I am trying field a question as to why an ER cannot move money as they choose from 1 benefit to another. For instance, there is a cap of $1,500 on the HRA and once the cap has been reached, the ER would like to contribute the rest to the 401K account as a profit sharing contribution for that participant only.

I'm trying to find something in writing that explains the differences in these plans and how they are developed as a benefit plan and the EE cannot choose how the "benefit money" is allocation (Health care, retirement, ect....) How you cannot aggregate all plans of the employer 401K or othewise, for non descrim testing.

Anyone have any ideas?

Thanks!

I am trying to figure out how to price this client, and also figure out a strategy for the future.

Client currently has:

A 401(k) plan with no employer matching or profit sharing.

1,500 people employed at some point throughout the year.

700 eligible participants

60 currently participating.

"Free" daily val administration

Client Wants:

Still wants online access.

Personal Service.

Now my dilemna.

To keep fees as low as possible, are we allowed to put a 2 year wait on deferrals? This would help lower his eligible employees and benefit his longer term employees the same as they are right now anyway. I know that you can do 2 year and make everything 100% vested, but in the back of my mind I am thinking that even with a 2 year eligibility that you have to allow deferrals after 1 year. Since he doens't have any match or profit sharing right now, the plan wouldn't operate any differently except cut down on all these employees popping up with zeros on the plan.

I don't think I can do this, but maybe...I always have hope.

JOEL L. FRANK

Retirement Analyst

PO Box 148

Marlboro, New Jersey 07746-0148

732-536-9472

Email: rollover@optonline.net

MEMORANDUM

September 2006

Public Retirement Planning

“Defined Contribution” and “Defined Benefit” Plans

For more than 40 years the State of New York has administered a Defined Contribution (401(k) type) retirement plan (the Optional Retirement Program) as a primary retirement benefit for the administrative/professional staffs at the State and City Universities, (SUNY-CUNY). In fact this select group of employees is given a choice of plans with the other one being a Defined Benefit pension. The selection is made, not by the state, not by the unions but by the individual. This identical choice of plans should be offered to the entire public employee workforce in New York.

Any intelligent dialogue about solving the multi-billion dollar funding problem of public employee pensions in New York must include a discussion about offering a choice of plans, Defined Benefit or Defined Contribution.

The unions’ position goes something like: “Defined Contribution Plans have a number of attributes that limit their applicability to most state and local public employees, although they are suitable for higher education professionals. Defined Contribution plans place all of the investment risk on the individual. Hence, they are best for employees who can bear that risk because they have other assets and who are knowledgeable about investment alternatives.”

This assertion is utter nonsense and highly insulting to the hundreds of thousands of public employees who do not work for SUNY-CUNY. Prior to allowing the higher education employee to join the Defined Contribution Optional Retirement Program does the state require the employee to file a net worth statement and take a financial literacy test in order to evaluate his or her “knowledge about investment alternatives”? Of course not!

Prior to 1964 higher education employees in this State belonged to a State-administered Defined Benefit pension system just like all other public employees. As a group higher education personnel are more mobile than other career civil servants and, as will be shown in this Memorandum, the Defined Benefit system is hurtful to such employees. The Defined Contribution system, on the other hand, is ideal for the employee who has had several employers during a career of service or just one.

The Defined Contribution plan is not reserved for the higher education community because they have “other assets” and are “knowledgeable about investment alternatives”. Career mobility is the sole reason why higher education personnel are furnished with a choice of plans: Defined Contribution or Defined Benefit. When it comes to choosing the type of retirement plan one size does not fit all. The choice of plan is best left to the individual based on his or her personal circumstances and work pattern. The Defined Contribution approach may very well be “suitable” for the person that cleans the office of the Professor of Greek Mythology but “unsuitable” for the Professor. The State of Florida has come to this conclusion by offering a choice of plans to its entire public employee workforce. http://www.myfrs.com/content/index.html. New York should do the same.

Each type of plan has a different impact on a participant’s total compensation, career mobility, and retirement income.

