mwyatt

Thanks for the quick response. I know that I can't use a signature stamp on a Schedule B (very explicit in the instructions), but couldn't find anything in the 5500 instructions for plan sponsor signatures.

Haven't been able to find the answer to this: client wanted to know if use of a signature stamp on the Form 5500 / Schedule P / SSA was ok, or whether signature must be hand signed. Any thoughts?

Great the first year, but what happens when one covered employee leaves or non-covered employee is hired?

I'll go with Harry here. I'd focus on properly adjusting the old AB @ 62 to the new NRA of 65 rather than thinking about the vesting (which in practical terms may end up to be more of a sideshow given a max of 7 years under Code now for full vesting). One other thought would be on what actuarial basis to convert to 65; the old plan or the new plan assumptions?

Well, I guess that we have arrrived at a conclusion here as to the "disadvantage" of a cafeteria plan (or for that matter a qualified plan). If your income or personal circumstances negate the tax advantages provided, then don't sign up. This is up to the individual participant. For many of us though, the ability to pay expenses we otherwise would incur pre every conceivable tax known to man (including AMT) kind of sways us to opt in. Let the buyer beware...

Of course, please let me know this area of the country where child care can be found for $5,000 for the year so that this could be a significant problem. For too many folks, that $5k max is exhausted somewhere around Memorial Day...

You know Summit, there are many people on this board trying to help others. This field is pretty "picky" due to complex (and sometimes contradictory) regulations promulgated in not such a neat manner. The tone of your original posting seemed to be of a leading nature. Perhaps a discussion of the pros and cons of utilizing a cafeteria plan might have been in order, rather than lashing out at the responses you got to your original post (you do know, BTW, that some of the same people who may be assisting or interviewing you in your career change might be the ones you are attacking here - a little food for thought). The principal "con" as previously stated is overestimating funds deferred and having them revert to the employer (ever wonder why so many eyeglasses are purchased in November/December each year). In my personal case, I have my share of family health premiums and a medical expense account in my cafeteria plan. As stated before, these do reduce your income for Social Security purposes, both on the employer and employee side (my earnings are over the Taxable Wage Base so this is moot, but could affect some folks' ultimate SS benefit). However, as GBurns points out, the effect, if any would be minimal, given the 12.4% tax savings inherent in reducing the FICA tax; coupled with the incredibly progressive nature of the SS ben calc (you're likely talking about a reduction in the AIME subject to the 15% formula) I wouldn't even worry about it. Given that the amounts put into a Caf plan are not subject to Fed, State, FICA, and Medicare tax, there is a fairly significant tax savings on these amounts. Costs paid by the Caf funds aren't going to be any different if paid instead after-tax. Sure, some plans can specify compensation net of deferrals, so you could potentially see a reduction in qualified plan benefits. But let's assume that you have $5,000 in play in the cafeteria plan, marginal tax rates of 28% Fed, 5% State, 7.65% FICA, and that you have $5,000 in qualifying expenses in the year so no worry of reversion. Further, let's "worst case" this scenario and say that you forego 10% in employer contributions to a qualified plan (ie, that your plan uses comp net of deferrals - most add back). So by participating in the Caf plan: $5,000 expenses are paid pre-tax. You lose $500 in contributions to the plan. SS benefit is negligible (and won't go off on the true SS tangent that these benefits, especially for a younger worker, are mythical). And how does that impact the SS benefit? Worst case, your AIME for the year loses the $5,000. So divide $5,000 by 35, then again by 12. To be charitable, let's multiply by a factor of 2 to adjust for future increases in Average Earnings. So, delta of AIME is $23.81 (5000/35/12*2). Now take 15% of that = $3.57. There's your upper bound of reduction of SS benefit (if at all). By not participating in the Caf plan and paying the $5,000 after-tax: $5,000 takes $8,424.60 in pre-tax dollars to pay ($5,000 / (1 - .28 -.05 - .0765). You get $500 contribution. Pre-tax savings of $3,424.60 less $500 loss of contribution. Still seems pretty favorable to the cafeteria side of life. Think that you've been assigned the more difficult side to defend...

I'm with the waiting camp myself (unless you want to have to explain to your client why you had them pay variable premium on 3.95%, only to find potential relief in a couple of months).

Seems a tad aggressive to me, given the one-man, 415 limit, circumstances. Paying the unreduced benefit as an annuity stream I could see. A little bit of a stretch on the lump sum amount (otherwise we would counsel our overfunded plan sponsors to have a nervous breakdown). I'd do a little more research than posting here before proceeding.

The give and take of a disability benefit is overcompensating with the annuity stream due to the probability of shortened mortality. Are you proposing paying a lump sum on an unadjusted accrued benefit for early commencement due to disability, using normal mortality tables?

Without starting another thread worthy of Red Adair's help to put out, the issue here seems to be whether having a bank account set up to park premium payments as they come due from the insurance company triggers additional requirements over those outlined under 412(i), such as filing a Schedule B and bringing those onerous actuarial fees into play (as opposed to those benign insurance commisssions). Do I know the answer to this? No. Do I wonder if the IRS may raise an objection? Yes, I've seen them raise their hackles on more illogical points in the past. From a practical standpoint, what is gained by having the employer move monies early over to the plan's checking account, rather than just paying the bills directly as they come due?

