JAY21

ASC does DB-DC combo testing pretty sweet except I understand from SoCal it may not handle some early retirement subsidies well if you have any of those. For typical small plans that don't have early retirement subsidies it seems to work great. I've haven't done a cash-balance-DC combo in ASC, just traditional DB plan aggregated with PS plan for testing, but I wouldn't think a cash-balance should work any differently in their system. There system was updated to include cash balance formulas a while back. It's probably worth some consideration.

In my opinion; (1) the plan should stop the overpayments and indeed has a fiduciary responsibility to do so, (2) the plan document should address how overpayments are to be addressed and adjusted for, a reduction in the future amounts is a common remedy if allowed under the plan, (3) not sure any statute of limitations would apply since this is a private party (plan) to private party (actuary) issue, but I'd think the damages might not justify a suit if under the plan you're able to adjust the benefit stream going forward. In that case maybe the damages to negotiate over are the expense to do the calcs (including make-up reductions) plus any overpayments on deceased individuals where the overpayments can't be re-couped.

I'm not sure the w-2s tell us very much. You would expect the w-2s to be issued under the leasing organization as the "employer of record" for certain purposes like payroll and often health insurance coverage purposes . However, for retirement plan purposes we are to look past this and consider the deeper underlying relationship and control of the employees. Under this analysis ABC may or may not be the employer. I think it's possible that there could be a "co-employer" relationship between the recipient organizations and ABC company, though it's possible the cite that Jim mentioned may give some "out" from this situation. The stakes are high here with this many employees, I don't see it being an easy call or one you'd want to make yourself.

Some plan docs allow for waiver of participation agreements but I'd think the CODA issue might still be a possible issue under that approach (at least on some level). I personally think it would work better to define the eligible group of employees in the plan document so that the HCE who doesn't want in the plan (DB) is written out of the plan by some job classification or category. That wouldn't preclude him/her from being in a DC plan where the eligibility there could be more generous and still cover him/her.

If a plan previously had a benefit formula with under the old integration rules (before 1989) and then continued to provide for disparity under the newer permitted disparity rules, does the 35 year cap on YOS include both years earned under old integration rules plus years earned under the newer permitted disparity rules (vs. just starting from 1989 forward) ?? I'm thinking it includes both but would appreciate a confirmation if true.

Thx SoCal; all your assumptions are correct and yes it's the same employer (controlled group). Belgarath, thanks for the reminder on the extended date on the 415 grandfathered benefits. So thinking it through, even if the plan did not have a higher high-3 during the years of participation under the old DB plan (say the high-3 occurred during the gap years between the two plans existence) then I could still use this extended reliance and use pre-participation comp for the high-3 (under interpretation of existing guidance) until the final effective date of the new regs (e.g., 2007). Therefore, I could end up with 2 years of the higher accrual rate for 2005-2006 (grandfathered) after which I basically have a frozen accrued benefit unless/until the new post-2007 participation comp times yos/yop ever increases the accrued benefit beyond the 12/31/2006 grandfathered benefit. Does this sound right conceptually ?

OK, If no changes to the proposed 415 regs (hopefully there will be), we know the proposed regs "clarify" that the high-3 415 comp limit is based upon "participation" for those plans adopted after the effective date of the proposed regs (May 2005). Anyone have any thoughts on a situation where a new plan adopted in Dec. 2005, but which has an offset to the 415 limit for a prior DB plan sponsored by same employer, can continue to use the old previously established 415 high-3 comp limit even though the new plan not adopted until Dec. 2005. For what it's worth under old plan the distribution was far below the 415 limit. I plan on using the 2005 proposed regs offset approach to the 415 limit. The sponsor does not contemplate drawing as high of salary under the new plan as under the prior DB plan so he'd prefer to use the previously established high-3 average. I don't see where the proposed regs address this combination of events for the new DB plan's 415 high-3 limit, but if anyone knows differently, please let me know.

Just what are his layers of protection if he keeps the plan ? Assume his state has statutes that protect qualified plans (I assume most do). Is it the following (in no particular order): 1. Protection under Federal Bankruptcy Code (passed in last couple of years ??). 2. Protection under State Bankruptcy Code (if state has such statute). 3. Does U.S. Supreme Court Case (1992; Shummate vs. Patterson) help here if no rank-and-file employees (believe the "Erisa Qualified Plan" language in the case has been interpreted to mean only ERISA plans are covered). How does the federal bankruptcy code recently passed help, if at all, if a creditor attacks you in state court. Does it pre-empt the state bankruptcy code in this situation ? I guess I'm trying to get a feel for the practical logistics of how these al interact vs. just the blanket statement that they're protected.

