John Feldt ERPA CPC QPA

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?

A couple of ERSOP links, I am neither claiming agreement nor disagreement to these type of arrangements at this time: http://www.businessweek.com/smallbiz/conte..._0799_sb006.htm http://www.rainwatercpa.com/links/ersop.pdf

Go for it. Thanks for asking! -John

I agree with Carol's point. If your plans do not contain language, however, then you should try to administer it in the same way it started out. However, the regulations talk about aggregating plans where the determination dates fall within the same calendar year: 1.416-1, T-6 Q&A: "the required aggregation group includes each plan of the employer in which a key employee participates in the plan year containing the determination date". 1.416-1, T-22 Q&A: "The determination date with respect to a plan year is defined in section 416(g)(4)© as (1) the last day of the preceding plan year, or (2) in the case of the first plan year, the last day of such plan year." 1.416-1, T-23 Q&A: "When two or more plans constitute an aggregation group in accordance with section 416(g)(2), the following procedures are used to determine whether the plans are top-heavy for a particular plan year. First, the present value of the accrued benefits (including distributions for key employees and all employees) is determined separately for each plan as of each plan's determination date. The plans are then aggregated by adding together the results for each plan as of the determination dates for such plans that fall within the same calendar year." OK, so at this point, we've put the two plans together to run the TH test, and let's say the result is top heavy. If this was the first year for both plans, (and they are required to be aggregated) then there is no question about the TH minimum: if one plan says that it will provide it, then that first plan year must provide a TH minimum. If both plans say they will provide it, then they both provide the TH minimum in the first year (and a search for a new plan design consultant is initiated - just kidding). With that in mind, follow to the next year. What must happen if the second TH test shows the plans are top heavy? Follow this langauge again, and so on until you reach your current year. Even if the plans were not set up at the same time, then the same approach applies, by using the determination dates that end in the same calendar year for the aggregation. For example, a 6/30/2005 determination date and a 12/31/2005 determination date are used for testing Top heavy. If the result is TH, that means the 7/1/2005 plan year and the 1/1/2006 plan years are top heavy. The plan language will then dictate which plan (or plans) have to giev a TH minimum for that plan year. Well, that's what I think should work. I hope this helps. -John

In Nate's scenario, the Safe Harbor Match means that the Top Heavy minimum is deemed to be handled - that's one of the benefits of using safe harbor provisions. If some non-key employees do not defer, and thus they get no employer contribution, it does not matter because the plan is deemed to satisfy top heavy under the safe harbor plan regulations (assuming all NHCEs deferring get a Safe Harbor Match). I first saw the Triple-Stacked Match design at a SunGard Corbel conference (Steve Forbes happened to speak at the one I attended). This type of arrangement allows the maximum deferral for the HCEs and gives them the ability to control their own costs (by choosing to defer or not) and it gets them to the maximum $44,000 limit with the match if designed properly (and if the HCE pay is high enough). If the NHCEs are doing jobs that are low paid (usually due to the skills required), then it is possible to see some lower costs due to lack of employee deferral (but it won't always end up that way because of households having more than one income producing source). If the cross-tested safe harbor does not work due to demographics and the integrated plan does not fit their goals either, then this might be an option to show. Mr. Forbes suggested that you show both the average deferral scenario and the worst-case scenario (where each employee defers enough to get the maximum match). In our firm we have discussed this design with less than 1 percent of our prospects. For example, one prospect was a feed mill with a lot of older workers (15 or so out of 60 people) with low wages - the cross-testing would not work and the integration was too expensive. However, an additional problem was that the HCEs were not earning the $220,000 limit - that made it impossible to get to the $44,000 limit in this design. They ended up offering no retirement plan to the employees (their industry does not compete for employees anyway, so any plan would have to justify itself on a tax-savings vs. employee cost basis). I hope this helps! -John

Well, maybe I read this wrong from the current regulations: "A plan may be amended to modify an optional form of benefit by changing the timing of the availability of such optional form if, after the change, the optional form is available at a time that is within two months of the time such optional form was available before the amendment." If the plan language currently provides for a distribution option to be paid as soon as administratively feasible after termination of employment (regardless of whether or not anyone was ever paid out), then the right to be paid according to that timing still exists in the plan language. Thus, every accrued benefit so far gets to retain that right as it relates to the timing of the distribution, with a single 2-month exception. So, it appears to be permissible to adopt an amendment that changes the timing to say something like "benefits are to be paid as soon as administratively feasible two months after a participant's date of termination." Just make sure the plan does not get amended again for purposes of those accrued benefits that are affected by that amendment. Alternatively, the plan could be amended for future accruals only (administratively impractical though) to move the payment timing for future accruals to be as administratively feasible after the calendar year-end following the participant's termination. Or, the plan could be amended to affect only new participants (let's hope some new participants will be HCEs soon so this looks like it is not discriminatory). Any amendment would have to prove to be nondiscriminatory. With all of that said, are you just trying to change the month(s) that are used for purposes of determining the GATT interest rate for calculating the lump sum? That would be a diferent answer.

