mwyatt

One other point to consider with the payment of expenses from a Plan, including administrative costs, is the expense assumption used in the annual actuarial valuation. If the employer has in the past paid all expenses, and now wants to have the plan pay these annual expenses, the actuary needs to modify the expense assumption. In reality, the contribution goes up to reflect these expenses (and hence lower net investment return). In essence, no free lunch (unless of course we are talking about an overfunded plan).

Our VP just got back from ASPA and said that the general consesus was that cross-tested plans may be on the way out (given the increased scrutiny of aggressive plans in general owing to the cash-balance episodes of this summer). Anyone care to comment on this opinion (not mine, my boss's - however, a Democratic house in 2001 should surely bury these plans - my view).

Actually, the pre-GATT mortality table used for IRC 417 purposes was the mortality table specified in your definition of actuarial equivalence. So if your plan defined actuarial equivalence to be the 1983 Individual Annuity Mortality Table (pre-retirement only) at 5.0% per annum (a fairly generous set of assumptions but common in small plans), the PBGC minimum would be calculated using the PBGC interest rates with the plan specified mortality table. This of course pointed out the problem with REA in the first place. The PBGC rates are developed in conjunction with the UP84 tables and try to mimic the current market cost of providing an annuity. Of course, most insurance companies aren't using 25+ year old mortality tables in pricing annuity contracts. Therefore, in recent years the PBGC has had to "floor" their interest rate to somewhat match current market conditions. However, note that REA only had you use the interest component; if you had more liberal mortality assumptions in your plan document, the 417 minimum benefit really went off the charts. This is one of the primary reasons that the GATT rates tie the interest and mortality assumptions together.

This was just released at Corbel' website: http://www.corbel.com/news/indnews091799.asp The gist is that the program for prototype sponsors may open up by the end of December. Looks like things may be on track for 2000 after all.

Does anyone have any idea or heard any rumors as to when the IRS will open up the determination letter process for GUST amendments/restatements including post-1998 language. We're trying to gear up for having to restate all of our plans next year and the more time available the better off we'll all be.

This one is a real "kick in the pants" from the IRS under current law. Essentially, anything that the employer puts in over and above what you can justify on the Schedule B for the year in which the plan terminates is deducted over a 10 year period. Unfortunately, the amount is subject to the 10% excise tax on nondeductible contributions during that time (this was confirmed by both Holland and Wickersham at the 1998 EA meeting). So if an employer puts in 100,000 over the amount able to be deducted on the last year Schedule B, in year 1 they get a $10,000 deduction and a $9,000 excise tax bill. As you can see the math is not too good. For this reason the "Substantial Owner Waiver" approach (if available) is a far better way to go.

So sorry, but taxes are due on the total amount of reversion prior to payment of the excise tax (remember, excise taxes are never deductible so this makes sense). So if you had a $100,000 reversion, you would have a $50,000 excise tax, and additional income for personal taxes of the full $100,000. This is the reason that you see so many "creative" schemes developed to deal with the overfunded DB plan (w/ respect to 415 limits).

I've just received two separate reject letters from 5500EZ filing clients regarding a non-valid actuary enrollment number. In both cases I signed in April 1999(after receiving reenrollment confirmation in March) using the "99" prefix. Is anyone else getting these reject letters? I remember from past messages that the IRS was extending the validity of the "96" prefix through the end of April as they were late in sending out the confirmation letters, but I didn't expect that this would cause properly filed Sch Bs w/ the "99" prefix filed in April to be rejected. Any comments/suggestions (I've got a call into the IRS now).

