John Feldt ERPA CPC QPA

Well, under the text of the law itself, I don't see that a 5-year cliff plan is required to go to the 3-year cliff. It looks to me like they must do either the 6-yr graded or the 3-yr cliff, see the phrase "clause (ii) or (iii)" as shown in the text below: [PPA] SEC. 904. FASTER VESTING OF EMPLOYER NONELECTIVE CONTRIBUTIONS. [PPA §904] (a) Amendments to the Internal Revenue Code of 1986- (1) IN GENERAL- Paragraph (2) of section 411(a) of the Internal Revenue Code of 1986 (relating to employer contributions) is amended to read as follows: (2) EMPLOYER CONTRIBUTIONS- (B) DEFINED CONTRIBUTION PLANS- (i) IN GENERAL- In the case of a defined contribution plan, a plan satisfies the requirements of this paragraph if it satisfies the requirements of clause (ii) or (iii). (ii) 3-year VESTING- A plan satisfies the requirements of this clause if an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions. (iii) 2 TO 6 YEAR VESTING- A plan satisfies the requirements of this clause if an employee has a nonforfeitable right to a percentage of the employee's accrued benefit derived from employer contributions determined under the following table: .................... -- The nonforfeitable Years of service -- percentage is: ....... 2 ............. -- ..... 20 ....... 3 ............. -- ..... 40 ....... 4 ............. -- ..... 60 ....... 5 ............. -- ..... 80 ... 6 or more .... -- .... 100. Of course, if they move to the 6-year graded schedule then they must deal with those participants who have 3 or more years of vesting now - those participants can elect to stay on the 5-year cliff or to move to the 6-yr graded, unless the employer provides that they are vested under whichever schedule provides the better vesting at each year, then no election would be necessary.

Most of our DC plans were already using a top heavy vesting schedule, but for those few who were not and who were also safe harbor, we had them decide before we sent the safe harbor notice for 2007 and we sent a vesting schedule amendment with their 2007 notice. We did this because, as you know, the Safe Harbor notice for 2007 must state the plan's vesting provisions. The main concern was for those clients who had a 5 year cliff in 2006 - would they want to adopt a 3-year cliff or the 6-year graded. Those that were already using the 7-year graded will just move up to the 6-yr graded. Other than that, our biggest efforts are for design changes to add DB plans or to amend the existing DB plans to increase the DB and leave the DC at 6% - we're usually doing the DC as a safe harbor cross-tested with the owners getting 9% and the employees getting 3% (as long as the testing passes and as long as that keeps them under 6% overall) and that way they get the deferrals deducted and no ADP test is needed.

Apply online: https://sa.www4.irs.gov/sa_vign/newFormSS4.do Instructions, 7th line down talks about getting an ID for a plan https://sa.www4.irs.gov/sa_vign/page?conten...menubarHelp.jsp

Are you saying this is a DB plan? If so, DB plans cannot have a last day rule for accrual purposes. Perhaps someone can give us the cite for that. If this is a DC plan, then you cannot take away any accrual rights that have already been earned for the current plan year, but you can add requirements if no accrual rights have been earned yet. For example, if the plan year ends 12/31/2006 and the plan does not have a last day requirement now but only has a 1 hour of service requirement, then you cannot add a 1000 hour requirement for 2006 nor can you add a last day requirement for 2006. However, if you amend the plan by 12/31/2006, you could add a last day and a 1000 hour requirement for next year, 2007. And yes, the formula that uses smoothly increasing allocation rates does not change the normal requirements that the overall plan satisfy coverage (410) - you do not test each allocation rate group for coverage. Have you read Bill Karbon's article in the September-October 2006 ASPPA Journal?

Put it in the document. Make sure your safe harbor notice is clear in this regard too.

For clients where at least one participant is a "beneficiary" in both plans, we are taking this approach: 1. the minimum required contribution to the DB plan is deductible, plus 2. the employee deferrals in the 401(k) are ignored (i.e. deducted), plus 3. contributions up to the first 6% of eligible compensation for ER contributions in the DC plan (match, nonelective, etc.) are also ignored (thus deductible), plus 4. anything above 6% in the DC is deductible but only up to the point where DB + (the DC% above 6%) is equal to or less than 25% of elig comp For example, if the DB minimum was 18% of pay, and they somehow goofed by contributing 15% of pay to the DC plan, then the DB contibution is deductible, plus 6% of DC is ignored for purposes of 404(a)(7) under PPA 2006 (thus it's deductible), AND of the remaining 9% (DC money) only the 7% portion is deducted, leaving 2% that cannot be deducted. This becomes a 31% deduction plus a 2% nondeductible contribution. 1. 18% minimum DB - deductible 2. x% deferrals DC - ignorable (deducted) 3. 6% ignorable DC - ignored (deductible) 4. 7% considered DC - deductible (DB + DC <= 25%) 5. 2% considered DC - nondeductible - the DB + this DC portion now exceeds 25% In this example, if they had contributed only 13% to the DC, our approach would be to deduct it all, DB and DC. Numbers 3 and 4 might be in question, of course, but that is our approach for today. By "beneficiary" we take the approach that the employee is benefitting (receiving an accrual / receiving an allocation).

