John Feldt ERPA CPC QPA

Does the plan have language that identifies employees by age directly or indirectly, such as "the formula for group B is 0.50% of pay and Group B consists of employees born after January 1, 1980"? Does the plan have language that excludes employees by age directly or indirectly, such as "NonHighly Compensated Employees identified by the Employer as 'Apprentice B' Employees are excluded from the plan" - and the employer definition of an 'Apprentice B' employee is any employee born before January 1, 1980? If the plan has something similar to either of those, you have a problem. Otherwise, no problem.

That’s right – employers are not required to obtain IRS approval of their plan’s written language. Obtaining an IRS determination letter provides the employer with the assurance that the plan's written language is currently in compliance. In Revenue Procedure 2012-13 (see sections 4.03 and 4.10), the IRS indicates a plan may be required to have or to obtain a determination letter in order to fix certain errors. If a significant operational error occurs, the option to self-correct under Revenue Procedure 2012-13 is not available if the plan does not have a determination letter (an exception currently applies for 403(b) plans). Another benefit of having an IRS determination letter occurs when the plan gets audited by the IRS. The tax-qualified status of the plan requires the plan to operate in accordance with the terms of the written plan and in accordance with current law. The written plan must comply with the requirements of the Internal Revenue Code and applicable regulations/guidance. That makes two broad areas where the IRS can target their audit: 1) the plan’s operation and 2) the plan’s written language. If the plan has a determination letter, half of the target is protected, making a smaller target zone for the IRS agent, assuming all good-faith amendments are up-to-date. If the plan operates according to the law/regs/guidance but it has no determination letter, an IRS auditor can read any portion of the written plan to look for a failure. They have a checklist to help them to look for omitted language and for impermissible provisions. When found, the IRS can sanction the employer under audit cap, which is generally an unpleasantly high fee, usually much more than the cost to apply for a determination letter. That said, your question is about a governmental plan. The IRS is a governmental agency, so if they audit a governmental plan, I’m not sure they would be as strict as they are with a private sector plan, but this is only my take on it and this comment should be considered anecdotal at best. FWIW, I hope that helps.

404a5 would not apply since this is not a participant-directed plan.

We ended a recent IRS audit where the IRS wanted mathematical proof that the cash balance plan passed 401(a)(26) for 3 years: the year before the year of audit through the year following. During the course of the audit, we noticed the employer had made a mistake in providing their census information - this was regarding employee termination information for one of the years. This caused a problem that the employee count increased and the plan would need one more individual with a 0.50% benefit accrual to get over the 40% requirement. We looked at accrued-to-date, fresh starts, averaging compensation over various periods, etc., but could not quite get one more person over the 0.50%. The best result was to get one more participant accruing a benefit of about 0.45%. The IRS closed the case without requiring any action, but they explained that they only closed it because of several two main factors: the additional accrual needed to get one more person to 0.50% would have an insignificant benefit value, and because the plan was already terminated and the participants were paid out, it was not worth requiring action. FWIW.

I saw the headline of this post and assumed a member of Congress had originated the post, either that or Mark Twain somehow got in here.

The Form 1099-R instructions state: Use Code 4 regardless of the age of the participant to indicate payment to a decedent's beneficiary, including an estate or trust. Also use it for death benefit payments made by an employer but not made as part of a pension, profit-sharing, or retirement plan. So, if the participant's benefit is paid to their survivor, it seems that code 4 is the correct response. Even if the payment to the survivor is a refund of employee contributions, it is still a payment due to the death of the participant. Code 2 says: Use Code 2 only if the participant has not reached age 59 1/2 AND you know the distribution is: A Roth IRA conversion (an IRA converted to a Roth IRA). A distribution made from a qualified retirement plan or IRA because of an IRS levy under section 6331. A governmental section 457(b) plan distribution that is not subject to theadditional 10% tax. But see Governmental section 457(b) plan distributions, earlier, for information on distributions that may be subject to the 10% additional tax. A distribution from a qualified retirement plan after separation from service in or after the year the participant has reached age 55. A distribution from a governmental defined benefit plan to a public safety employee (as defined in 72(t)(10)(B)) after separation from service in or after the year the employee has reached age 50. A distribution that is part of a series of substantially equal periodic payments as described in section 72(q), (t), (u), or (v). A distribution that is a permissible withdrawal under an eligible automatic contribution arrangement (EACA). Any other distribution subject to an exception under section 72(q), (t), (u), or (v) that is not required to be reported using Code 1, 3, or 4. A distribution to an alternate payee is an exception to the 10% excise tax, so it seems that code 2 is the correct response, if under age 59.5.

