mwyatt

Just a few comments on standardized plans: One, documents I have seen recently are now requiring some sort of annual fee to use the document. Two, as previously stated, you may be tying yourself into one firm's set of investments. If the money leaves, you no longer have a document. Three, make sure that the adoption agreement is completely and accurately filled in. If you miss one item, the IRS's contention is that you have NO document (especially ugly when discovered under audit). Four, the reason a document is "standardized" is that every possible decision made is in the participant's favor. Extra costs in additional contributions that you could avoid with a nonstandardized document could very well overwhelm any savings on document preparation and submission fees. Five, I have seen cases where a standardized document was used (generally set up by a CPA or broker with limited pension knowledge) that absolutely did not meet the requirements for nonfiling (i.e., prior plan, etc.) A little anecdote is in order to illustrate the potential pitfalls of standardized documents. We had a client who sponsored a DB and a PS plan. Client left in early 90's and subsequent administrator used standardized documents for the TRA '86 restatements. The plans came back to us in 1997. Now these plans were top heavy and the client had consistently made a 15% PS contribution each year (more than covering TH minimums, right?). Wrong, as the standardized DB document stated that the plan would always be deemed to be top heavy and that the TH minimum accruals were required regardless of other plan contributions. We of course restated the document and submitted as soon as possible to eliminate these nonsensical provisions. However, that little provision in the prior DB document cost the employer over $50,000 in needless accruals to the rank and file and contributed mightily to the current underfunded status of the DB plan. IMHO, paying for a document that is thoughtfully drafted can save a client many times over the cost of a real document. I'm not advocating individually designed documents, but at least explore a nonstandardized prototype if your client has more than a couple employees; you may be surprised at how much negative savings a standardized prototype actually generates.

In response to Pax (thanks for your input): Have amendment. Entry was not eliminated as plan was top heavy at time, must have known further accruals would continue (client had profit sharing plan but no recent history of contributions). Entrants in 1996 and 1997 had TH min accrual for prior years. Entrants 1998 and on no TH service so no benefit. Plan is ongoing, not terminated. End game is to run about 4 more years to get underfunding to acceptable level to owner.

Just taken over a defined benefit pension plan that has had benefits frozen by amendment at the end of 1995. Plan was top heavy through end of 1996, and is no longer top heavy. Company is active and is just running this plan for another few years to bring funding up to an acceptable level at which point plan will terminate. My question is about participants who have entered in 1998 forward. They have no accrued benefit and will not have any further accrued benefit as sponsor has no intention of lifting accruals. I'm assuming I can amend the plan to eliminate future entrants in 2000; any way that I can eliminate the $0 benefit participants? Thought about changing definition of eligible employee to eliminate those with no accrued benefit under the plan. Would a now excluded employee with $0 accrued benefit be able to be dropped as participant (ala a deemed distribution to a terminated non-vested participant) for PBGC premium and IRS count purposes? (Count is getting close to 100 and would like to avoid additional complexity with over 100 count). Thanks for any input on this issue.

I think you really need to think this out, especially in light of an officer being age 54. Clearly the early termination restrictions apply in this case so your officer has no chance of exercising any lump sum option next year (I'm assuming that since this is a small plan that LS payments are available and that this is a top heavy plan). Remember also that TH minimum accrual percentage of 2% is NOT adjusted downward for earlier NRA so the front-loading for non-key employees is going to get even worse. The real point is that your plan is underfunded before the change in NRA; moving to an earlier NRA will make it worse. Your substantial owners are only going to be able to make their exit under the Early Termination restrictions of IRC 401(a)(4) or upon plan termination they are going to have to reduce their benefit. I'd try to project out to some reasonable wind up date and see where liabilities end up before proceeding.

How well funded was this plan prior to the change in retirement age? Although your sponsor may want to do this, I would at least check out where your funding status will be after amendment to make sure you haven't created an underfunded plan here.

First, you may want to dig out a copy so you can review the actual language. Going on memory (I haven't seen an offset plan since 1989) I believe the key statements concerned the earnings history for the individual. I recall 6% being an acceptable prior salary history backwards scale (for prior years before employment with the plan sponsor) or using National Average Earnings as an acceptable substitute. I also recall that you had to provide the participant with the ability to get their actual earnings history from SSA to use in the calculation. If I remember correctly, for terminated vested calculations we always got the actual earnings history from SSA before releasing any calculations for distributions.

