Below Ground

Having had a chance to digest the Demo #6 PDF provided in Tom's April 14th post (Thanks Tom!), I find myself still somewhat confused. On page 10-53, the "Rate D Formula" for imputted disparity is: (Accrual + (Factor x Covered Comp)) over Compensation. In Tom's post #15, the factor used is ".7". Why isn't this value .007 as used in the example on page 10.53? (That example is (1,802 + (.0065 x 69012)) over 106,000; or 2.12%.) Why is the ".00" left out? Also, is the "accrual" in the book's formula the "annual equivalent retirement benefit" provided by the $42,000 in Tom's post. I think that this value would be $6,749.40 (210,000 *.03214). If followed through, you would get the same 3.4% that Tom got, but I am having trouble understanding "why". Also, the book's formula seems to be one simple step. Why not use that approach? As stated in earlier posts, I am NOT trying to say anyone is wrong. To the contrary, I am trying to understand a concept that has previously escaped me. Thanks for your insights!

As a non-producing TPA, we have been asked to provide the notice on a number of occassions. I can also say that some financial institutions automatically provide the notice. Our experience is that if the financial institution is not doing the notice, we will need to do it for the Sponsor. Otherwise, you can bet that it would not get done.

It sounds like there was no distribution. If the check was not cashed then I suggest that the person never "took possession" of the money. I don't believe that just because a check was written, the distribution was made. Could there be some arcane rule that says I'm wrong? I suppose that's possible. However, I know of no rule that says ripping up the check throws the plan out of compliance. What about the withholding? That's the tricky part. I suppose you could request return of those monies from the IRS. Ultimately, the person will "get those monies back" when filing the 1040; especially if the transaction is "reversed". That would require the person to pay the plan a sum equal to the withholding. I think you should also look at this from the "other side". Since the person did not have a hardship, could the person legitimately keep the money. You may need to ask if the distribution is even permissable, especially if under age 59 1/2 and the payout included deferrals.

There are a number of financial institutions that will set-up an IRA for a person, under the authority of the Trustee. (See insurance companies that work heavily with plans, if nothing else.) These accounts typical use the employer's address, or last address of record for the person. Paperwork is completed and signed by the trustee. Signature of the participant is not needed. I suggest that you use the "IRS Locator Service" to contact missing people. Social Security also has a similar service for use. In any event, document that efforts were made to locate the person and/or set-up the IRA. Finally, if concerned about compliance with plan terms, maybe you should look into removal of "automatic rollovers". Just use the $1,000 threshold for cashouts. Just some thoughts on the subject.

Misery loves company. Thanks. I must admit I do feel better.

I waste an incredible amount of time explaining why and when distributions can be made. I must admit that I am sick of hearing how "Aunt Betty got her 401(k) check on the day she quit", or how "Cousin Billy (at age 24) took his full 401(k) Account (including deferrals) while still working to invest in a sewage reprocessing factory", or "it's my money, you can't tell me what to do". Liars, drunks, morons and self-impressed "people" are in the mix. (I have been threatened numerous times.) I would love a nice simple solution, but there does not seem to be one. Education is the answer? Don't you communicate with these folks? Right. People hear what they want to hear, and nobody ever reads.

Maybe you did not have a plan at all? Just a thought.

In support of J Simmons's post, it is not that unusual to see a Plan that has most employees in mutual funds (structured accounts), and a few "high-rollers" in brokerage account (lower structured accounts). The key is availablity of the use of brokerage accounts. To document that people were offerred the the brokerage account you may wish to have people sign an "election form" that shows they were offerred the brokerage account and chose the mutual fund account. Similar to coverage testing (please note coverage not ADP) for a salary deferral provision, it is not how many use the feature, it is how many could.

Excellent! Could not have gotten a better answer! Thanks!

On what forms and on what lines does the Sole Proprietor use to deduct his/her Salary Deferral, Employer Contribution for himself/herself, and Employer Contribution for employees? I assume that deferrals by employees are a payroll expense. Thanks!

Thank you both for your replies. BG - Safe Harbor Match is used. See boldfaced text in OP. I should have included match in the first sentence for better clarity. Sorry. SWH - I agree with your conclusion that 3% is needed. (Exemption lost so all rules apply.) Luckily, the document allows Forfeitures to be used for any "discretionary allocation". We used the monies under a discretionary Match that complies with ACP Safe Harbor Rules; thereby, avoiding the Top Heavy Minimum. While I was fairly confident of the answer (as given by SWH), I had this bit of doubt on whether the TH Minimum is computed looking at all allocations to Keys (including Deferral and Safe Harbor Match), or just the "non-safe harbor allocations". When I research this I wasn't finding any "clear" answer to this question, and that further raised my curiousity level. Anyway, thanks for your input!

Plan is Safe Harbor 401(k) Plan that only does Safe Harbor Contributions. When computed, Plan does have Top Heavy Ratio of over 60%. Since only Safe Harbor Contributions are used, Top Heavy would not normally apply. However, a person terminates and forfeits profit sharing monies that need to be reallocated under profit sharing allocation formula. (They did use profit sharing allocations in prior years.) This forfeiture reallocation would provide everyone employed on last day with (equally) a little under 1% of pay. Does the employer need to kick in monies necessary to give everyone 3% under profit sharing, since Keys are getting over 3% from Deferrals and Safe Harbor Match? (Not all people are deferring so Matching can't alone satisfy the Minimum.)