I do not know of any means by which a true merger of the plans could occur, one big reason being that the cash balance plan is a defined benefit plan requiring actuarial cost calculations to determine minimum funding. The assets of the 2 plans theoretically could be pooled together if accounted for properly and by using a master trust of some sort that allows the two plans to invest together, but if the 401(k) plan allows the participants to direct their investments, then pooling the 2 plans assets may not work well. If the cash balance plan terminates and if the cash balance plan offers lump sum distributions and if the 401(k) plan accepts rollovers, then the distribution paperwork for the cash balance plan could be designed to make it easy to rollover the money to the 401(k) plan.

If the 403(b) plan has hardship provisions and they want to utilize the 2 new hardship options, we are sending the new language now specifically for the hardship. We did not have any Safe Harbor (ACP) 403(b) plans to deal with.

Perhaps the new plan could incorporate a special effective date just for the safe harbor provisions? Most nonstandardized prototypes have a special effective date section.

The fixed match does not have a 4% limit, but the fixed match can only be done on deferrals that do not exceed 6% of compensation. That would not require ACP testing. See #3i and 3ii below, from the regulation itself. §1.401(m)-3(d) Limitation on contributions (1) General rule. A plan that provides for matching contributions meets the requirements of this section only if it satisfies the limitations on contributions set forth in this paragraph (d). (2) Matching rate must not increase. A plan that provides for matching contributions meets the requirements of this paragraph (d) only if the ratio of matching contributions on behalf of an employee under the plan for a plan year to the employee’s elective deferrals and employee contributions, does not increase as the amount of an employee’s elective deferrals and employee contributions increases. (3) Limit on matching contributions. A plan that provides for matching contributions satisfies the requirements of this section only if (i) Matching contributions are not made with respect to elective deferrals or employee contributions that exceed 6% of the employee’s safe harbor compensation (within the meaning of §1.401(k)-3(b)(2)); and (ii) Matching contributions that are discretionary do not exceed 4% of the employee’s safe harbor compensation.

Richard, you said "And they have an additional fixed match of 200% of the first 6% of pay!" Make sure it is fixed and not a discretionary match. Otherwise, the matching limits section of your plan probably has something like "The Employer must elect to limit the match to no more than 4% of a Participant's Compensation under the discretionary match formula if the plan has a safe harbor 401(k) contribution formula and the Employer wishes to avoid the ACP test." So if it was discretionary, then your plan would still have to pass ACP. For Top Heavy however, ever since yesterday I'm no longer sure. It was disturbing to hear the IRS Q&A yesterday at the ASPPA conference when a similar Top Heavy question surrounding this was discussed. The IRS position as stated by Lisa Mojiri-Azad (and not disagreed with by Jim Holland) was: if the Employer makes any contribution other than the Safe Harbor contribution (even it is within the 6% deferral match limit and, if discretionary, within the 4% match limit), then the plan is NOT exempt from Top Heavy. You should have heard Craig Hoffman as he strongly disagreed. Lisa did not change her stance. It sounded like the IRS was threatening to disqualify plans in one of the regions that were not providing Top Heavy minimums (the IRS's view was they weren't giving Top Heavy). This stance does not appear to be applied by the IRS in a nationally uniform manner. Craig was not a happy camper about this issue.

http://www.irs.gov/retirement/article/0,,id=96461,00.html

JanetM, You are correct. The cola increase is not large enough to increase the catch-up by $500. It would only move it up about $167 -- so the $5,000 limit will not increase for 2007. CPI-U Year July Aug Sept Total 2005 195.4 196.4 198.8 590.6 2006 203.5 203.9 202.9 610.3 Multiply $5,000 x 610.3 / 590.6 and since it's less than $5,500 the limit stays at $5,000 414(v)(2)© COST-OF-LIVING ADJUSTMENT. In the case of a year beginning after December 31, 2006, the Secretary shall adjust annually the $5,000 amount in subparagraph (B)(i) and the $2,500 amount in subparagraph (B)(ii) for increases in the cost-of-living at the same time and in the same manner as adjustments under section 415(d); except that the base period taken into account shall be the calendar quarter beginning July 1, 2005, and any increase under this subparagraph which is not a multiple of $500 shall be rounded to the next lower multiple of $500. Hope this helps!