I see nothing wrong with funky annuity stream or the entire lump sum distribution if the plan has the in-service (post-NRA) distribution options that include all these variations.

Does anyone know, or care to venture a guess, as to what the "phase-in" over 4-5 years might mean for replacing the 417(e) rate for lump sum purposes under the Senate & House Bills ? I keep seeing a snyopsis of the two currently passed bills (House, Senate) stating lump sum rates a yield-curve "phased-in" over 4 or 5 years and wonder if it's likely to similar to the Gatt rate phase-in where you had an option to adopt it within a window period of a few years, or likely to be a mathematical phase-in where the impact is slowly phased in (e.g., 20% the first year, 40% second year....) ? Any thoughts or guesses ? I have a client's considering a plan term and the plan's somewhat under funded so I'm wondering if there's likely to be any relief on the lump sum values in the next couple of years (of course if it only applies to new accruals it won't help much).

I haven't read the DOL cite you mention. However, I take your comments to mean that the DOL opinion is dealing primary with the PTE exemption issue and the IRS standard is more of a taxation issue. Would valuing and distrubuting the policy using the IRS safe-harbor approach (if higher) satisfy both agencies ? Or do you intepret the DOL opinion to "require" it be distributed at CSV for it to satisfy the PTE exemption ?

My take on it is that with universal life you're usually using an envelope funding approach (vs. split funded where the guaranteed cash value at retirement is subtracted from the projected future cash value of the benefit) which typically would only have the pure "death benefit" portion of the premium added to the funding not the portion of the premium going to build up the cash value of the policy. This add-on death benefit premium is likely to be fairly modest in it's amount. The portion of the premium going to add to the cash value would not typically be added to the contribution and therefore not deducted but the trust assets would include the cash value of the policy which indirectly impacts funding through gains/losses (if immediate gain method) or through future normal cost if a spread-gains method (e.g, Aggregate funding). This envelope approach differs from using whole life policies where the funding method is usually split funding approach where a specific portion of the benefits are being carved out and funded through the full premium including the portion that includes the cash value accumulation. In this latter case with whole life policies (split-funded plan) I believe the full premium is deducted not just the death benefit portion.

You might get some different opinions on this one as to my knowledge there isn't any definite statute, reg, rev-ruling, or other guidance on this (not sure if this is a EA mtg grey book item where IRS has provided a non-binding opinion or not). This issue has been around for a while not only for subsequent (2nd) DB plans by the same employer, but under old IRC 415(e) how much the terminated DB plan impacted the future DC contribution accumulation (if any) if the DB plan was under funded when terminated. That was the same issue before 415(e) was repealed for 2000 and beyond. Our firm has always used the "distributed" benefit (the $6,000 in your example) but I can't provide any strong support for or against this position.

Ancillary benefits like life insurance are benefits subject to discrimination testing under 401(a)(4) as specified under the benefits, rights, and features of Treas. Reg. 1.401(a)(4)-4. Since there are no non-highlys to discriminate against I don't see any problem if just one owner (HCE) has a policy. Of course if you add a non-HCE employee in the future they would need the same insurance benefit coverage. I agree with Effen on using the term cost plus normal cost and the fact the premium paid from the trust is no different that paying the premiums directly from the employer to insurance company (as a contribution). Whether you use envelope funding vs. slit-funding doesn't have anything to do with whether the trust pays the premium or not. I believe that's a funding method choice and often seems to tie to whether you're using whole life policies (usually split funded) vs. term or universal life policies (more often associated with envelope funding given the cash value (if any) at retirement isn't guaranteed).

I agree with Charlie's answer on settting up individual corporations.

The problem is the owner is not the employer (i.e., he's not a Sole Proprietor but rather a partner in a partnership) and the plan has to be sponsored at the business level (under whatever structure the business is set-up under). An individual cannot sponsor a qualifed plan. Even for a one-man Sole Proprietorship it isn't the owner "personally" sponsoring the plan (Uni-DB) but rather the Sole Proprietorship as a business is sponsoring the plan. That's a fine line distinction between the owner and the business entity but a critical one. Bottom line is he would need to be an owner of an business entity with no employees to sponsor a "Uni-DB" plan just for himself.