Look to the Top Heavy Regulations for the answer to part 1. I assume the first question is regarding TH testing for the 1998 plan year. Determination date for the 401(k) plan is 12/31/97 (last day of preceding plan year). DB plan would ordinarily use a determination date of 12/31/97 (computed using the actuarial valuation date occurring during 1997 - so 1/1 if BOY val, 12/31 if EOY val). As you point out, there are no benefits as of 12/31/97 in the DB plan (since not effective until 1/1/98). However, there is an exception for first plan year. I believe for 1998 you would use PVAB under DB plan as of 12/31/98 (computed as if plan was not TH). In future years you would go back to 12/31 of year preceding testing year. (Just a thought: what if DB benefits originally computed w/ no TH minimum @ 12/31/98 put plans in TH status, but then when you recompute 12/31/98 DB benefits including TH Minimum the percentage slides back to under 60%? - doubt the regs cover this situation ). I think you need to look at the regs again for combined coverage. Your plan language specifying which plan provides TH min only applies to those participants covered under both plans. If a group is in the 401(k) but not in the DB, the 3% minimum applies; again, a careful reading of the final TH regs (albeit back to 1985) should provide the solution. As an aside, I had posed another question concerning TH that noone wanted to take a stab at, so I'll restate it again. Ran into a plan that is TH, but as part of their eligibility provisions provided that a certain classification of employees was excluded from participation (surprise, surprise it is a medical practice). My concern is that these excluded employees have generally satisfied the standard 21 and 1 YOS requirement and would participate if not for the excluded category of employment. The TH regs reference that employees who are not participants because they have not elected to defer or who have not reached a given level of compensation (going back to the old excess only days) but have otherwise satisfied eligibility requirements must receive the TH minimum. The excluded class of participants is not directly addressed in the regs but my gut feeling is that these participants should have been receiving the TH minimum. Any thoughts on this matter?[Edited by Dave Baker on 07-27-2000 at 03:59 PM]

Looking at the Regs, 1.401(a(4)-2(B)(2)(i) states: "(2) Safe harbor for plans with uniform allocation formula. (i) General rule. A defined contribution plan satisfies the safe harbor in this paragraph (B)(2) for a plan year if the plan allocates all amounts taken into account under paragraph ©(2)(ii) of this section for the plan year under an allocation formula that allocates to each employee the same percentage of plan year compensation, the same dollar amount, or the same dollar amount for each uniform unit of service (not to exceed one week) performed by the employee during the plan year." I think that given your situation, it appears that you do have a safe harbor design. You should also look at your Determination Letter filing (if any) as Appendix A (now Schedule Q) indicated whether the plan was filing as a safe harbor. Your DL would also state if the plan is qualified as a safe harbor plan. As an aside, fairly uncommon plan design (most owners would rather skew on compensation rather than hours worked). This is a design more commonly seen in a Union plan than a single employer plan. [This message has been edited by mwyatt (edited 06-10-99).]

If I understand you correctly, the contribution is allocated solely on hours worked (with some sort of check for IRC 415, 404 issues, etc.) I would tend to bet that given the physical limit on hours worked during the year that the "Safe Harbor" issue is moot since if anything, I would think that this type of plan either includes no Highly Compensated Employees (if I owned the company I sure wouldn't sign up for this type of plan design) in which case there is no issue, or if you did look at the General Test that you would pass incredibly easy. More details please?

I concur with Dave Baker. That is the approach that I've taken on the few plans we've done. I think that this is the best approach as your original calculations presumably generate the "optimal" (i.e., the minimum amount necessary to get your principals the maximum amount and satisfy 401(a)(4)) contribution level. From this, subtract your forfeitures to determine the net amount to be physically deposited. The Trustee instructions then state that the Employer will be contributing $X and that forfeitures of $Y will be reallocated under the terms of the Plan. The total amount of $X plus $Y will then be split between your classes. This gets your allocation back to your solution and I don't see how the IRS would object as everything is spelled out in the Trustee instructions.

Another point to consider is the taxes due on the transfer. If your client has a cost basis of $20k for example in the potential transfer, and the current market value is $30k, I would have to think that capital gains taxes would be due on the increase in value. Keystone tended to focus on the illiquidity of the non-cash contribution (I believe it was a trucking terminal in the Keystone situation). Plus other issues are raised as to the real value of the nonpublicly traded security (is the true value higher or lower than the "market value" specified by the client - it is easy to imagine the abuse that could take place). We tend to get our clients to contribute cash to be on the safe side- usually bringing up the capital gains tax is enough to discourage all but the most persistent. What are other people's thoughts on this subject?

The IRS addressed this type of situation in the Gray Book from the 1999 Enrolled Actuaries Meeting. The question dealt with a similar situation wherein a special brokerage feature was only available for a given account level. In the question, only HCEs had such balances. The questioner argued along similar lines that the brokerage firm was supplying the constraint, not the plan. Unfortunately, the response was that there would definitely be issues with the Benefits, Rights, and Features of the 401(a)(4) regulations. (While the usual disclaimers applied in the Gray Book, the panelists included Jim Holland, Harlan Weller, and Dick Wickersham, all high level IRS representatives). Here is Question #19 from the 1999 Gray Book (apologies if I'm breaking any copyright laws): Q: 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-discrimination rules. Is this an issue? A: 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. [This message has been edited by mwyatt (edited 05-13-99).]