A month or so ago, a former Employer of mine gave out pink slips to about 20 of my former team members who performed/reviewed benefit calculations for qualified DB plans (and nonqualified). They were part of a DB outsourcing department - meaning the calcs (years ago) had been done by the HR departments of the various clients, which was later outsourced to this large consulting firm. They have until sometime in November to find employment elsewhere, and I'm sure they'll all do fine, perhaps even better than they think. I was blessed enough to be able to voluntarily leave 2-1/2 years ago (for a better job) before this all occurred (but the direction was obvious even back then). In order to keep costs low enough to stay competitive, this large firm had few options. Few clients were willing to pay extra just to keep their outsourcer in the US - they had already outsourced the work from their HR to them anyway! The calculations/calc reviews will be done in India now. However, the firm still needed to keep 4 or 5 people in the US to handle the more complicated items and to act as the "local" technical voice on the phone that the client can meet with in person when needed. The DB outsourcing department was profitable, but when the DB outsourcing and H&W outsourcing departments were combined into one, the overall effect was showing a departmental loss in the millions. This should not be confused with the actuarial department (doing valuations) which was also profitable at that time. This will not end after it is outsourced, however. It appears that the goal is to automate and certify the overall programming on many of the calculations as well, such that a large number can be done and sent off of the system without a mathematical review (other than a statistical sampling). Once that programming effort is complete, then the India jobs will also be getting pink slips - assuming that this employer doesn't sell its employee benefits unit to another company first (which also appears likely). The number crunching repetitive jobs appear to be the easiest to send overseas to lower costs, perhap even the phone centers for the large market can be sent over as well. But the "ideas" jobs can hardly begin to do that yet. Now that I am in the micro-small market, the face-to-face meeting and the ability to truly say "I was in your town last week when my nephew had a district track meet there . . ." is best met with local people, especially when the client stops by the office and wants to just say hello. Most of our jobs are "ideas" jobs in this market - the administrator must intently listen (and truly hear what the client is saying) so they can ask the right questions based on their statements - how else can we make sure their plan is still designed to suit them best? This ability is especially important now after August 17th, 2006. I'm sure Congress will continue to provide more design opportunities for the small TPA. Off topic: As more and more fee disclosure becomes transparent, I think we will see more pressure for brokers/financial advisors to lower their basis points further. It's interesting to see the look a client's face when they see exactly how much was paid in fees by the plan, they usually look at the largest amount and say "who is that?" - that's your broker or financial advisor. Then they ask "what do they do?" and "Is that a reasonable fee?" Gotta be careful there.

A previous client maintained a suitcase full of cash in a vault in case any employees or their family were ever kidnapped or held hostage - this client worked all over the globe with many different governments. Of course, this benefit was not widely known to the employees for obvious reasons.

Vicki's statement also applies to the PPD documents, which are also supported by Sungard (Corbel). In the Employer Information section it states "This checklist is not part of the Plan document."

Exactly. I'll keep you posted on how our EA responds to these excellent cites.

Effen: "I've been wondering how long it will be before some otherwise exempt group asks to be covered by the PBGC. Does anyone know if it is possible?" According to Brian Graff and Judy Miller from yesterday's ASPPA Webcast, the answer is no, it is not possible to voluntarily become subject to coverage by the PBGC.

In 17 years we've seen one - selected $21.05 per month J&50% - ppt age was in low 30's. May have wanted to avoid getting spousal consent for the lump sum?

This question pertains to Defined Benefits plans that offer immediate lump sums, but have no early retirement provisions. An enrolled actuary that we work with has stated that a DB plan would not have to offer immediate annuities, that they could make the annuity options only available at retirement, even if the plan allows for immediate lump sums upon termination of employment, further stating that no annuity options exist before Normal Retirement if the plan does not have early retirement provisions. However, we believe that in order for the lump sum to be payable now, the participant must waive a QJSA that would be payable during the 90-day period that includes the annuity starting date. But, if no annuity is payable during that 90-day period (as the enrolled actuary has suggested), then the participant has not waived anything and therefore has not made a valid QJSA waiver. Q1. Must a plan that offers immediate lump sums also have early retirement provisions that start immediately upon termination? Q2. Must a plan that offers immediate lump sums also offer an immediate QJSA that would be eligible to have payemnts begin during the 90-day (soon to be 180-day) QJSA waiver period?

