richard

Tom, If I understand your January 9 post, is the following a correct application to the following situation. ADP test is failed for 2007. 6 HCEs will receive refunds by March 15. However, 1 HCE (whose refund would be $3,000 including interest) terminated employment in mid-2007 and rolled his entire account balance to his own IRA in late 2007. Since the $3,000 cannot be taken out of his 401(k) account and refunded to him now, that $3,000 is considered as a refund and is taxable to him for 2007. Is this correct? If this is correct, what happens to the $3,000 that is now sitting in his IRA? Richard

How about the following variation on a theme (new client which I just picked up). This is the third year of their safe harbor 401k. 5 owners, 15 employees. They have a safe harbor match (100% of the first 3% of pay plus 50% of the next 2% of pay) And they have an additional fixed match of 200% of the first 6% of pay! Does this plan design meet the safe harbor ADP and ACP rules? Also, are top-heavy minimums automatically satisfied? Other issues that I can handle --- all 5 owners are contributing the maximum and none of the 15 employees have ever contributed, despite having been provided with safe harbor notices. (Yeah, I know the questions this might raise.) And in year 1, they started this as a brand new plan 30 days before the end of the year, not 90+ days (this is not a new company, so I know year 1 was blown badly The client will enjoy hearing this). Richard

My instinct is that new elections would have to be offered, and that a QJSA would have to be one of the options. This is, after all, an additional benefit provided via plan amendment, and not part of the original accrued benefit. (My rationale is that when an employee elects a $10,000 lump sum instead of a $100 per month pension, he is not committing himself to an ultimate $11,000 lump sum instead of a $110 per month pension.) I suspect that the large plans that have offered ad hoc COLAs provide it to the employee in the form of benefit already in effect, without giving the retiree any choice. If so, either they have done it wrong (but as a practical matter, the retirees wouldn't care, since they would normally elect the same form anyway), or my instinct is wrong (which is always a distinct possibility!).

Another approach I've seen (particularly in the 1980's) was where companies philosophically adopted a policy of ad hoc COLAs every 3-5 years desired to replace X% (such as 75%) of the cost of living increase since the last ad hoc COLA (or the employee's retirement date, if later). Then, we (or they) calculated the percentage increase that applied to the different cohorts of retirees, based on retirement year, that approximated the desired X%. The trade-off was the simplicity of the formula vs. matching the desired X%. Often, a fixed percent per year since the last ad hoc COLA (or the employee's retirement date, if later) came close enough.

A fidelity bond equal to at least 10% of plan assets is generally required. The minimum required bond is $1,000, the maximum required bond is $500,000 (ERISA Section 412). 1. I thought the maximum required bond had been increased to $1 million. Is this correct (or am I dreaming)? What is the site? 2. If a plan sponsor maintains 2 plans, each with assets above $5 million, can a single $500,000 bond that covers both plans meet the bonding requirement, or must the plan sponsor obtain two separate $500,000 bonds. (This assumes that the maximum required bond is still $500,000.) I suspect that two bonds must be obtained. Thanks

I've always shown the contributions in Form 5500 as the contributions "for the plan year." In other words, I take the contributions actually made during the year, add the receivable as of the end of the year, and subtract the receivable as of the beginning of the year. Pretty standard stuff. (And of course, the contribution agrees with the tax deduction taken.) Recently, I've seen (and taken over) a number of plans where the contributions shown on the 5500 were the contributions actually made "during the year" --- and excluding receivables. 1. If I transition to the "for the plan year" basis, I will wind up including an extra contribution (the end-of-year receivable) in my first 5500. So, the contribution shown in the 5500 will not equal the deduction. (Of course, in future years, everything will be fairly normal.) Any problems with this approach. 2. Or, can I stay on the "during the year" basis? And, if the IRS questions the deduction vs. the 5500 contribution, explain that the difference is due to the receivables. (Assume that this is not a DB plan.) This has come up several times on 401(k) plans where the employee contributions and assets were taken from the mutual fund statements (there were no company matches), and the receivable was ignored. The receivable is simply the employee's deferral in the last week of December that wasn't sent to the mutual fund until early January. Shouldn't the ADP test be done based on contributions deferred for the year (and not contributions actually made during the year)? Shouldn't the 5500 include those late December deferrals?