Nope - see the other thread Andy (IR specifically references SI plans in 2000-14). I put a hyperlink to Notice 2000-14 there for your use.

Andy: IRS's logic in exempting age-based plans is that a rank and file employee can grow into the higher contribution levels by virtue of increasing age; the same rank and file employee (unless he somehow gets into the favored class) stays with the lower contribution level forever. In brief, contributions under an Age-Based plan vary due to participant's age (and everyone gets older last time I checked), which is not necessarily related to their HCE status (although I must admit I haven't set many AB plans up where the owner is 30 and the staff are all in their 50's). [Edited by Dave Baker on 07-26-2000 at 04:16 PM]

Jeez, I guess my boss attended the right session after all (see IR Notice 2000-14).

I would suggest that you all look at IRS Notice 2000-14 immediately to see the IRS's line of reasoning. It appears from first review that no "significant" rewrite of 401(a)(4) would be necessary. Rather, they would extend the Benefits Rights and Features language to the composition of HCEs and NHCEs in each Contribution class (this will blow up about every New Comp plan I've designed and I bet everyone else has concocted). They explicitly said that age-based plans would not be affected by proposal. In reality, where someone finds a "loophole" in the law, it gets exploited to the point where the results are clearly odious to the average person (i.e, the press, IRS, congress, etc.). I tend to think that this is what happened in this instance. Obviously this Notice just was released so nobody has had a chance to discuss what to do with existing or new CT plans, but I'd have to think that you should at least inform your clients that after spending extra admin fees, legal fees, and a $1250 IRS user fee in 2000, that their plan design is probably null and void in the immediate future. (The IRS fortunately did see that changes would be made prospectively). In our neck of the woods (Boston), given the extremely low unemployment rate and the difficulty of attracting/retaining good employees, we've found in the last couple of years (especially with conversions of existing structures) that proposal results may be great but that the fear of insurrection of staff has stalled any plans from coming to fruition. I always thought that these plans were a good idea to implement in an economic downturn, not such a good idea when times are robust.[Edited by Dave Baker on 07-26-2000 at 04:15 PM]

One point to consider: IRS has confirmed (at the '98 IRS meeting) that anything contributed over the maximum deductible amount in the year of termination is 1) deducted over a 10-year period, and 2) that the 10% excise tax on nondeductible contributions applies for the remaining 10-year period! As you can imagine, point 2 is a real kick in the pants to the poor sponsor trying to make up the funding at termination. Run the math (say $100,000 put in over and above what is deductible; then year 1 the client gets a $10,000 deduction and pays a $9,000 excise tax). This is a pretty ugly result. Note also that the over 100 life modification to the Current Liability limit only allows you to bring funding up to Current Liability. Given low interest rates in 1999, what you owe (especially if lump sum options are available) on distribution probably will exceed Current Liability. It helps, but not to the full extent that you may need to settle all lump sums. In any event, small plans can't avail themselves of this relief due to the 100 life limit. When you work out the excise taxes due, we've found that the client is better served (if possible) going with the Substantial Owner Waiver route and making up the shortfall (the $100,000 extra going in also generates $45,000 in excise taxes which is not very palatable to anyone).

Just a followup to clarify the testing procedure: First perform Ratio Percentage Test using CT contributions converted to accrual percentages only. Usually fails. Second, perform Nondiscriminatory Classification Percentage Test again ONLY on CT contributions converted to accrual percentages. Adjust contributions until you pass this test. (Aside: passing this test is required before you proceed to Average Benefits Test). Third, perform Average Benefits test using ALL sources determined on accrual basis. This means adding in deferrals and matches to equation. If fail, go back to square one. Anything I missed here? (Again, I usually look at the Average Benefits Test before and after adding in deferrals and matches. Usually adding in deferrals, etc. makes results better - but for comfort I want to make sure that my CT allocation could pass on a "stand-alone" basis).

What we've found in the past concerning a final short year filing is that if the filing deadline (including 2 1/2 month extension) falls prior to the time that the new forms are released, then the IRS will accept the prior year form. However, if it falls after the date that tne new forms are (or should have been) released that you will get a reject letter and ask you to resubmit on the new forms. You might want to wait until new forms show up unless your deadline is near. If your client is really anxious go ahead, but let the client know that the filing may need to be redone due to chance of IRS rejection.