They did not obtain an IRS opinion regarding 401(a)(26). When you cover everyone in both plans as you suggest, do you have two accrual classes in the first plan so the second owner is not accruing the higher benefit that the first owner is? If so, does this jeopardize the "uniform" requirement?

Here's an interesting potential takeover that is causing me to examine my interpretation of 1.401(a)(26)-5: Two business owners (50% each) have differing investment philosophies, so they set up 2 DB plans, one for each owner (and each plan covers the employees too, uh sort of, - well, you'll see...) They set up the formula for Plan A (for owner A and all non-owner employees) to provide the largest benefit (both plan's have the same retirement age provisions and actuarial equivalence). For owner B and all non-owner employees, they set up Plan B which has a smaller formula where the benefit accruals are offset by the actuarial equivalent of the amounts accrued under Plan A. Thus, the benefits in Plan B are completely offset by the benefits accrued in Plan A, other than the benefit for owner B. You see, the document for Plan A excluded owner B from participation in Plan A. Likewise, Owner A was excluded from Plan B. However, the requirement under 1.401(a)(26)-5(a)(2)(iii)(2) states, "The employees who benefit under the formula being tested also benefit under the other plan on a reasonable and uniform basis." Does that mean ALL employees under the formula MUST also benefit under the other plan? If so, then doesn't this two-plan arrangement (described above) fall apart, since it does not get to disregard the offset when determining who 'benefits' -which is what 1.401(a)(26)-5(a)(2) would otherwise allow? Is there a way such a 2 plan arrangement could be established to ultimately have only one owner with a net benefit in the plan?

AndyH and JanetM, just an FYI, according to the tracking notes for H.R. 4: http://www.govtrack.us/congress/bill.xpd?bill=h109-4 Aug 14, 2006 - Bill Action H.R. 4: Pension Protection Act of 2006 Sent to President. To provide economic security for all Americans, and for other purposes. Presented for signature 5 days after your posts. Just an fyi.

For coverage, the intention is to cover all employees, so we think it will always pass coverage based on the numbers (we'll keep a careful eye on that). For the design, we are considering safe harbor designs to eliminate the ADP/ACP testing. If the safe harbor design is not adopted, then you are correct, we would run the risk that the tests appear to pass when they really failed or vice-versa. In that case, our conclusion was the same - go to the IRS to find out for certain if you are a CG or ASG. Would anything else pose a problem if the Controlled Group / ASG determination is in limbo when the plan is established and/or administered - perhaps the 5500?

A group of companies intend to adopt one 401(k) plan for all employees of all 4 organizations, A, B, C (nonprofits), and one LLC (partnership). The reason for the question is to obtain feedback regarding risk. The plan is intended to be established on a volume submitter document that allows for multiple-employer adoption. The issue is that we do not know if they are considered to be a controlled group (or possibly an affiliated service group). Even so, with the use of this type of document, what risks exist if the employers decide not to hire an ERISA attorney to help them with their determination. Here is their situation: 501©(3) entity A and 501©(3) entity B are controlled by their own separate boards as follows: Entity A's board is comprised of 2 appointed members plus 3 other members. According to their by-laws, the 2 appointed members are each appointed by their respective county board of supervisors (there are 2 counties). Thus each county's board gets to appoint one board member for entity A. The 3 other board members are determined by the existing (sitting) board (1 per year to serve a 3-year term). Removal of any board member is done when their term expires (3 years) or is done by a vote of the other members of the existing board. Entity A provides vocational (job) assistance. Entity B is also a 501©(3) entity. About half of the clients of entity B choose to do business with entity A. According to the by-laws for Entity B, their 5 member board is determined under the same methodology as Entity A. These board members for B could end up being entirely different, partly the same, or entirely the same - they are not tied to each other by the by-laws. It just so happens that the same 5 people currently sit on the board of entity B who also sit on the board of entity A. Entity B provides in-home care. Entity C is also a 501©(3) entity. The selection (control) of Entity C's board members is handled by the existing (sitting) board of entity C. Entity C is not related (by clients or otherwise) to entities A or B. The board members are also not related. Entity C and Entity A together own an LLC (50/50 partnership). This LLC will primarily provide services for one county, one which does not currently have a service provider. Are Entities A and B a controlled group? I’ve been reading 1.512(b)-1 (for non-stock organizations) and I am interpreting this to mean that determination hinges on how the board members themselves are controlled (appointed and removed). If that is correct, then only 2 are controlled by the same outside groups? Would A and B possibly be an affiliated service group? Would the LLC be considered part of a controlled group with Entities A or C? I find no way to insert the LLC (partnership) into the potential controlled group picture with the non-profit agencies – proposed reg 1.414©-5(b) applies only to two exempt entities – right?