mwyatt

Also, think about ultimate plan termination where participants will be sharing in some portion of excess assets: fees paid obviously will have an impact on the level of excess assets. Of course, one difference between DB plans and DC plans is that if the employer does make a habit of settling allowable expenses from the trust, the actuary will make an assumption for expenses (so that the contribution paid will be higher than if the employer paid all expenses directly). DC domain has no allowance for expense load in employer contribution (although I did see a takeover Target Benefit plan one time that included a 5% expense assumption in determining the contribution - amazing).

Actually, if your volume submitter provider also submitted other types of plans, remember that extension date for ALL (not just the last type of plan approved) is 12 months from the date that the provider was issued the last opinion letter.

Ah, should have turned to BenefitsLink and read the JB release before posting. This taken from the JB notice: Application for Renewal of Enrollment and Extension for Use of the “99-” Prefix The Joint Board will soon begin mailing out the Application for Renewal of Enrollment (Form 5434-A). The Joint Board is extending the date by which the Application for Renewal of Enrollment is due to July 31, 2002. The Joint Board will continue to process applications as they are received, and applicants are urged to complete the form and mail it in as soon as all CPE requirements are met. Once you receive written confirmation of your re-enrollment, you should begin using the “02-“ prefix. The Internal Revenue Service and Department of Labor will not reject the “99-“ prefix on a document with a signature dated before September 1, 2002.

Just received my "Notice of Active Status" from the Joint Board and I am a little confused as to when I should start using the "02-" prefix for Schedule Bs, etc. The notice I received states "Under these extensions, your "99-" prefix is valid through August 31, 2002. Beginning September 1, 2002, you must use the prefix "02-" before your enrollment number." Now I know that this is relating to the extension for continuing education due to 09/11. However, I can't determine whether I have to wait until 09/01/02 to start using "02-" even though I've been approved for "active" enrollment, or should I start using "02-" now since I've been approved?

One other point alluded to by Mike Preston (even in the small business world) is what happens if the circumstances change (terminations, additions, etc. to your population affecting Testing results)? If your document specifically details exact allocations/relations among groups, what do you when/if you fail the General Test? In the discretionary among class approach, you really haven't "failed" anything yet, as you just adjust how the dollars are allocated until you pass, neatly sidestepping all the issues of corrective amendments, etc. BTW, that was one of the problems I had with the Super Integrated approach. The "fixed" New Comp plans I've seen usually started with a "bucket" approach where you first fill 3% of everyone's bucket, then fill your favored groups' bucket up to 415, and then filled the other buckets with what's left over (usually amount to satisfy General Test). This is all well and good, but what happens when that third "bucket" overfills the 404 limit? Or say your client wants to contribute a lower amount?

Moving to the discretionary class approach is definitely the way to go. Our experience has been with smaller clients where the main intent is to maximize the contribution for the principals while holding down costs for rank and file employees. We determined the appropriate groups first in design of the plan. Usually fall into two groups: favored and unfavored, with a possible third group if necessary for any younger HCEs who may blow up the allocation. We then determine the optimal contribution to pass the General Test and then communicate this to the client. If total cost is acceptable, we then prepare the written instructions from Employer to the Trustee which specify how contribution of $x (including forfeitures - need to take these into account also) will be allocated among various groups (ie. $Y to Class A and $Z to Class b). We're usually the ones making the decision given our small (doctor) clients. In summary, clients are looking to us for the best solution; once we find it, we tell them the way to go. On a different subject, I've heard and read of a few people promoting the idea of bringing spouses into plans for 2002 with high 401k deferrals under a Safe Harbor 401k plan with New Comparability discretionary PS allocation. Looks great and can be done under new 404 and 415 guidelines; however, may want to consider impact of an HCE getting 100% of comp before presenting to client (great if doc's wife can put away $11,000; not so great if this same $11,000 causes the rank and file amount to go to the moon in order to pass the General Test;) ).

Good discussion on "last day" usage. I do tend to fall w/ Andy H's observation of problem of generating 0% rates for terms. We've generally dealt with fairly small plans with 1 year eligibility, so that new hires during the year we're working on can be analyzed not too far into the next year so that if demographic changes look to be a problem in next year we do have time to make changes. This of course assumes that client gets you the data not too far after the end of year. Another item for thought: when I was at the EA meeting last year, one presenter had the interesting idea of actually having all employees in the plan with a very minimum $ amount (say $100) guaranteed to all participants. In some ways this is kind of a sneaky "gift" as these part-timers aren't earning any vesting service, so unless they stick around to NRD they walk with nothing. But consider the accrual percentages that can be generated from a bunch of part-timers earning minimal dollars with a $100 contribution. In some circumstances (his example was the typical dentist office with rafts of PT employee) the extra minimal cost for these folks may generate much more favorable results. Can't say that this approach would be appropriate for all but made for an interesting discussion...

