John Feldt ERPA CPC QPA

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.

I am curious to see if any Benefitslink readers would care to add a post to this to indicate how many times an IRS audit of one of their plans has gone into audit cap sanction negotiations due to a plan amendment done to a safe harbor plan for an amendment that was not prospectively effective starting on the first day of the next plan year). If the IRS has a strict stance, I am sure the IRS has found this and enforced it on quite a few plans, right?

15% of average pay does not necessarily exceed the 415 limit. Suppose the employee already has 10 years of service and the plan just started a couple of years ago.

As you mention, the plan is cross-tested with a DC plan in order to pass nondiscrimination testing. So, if the combined plan, when tested under 401(a)(4), passes with no additional DB accruals for the NHCEs, then 401(a)(4) is satisfied with regards to that amendment, even if the amendment is only changing one of the two plan's written formula. If you work on DB/DC combo-tested plans, you'll probably run across this quite frequently.

I think it has to be a plan-to-plan transfer, the successor plan rules apply, unless there's a change in the employer.

And I never noticed that Grinch picture up there all this time either.

Also it may be wise to prehaps consider the affiliated service group rules under 414(m) for determining who "the employer" really is overall for 415 purposes. 414 (m) Employees of an affiliated service group (1) In general For purposes of the employee benefit requirements listed in paragraph (4), except to the extent otherwise provided in regulations, all employees of the members of an affiliated service group shall be treated as employed by a single employer. (2) Affiliated service group For purposes of this subsection, the term “affiliated service group” means a group consisting of a service organization (hereinafter in this paragraph referred to as the “first organization”) and one or more of the following: (A) any service organization which— (i) is a shareholder or partner in the first organization, and (ii) regularly performs services for the first organization or is regularly associated with the first organization in performing services for third persons, and (B) any other organization if— (i) a significant portion of the business of such organization is the performance of services (for the first organization, for organizations described in subparagraph (A), or for both) of a type historically performed in such service field by employees, and (ii) 10 percent or more of the interests in such organization is held by persons who are highly compensated employees (within the meaning of section 414(q)) of the first organization or an organization described in subparagraph (A). (3) Service organizations For purposes of this subsection, the term “service organization” means an organization the principal business of which is the performance of services.

And the Social Security database is not always accurate. We found that sometimes the oldest retirees had problems with their SSN and their spouse's SSN being mixed up, meaning a participant or beneficiary calls in to the SSA to report the death of their spouse, but the SSA database was marked to show the caller as deceased instead. This also might have to do with the fact that some of the oldest SSA recipient's spouses were not issued social security numbers when social security payments started. One of the larger (17,000+ participants) plans that we worked with had us use PBI for all deferred vested participants, retirees in pay status, surivivors in pay status, and the designated surivivors for all J&S chosen forms of payment. This may be more that you would need to check for your plan, but this plan had a joint and reversionary option where the J&S benefits increase to a higher level after the death of the designated spouse (if they died first). We received a quarterly report. http://web.pbinfo.com/ We also did not always trust that report either, but it was very useful and provided good details. Regardless, we were careful on how the letters to participants were crafted if they that showed up in the reports. We were not just immediately stopping payments simply because they showed up on the report.

This makes me think of a non-uniform PS allocation, just a different conversation occurs: Employee 1 says "Hey, how about that profit sharing contribution, my old company never did that." Employee 2 replies, "Huh? What profit sharing, you mean the company match, right?" Employee 1 says "No. I'm not deferring, so I don't get a match." Employee 2 replies, "Really? I'm going to call Tom Poje and ask him what's going on here." Tom Poje says "You should change your deferral so you only get a 2.99% of pay matching contribution. Have nice day."