drakecohen

2011 ADP test looks like it's going to fail so the plan is amended before year-end (let's say 12/21/11) to impose a limit for 2011 on the deferrals of two named HCEs (let's say $15,000) so as to pass the ADP test and not have to make corrective distributions to other HCE's who are either not 50 or had already put in their $22,000 for 2011. 1) Any problems with this? 2) If not, any time constraint on when the amendment needs to be adopted?

It would help if this merged somehow with actuarialoutpost (or PIX, is that still around?). That was brought up there and here's what I answered: "If you argue for 401(l) you also have to argue that Social Security is a valuable benefit and people should be demanding to pay taxes on their salaries in excess of the TWB. They're not. Though the limit on pay kind of equalizes out the discrimination."

To the charge of hypocrisy here's how I responded on actuarialoutpost: "It's separating what I do from being able to see the truth. I'm sure there are lawyers, CEOs, politicians and other professionals who are playing the game based on the rules in place recognizing the damage they do to the greater good but keep quiet about it (even defend it passionately) because of how much they personally benefit. I also do a lot of 401(k) plans with safe-harbor matches where only the principals benefit and it's perfectly fine under the rules we've lobbied for. It's kind of like lawyers taking 40% (or more ) of some jury award or those investment guys who made millions off CDOs and MBSs. They must have realized what a warped system it is that allows them to profit so handsomely from the pain/loss of others but they're silent about it because they can use that money to run for elected office. For the record, I also feel integration is a scam since the idea that people making over the TWB would need to 'make up' what they would be losing in Social Security benefits is a farce." To elaborate here: I don't see actuaries as villains except for those who refuse to admit that cross-testing (like 401(k)) plans is not good retirement policy and it's only there to benefit pension sellers and the principals who buy their services. The villains in this piece are the the event-planners in congress and their staff who buy into the spiel because they are too dense (or lazy) to do their jobs. It happens at the local level much more often, and blatantly, but you would think that somebody somewhere would have noticed the cross-testing flaw per this example: http://blog.nj.com/njv_johnbury/2009/12/pe..._betrayals.html

Normally I wouldn't respond but since there might be newbies out there I would point them to: "Coverage and Nondiscrimination Answer Book - Poje, Bitzer and Topazio,Q 11:24,What is an age-weighted plan? The age-weighted plan was the first of the new breed of hybrid plans designed in response to the cross-testing provisions of the Treasury regulations. In an age-weighted plan, the employer's discretionary contribution is allocated in a manner that considers both the participant's age and compensation. The plan's allocation rate is backed into, therefore, as a matter of mathematical necessity; the theoretical accrual rate or effective accrual rate (see Q 11:12) is generally the same for each participant. Each rate group will generally have the same test results, and no adjustments to the rate groups are necessary to satisfy Code Section 401(a)(4). In short, nondiscrimination with respect to contributions and benefits becomes a natural extension of the allocation formula. An age-weighted plan also passes the "broadly available allocation rate" test (see Q 11:38), and therefore would not have to provide a minimum allocation gateway contribution as required for plan years beginning in 2002 (see Q 11:42)." So you see the last two comments were examples of petty quibbles (that happened to be mistaken anyway) designed to divert from the main point of the blog.

Didn't send a letter but after thinking about it: http://blog.nj.com/njv_johnbury/2010/05/lobbying_fools.html

Sony Pictures, Inc. which apparently produces the soap opera he writes for. They pay him a salary (don't know if it's 1099 or not) and make a contribution to the WGA plan for him annually.

Participant in the WGA (Writer's Guild of America) DB plan makes $500,000 a year from writing. The WGA plan funds a projected benefit using that income of $125,000 a year at NRA 65. Can a separate DB plan be set up for the writer to fund the difference to the 415 limit using that income? Any issues? Thanks.

It is - also Indian tribes. I'm thinking teachers, then.

The salary is debunked. I checked the handbooks and they do limit salary to $245,000. Government plans are also exempt from 412. However, I don't see any exception for 415 and in NJ a cop retiring with a final one-year salary of $150,000 at age 47 (not unusual) would have a benefit of $97,500 which would exceed 415.