Really stupid question here concerning this post. In determining the ABP, you have your discretionary (cross-tested) contribution converted to accrual rates. Do you also convert the Deferral and Match to accrual rates or do you leave these as is (contribution rates). What do you view as the correct answer for ABP? In one sense adding the Deferrals and Matches into the equation should tend to make it EASIER to pass the ABP as the ADP and ACP tests tend to limit the wild disparities (on a contribution basis) that you see in the Cross-tested discretionary contribution.

Sounds like a good idea to me. I'm in the same boat with a small pension consulting firm where the primary focus is on DC plans. Would be glad to correspond on any issues (around here all I get is "My Eyes Glaze Over" most of the time). My e-mail address is mwyatt@ziplink.net Michael Wyatt Newton, MA

I could understand the need to approximate the PBGC variable run if this was back in 1983 when we all were using "state of the art" IBM PCs with 256k ram and two floppy disks, but this is 1999 with a little more computer power available to all for a fraction of the cost. I'm not trying to be flippant, but I really don't understand why you don't just run the numbers using the PBGC interest rate. Most of the software packages I've seen provide for all of the various runs to be processed at one time anyway. If you have the current benefits calculated, why is it such a problem to do one extra valuation run (if not already calculated with the regular valuation?).

Let me see if I get this straight (assume a calendar year plan). For example, you are doing the Premium for the 1999 year beginning 01/01/99, so the following liabilities would need to be calculated: 1) If General Test, use Accrued Benefit as of either 12/31/98 or 01/01/99, run on your Current Liability assumptions and the PBGC interest rate 2) If Alternative Calculation, take results from prior 1998 Schedule B as of 01/01/1998, which is the 01/01/1998 Accrued Benefit valued on Current Liability assumptions, then adjusted using the methodology described in the instructions to Schedule A. By virtue of what you are proposing, you already have the 01/01/99 Accrued Benefits calculated and valued on Current Liability assumptions. I think that the biggest reason (as previously mentioned) for using the Alternative Calculation method is that this benefit has not yet been calculated; if you already have the 01/01/99 benefit determined, I wouldn't think it would be such a big deal to run using the PBGC required interest rate.

You state that she received an "18,000 annual benefit". Do you mean she is receiving some form of an annuity? If so, then I would think that since payment is being paid over lifetime, then the 10% excise tax would not apply. Need more details; did she (or is she continuing to) receive annuity payments or did she get a lump sum? Maybe tax due was for underwithholding? More details would be helpful. If she is receiving an annuity then the 72t tax is inapplicable.

I recognize a fellow Massachusetts practitioner when I see one. "04" is referencing the Employer Identification Number. The IRS is requiring that plans get a separate EIN for the plan itself. This number should be used for identification on any brokerage accounts and for transmitting distributions from the plan. (If you think about it, using the plan sponsor's EIN on the brokerage account is asking for trouble when the IRS's computers are finally up to snuff. We had a client with a corporate audit recently where the reviewer was asking about a bunch of dividends, etc. from the plan showing up as unreported on the 1120. For this reason alone a separate EIN for the Plan makes a tremendous amount of sense).

I guess that my small plan bias is showing here. All of my clients are anxiously awaiting the repeal of IRC 415(e) and are welcoming the springup in accrued benefits. We primarily use Corbel documents in our office and looking at the language I would say that it is not incorporated by reference (given the choices that you need to make wrt dominant plan, etc. in 415(e) I don't know if I've seen any documents that incorporate solely by reference). My focus was on comments by the IRS that I would need to amend these plans early to take advantage of the springup of accrued benefits rather than waiting for the end of the remedial amendment period. [This message has been edited by mwyatt (edited 11-23-1999).]

