish their own self directed account.

The money will likely start in the participant's money market type account and then be available for each of them to invest as they choose (i.e. no menu of investment options) and access on-line just as if they had their own savings account with Schwab.

Is this a permissible type of self directed arrangement?

Thank you.

Cheiron, Inc. is pleased to announce that longtime IRS veteran James E. Holland, Jr., ASA, EA, FCA, MAAA will be joining Cheiron, Inc. on January 4, 2010 as the firm's Chief Research Actuary. Holland, who has been Assistant Director, Employee Plans Rulings and Agreements since February 2008, is leaving the Service after a distinguished 36-year career.

One of the nation's leading experts on the pension provisions of the Internal Revenue Code and ERISA, Holland is a frequent speaker at professional conferences. He has provided technical guidance, interpretations, and rulings on the myriad of complex issues throughout his tenure with the IRS, both directly and through supervising the Employee Plans technical staff. He holds a bachelor degree from the University of Virginia with a major in mathematics.

I'm not sure how to ask this question, as it was asked of me: With a sole prop entity, is FICA paid on the company's profit sharing contribution? Does FICA reduce the reportable gross income?

Thanks - Mike

I've got three questions for posters. I'm trying to find out what others are doing with these issues.

Assume that a 401(k) plan is intended to satisfy the QACA safe harbor for employees who have attained age 21 with 1 year of service. Match is 100% on 1% + 50% on next 5%. There is auto enrollment beginning at 3% + 1% annual contribution increases stopping at 6% - 10%. Eligibility for deferrals begins 2 months after hire date and eligibility for the match begins one year after hire date. Assume a calendar plan year.

1) Arnold is hired April 1 of year 1. Arnold does not make an affirmative election to contribute. As of what date should Arnold be automatically enrolled: June 1 of year 1 or April 1 of year 2?

2) Beth is hired April 1 of year 1 and earns over $110,000 during that calendar year. For year 2, is Beth included entirely in the age 21+ and 1+ YOS group that does not require testing because it is a QACA safe harbor plan? Or does one include Beth's data from January 1 - March 31 of year 2 in the otherwise excludable group and (because there is now at least one HCE in that group) perform an ADP test on the otherwise excludable group?

3) Carmen is hired April 1 of year 1 and earns over $110,000 during that calendar year. Carmen terminates employment on March 15 of year 2. Does Carmen have to be included in the ADP test for year 2 for the otherwise excludable employees?

I'll suggest an answer to question 3 but will leave questions 1 and 2 open for discussion. Yes, Carmen must be in the ADP test for year 2. There is an early participation rule whereby HCEs from the nonexcludable group can be included in the age 21+ and 1+ YOS testing group, but after looking at Treas. Reg. 1.401(k)-1(b)(4)(iv)(A)(last phrase), 1.401(k)-1(b)(4)(vi)(Example 2), and 1.401(k)-2(a)(iii)(A), it appears that the early participation rule only applies if the age 21+ and 1+ YOS testing group or "plan" is subject to ADP testing instead of relying on a safe harbor. Besides, Carmen never received a QACA match, so it really doesn't seem right to put her in that testing group.

Thanks for any help you can provide.

Can anyone direct me to references for the impact the NRA 62 amendment would have on a governmental plan and what the amendment deadline would be?

401k PSP gives EEs self direction opportunity, including choice of brokerage house where a plan account will hold an EE's benefits.

EE has a plan account at one brokerage house, wants to transfer to having at another one. EE calls and sets up the account, distinctly recalling that he told the new brokerage house rep that it was a 401k FBO account that was what was needed.

New brokerage house sends out confirmation of establishment and number for new account, but as an IRA.

Lay trustees don't realize the difference, and sign a transfer form for old brokerage to transfer the assets to new brokerage house, giving the number of the new account (i.e., the IRA number), but specifying in the transfer form that the new account is a 401k Trust FBO account for this EE.

The money transfers.

When the ER next makes a company contribution, the share allocable to the EE is sent to new brokerage house, which refuses the contribution saying it exceeds the annual amount that can be added to an IRA. That's when EE, ER and lay trustees realize that something has gone wrong.

Can this isolated, one time problem with one EE be corrected by self correction or does this require VCP submission? Does anyone know off the top?

One person DB Plan - his company is a PLLC and he is the only partner. He receives TWO K-1s each year for the same company. One appears to be for services rendered. One is not. Is it correct that the earnings that appear on the K-1 that are not for services rendered cannot be used for qualified retirement plan purposes?

I've never seen anything quite like this.

Plan termination. Participant has $20,000 account balance. Elects to receive $5,000 in cash, and roll over the $15,000 remaining to her new 401(k) plan at new employer.

Distribution is processed, but unfortunately the entire $20,000 is sent to the new 401(k) plan and accepted and deposited.

New 401(k) plan does not allow for in-service withdrawals/distributions, and initially at least, PA is ostensibly refusing to allow the transaction to be "reversed" in any manner.

Participant, very reasonably, doesn't give a hoot how it is fixed, just wants her money.

Any bright ideas? It isn't really an "ineligible" rollover distribution, so it's hard to use that line of argument. If you were a PA, what line of argument/documentation would induce you to send the $5,000 back to the Trustee?