Does such a design fail on a benefits, rights, or features basis? Do the NHCEs have better BRFs than the HCEs when designed like this?

Certainly not doing any designs this way, merely gathering unverifiable information from mostly anonymous sources here due to an outside plan we came across but we declined to administer. Suppose the employer has a stand-alone cash balance plan and they want the NHCE balances to grow at a higher rate, but to minimize increasing plan costs they want the HCE balances to grow at a slower rate. One could argue that the plan could either be designed to simply provide much smaller pay/service credits for the HCEs and apply the higher crediting rate for everyone, or provide the low crediting rate to everyone and provide higher pay/service credits for the NHCEs? If the employer had this as a goal, is this the route you would recommend? Suppose an employer has a stand-alone cash balance plan and wants to generously encourage annuity payment options, but not for the larger benefits payable to the HCEs. Would it be unreasonable to do this only for the NHCEs? No. Perhaps you are suggesting that it would not be reasonable to encourage annuity forms of payment through the plan's definition of actuarial equivalence? I could see that, but if so, how would any such option not be, by definition, a form of actuarial equivalence to convert it into that annuity? "Have you seen studies that NHCEs are better investors and generally earn more than HCEs?" This question is off target if we're trying to argue regarding code/regulation/guidance or other IRS thinking on the concept. That's probably not the intent of your question, so no, I have not seen nor am I in need such a study (although I've heard that the best way for an overfunded doctor/dentist/lawyer plan is to have the doctor/dentist/lawyer handle all of the investments). edit: typo

I've actually seen a competitor's plan where the A.E. for the plan was 3% so the targeted lump sums for the HCEs were reaching the maximum 415 lump sum amount without the accrued benefits reaching the 415 annuity limit. We've still not done any this way, but our reactions were similar to yours, but in addition was the question of whether or not the 3% is a reasonable rate for the definition of A.E. I don't see 1% as a reasonable rate in your example above, but someone out there has used 3% A.E. to allow the tested accrued benefits of the HCEs to be smaller. But again, I thought the A.E. definition had to be reasonable, so that's why I would hesitate before going as low as 3%. On the cash balance side, the IRS has already explained to use what interest rates are allowed for crediting, so why not allow the NHCEs to have better conversion factors for their accrued benefits than the HCEs. Currently, a combined-tested plan is not required to normalize the DB plan benefits due to lump sum differences because of its A.E. definition when compared to 401(a)(4) assumptions for testing. You're not suggesting the 401(a)(4) regulations be modified to do that?

Appreciate the response. I did not find this issue addressed in the proposed CB regulations or in the portion that was finalized. Awaiting the final cash balance regulations before truly considering implementing anything of this sort. Hoping to hear if anyone else might have jumped into this opening in the ice first (I don't like being eaten by an unseen walrus). The AE was just a carrot to illicit some reply. If the conversion from the cash balance account into an accrued benefit for the NHCEs is a more favorable conversion than it is for factors that apply for the HCEs, how does 401(a)(4) or 401(a)(26) or 411 or other code/reg prevent a plan from doing this? I don't see it yet, but perhaps the final cash balance regulations will tell us something.

Okay, maybe this will spark a reply: How about doing the above except we also define the interest rate for actuarial equivalence purposes for HCEs as 5% with a higher rate (like 8.5%) for NHCEs for determining the accrued benefit in the cash balance plan? Or how about also defining A.E. with GAM71 mortality for the NHCEs and something like GAM83 Female for the HCEs? With all of this, 401(a)(4) would be really humming along, right? Just hoping for some comments/feedback. Is ak2ary still out there? edit: typo

In a small cash balance plan (a DB/DC combo design to minimize employee benefit costs), suppose that the plan's interest rate credit is written to provide for the NHCEs the greater of the 3rd segment rate under MAP21 or the 30-year treasury rate. Then, for the HCEs, it provides the lesser of the 3rd segment rate under MAP21 or the 30-year treasury rate. Perhaps define the actuarial equivalence as a fixed rate (for purposes of this discussion). Problems? The HCE benefits would grow less quickly than the NHCE benefits. Of course this helps with 401(a)(26) and 401(a)(4). Has anyone attempted this? Has anyone attempted this and received a D letter? Has anyone attempted this, been audited, and survived the audit?