I always remember the maxim "no good deed goes unpunished". (We tried to do the TEFRA restatements early and then had the pleasure of starting all over when REA came along - not fun in the pre-Laser printer days). At this point in time no document providers have language available that has been approved for post-1998 GUST changes (in fact the IRS has not yet even opened up the program for the Corbels of the world to even submit their master language for approval - supposedly this will open for prototype sponsors by the end of 1999). If you want to get a head start on the restatement process this might be a good time to make sure that all of your files are in order (i.e., amendments signed, DLs located, etc). However, generating documents at this point in time would only invariably mean that you get to do the same work again in the future. Now having said that, it does seem that in the DB world that there may be some amendments that you may want to consider making sooner than the restatement in year 2000. 1) If you haven't yet amended your IRC 417 rates to use the GATT interest and mortality structure, you might want to get this done soon to have in place for year 2000. It appears that the IRS is taking the approach that if you wait until the restatement in year 2000 that you may need to do double calculations (i.e., both PBGC and GATT min lump sums for payouts) in 2000 and pay the greater of the two. 2) The IRS is taking the position that unless your document incorporates IRC 415(e) solely by reference, that you will need to amend before being able to take advantage of the year 2000 repeal. Any comments on these last two points would be appreciated - just going from memory from the recent ALI-ABA Pension Law Update.

I think Jon brings up a good point as to the minimum level. AK, what is the specific threshold you are talking about in your situation? There is a big difference between a $1-5k minimum and a level so high as to only effectively include HCEs. My original post showed that the IRS's position is that if the practical effect is to exclude all NHCEs then you have a problem, even if the limitation is set by the broker, not the plan itself. As another example, let's say your sponsor is trying to decide on the investment options. Many mutual funds have a minimum initial purchase amount (say $1000). I don't think that the IRS or DOL would have a problem with this as a choice in your plan. However, if you wanted to add a "Hedge Fund" option with a minimum purchase of $100,000, what do you think the IRS would think of that (although the limit is set by the fund, not the sponsor). In essence, the dollar threshold is the important criterion here in determing BRF. [This message has been edited by mwyatt (edited 11-19-1999).] [This message has been edited by mwyatt (edited 11-19-1999).]

The following is from the 1999 "Gray Book" from the Enrolled Actuaries Meeting and consists of a question posed to James Holland, Harlan M. Weller, and Richard Wickersham. Here is Q&A #19: Nondiscrimination: Nondiscriminatory Benefits, Rights and Features An employer has a profit sharing plan with individually directed accounts at a major mutual fund house. The participants are all being given the option of electing to use an investment manager for their accounts if they so desire. The management fees would be paid directly from the participant's account. Only the HCEs have account balances at the minimum amount necessary, as established by the investment manager, to be serviced by the manager. There is a concern that the use of investment managers by the HCEs would violate the benefits, rights and features requirements of the non-discrmination rules. Is this an issue? RESPONSE Yes, there is an issue. If the option of using individually directed accounts is only effectively available to HCEs, the plan is in violation of the nondiscriminatory benefits, rights and features requirement. (end of Q&A) As anyone familiar with the Gray books responses knows, there isn't a whole lot of evasiveness in this response by IRS and Treasury. I would do some more research before proceeding (just because it is the broker who is setting the limit does not get the plan off the hook). What is the minimum amount for self-direction and the qualification percentages for HCEs and NHCEs? If the level is say $5000 and you have a mix of qualification levels then this is certainly a different situation where the level is $100,000 and only HCEs qualify. If effectively only your HCEs qualify in your situation then I would have to think you have a real problem (as you probably would know on a gut level). [This message has been edited by mwyatt (edited 11-17-1999).]

Generally, if both the DB and DC plans are ongoing plans, then the safe harbor buyback of the 1.25 multiple is 7.5%. The one situation where I can see the 4.0% being used would be where you had a terminated (not frozen) DB plan and you need to buy back 1.25 multiple to get a DC contribution for your key guy. Of course, next year when 415(e) goes away, you would want to look at this situation as there is no "buyback" needed.

One point to consider (some research may need to be done to verify): I think that if you do offer this option, the lump sum will NOT be eligible for rollover as payments were already being made in a periodic fashion. I seem to recall a case back in the late 80's where someone had commenced receiving payments from a profit sharing plan over their life expectancy and then when the plan terminated took the remaining balance and rolled to an IRA. The IRS disagreed and stated that the final lump sum was ineligible for rollover and could only be recognized as ordinary income in the year of payment. I guess the point is that you should be very sure that these lump sums will be eligible for rollover before proceeding; otherwise your client (and the participants) will be very upset if they take a lump sum and can't rollover the balance. Any comments?