Charlie's right, though the partner's personal pension deduction is taken on the partner's personal 1040 return (not the partnership return) as a self-employed Keogh deduction. Perhaps the confusion lies with where the partner's deduction is taken even though the plan is still sponsored by the partnership and must cover most/all of it's employees. The partnership only reports deductible pension expenses on the partnership return for the non-owner participants (the owners report it on their own 1040 as aforementioned). Don't confuse deduction issues with the actual sponsorship and employee coverage and participation requirements which are all still on the partnership level (not personal level), even though the owner deducts his own contribution on his personal 1040 return.

Hmmmm......so in essence the emloyer basically is penalized for having multiple plans with common participants benefiting since if it only had the DB plan the company could contribute and deduct up to the unfunded current liability (200k), right ? I guess that's the same result as any other DB-DC combination plan with common participants, but it sure feels weird given these facts. I presume if there were no forfeitures to allocate then there would not be common participants benefiting and the 25% limit wouldn't apply and they could do the 200k.

Given you've received no better response, I'll throw in an opinion that it seems likely the Schedule F would work like the Schedule C on the deduction issues as any non-incorporated entity is not allowed to deduct more than their net business income as it would otherwise reduce or wipe out other non-business type of income (e.g., income from personal passive investments). I can't say I'm familiar with the Schedule F, so this isn't a high knowledge opinion but it would seem consistent with the general framework of non-corporations being limited in their tax deductions, and therefore with some potential carry-forward deductions if greater than the net income.

I don't see any pros or cons from the profit sharing plan's perspective since only w-2 comp could be used either under an S-Corp or a C-Corp. I do agree with nherkowitz comments on the 125 plan. I don't see how the 125 plan can be done given the key employee rule. The 125 plans are problematic for owners of small companies if the intent is for the owners to significantly benefit. It takes significant staff participation and thus a larger employee base to "free up" enough room under discrimination testing and the 25% concentration test (key employee test) to allow for any significant benefits to the owner(s).

The retroactive application depends on the client's election when adopting the good-faith EGTRAA amendment a few years ago. The election is whether to apply the new higher comp limit prosectively only or apply it retroactively. It sounds like your doc language has the language (election) to apply the increased comp limit retroactively. In that case I believe that even a career avg. would have a retro-active "pop-up" benefit (increased retroactive accruals) which would be funded for via an amendment change base if your funding method has bases. I believe both a final avg. pay plan or a career avg. can have this retroactive pop-up benefit.

Thanks Tom.

A DB plan was add late in 2005 to an existing 401k-PS plan and it's intended to be permissively aggregated for testing and subject to the gateway (don't qualify for the exemptions from gateway). There were some modest match contributions made on a more liberal basis (eligibility wise) than exist for the PS plan or DB plan. Do the participants that got these token match contributions but who are not eligible for the PS or DB contribution/accruals have to get the 7.5% gateway ? Or is the fact that 401(m) testing on match contribution is mandatorily disaggregated from the general 401(a)(4) test enough to avoid giving them the 7.5% gateway (on an aggregated allocation basis) ?

It depends on if you have any earned income (i.e., income from current work not from pension plans). If you have current earned income from say a part-time job (no matter how small) then you can make an IRA contribution up to the lesser of (a) the earned income amount or (b) the IRA contribution limit for the year (including catch-up if over age 50). Perhaps the problem your accountant is referring to is if all your income is "passive" income from investments and pensions but no current working income. If you do have earned income from a current job then if you are not earning any additional pension benefits (e.g., maybe because part-time employment doesn't qualify for additional service credits) then you should be able to deduct the IRA as well. If you're earning new pension service credits then the IRA may not be deductible depending on your income level. I suspect the main issue issue is that you have no current income from a job since you're retired.

Amen to what Effen said. We've had the IRS try to apply the 5 year approach but have been succesful in arguing for a 1-year break in service approach. I think there is an old IRS memorandum (or something like that) from the national office that supported the 1-year approach. I think we hauled that out and waived it around and presumably that helped our case.