That's right, ignore catch-ups when applying the limits. Plan deferral limit: (e.g. 5% of pay maximum deferral limit for HCEs, HCE defers 5% of pay plus $5,500. 402(g) deferral limit: ($17,500 for calendar year 2014) 415 dollar limit: (e.g. wages $104,000 in 2014, defers $5,500, receives 50% of pay profit sharing, or $52,000) 100% of pay 415 limit: wages $35,000 in 2014, defers $23,000, receives 50% of pay profit sharing, or $17,500). Employee gets $40,500 overall. Of course you can also get some regular looking deferrals characterized into catch-ups with the classic ADP-tested plan.

Right, Before 2002, a 457(b) plan deferral limit is generally reduced see the old Regulation 1.457-2(e)(1). This reduction does not apply after 2001.

Before 2002, a 457(b) plan deferral limit is generally reduced by contributions made under a 403(b) plan (the prior Regulation is 1.457-2(e)(1). This reduction does not apply after 2001 as the regulations were changed - see IRC 457(b)(2). You might also want to look at 1.415(f)-1 Aggregating plans and 1.415-6(b) Annual additions.

The IRS does not issue determination letters for 403(b) plans. If the plan truly does not address the issue, you'll need to look at the past administrative practices for handling these 403© accounts (they're not 403(b) if they are not vested), then compare those admin practices to the code and regulations to make sure it's reasonable to continue, and if not, to bring that up to be addressed by the employer (and by recommending an amendment to provide written language).

I found some of Derrin's comments: http://benefitslink.com/modperl/qa.cgi?db=qa_who_is_employer&n=113 and http://benefitslink.com/modperl/qa.cgi?db=qa_who_is_employer&n=138 Based on that, I think they are HCEs. Look at the paragraph near the end in #138 where he changes the facts a little.

A 100% business owner of a PC (must be a licensed professional to be the owner) lives and does business in a community property state. The owner has children from a prior marriage and they are employed by the business. These kids are HCEs due to attribution. The owner's spouse also has children from a prior marriage and they are also employed by the business. These kids were never adopted by the business owner. Due to community property rules of the state, this spouse is considered as owning 50% of anything the business owner owns. Due to that, are these kids, the step-kids of the business owner, HCEs? Or is that double attribution?

We have not needed to go back as far as a TEFRA/DEFRA/REA document yet, but we were able to get documents (adoption agreements and basic documents) in Word format for TRA'86 and GUST from Corbel. I would guess that the other major document providers would also be able to provide - I'd start with the document provider you use now for your current plan documents.

I just hope that volunteers who provide their own hardware and software will agree to set up the myRA website instead of charging the full fee for these costs to the plan participants.

Applying logic to analyze the IRS position? Maybe that should be posted in humor?

"but does that give you 'permission' to act otherwise" Action should be within the law and its guidance. But verbal statements by agents "you can't do any amendment" is not found in the law or its guidance (IMHO) and does not deny permission to take reasonable actions.

From TAG: See Treas. Reg. 1.404(a)-1© and Don E. Williams Co. v. Commissioner, 429 U.S. 569 (1977). Contributions may be deducted for a prior taxable year if the actual contribution is made no later than the due date including extensions for the employer's federal tax return for such year. This rule applies to both cash basis and accrual basis taxpayers.

I am not too sure that "most" governmental plans apply for D letters. Could be, but it seems less likely from my own experience with gov't plans.

If you name names, then as said already, you are forced to pass 410(b) with the 70% ratio test. The other 410(b) coverage option is the average benefits percentage test which requires reasonable business classifications, and saying "Bob Jones is excluded" will not satsify the IRS as a reasonable business classification. "The IRS may stall your D-Letter". Is this speaking from an actual case? We have seen D Letters stalled for "oops, we misfiled your application . . . oh, here it is . . . yeah, so, let's get that assigned to someone", but we have not seen naming names ever slow down a filing. Also, a while back one application received a request to provide a Schedule E and the investment alternatives for a cash balance plan, so that D letter request is taking some extra time. I would avoid using age or something that indirectly refers to age as the identifier for excluding someone (like date of birth). Something about 410(a)? seems to gnaw at my memory there that a plan cannot apply an indirect age or service requirement to the plan other than age 21 and 1 YOS (with vesting) or age 21 and 2 YOS (with 100% vesting). For example, you can't say "all class A-type employees are excluded" if class A is solely defined in your company as employees with less than 5 years of service. FWIW.