The Defined Contribution Plan

This type of plan makes its pension commitments to participants in the form of monthly contributions that are a stated percentage of current salary. The employer’s contributions, along with those of the employee, are deposited each month to the individual retirement investment account of each participant, as are the investment earnings on the accumulating contributions. For the Defined Contribution plan illustrated in this Memorandum, contributions are 12% of salary, with 7% paid by the employer and 5% by the employee. (Under the assumptions used, this rate of contribution provides a retirement income of about the same amount as the Defined Benefit plan illustrated after a career of participation.)

During the working years, all funds contributed to a Defined Contribution plan accumulate with investment earnings, and at the time of retirement may be used to provide an annuity income based on the amount of the accumulation. Age, of course, has a material effect on life expectancy and therefore on the rate of monthly pay-out. The younger the age of retirement, the smaller the monthly income per $1,000 of accumulation, because the longer the number of years over which payments will be made.

The Defined Benefit Plan

This type of plan provides that if an employee stays with one employer until retirement, he or she will receive a monthly single-life income equal to a specified percentage of the average salary paid by the employer in the years just prior to retirement, e.g., 50% of final-5-year average salary at age 65, after a career of service. The monthly single-life income is therefore the same for all who have identical salary and service histories. The accumulation needed to pay the income is determined by the age, salary and service of the person.

The Defined Benefit plan in the illustrations that follow provides that for each year of participation the plan will pay a retirement income at age 65 equal to 1.5% of the average salary paid the employee during the final five years of participation in the plan. This formula therefore promises that after 35 years with one employer the participant will receive a retirement income equal to 52.5% of final-5-year average salary.

Pension Contributions as Deferred Compensation

It is revealing to compare the two plans in terms of how much they add to a participant’s total compensation each year. Under the Defined Contribution plan illustrated, employer contributions of 7% of salary are credited to the participant’s retirement account each month along with the participant’s own contributions of 5%. Each month the employer is therefore adding 7% of salary as deferred compensation to each person’s account.

A Defined Benefit plan is more difficult to pin down in terms of how much it adds to a person’s compensation each year. Although employer costs are often expressed as a percentage of salary, e.g., “7% of covered payroll,” this over-all percentage is rarely indicative of the value of pension benefits earned by any individual in the plan. Instead, the cost of the defined benefit earned by a year’s work depends on a person’s age, salary, and years of participation in the plan. If the plan is contributory, participants contribute a stated percentage (5% in the illustration), just as in Defined Contribution plans. But the employer’s share of the cost varies substantially from person to person, adding little or nothing to a younger person’s compensation, and adding a great deal with advancing age and long-term participation in the plan. This is shown in Table I, which illustrates the contribution pattern required to keep each type of plan fully funded for a person who enters at age 30 and stays with one employer until age 65.

Assumptions

All of the Tables are based on the following assumptions:

· Salary is $8,000 a year at age 30, increasing by 4% a year to an average of $28,107 a year between ages 60 and 65.

· The Defined Benefit plan provides that a person who enters at age 30 and stays with one employer until age 65 will receive a retirement income of 52.5% of the final-5-year average salary, or $14,756 a year for life.

· The level contribution rate for the Defined Contribution plan (12% of salary) was selected because under the stated assumptions it too will provide a single life annuity of approximately the same amount at age 65.

· Both plans provide full and immediate vesting and the full accumulation value is assumed to be payable to the participant’s family if he or she dies before retirement.

· Employee contributions are 5% of salary for both plans.

· The investment return is 5% for both plans.

Table I

Contributions as Per Cent of Salary

Employee’s Employee Employer Contribution Employer Contribution

Attained Age Contributions Defined Contribution Defined Benefit

Either Plan Plan

Approach

________________________________________________________________________

30 5% 7% -2.18%

35 5 7 -0.99

40 5 7 1.02

45 5 7 3.86

50 5 7 7.83

55 5 7 13.38

60 5 7 21.06

64 5 7 29.27

Under the Defined Benefit plan illustrated, the younger employee’s own 5% contributions are more than enough, with anticipated interest earnings, to cover the full cost of the defined benefits earned at the younger ages, and to cover most of the cost until nearly age 50. Thereafter, for a participant who remains at one employer throughout a career, the employer’s share of the cost rises rapidly with advancing age and long service, because each year’s pension commitment includes not only (a) the cost of the current year’s 1.5% benefit, based on the most recent five years’ average salary, but also (b) the additional cost of updating all previously earned benefits to the latest 5-year average salary. This results in deferring most of the employer’s pension commitment for an individual to the final years of long service, as shown. For example, in the Table I illustration about 85% of the employer’s cost under the Defined Benefit plan is deferred until after the 25th year of participation, between the participant’s age 55 and 65.