Yup. OK - thanks!

Another reason to have a TPA is to keep the form of the plan qualified. Most TPAs provide a plan document service to keep the plan up-to-date with all laws and regulations. Has your plan been amended for the automatic rollover rules? This was required under 401(a)(31)(B) and is due no later than the filing deadline for your corporate tax return that contains March 28, 2005, or if later 12/31/2005. This includes any extension, if your filed an extension for your coprorate return. Perhaps you have a standardized or nonstandardized plan and the amendments are done by your document provider automatically. If it has been done, then a Summary of Material Modifications should be prepared and provided to your employees - that will be due no later than 210 days after the plan year in which the amendment was adopted. Was the plan amended for 401(a)(9) by the end of 2003 (or thereabouts depending on your plan year)? The next amendment will be for the Final 401(k)/401(m) regulations - this will generally be due no later than the filing deadline for your 2006 corporate tax return plus any extension, if you file an extension for your coprorate return.

My question is concerning the combination of the DB ebars with the DC ebars for the general test when the DC plan provides the combo plan gateway of 7.5% of pay, but where the DC plan is only based on 7 months of pay in the first year. The client is adopting 2 new plans this year, they've never had qualified plans before and their fiscal year is a calendar year. If the DC plan is a short plan year, say June 1, 2006 to 12/31/2006, but the DB plan is the full 2006 year, when we convert the DC contributions and divide by DC comp for the DC ebar, are we OK to use the short year DC compensation to achieve the DC ebar? The DB ebars will be based on full 2006 compensation - so when we add the two sets of ebars together, I'm concerned that we are adding apples to oranges to arrive at an invalid result, or is this legitimate thing to do? PS, yes I know we could lower the 7.5% a bit because of the DB accruals, but we are just concerned over the short plan year DC here. I did not find guidance, but I could have looked harder I suppose.

Here's what I've found under current regulations, in §1.411(d)-4, Q&A-2(b)(2)(ix): De minimis change in the timing of an optional form of benefit. A plan may be amended to modify an optional form of benefit by changing the timing of the availability of such optional form if, after the change, the optional form is available at a time that is within two months of the time such optional form was available before the amendment. To the extent the optional form of benefit is available prior to termination of employment, six months may be substituted for two months in the prior sentence. Thus, for example, a plan that makes in-service distributions available to employees once every month may be amended to make such in-service distributions available only once every six months. This exception to section 411(d)(6) relates only to the timing of the availability of the optional form of benefit. Other aspects of an optional form of benefit may not be modified and the value of such optional form may not be reduced merely because of an amendment permitted by this exception. I hope this helps, although I don't really like the 2 month restriction.

Tom and E, Thanks for the info. We had already drafted the warning to the client about this and it's good to see our own conclusions were the same as yours.

Under 1.401(a)(4)-5(a), a plan cannot be amended in a way that discriminates significantly in favor of the HCEs. THis is based on relavant facts and circumstances. Does anyone have any guidance or opinion with what the IRS would view as significant or insignificant here? Here's the situation: the plan requires 1000 hours for a year of vesting service, they have 5 HCE doctors and 9 or 10 NHCEs. They usually have 1 to 3 NHCES leave each year and they are replaced by rehires. This year, 1 doctor left with under 1000 hours and was only 80% vested, the 20% nonvested portion is over $40,000. Two of the other 4 HCEs are still not yet 100% vested either, but they're still working. Some of the NHCEs are fully vested, some are not. Would it be a significant favor to the HCEs if the plan is amended to only require 200 hours for vesting only for 2006? (Assuming 1 or 2 nonvested NHCEs also leave with over 200 but under 1000 hours) Or would it be a significant favor to the HCEs if all participants' vesting was bumped up by one year (this would now increase 3 HCEs, not just one, but it would help several NHCEs). Any other ideas?

Corbel released a good faith amendment in early December (no IRS model found yet). If you are on their prototype maintenance plan you should have free access to that. If not, there should be a location where that language can be purchased. The dozen or so of our clients have heeded our advice to not allow loans to be made from the Roth accounts (but to utilize the Roth account when determining the 50% limit - giving the loan as the lesser of A) 50% of all accounts or B) the non-Roth account) or C) $50,000). However, they have all decided to allow Roth to be made available for hardship and for in-service. We are hoping to see final Roth distribution regs by year-end. So far none have actually taken a hardship or in-service with Roth . One other item, one of our clients had automatic enrollment, so we added another paragraph to the Corbel Roth amendment to specify that negative elections would be contributed as Pre-tax elections, not Roth.