Called in to review a case where a plan is filing a Standard Termination with the PBGC. There exists one individual who retired over 10 years ago and who elected 10 Year C&C Annuity (this is a small plan that offered lump sum option - uncommon for someone to elect an annuity form to say the least). Retired participant has been receiving monthly payments since then. Another firm is doing the plan termination. In the course of termination, they sent distribution packages out to all participants, including the retired participant, showing a lump sum optional form of payment. My thoughts are that the participant has already made her election of form of payment and that Plan must purchase an annuity contract providing monthly payment for life (10cc guaranty has long expired). I don't see why lump sum option would be available to a retiree at termination (already turned it down at retirement). In addition, if I recall past readings, that if she somehow was able to elect a lump sum, that the lump sum would be ineligible for rollover as she has been receiving periodic distributions, so that amount would be currently taxable. Any comments would be appreciated (this is a rank and file employee by the way, not the owner's mother or any such nonsense).

Answer is (a) . Instructions from IRS Form 5500 clearly state this under "When to File". As cite, "File all required forms and schedules by the last day of the 7th month after the plan year ends. For a short plan year, file the form and applicable schedules by the last day of the 7th month after the short plan year ends."

Recently had a plan brought to my attention that is top heavy and also provides that a certain class of employees is excluded from participation. The question is whether these employees who would otherwise be eligible to enter the Plan (over 21 and completed 1 Year of Service) but for their employment classification have to receive the top heavy minimum contribution. The 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; they don't mention employees in excluded classes of employment who are not participants. What are peoples' thoughts on this situation (admittedly pretty rare as most TH plans usually are of such small size that exclusions would probably run into ongoing 410(B) problems).

IF you are subject to the quarterly contribution requirements, there might be some way of pulling the money out (I assume this was an end of year valuation where the employer contributed during the year). Look back at the material (circa 1988-1989) where this was addressed. If you are not subject to the quarterly contribution requirements I agree with you, money stays in (and the employer pays $8,000 in excise taxes on nondeductible contributions).

Look at DOL Regulation 2530.203-2© for the rules. My original analysis is correct (doesn't matter if it is first year or not). So for prior example, have two measurement periods to consider: 1) 10/1/98-9/30/99 (start of short year) and 2) 1/1/99-12/31/99 (and calendar year thereafter). The key point to note is that a change in plan year will usually accelerate vesting service by "double counting" service. Client should be aware of this implication when changing the plan year. Anyone who terminated prior to the beginning of the short year is clearly unaffected by the amendment. Here is the DOL regulation in question: © Amendments to change the vesting computation period. (1) A plan may be amended to change the vesting computation period to a different 12-consecutive-month period provided that as a result of such change no employee's vested percentage of the accrued benefit derived from employer contributions is less on any date after such change than such vested percentage would be in the absence of such change. A plan amendment changing the vesting computation period shall be deemed to comply with the requirements of this subparagraph if the first vesting computation period established under such amendment begins before the last day of the preceding vesting computation period and an employee who is credited with 1,000 hours of service in both the vesting computation period under the plan before the amendment and the first vesting computation period under the plan as amended is credited with 2 years of service for those vesting computation periods. For example, a plan which has been using a calendar year vesting computation period is amended to provide for a July 1-June 30 vesting computation period starting in 1977. Employees who complete more than 1,000 hours of service in both of the 12-month periods extending from January 1, 1977 to December 31, 1977 and from July 1, 1977 to June 30, 1978 are advanced two years on the plan's vesting schedule. The plan is deemed to meet the requirements of this subparagraph.

My understanding of the short year rules is that a vesting year starts from the beginning of the short year and also at the beginning of the next plan year following the short year. In your case of a short year 10/1/98-12/31/98, vesting would be measured on 10/1/98-9/30/99 and then on 1/1/99-12/31/99. So, your 12/31/98 valuation would basically reflect the vesting service @ 9/30/98 (unless someone really needs to get a life); the double bonus of service would reflect in your 12/31/99 valuation. Your person terminated prior to the beginning of the short year so their vesting service is unaffected by the change in plan year.

Just received letter from IRS (dated 3/25/99) over the weekend. You should get letter (if not already received) in next couple of days.