The reason assets are non-zero is that the client made deposits during the year. Non-zero portion represents earnings/losses that accrued on contribution deposited during year. Consider also situation where assets had gain; still would have non-zero assets. If I just force assets for initial calculation to be zero, aren't I really forcing gain/loss from 2001 (initial year) onto 2002? Does that make sense either (remember we're talking EOY val; problem does not exist w/ BOY val). How have others approached initial EOY val situation where funds were contributed prior to close of year?

We established a defined benefit plan for a new client eff. 1/1/01. As the company also started as of that date, for 2001 we were going to perform the initial valuation as of 12/31/01. As part of the proposal we developed an estimated cost for the year. The client established an account and made partial deposits during the year towards 2001. Situation that is a little weird is that assets incurred a loss during the year. So: Deposits $100,000 during 2001 Say credit $2,000 interest on contribution for FSA purposes. MV of assets as of 12/31/01 was $90,000. To establish AV of assets as of 12/31/01, I take MV Assets, subtract out contributions paid for 2001 to get IRC 404 assets. I then further subtract out interest for IRC 412 assets. Obviously I am coming up with a negative AV assets as of 12/31/01. Does this seem a little odd to anyone?

You are correct (sorry for adding differing terminology). What I meant by "class allocation" was the typical New Comparability design (i.e., you specify different classes of employees, and then the employer provides written instructions to the trustee each year saying "The total contribution for the year will be $X, with $Y going to Class A and $Z going to Class B.") I find this method to be the best for a number of reasons, as you basically determine the optimal contribution each year, and then get to specify the exact dollar amounts necessary to make it work without having to amend the benefit formula (with all of the problems that accompany multiple amendments). The only things that you may have to watch out for are census changes that necessitate adding or modifying your classes (young HCEs - the bane of any New Comp plan ).

Super-Integrated Plans generally work as follows: 1) Everyone gets a base percent of compensation (usually 3%) 2) Funds then spill over to "fill" the next allocation (say 25% of Compensation in excess of $100,000 - hence "super" integration) with the intention of attaining most, if not all, of the 415 limit for your highly paids; then 3) If further funds are remaining, then allocated among all based on compensation (with exception of those already at 415 limit). Generally this amount raises allocations to level necessary to pass General Test on "cross-tested" basis. This design was generally a reaction to the IRS's mid 90's position that the Class Allocation (where the Employer specifies various classes in document and then allocates contribution among classes) method was not "definitely determinable". Super Integration was developed to deal with this objection. I have one problem with the Super Integration approach, however. Look back at the method; say you calculate the optimal amount of contribution that gets your favored participants to 415 and allows you to pass the General Test. What happens when client may want to put in a lesser amount (or the amount exceeds the 15% IRC 404 deductible limit)? The above approach to allocation doesn't handle this real well, to put it mildly. The IRS has since backed off of their objection and is allowing class allocation. The few clients that we have who took the Super Integrated approach we have amended to the Class approach. This is much cleaner and allows you to achieve goals of maximizing contribution while passing General Test without amendment to the plan each year. Hope this is of help.

Go ahead and add in 415(e) repeal as has no impact on your client's funding requirement. Will also smooth your determination letter process as this is one point any agent will be looking for in review of your GUST restatement. Happy holidays...

What do you mean by "frozen"? If you mean that the contribution percentage was reduced by amendment of the document to 0% of pay in 1995 (which is what I think you meant), then the repeal of 415(e) contained in your GUST restatement won't "spring up" any contribution requirement. If however you mean that you haven't been making any MP contributions since 95 with a non 0% formula solely due to the fact that you had a 415(e) dominant DB plan in place, then you might have some issues. I'm assuming that this is a one-person plan (remember under 415(e) a rank and file employee was effectively under the 1.4 rule so a MP contribution was available even with a 100% DB formula). If this was the case, then really in the 2000 year 415(e) went away and the MP contribution was possible. Further help based on your situation: if MP formula was amended in past to 0%, then putting the 415(e) repeal in place in your GUST restatement won't spring any problems up with how you ran the MP plan. Could be problems though if you just let DB plan forbid contributions to the MP under 415e as post 1999 this no longer would apply.