This deferral has the unfortunate effect of making a disproportionate part of a person’s lifetime compensation contingent on age and fealty to one employer. Deferred funding also works to the disadvantage of those who participate at the younger ages but leave the work force during the middle years, say to raise a family. They take little or no deferred compensation with them when they leave, and their re-entry problems, if they later return to work, are exacerbated by the high pension costs at the older ages. A Defined Benefit plan also has worrisome implications for an employer’s budgeting and salary administration, especially during periods of salary inflation. For example, under the Defined Benefit plan illustrated, each salary increase of $1,000 at age 60 carries with it a pension cost of approximately $5,800 between ages 60 and 65.

Death Benefit Prior to Retirement

It is also interesting to compare the amount that accumulates on behalf of each participant during the working years. Under Defined Contribution plans the accumulated funds are payable to the participant’s beneficiary if the participant dies prior to retirement. Under the Defined Benefit system, any employer funding on behalf of an employee is forfeited upon death prior to retirement. The funds revert to the pension plan and help pay the employer’s pension costs for other participants. But Table II shows the combined amounts of accumulated employer and employee contributions at 5-year intervals, and assumes that under both plans the full amount would be payable to the beneficiary or estate of a participant who remains at one employer until the ages shown and then dies.

Table II

Accumulated Death Benefit Prior to Retirement

(Assuming participant remains at one employer until death at age shown)

Age Defined Contribution Plan Defined Benefit Plan

Attained

at Time of Death

30 $ 953 $ 223

35 7,166 1,951

40 16,476 5,621

45 30,066 12,846

50 49,521 26,495

55 76,964 51,545

60 115,225 96,572

64 156,115 156,523

Retirement Income and Career Mobility

The effect of career mobility on the end product of each plan also bears examining. A person who moves among several employers having identical Defined Contribution plans will reach retirement with the same level of retirement income that would have been produced staying at one of the employer’s for an entire career. On the other hand, a person who moves among several employers having identical Defined Benefit plans will reach retirement with substantially less retirement income than by staying at one of these employers for an entire career.

Consider Jack and Jill. Jack is covered from age 30 to age 65 by the 12% Defined Contribution plan illustrated. He will receive $14,718 a year at age 65, or about 52.4 percent of his final-5-year average salary whether he remains at one employer throughout his career or moves among several employers having identical plans.

Jill is covered by the Defined Benefit plan illustrated, and if she stays at one employer from age 30 to age 65 she will receive a retirement income of $14,756 a year, or 52.5% of final-5-year average salary. But if, for example, she changes employers at age 40 and again at age 50, remaining at the third employer until age 65, her retirement income will be $10,246, even though all three institutions have identical Defined Benefit plans and provide full and immediate vesting. This occurs because when she leaves an employer the defined benefits earned at that employer are related to the participant’s 5-year average salary just before leaving, not to the 5-year average salary just before retirement.

The “cold storage vesting” of Defined Benefit plans provides no way for vested benefits to increase between termination of employment and retirement. The calculation is shown below.

Table III

Average Salary

Last 5 years Years

at Each of Yearly Income

Employer x Service x 1.5% = at age 65

Employer 1 $10,543 x 10 x .015 = $ 1,581

Employer 2 15,606 x 10 x .015 = 2,341

Employer 3 28,107 x 15 x .015 = 6,324

Total $ 10,246

Advantages of Each Plan

The main advantage of a Defined Benefit plan is that it assures retiring employees with equal periods of service at a given employer a consistent ratio of retirement income to final average salary. And this ratio (although not the amount of retirement income) is predictable if it can be assumed that the employee will stay with a given employer until retirement.

A major advantage of the Defined Contribution plan is that it adds a consistent and visible percentage of salary to each employee’s total compensation at the time the compensation is earned. If one person’s salary is more than another’s, the deferred compensation is greater by the same percentage, not warped out of proportion by age or length of service. This pattern of funding, unlike a pattern that defers most of the employer’s commitment to the final years of long service, helps keep the pension plan a neutral factor when the person is deciding about joining or leaving an employer (also when the employer is making the decision). Shouldn’t the individual have a full measure of benefits whether staying at one employer or moving among several?