As part of the accountant's audit report for the New Jersey state pension plans: http://www.state.nj.us/treasury/pensions/p...ioncombined.pdf on page 20 there's this: "Income Tax Status Based on a May 2007 declaration of an outside tax council retained by the Attorney General of the State of New Jersey, the five pension funds/systems (TPAF, PERS, PFRS, JRS, and SPRS) comply with the qualification requirements of Section 401(a) of the Internal Revenue Code." Apparently complying with 401(a) is important enough for a government plan to note in the audit report. The problem is that the plans do not comply with at least three sections of 401(a): 401(a)(16) - maximum benefits - Lots of 47 year old cops retiring with benefits over 415 limits. 401(a)(17) - maximum salary - Lots of school superintendents making over $245,000. 401(a)(29) - Obviously minimum funding requirements are not satisfied under PPA Would this mean that New Jersey's plan is not qualified and whatever has been set aside is taxable to plan participants?

A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury. Alexander Tytler http://en.wikipedia.org/wiki/Alexander_Tyler

OPEBs are horribly underfunded as a new GAO study documented (linked to here): http://blog.nj.com/njv_johnbury/2009/12/ga..._opeb_debt.html with a funded ratio of 4.3%. They're a bigger problem because most states don't have trust funds and insurance companies don't take IOUs. Pensions aren't an immediate problem (except in Prichard, AL) since there remain trust funds and even if the governments themselves don't contribute, workers do so there is some input to keep what have become ponzi schemes working. In NJ for example I peg the funded ratio at 30% with about 5 years at the rate they're going before it's a true ponzi plan (i.e. remaining assets consisting of only employee contributions).

Comments? http://blog.nj.com/njv_johnbury/2009/12/actuaries_suck.html

You sound like an expert there. My choice came down to watching Andrzej Wajda's Pan Tadeusz or responding by point to your post. I chose what seemed like it would take less time.

Yes and sorry about not responding to your recent extended retort by point since: 1) It smacked too much of work; 2) Didn't see any profit in it; 3) Would flash me back to PIX days which I can't seem to get back onto. How'd that Iraq thing work out for you anyway? Haven't been keeping up.

It may be hasty to assume that any money given to any government will be used to enhance the lives of anyone. It does and those people enhanced are desperate to keep the status quo. Keep in mind that it's New Jersey and your state is likely not as corrupt, but in Union County they routinely trade no-bid contracts for campaign cash. Here's an extreme example: http://blog.nj.com/njv_johnbury/2009/07/our_trial.html This keeps going on even as pension deferrals continue apace. Here's an extreme example that came to my attention today: http://blog.nj.com/njv_johnbury/2009/12/mo...ate_pensio.html

Exactly my point but whereas A gets that $1 in 2011 and can buy a widget with it, B will get their $1 dollar in 2041 when a widget will cost 10 times as much, assuming the normal operation of inflation.

That's presuming deflation which certainly occurs on the micro level for some products. However I'm presuming that the same forces that return 8% annually over 30 years would impact the overall cost of goods over that period. Otherwise where would the rise in the value of the investment come from aside from productivity gains. If this widget cost $2,000 in 2011 but would cost $500 in 2041 then how would one's investment in the widget factory rise tenfold?

Which goes back to the relative advantage argument. Without cross-testing that doctor would take the $60,000 in salary and pay $21,000 in taxes which presumably would bolster Social Security or put up jungle gyms in some Iraqi neighborhood, whatever the government decides to do with it. It could conceivably benefit the rank-and-file employee more than that 3% TH minimum. If the argument is that the rank-and-file would not have a plan at all without cross-testing then it comes down to what minimum level of benefits should be provided. Wouldn't a 1% of pay minimum create more plans? How about a hearty hand clasp for the non-keys? That would certainly be an easy sell to a doctor but would it provide any significant retirement security for the receptionist. The non-key could be better off with that $21,000 being spent by the government. Having said that and having seen government in operation I am all for giving government as little money as possible since I see it as corrupted and dysfunctional. But, being from New Jersey, I might be looking at an extreme case.