A few points to consider about age-weighted plans v. "new comparability": 1) Disparity in contribution percentages among rank and file employees due to age. A few clients of ours have been concerned that rank and file employees are all getting different contribution amounts (and gets known as his staff all compares benefit statements after distribution). A "new comparability" class-based approach eliminates this problem as everyone in comparable employment classes will (usually) get same percentage of compensation. 2) Disparity in ages between favored HCEs. Again, new comparability can handle this situation better (although problem of that one pesky HCE of young age - hello owner's son - is still unsolved; in fact, you'll need to create a third class to handle the young HCE issue). 3) Older rank and file staff and new 2002 IRC 415 limits: In a perfect world, your owner is old and all staff is young. But what about those few exceptions (the bookkeeper who has been there forever?). Prior to 2002, you may have had this person getting an inordinately large contribution under an Age-Based plan (limited to 25% of compensation with excess being reallocated). But remember, in 11 days this is going up to 100% of compensation so contribution may be brutal (this applies as well to Target Benefit plans by the way). New comparability designs can handle these "exception" employees much better. You do avoid the 5% threshold test using an age-based design so this is a point in their favor. However, you will probably want to look at results for 2002 both ways to determine the real cost of this threshold before making your decision (probably would be a good idea for all of us to project 2002 results using the 2001 data, especially with the expansion of 415© and higher salary limits, to determine client's best approach for next year). Just my two cents. As someone previously said, age-based plans were basically the Version 1.0 design after the release of the original 401(a)(4) proposed regs back in 1990.

Not an article, but you might want to consider what the "end game" is with that type of deduction. PVAB of $1333.33 payable at 62 for a 31 year old (1/10th of $160,000 /12) valued using Blended 83GAM with a 5% interest rate (no pre-retirement mort) is only around $44,000. Say his wife is identical in age, salary, then you're still only talking max LS in range of $88,000, yet you just dumped in $250,000 for the first year. Looks to me that you get a huge "deduction" that would get taken all back in excise taxes at the end. Never could figure the end of these plans out as it seems that all you are doing is creating a massively over funded plan (unless your client is the only one who wants to stick with an annuity payment at the end rather than getting a lump sum rollover to an IRA).

Thanks for the reply, Everett. From the examination guidelines, this seems to read that you could ignore service while not a participant in the Plan if no accrual was granted for normal benefit purposes in that year. This doesn't seem to be a problem as employees excluded from participation would ordinarily be credited with service for eligibility (in case of leaving excluded class somewhere down the road) and vesting purposes, but not for accrual purposes. Although then I guess one would need to be careful in a DB setting if excluding certain classes and using Years of Service rather than Years of Participation for accrual purposes... hold that thought. My reading is that you can exclude YOS while not a participant from TH purposes if and only if accrual is based on participation, rather than service as an employee. Don't see how you get around that (and it is interesting that this guideline really is not supported anywhere in the 416 regulations, which make no distinction between service prior to entry, only service when the plan is or isn't top heavy). As to the ASPA Q&A, looks like (Wickersham or Holland maybe?) someone really didn't want to go out on a limb (or answer the question definitely). Thanks for the input.

Hello; thought I'd bring this question back up for discussion (no answers before). This was just brought to mind because of a plan that wanted to exclude a certain class of HCEs (who are NOT key employees) from participation in a profit sharing plan. Say that excluded class does not cause problems with 401(a)(4), etc. Only issue is whether they should get the top-heavy minimum. (OR if the HCE point is confusing the issue, say a plan states that a certain class of rank and file employees is excluded from participation). Reading TH regs as previously mentioned, wouldn't the position that they don't get the TH minimum seem to fly in the spirit of "top heavy regs drafted back in 1984 mention that employees barred from participating due to level of compensation (the old "excess-only" plan) or who are not electing to defer (401(k) plan) must receive the top heavy minimum"? Thanks for any insight (or even better, a cite for your position ).

A few words from a Mass. resident: The Mass. gubernatorial election is next year (2002). Does anyone want to take a guess as to who has been pushing himself as a candidate for the race (including state-funded mailings stating what a great job he is doing?). Don't spend a bunch of time on this one... political grandstanding with no chance of implementation (after all, there are a few of us here in Boston who know how to spell E-R-I-S-A P-R-E-E-M-P-T-I-O-N ).

We use a well-known software package to generate Volume Submitter documents. Now that approval has finally been received by our provider and language released, starting to generate volume submitter documents for our clients to comply with GUST II. Given that IRS has now allowed sponsors utilizing volume submitter doucments to rely on the VS opinion letter (and not file for an individual DL), would like some input on dealing with the following: Say your plan made an amendment effective 1999 to change a provision also available in the body of the VS document, but does not coincide with the GUST restatement year of 1997. What we have done in the past is to generate document using the pre-amendment provision, and then add "special language" to the document stating "Effective 1/1/99, . However, this is now a change to the VS document and I'm assuming that we would now need to file for a DL letter (although all language taken from VS source). What we were proposing to do instead is the following: 1) Generate first document with GUST effective date. 2) Generate second document incorporating change with amendment effective date. Killing more trees this way, but now we have two documents that totally rely on VS language. Any ideas on whether this is a good idea?