The Defined Contribution plan also has budgeting advantages for the employer. Pension costs are a constant percentage of salary each year. And the employer’s pension obligation for each person is fully and permanently funded at the time the obligation is incurred, not left as an open liability tied to whatever salary levels the future brings.

I am trying my hand at drafting an SAR for a client for whom we did a Form 5500 for its Health Care Plan. I am following the format outlined in Sec. 2520.104b-10(4). It states that if any benefits under the plan are provided on an uninsured basis, the SAR should include language that "Sponsor has committed itself to pay (all, certain) (state type of) claims incurred under the terms of the plan." Here's my question: how do I phrase this if the sponsor has excess coverage that pays for anything over a certain $$ amount?

If I understand how the excess coverage works, the employer/sponsor is responsible to pay all claims incurred by participants, but once the claims go over the set $$ amount, the excess coverage carrier will reimburse the employer/sponsor. So I'm thinking the SAR should state that "sponsor has committed to pay all claims incurred under the terms of the plan."

Anyone have any thoughts on this? Thanks!

Husband is a self employed consultant... no EEs

Wife owns travel agency. 4-6 EEs

Wife is closing business before the end of the year... but may drag on into 2007.

Can husband open a Solo 401K and defer himself. Wife will work for Hub but will not defer until 2007.

Any problems here?

Thanks!

I am looking for seminars or information regarding administration of an RRSP.

Any information????

Thanks!

Is the truth in lending disclosure (Reg Z Disclosure) required for a plan loan where the plan has less than 25 loans in a year? I got information from a document provider that the disclosure is not required. Where can I go for a cite for this? Thanks

I am reviewing a 501c entity (Library) that has a document that states that the employer contribution is only given/eligible to employee's that work more than 35 hrs per week. The contribution is 6% non-elective. The 501c is in PA.

Am is missing something in the 403(b) arena that this can be allowed beyond the 20 hr per week or 1000 hr yearly requirement?

I am trying to help someone out but I am more a 401k guy.

Hello All:

Strange question for you all -- My company provides an educational assistance program. For now, let's assume it qualifies under Section 127. The company will reimburse up to the statutory limits. However, if the employee quits within one year after reimbursement, the employee would have to pay back the company with a pro-rata portion of the reimbursement. Under Section 127, it is not discriminatory to require a reasonable condition subsequent with respect to reimbursement (and the Code mentions "such as remaining employed for one year after completing the course"). However, I read that as the Company can "wait" a year before reimbursement -- not pay the reimbursement today (and take a deduction) - and then possibly have income when the reimbursement is repaid at a later date. Also, what happens to the employee who quits? Does the employee get a tax deduction with respect to the amount he/she "paid back" to the Company (as if the employee paid for the course himself/herself?

Any help would be greatly appreciated. There is not much on this topic (at least that I can find).

ERISA Guy

Someone asked me about waiver of customer identification procedures (CIP) for active members of the armed force. I have searched high and low and can’t find anything that provides a waiver of these (CIP) rules for these individuals.

Are we aware of any? If you are involved in the account opening process at your firm, do you have special provisions for active members of the armed force?

Denise

Does anyone know of any software that will import data to fill out Form 8905?

Client is complaining to us, their accountants, about their insurance broker who is stating that all employees who are eligible for the plan (not sure what type it is other than provider who shall remain nameless) are obligated to meet with her and it must be done on company time. Broker is citing "IRS Rules"....

This is new to me...forced attendance on company time? Is she right?

Working with a controlled group has not been too difficult before now. I have a multi-state company that has made a number of acquisitions over the years. All of the divisions participate in the same plan. They have a very complicated ownership structure that leads to four controlled groups. We have always tested these groups as four separate plans.

It so happens that the smallest group will be top heavy as of 12/31/06. They asked if there is any way to avoid the top heavy minimum for this small group. Can I combine this small group with one of the larger groups for testing purposes? The research I have done talks about combining two plans, but I am uncertain if that applies to two divisions of the same plan.

I appreciate any insight.