1) Cross-testing is based on the premise that it's fair if you give B $1 at the same time you give A $10 because A is retiring now and B is able to invest that dollar for 30 years to get to $10 and buy the same widget that A bought - that's the flaw. The forces operating to increase that $1 to $10 in 30 years are also operating to raise the price of that widget to $100. OK, I'm pretty much out of examples without resorting to semaphore. 2) Assuming the IRS operates like other parts of the government you get people from the industry essentially 'advising' lawmakers and lately writing their own rules since the glorified-event-planners manning the legislative staffs couldn't reason their way past a sufficiently complicated concept. Cross-testing came about solely because it sold plans and made money for pension planners with the rulemakers cashing in also upon their return to the private sector. Government 101. 3) An interest rate between 7.5% and 8.5% was deemed reasonable by IRS when they were trying to disallow DB contribution of Vinson & Elkins plans within a small plan audit program that argued 5% was unreasonable and it stuck for target and age-weighted plans. 4) I get that this is a cross-tested board and most of you make big money off this legal scam but wasn't there a time when you entered the profession to ensure secure retirements for the greatest number and it wasn't all about your fees? Just wondering.

Don't know how the annuity example relates except to confuse. Both A and B would get annuities but B would get theirs 30 years later which, if interest continues to apply, would be at a greatly discounted value. The idea that members of Congress or their staff understand 401(a)(4) is too silly to entertain. Perhaps this is off the point but there is a bigger issue here: the integrity of pension actuaries. Some guys get together and figure out a way to sell more plans by severely discriminating against younger employees and it gets codified. Because of this (combined with the selling of 401(k)s as pensions) a vast majority of the working population will be retiring without adequate funds though taxpayers have heavily subsidized the system. Again, if the majority are gulled into legalizing it then I have no problem using it for clients where appropriate but I find the hypocrisy of calling it anything nobler than an over-elaborate tax dodge a bit much.

You promise the same percentage of pay but A gets it at their NRA and B gets it 30 years after that. The difference in what that percentage of pay will buy 30 years apart is ignored. It's a DB concept applied to DC plans to sell DC plans so that the innumerate making the rules and getting shorted on benefits buy in. The rules that somewhat curb discrimination in DB plans (TH and requiring minimum service for full benefits) aren't applicable to DC. Understand, I'm not against it except on principle. If it sells plans - fine and I've got a bunch of them. It certainly improves the retirement picture for the doctor who puts money in his plan instead of paying himself and the IRS but it should not be construed that the young B getting 3% of pay contributions that will likely be cashed in at higher tax rates and with a 10% excise tax in the near future is getting a significant benefit.

It's gone into here: http://blog.nj.com/njv_johnbury/2009/12/pe..._betrayals.html but it occurred to me a few years ago when I wrote out the example that I've attached as a pdf file. Basically, it's supposed to be fair and it sounds fair if you don't think about it too much (or have a financial incentive to think it's fair) but it's really not. What's ignored is the interest from the time the doctor (A) gets the money (2011) to when the receoptionist (B) gets the money (2041). Age_Weighting_1_.pdf

And that's where your government wonk might say "mmm, why not? We'll take the $21,000, and give $10,000 to the employees in some form of a government-run plan, and have $11,000 left over!" I'm not saying I'm in favor of it (it would probably cost $30,000 in waste to give the employees the $10,000) but if it really costs $21,000 in taxes to get $10,000 to the employees, as a taxpayer, I have to question whether it is worth it. Good point and it hasn't escaped me that this may be a government ploy to get that $21,000. Cross-testing and safe-harbor match 401(k) plans have yielded plan designs that are so abusive (providing the possibility that some rank-and-file employees get either 3%-of-pay annual contribuitons subject to vesting or nothing, respectively) that even government bureaucrats pick up on it. Combine that with the faulty reasoning underlying cross-testing and you have an easy target.

What about the underlying theory behind cross-testing as examined here for a simple age-weighted plan: http://blog.nj.com/njv_johnbury/2009/12/pe..._betrayals.html