I can see I have a good deal of reading to do. I really find it odd that since you are testing allocations, why you can't test allocations adjusted for imputted disparity. That is, why not test contribution values that have been projected forward after they have been adjusted for imputted disparity. It just seems that you would continue forward with that logic for testing on a benefits basis. Am I making sense? I think that projecting forward the "imputted allocations" would actually have less "allowed discrimination". While I can't prove that right now, I suspect that only imputting disparity under a DB Basis results in higher "allowed discrimination. Now I will need to check that out. Regardless, if I'm wrong, I'm wrong. It won't be the first or the last time. I will read that big beast of a file, and let you know what I think. Thanks for your patience and helpful replies. Thanks for the PDF File. And, thanks for your contributions to an excellent resourse in the Nondiscrimination Answer Book.

Okay, I think I'm lost. Compression and expansion? Doesn't vary with mortality and interest changes?? Not uniform... different results??? Am I missing something here???? Mike you are way beyond me! Even so, it almost sounds like you are agreeing with what I was saying on consistency. Wishful thinking? Probably? Especially since I can't see how you would calculate the "most valuable accrual rate" or the "normal accrual rate", or items like "employer-provided accrual plus the permitted disparity factor times covered compensation divided by average annual compensation" as needed to input disparity for a DB Plan. While I can see how you could apply the "permitted disparity factor", and I can see how they apply to a DB Plan, I really don't see how this can be applied to a DC Plan. Again, thanks! I really appreciate the time you have allowed for my questions. Hopefully, somebody else is also benefiting from this exchange. I know I am.

While I am sure that you are right, I am having a hard time grasping this. Am I right in saying that: 1) If you are NOT imputting disparity you simply project forward the allocation value for testing on the benefits level. 2) If you ARE imputting disparity you simply adjust the allocation (as stated in the formula in my previous post) for testing on the contribution level. 3) If you ARE imputting disparity you can NOT simply adjust the allocation (as stated in the formula in my previous post) and project that value forward for testing on the benefits level. 4) What you DO need to do if testing on a benefits level is to first project forward the allocation and then impute disparity to that benefit using the formula used for DBP's. Doesn't that seem "inconsistent"? While I am NOT an authority in ANY respect, it just makes sense that you would project the adjusted allocation since that is what you do if you are not imputting disparity. Afterall, if testing without imputting disparity you are using the allocation whether testing is on a benefits or contribution basis. Why can't you just adjust the allocation and project that value for a benefits basis test. Anyway, I know that things don't have to make sense to me. I just wanted to make sure that I understand how this works, and confirm that my orginal thoughts on how this works were totally wrong. So, is it just wrong to project forward the allocation after making the adjustment as done for the contribution basis testing as stated in #2 above. Thanks again! Last question: Are you the co-author of a book that I frequently use on CCH? If so, great job!

I thought that: For below TWB you use lesser of (A) 2 times allocation rate or (B) the allocation rate plus permitted disparity rate.... and For above TWB you use lesser of © Allocation/(Compensation - (50% of TWB)) or (D) (Allocation+5.7%TWB)/Compensation. You then apply this rate to Compensation to to get a dollar value which is then normalized. Is that wrong? Is it necessary to use a "permitted disparity factor" like DBP when Testing Age is not SSRA? If so, where can you get that factor? Sorry if these questions sound dumb. I am a "DCP Person" so DB stuff, while interesting, does create a mental block for me.

I must admit, that Mike did lose me a little as my understanding of imputted disparity is more in line with "I'd hold the way the regs do - that would be an 'adjustment' to the accrual rate (found in 1.401(a)(4)-7), not the actual equivalent accrual rate." My question now becomes if you are adjusting the rate, would the mortality table have an impact? Wouldn't you then apply the imputted disparity as if you were testing on a "contribution basis", and normalize this adjusted allocation?

I think I now understand why my very good EA friend says that the mortality table really has no impact, unless person is over NRD (testing age). Basically, it's all discount rate for period to NRD? Again, thanks to both. You are both truely gentlemen and scholars!

I see under Standard Morality Table that I can get these tables from the Society of Actuaries. I also see I can use the table under 417(e)(3)(A)(ii)(I). Anyway, my goal was to obtain a better understanding of these concept. For me, that would be doing the computation by hand. My big problem was: "and then somehow these are converted to an APR depending on interest rate and age (e.g. 95.38 at 8.5%)." and "[(allocation * 1.085 10 * 12 /95.38) ] / compensation the 95.38 is UP 84, 8.5% at age 65" Getting that 95.38 is my problem. No matter. Both you and Mr. Preston provided excellent explanations. My thanks to both.

Thanks for the very good explanation, Tom. Could you tell me where you got the value 95.38 for UP 84? Is there a published table of these values for respective mortality tables? Again, thanks!

In-house, custom program. EBAR Programming by an EA. Any idea where a table of factors might be found?

Does anyone know where I can access the tables that list the factors used to calculate "EBAR Values"? I would like to be able to check values that the "program spits", using a table of factors. Thank you in advance.

Why not file an amended 5500 for that year?

Well, there you have it. Assuming that you do not have some special powers that the rest of us mere mortals do not have, and can bring the light of knowledge and understanding to this "client" by divinely transferring goodwill and sanity by a magical force, dump the client. (Read as resign.) Or perhaps, refer this jewel of a client to someone who knows he or she is superior to that rest of us in helping clients understand the nuances of plan design and adminstration, and needs this type of business to serve as their flagship client. (I agree that it might be worth it for someone else to take a crack at it, but I suspect that the original poster is associated with a fine service. Inference to the contrary is in bad taste, IMHO. ) Of course, I fully understand that there are supernatural forces out there that never have a problem, and all clients serviced are a picture of perfection. Could it finally be the fabled superior service for almost no money that we simple humans have dreamed of? Oh yes, anyone interested in buying ocean front property in Nevada?

Neville Chamberlain appeased Adolf Hitler and we got WW2. Dump the client.