E-mailed the following to Mr. Bartlett: Dear Mr. Bartlett: Three comments are in order concerning your analysis of the impact of Defined Benefit plans on equity markets: 1) Companies actually never received "real" income from these pension plans (the only way that a company could actually have assets revert to the employer would be for the plan to terminate, which these plans did not do). I think that you are confusing "pension income" showing on the books due to FAS-87 calculations with physical income received by a company. Rather than hiding this problem, several major actuarial firms have been pointing out the impact of this phantom income on major corporations' bottom lines in the past few years (see Mercer and Watson-Wyatts' websites - also go back to Barron's over the last year). Note that this is only an issue for major, long-established firms. I wouldn't say that DB plans are the culprit here, though. This "pension income" under FAS-87 (which in a way is phantom as the money is still under trust and can only eventually go back to the company after payment of significant excise taxes) largely arose due to favorable investment gains in equity markets (which came first, the chicken or the egg?). Rather, I would tend to focus on the gimmicks inadvertantly provided by the implementation of FAS-87 (why do you think Cash Balance plans came into being anyway?). 2) While there was an impact on the DOW index companies, I would venture that DB plans had little or no impact on the large majority of NASDAQ companies who don't even sponsor such plans. And I think I can state with certainty that DB plans had NO impact on the stock prices of the large majority of Internet/Telco/Tech companies (do you really think that DB plans were the reason that the Amazon.coms of the world were trading at the ridiculous levels of 1999-2000?). 3) To tell you the truth, the impact of DB plans on corporate earnings really won't be felt until the next few months. I would dare to say, though, that rather than casting out DB plans, I would work to eliminate the crediting of "income" from DB plans on corporate balance sheets as it is a misleading (and nonexistent) source of revenue due to the fact that pension assets belong to the Trust, and not the company. I am an enrolled actuary with about 18 years of experience working with small qualified plans. After seeing the experiences of a few clients in the past year ("masters of the universe" managing their own assets to spectacular losses), I would venture that the safety net provided by defined benefit plans, coupled with experienced and prudent investment guidance (rather than having a "Stuart" daytrade funds to oblivion), may be in participants' better interests than the 401(k) plan. This pentup rush to defined contribution plans looks great during a bull market; however, having seen losses in the past year under 401(k) plans from 20% to 86% (yes not a typo), defined benefit plans don't look so bad after all. Respectfully, Michael S. Wyatt Enrolled Actuary Norwell, MA

Also need to know at what point you were calculating the benefit in question due to various grandfathers due to: 1) (If applicable) $200,000 limit first applicable for 1984 plan year due to Top Heavy status. 2) End of 1988 year (if not top heavy) due to 1989 imposition of $200,000 limit to all plans. 3) End of 1993 year due to OBRA '93 lowered limit of $150,000. Also don't want to even mention family aggregation (repealed in 1997). So, to help you: Was plan top heavy? When are you calculating the accrued benefit (1988 grandfathering could be very critical to check if this plan was not top heavy given size of unrestricted salaries)? To further complicate matters, in 2002 EGTRRA will (unlike past practice) allow you to increase prior year eligible compensation figures to $200,000.

Quick explanation of why 30-year rates were lower in 1998 (mainly in fall of that year): Remember the collapse of the Russian and Far East markets in the summer of 1998, followed by the averted meltdown of our markets after the failure of Long Term Capital Management? Between Fed intervention and "flight to safety" world-wide to US Treasuries, this forced yield down on the 30-year bill. This is why 30-year rate dropped dramatically in fall of 1998 (at point getting down to around 4.72%). Definitely not normal circumstances, but a bonus for participants if they were paid a lump sum in 1999 (going on assumption that plan did lookback into fall of 1998 and fixed rate for longer period than a month).

At long last, the 5500 has clarified the point that the beginning of the year count does include participants who enter on the first day of the year. The software package that we use (HyperPrep/Relius) enters the prior year ending count in the beginning of year field but it is not "locked in" (i.e., can edit this number). So you will want to add to this number those who entered as of the first day of the year. The argument of whether to include those who enter on the first day of the year goes back forever (the IRS I think tended to lean to the position that the beginning of year count should equal the prior end of year count, but the DOL/PWBA argued otherwise). Why it took this long to clarify in the forms instructions is a mystery to me (I know, if you search these Boards you can find me arguing the "wrong" position a couple of years ago ).

On the lighter side (if possible under these horrible circumstances), see page 4 of the Notice: "The perpetrators of the attack, and anyone aiding the attack, will not qualify for relief under this notice." May they roast in hell...

Look at IRC 415(f). Specifically, (f)(1) IN GENERAL: For purposes of applying the limitations of subsections (B), ©, and (e) -- (A) all defined benefit plans (whether or not terminated) of an employer are to be treated as one defined benefit plan... I don't think it gets any clearer than that, so yes, you need to offset the new limit by the benefit already received (although you should find a sufficient benefit remaining to be funded especially after EGTRRA limits kick in).