The mechanics are that after a certain period of time after a participant terminates employment, their benefit or account balance is reported on the Schedule SSA filed with the annual Form 5500. If a terminated participant, subsequent to the filing of the Schedule SSA, receives their benefit, they are reported again as having been paid and their name is taken off of the Social Security records. The SSA, in future years, will send a letter to an individual near their retirement age if these records still indicate that benefits may still be due from a plan. An admirable intention, for sure, but many things can go wrong. Administrators change over time, and participants who were paid out aren't reported as such on a future SSA (anyone in the business can recall the joy of gettin those calls from people who were paid out 20 years ago, but cancelled checks aren't available to document the payment). Of course, as Janet pointed out, plans can be transferred to new sponsors, and an aggravating paper trail awaits those who are properly due benefits. The PBGC reference could help IF AND ONLY IF the plan in question was terminated and properly reported to the PBGC. What exactly are your circumstances? There are non-profit groups (I'm involved with one in the Boston area) that can help participants in getting the benefits entitled to them. Here's a link: New England Pension Assistance Project

I guess I've been a belt and suspenders type of guy, as I've always filed the 5500EZ for our DB plans even at the beginning when assets were under $100k (never know when the client will remember about that 20 year old Keogh they forgot to mention). Not quite sure what the rational was in eliminating the B from the IRS's standpoint - would be interesting to hear what other folks have heard at conferences (I can see the P going away - is the plan sponsor going to sue himself for trashing his own assets?). I'm planning on filing the Schedule B anyway so there is no question of preparation.

I'll chime in to second the CYA theory of filing both the B and P. If Lawrence balks at extra paper, so be it. Don't see any compelling argument to not filing, regardless of instructions.

spell check much?

Your key reg: 1.401(a)(4)5(b)(3)(ii) Restricted employee defined: For purposes of this paragraph (b), the term restricted employee generally means any HCE or former HCE. However, an HCE or former HCE need not be treated as a restricted employee in the current year if the HCE or former HCE is not one of the 25 (or a larger number chosen by the employer) nonexcludable employees and former employees of the employer with the largest amount of compensation in the current or any prior year. Plan provisions defining or altering this group can be amended at any time without violating section 411(d)(6). Your only out is potentially if the individual wasn't in the top 25 of all time paid list, not whether they were defined to be a HCE at the time of distribution. Now of course they could get around this, assuming there are 25 employees, by bonussing the heck out of the others so that your individual falls out of the count, but I suspect your client won't view this as an intelligent idea .

Ok, I've read through the details. If I get this straight, 412 funding method would consist of the following: Target Normal Cost: PV of Accrued Benefit during the year, including increases in benefit attributed to salary increases (straight Unit Credit normal cost in other words) Plus 7 year amortization of presumably BOY PVAB on new Current Liability basis less assets (but no established bases, just recurring computation of amortization payment). Then reform of 404 limit is that the upper deduction would bring ability to top up assets to 150% of Current Liability plus Target Normal Cost. Is forcing everyone to "pure" Unit Credit a good thing? After the OBRA '87 CL debacle, I don't think this is going to improve plan funding, especially in compensation based plans, to say the least (or am I misreading this entirely).

A little befuddled here. First cursory glance is that 412 goes away, and we all end up using Unit Credit. Guess this will greatly simplify studying for the EA tests in the future, but what is the reality of what's being proposed? From further review, seems to be focusing on the Current Liability calculations; the notes just say "Minimum Funding Standards repealed"; Target Normal Cost takes precedence. From a "soapbox" standpoint coming from the small plan market, can I make one suggestion concerning PBGC premiums? Let's limit the benefit valued for premium purposes to the lesser of the plan accrued benefit and the PBGC guaranteed minimum (including that fine print of a 30 year phase in of the guarantee for substantial owners). Why in God's name should I have to have a small plan pay a 4-5 digit premium when there is no possible way, barring outright thievery, that the PBGC would have to cough up any money for my client's situation?

Looking over an existing plan right now and have discovered the following: Plan uses whole life contracts on the 4 participants in the Plan. Appears that whoever set the plan up was relying on the 50% rule under 74-307 to determine the face amount of insurance purchased, rather than a definite multiple of the projected benefit. Plan document is not specific as to amount of insurance to be purchased. Fact pattern is the one HCE has a policy of around 130x projected benefit; one NHCE two years older has policy of around 15x projected benefit; two younger NHCEs have face values of around 25-30x projected benefit. Appears from my reading that although 74-307 is "satisfied", that there are issues with Benefits, Rights, and Features due to the disparity in face purchased. Any comments?

One other thing to consider, especially when you are just starting out, are account fees. Generally these are waived once the account reaches some amount. So consider exactly why you need (or think you need) to set up different accounts at this point. Check around, as you may find that you can accomplish your different funds family choices through one brokerage account. $50/year doesn't seem like much, but that will have a significatn impact on your return at the beginning.

More Companies Phasing out Retirement Plans

Unfortunately so. What I think is a real kick in the pants (and will certainly lead to a falloff of termination DLs) is the increase from $225 to $1000 for 5310 apps, regardless of the size of plans.

Was your Cash Balance plan a new plan or a conversion? We had a client with an '03 effective date new cash balance plan that received a letter fairly promptly. Issues on the letter seem to more focus on conversions of traditional db plans.

The IRS has raised the User Fee for 5310 filings from $250 to $1,000, effective for filings postmarked February 2006. Interesting that a one-person plan will pay the same fee as a 10,000 life plan. Given the sensitivity of small clients to costs, will be interesting to see how this increase in the user fee is received (one guess). I know we'll be busy getting whatever we can get out prior to the end of month deadline. And I'm sure that more clients will opt out of the determination letter process and terminate without a letter.

The 90/110 rates applied to the old OBRA '87 Current Liability, which is in effect not relevant to mainstream calculations anymore. RPA '94 CL was on the 90/105 (with the temporary 120 jump).