All of the pre-acquisition subsidiaries of a bank holding company are covered under one discretionary profit sharing plan. The Holding company has acquired a new subsidiary bank that has two plans: (1) money purchase pension plan and (2) 401(k) Plan.

The Holding company desires that all employees of all subsidiaries be covered under the existing discretionary profit sharing plan. The Holding company would also like to establish a 401(k) plan. The current Holding company profit sharing plan's assets are held by a trust. The assets of the acquired bank are all held in insurance contracts.

Even though there is a money purchase plan in the acquired bank, is it corect that the assets of both plans could be (1) merged into the discretionary profit sharing plan or (2) merged into the discretionary profit sharing plan and/or the new 401(k) plan ?

If the insurance contracts have termination fees, could that be mitigated by freezing the plan until those charges are no longer significant, while allowing the acquired banks employees to participate in the holding companies profit sharing and 401(k) plan or would you go ahead and merge while holding the insurance contracts as a seperate assets class until termination fees have lapsed ?

Has anyone ever run a non-discrimination test on a DB plan with a cash balance component where employees hired after 1/1/xx are cash balance only but those employed as of all prior years are greater of cash balance or FAP (grandfathered)? The FAP was safe harbor.

Not sure how to run the test.

All of the pre-acquisition subsidiaries of a bank holding company are covered under one discretionary profit sharing plan. The Holding company has acquired a new subsidiary bank that has two plans: (1) money purchase pension plan and (2) 401(k) Plan.

The Holding company desires that all employees of all subsidiaries be covered under the existing discretionary profit sharing plan. The Holding company would also like to establish a 401(k) plan. The current Holding company profit sharing plan's assets are held by a trust. The assets of the acquired bank are all held in insurance contracts.

Even though there is a money purchase plan in the acquired bank, is it corect that the assets of both plans could be (1) merged into the discretionary profit sharing plan or (2) merged into the discretionary profit sharing plan and/or the new 401(k) plan ?

If the insurance contracts have termination fees, could that be mitigated by freezing the plan until those charges are no longer significant, while allowing the acquired banks employees to participate in the holding companies profit sharing and 401(k) plan or would you go ahead and merge while holding the insurance contracts as a seperate assets class until termination fees have lapsed ?

A c-corp. is adopting a psp for the plan year ending 8/31/06, they want to ultimately have a CODA added. Question is can the document be drafted to incorporate the CODA retroactively to 9/1/05(beginning of first plan year)or MUST it be restated when they decide to add it? I'm thinking that it will need to be restated at least 30 days prior to allowing the participants to defer.

A 401(k) plan has a loan policy that allows a participant to repay missed loan payments within three months. It also indicates that the employer will inform the administrator of the missed payments and the administrator will allow a cure period for repayments.

In this case, the employer did not inform the administrator until eight months had passed after the participant had terminated employment and had made his last loan repayment.

A 1099-R was issued but no cure notice was provided.

What are the consequences of not providing a notice to the terminated participant before his loan went into default? Are there any penalties?

Thanks.

Can a company with 2 employees have a safe harbor match of 6% where the only employee deferring is the owner? The plan will be top-heavy - will they need to make a 3% nonelective since NHCE is not getting safe harbor contribution? There are additional profit sharing contributions going into the plan for both employees.

I am taking over a plan 10/1 that was not managed with a professional recordkeeping system. The trustee kept all the individual participants in segregated accounts and says "the employer (law firm) was responsible for compliance testing".

In creating the recordkeeping back to 1/1/04 (when the profit sharing plan added the 401k and safe harbor features) I discovered that the employer had incorrectly been taking away all employer contributions made on behalf of an employee who terminated before the end of the plan year. Of course, the safe harbor 3% nonelective cannot be subject to a last day rule, so a terminating employee was entitled to the 3% nonelective year-to-date up to termination. Unfortunately, I'm discovering this not only effects 2006 (my initial thought) but evidently there were 2 employees who terminated in 2004 to whom the employer did not pay the 3% safe harbor contribution.

Opening up a can of worms here. Where do we start to fix this? I know these employees have to get these contributions. Other issues? 2004 Form 5500 is wrong (?) 2005 hasn't been filed just yet, it's on extension. I assume I'm looking at venturing into the EPCRS?

Thanks.