We have a client that requires BRF Testing. Here is a breakdown of the formulas:

50% to 4% (A)

50% to 5% (B)

75% to 6% ©

100 % of 1, plus 50% on 2&3, Plus 25% on 4&5 (D)

For my testing groups breakdowns:

Test 1: Group A, B, C

Test 2: Group B, C

Test 3: Group C

Test 4: Group D

Is this correct?

We will probably get a coverage determination from the PBGC, but has anyone had experience with something like this?

Architect with 5 EE's has had a DB plan for 5 years. Plan has not been covered because of professional service employer exemption. Now acquires 80% of a storage facility business and has a controlled group. They have no problem covering all 15 employees from the storage business so the storage business becomes a participating employer in the plan. Now most income is derived from the storage business.

ERISA 4021©(2) says a professional service employer is any entity owned or controlled by professional individuals where BOTH THE ENTITY AND THE PROFESSIONAL INDIVIDUAL OWNING AND CONTROLLING IT ARE ENGAGED IN THE SAME PROFESSIONAL SERVICE.

Here we have a professional controlling a business that happens to be a participating employer in the plan, but he and the storage business are not engaged in the same professional service.

We are thinking the plan must now be covered. Any agreement/disagreement?

Thanks much.

Plan provides for monthly retirement benefits and has lump sum option.

Is there any argument for valuing the 415 limit using annual mortality instead of the usual m-1/2m adjustment to the annual annuity factor (times 12) for benefits payable monthly ?

Plan is over funded so client is looking to max out everything. Thanks.

Is anyone else fielding questions about the attached Q&A from 2009 ASPPA conference? In it, the IRS representative took the position that a traditional DB plan that does not issue a § 203(a)(3)(B) suspension notice at NRA, but instead provides for continued accruals at the same rate as pre-NRA, must pay both those continued accruals and actuarially increase the benefit year-to-year.

Our experience is that a great many plans in this situation provide the greater of continued accruals or the actuarial incease; that is, they offset the continued accruals by the amount of the actuarial increase. They do so without mentioning the offset, and they do so whether the plan (i) provides for a suspension notice (which the administrator fails to send), or (ii) simply doesn't provide for a suspension. The IRS is taking the position that the plan cannot use the greater-of approach at all, unless the document specifically provides for it.

The IRS's rationale is that the plan says the participant gets continued accruals, so ERISA (and the Code) requires the plan to provide them. Period. ERISA and the Code also require the participant to be made economically whole for the "suspended" payments. Period. The regs (which regs is another question--see below) offer a means of offestting the adjustment against the accruals, but to use that method the plan must contain language describing it.

I can see the IRS's point: the plan requires the continued accruals, and there's an extrinsic legal requirement to either issue a notice or pay the "actuarial increase." The rubber meets the road when you calcuate the increase, however.

One can read the 1988 proposed regs (see § 1.411(b)-2(b)(4)(iii)(A)) as requiring the plan to provide for the greater-of approach. The language is pretty soft ("A plan may provide . . ."), but I can sort of get there. I don't think it's the only reading--or that most lawyers and actuaries have read it that way.

I don't see a similar requirement in the 2002 proposed regs. Maybe I'm missing it.

I'm also confused by the fact that the IRS seems to be opining that the 2002 proposed regs control. The 1988 proposed regs were generally effective as of 1/1/1988; the 2002 proposed regs state quite clearly that they are not effective until final regs are issued. It seems like the 1988 regs (which generally require a smaller actuarial increase) are at least as authoritative as the 2002 regs (becuase they actually have an effective date), but that a good faith interpretation of the statute is still permissible, given the absence of any final regs.

And unless I'm mistaken, industry practice is well settled the other way--i.e., plans use the offset without specifically providing for it, both to correct the failure to send suspension notices (in plans that call for them) and to calculate late retirement benefits (in plans that don't). Note that EPCRS has approved a number of corrections for failure to provide suspension notices since 2000, and according to the annual Ernst & Young index of these corrections, the "greater-of" approach was used to calculate the corrective payments.

Any comments appreciated. Thanks.

2009_Gray_Book_QA_39.pdf

One of my plans includes bonuses in the definition of compensation and does not allow for special deferral elections to be made on bonuses. What happens if a participant elects to have a certain dollar amount deferred from each paycheck and that amount is greater than their actual bonus will be? For example, participant defers $300.00 per pay period. Bonus is only going to be $200.00. Does the entire bonus have to be deferred?

Thanks!

My client uses total compensation as their definition. For some reason they thought it excluded bonuses. 2 NHCE's received a bonus and did not defer on that bonus. First they did not use the correct definition and even if the plan excluded bonuses 414s would fail. How do I correct this? Do I tell them that deferrals should have been taken out of the bonus? What would happen under audit?

Is anyone aware of recent spot surveys regarding trends in matching contribution formulas or suspensions of match, particularly among the Fortune 500?

We suspended our match in 2009 and I'm trying to make a case for reinstatement in 2010.

Thanks very much.

Some threads have a blue folder on the left and some have a red one. The legend says that the red ones are "Hot Topics." What makes a topic "hot"?

I thought it was views and/or responses, but I saw a red one with 9 responses and 129 views, but a thread with a blue folder had 7 responses and 152 views.

Are you required to have a plan sponsor signature on a hardship withdrawal form as authorization to process the distribution?