Per IR Announcement 99-25: "Applications for Renewal of Enrollment should have been Filed by March 1st. The Board has noted that there is a wide spread impression that credits necessary to meet the CPE requirements for re-enrollment that were not earned by December 31, 1998 could be earned in January and/or February 1999. This is contrary to the regulations. However, the Board recognizes that, in the past, certain circumstances called for relaxation of the rules and that what has happened in the past might have been taken as a precedent. As result, the Board will not deny re-enrollment to those actuaries solely because they fulfilled their CPE requirements in part with credits obtained in January and/or February 1999. However, the Board will require that Enrolled Actuaries who have availed themselves of this relief should, in a signed letter to the Board, disclose the number of hours of credit thus obtained and how they were obtained (e.g. identify the course taken, when and where the course was taken, etc.). Those credits earned in 1999 will not count towards meeting the requirements for the next enrollment cycle. Such administrative relief will not be available at the end of the current re-enrollment cycle (April 1, 1999 through March 31, 2002) for credits earned in January and/or February 2002, nor will it be available in subsequent re-enrollment cycles. Enrolled Actuaries who are unable to complete their CPE requirements by the end of the last full year of the cycle will be expected to provide the Board's Executive Director with an explanation of the facts and circumstances which made it impossible for them to meet the requirements in a timely fashion. Four-digit Enrollment Number This notice provides enrolled actuaries and other interested parties with a reminder of the Joint Board's position, which was adopted some years ago, on a matter where some confusion has arisen in the past. The confusion arises regarding the prefix to the four- digit enrollment number an enrolled actuary should use when signing a schedule B after December 31, 1998, but before the earlier of: (1) receipt of official notice of reenrollment, and (2) April 1, 1999. Accordingly, enrolled actuaries are advised that: (1) An enrolled actuary is not permitted to use the (in this case 99-) prefix until such time as he/she has been officially notified in writing by the Joint Board of his/her entitlement to do so. See the Instructions for Schedule B. (2) An enrolled actuary who has not yet received official notification from the Joint Board should use the 96-prefix if he/she signs a Schedule B in the first three months of 1999. The IRS Service Center will not reject the 96- prefix for a signature date during this three month period. The 96-prefix will be rejected for a Schedule B where the signature date is April 1, 1999 or later. Paulette Tino, Chairperson Joint Board for the Enrollment of Actuaries" Now, where this leaves us poor folks between 4/1/99 and the receipt date I'm not sure. My guess is that you have to use the "99" prefix as of tomorrow (see the last paragraph) as it will be rejected. Wait until letter is received before signing any further Schedule Bs?

Actually, you COULD have a maxed out DB plan and a 25% of pay MP plan in place. However, as mentioned you wouldn't want to do this as the IRC 404 25% combined plan limitation would still apply and the annual deduction would be limited to the greater of 25% of eligible compensation and the amount required to fund the DB plan. Anything above that amount would be subject to the 10% excise tax on nondeductible contributions (including, in future years prior contributions not yet deducted) so that this would certainly not be in the client's best interests. Also, both plans are subject to 412 minimum funding requirements, so that an obligation exists to fund both plans, regardless of 404 consequences. I have seen some language or references to fail-safes under a MP plan which cuts out the contribution if a 404 violation would be in place; in practice, most clients utilize a DB/PS combination, using the PS plan to "top up" to the full 25% of pay. Given the client's age of 57, it is probable that a DB plan could be established generating contributions well in excess of 25% so that there would be little point to establishing a companion DC plan.

I guess that I was focusing on the fact that you had no 415 compensation paid for the individual so that the DC denominator would be a summation of $0. You do raise an interesting point as to whether the past service could be included (for high 3 year calcs I imagine) if the owner was not an "employee" during this time frame as no W-2 wages were paid. Assuming this is an aggressive plan design this might not be as significant as the participation reduction on the dollar limit would most likely override any calculations. I suppose one could argue he was an employee with 0 wages during this time in order to use the past service.

In response to Pax's "what if"? If the entire prior history was as a Sub-S with no compensation, only dividends, then your problem goes away (or maybe an uglier problem rears its head) as there shouldn't have been any prior DC contributions as there was never any eligible compensation paid to the principal. You could use prior service but in all likelihood part limit on 415 $ limit would limit benefit accruals from past service. (Trick question w/ Sub S dividends?)