Both the old allocation method and the new allocation method would be OK as far as being definitely determinable. In other words, once the company makes its contribution, it has no discretion on how it is allocated; it merely follows the terms of the document. More important is the question of what is accrued? (And its corollary, what cannot be taken away?) Does an employee accrue a right to an allocation method for a specific period of time during the year? Actually no. The employee only accrued a right to contributions once they have been allocated to him. And they are allocated to the employee only when the employer "declares" his contribution, which technically is done as of the end of the year. (By "technically," I mean that an employer should declare their profit sharing contribution with a Board Resolution. I realize that this is not always formally done.) So, since the contribution (and its allocation) aren't "official" until the end of the year, there is no accrual until that time. A sidebar on this. IRS rules are generally set up to be consistent internally. In other words, the IRS generally does not allow you to do "X" directly, but allow you to accomplish "X" indirectly. This discussion of whether a change in allocation formula during the year is an example. Note that you could not change the allocation formula after the end of the year retroactive to the beginning of the year. In other words, by December 31 (in a calendar year plan), the allocation formula is cast in stone. The alternative of setting up another plan (like I described in by previous comment) doesn't work, since the other plan would have to be established by December 31 to accomplish this change in allocation formula. Consider, as an alternative, a money purchase plan. Here, once the employee has met the requirements for a contribution (say 500 hours without a last day requirement), the employer cannot reduce the formula for the entire year. The approach of freezing the first money purchase plan and establishing a second money purchase plan with a reduced formula doesn't work, because even if you freeze the first plan, the employee still gets the contribution. As a final example, there was a debate about 3-5 years ago about whether the allocation formula in new comparabiliy profit sharing plans (i.e., different contribution percentages for different groups of employees) was definitedly determinable. The IRS originally objected, but later relented (and agreed that it is definitedly determinable as long as the plan document is carefully written) in part because one could accomplish the exact same thing by establishing several separate profit sharing plans, each covering the specified group of employees and excluding the other groups. I'm not aware of any examples whether the IRS didn't allow "X" directly but allowed "X" indirectly. Sorry for the lengthy response. Hope this helps.

I agree with Mo Agains's comments. #1 - one has to be careful with the wording of the amendment, but that really shouldn't be a problem for someone competant. #2 - If you're currently in a safe-harbor, you'd have to do the general nondiscimination test, but unless you've got some weird changes in payroll midyear, passing should be easy. If you're currently not in a safe-harbor and already using the general test, this design should probably not make the testing any more difficult to perform (you still test annual allocations vs. annual compensation even it the annual allocations are determined based on the sum of two semiannual allocations), nor more difficult to pass (unless again you've got some weird changes in payroll midyear).

My understanding is that you can amend a profit sharing plan's allocation formula at any time prior to the end of the plan year, even if the eligibility for allocation in that year has been met by any participant. The rationale here is that there is no obligation to make a contribution; therefore, no right to allocation is "accrued" until the contribution is determined. For those who don't like this answer, one could accomplish the same thing by adopting another profit sharing plan before the end of the year, retroactive to the beginning of the year, with the desired allocation formula. Then make the desired contribution to the second plan and no contribution to the first plan. (Note that with a money purchase plan, this doesn't work since the contribution is "accrued" once the eligibility requirements are met. Therefore, once cannot amend a money purchase plan to take away these contributions once accrued.)

Is a 5500 required for a premium-only cafeteria plan? If it has more than 100 participants, is an audit required?

Say we have a pension plan with age 65 normal retirement and a lump sum feature (using GATT rates). Also, let's say that for funding purposes, the actuary is assuming 7% preretirement interest and that all employees will take a lump sum at the assumed retirement age of 65. Currently, the GATT rates are about 5.2% and the PBGC interest rate for the variable premium is about 4.5%. For valuation purposes, the actuary uses the current GATT rate to determine the lump sum. Is the present value of vested benefits for PBGC Variable Premium purposes equal to the lump sum (calculated at 5.2%) discounted at 4.5%, or the value of the age-65 life annuity discounted at 4.5%. The former will obviously produce a lower PVVB, since the lump sum (per the actuary's assumptions) will be less than the age-65 value of the annuity at the PBGC's 4.5% discount. As a second question, I have seen actuaries assume lump sum will be paid, but do not assume the current GATT rates will remain constant. Rather, they assume a specific GATT rate in the future (for example, 6.5%) in the funding calculations. In this situation, would the PVVB for PBGC purposes be calculated as the lump sum (determined at 6.5%) discounted to the present at the PBGC's 4.5%?

And why did you fire them the first time? And why did you take them back?

Actually, the laws are complex with good reason. Otherwise, experienced practitioners would allow clients to deduct more than the IRS would allow. For example, consider a individual sole proprietorship (with no employees) who nets $400,000. He sets up a pension and profit sharing plan like yours, and contributes the legal maximum of $30,000. He then thinks, "hey, if I incorporate half of my business and keep the other half as a sole proprietorship, I can net $200,000 from each and have a $30,000 contribution for myself for from each. Gee this is nice." Or the person earning $2 million who sets up ten corporations, with net earnings of $200,000 in each, and a contribution of $30,000 from each. Or, why don't I set up 2 companies, one that employs me (with a pension plan) and one that employs my other employees (with no pension plan). Not a bad idea to avoid contributing for those other employees. Or, if that won't work, why don't I simply lease those other "employees" so they won't even be my employees. Gee, I could have an entire business with one employee (me) and 10 non-employees, a/k/a leased employees. And no pension contribution for any of them. None of these approaches work, because the law has evolved nearly 30 years to prevent them. I (along with most contributors to this thread) could give additional examples --- suffice it to say the complexity in the law is deliberate, and prevents unwanted consequences, i.e. abusing the system. As far as Schwab's people not being familiar with these nuances, this applies to most investment brokerage firms (or banks or insurance companies) involved in this business. They make their money by HOLDING AND INVESTING YOUR PLAN'S ASSETS. They set up the pension documents as a loss leader (either as a freebie or at a significant discount to market rates). They do not make any money on administrative or consulting questions. They also only provide the types of retirement plans that they can understand and can support. The questions you ask are actually quite routine for experienced practitioners --- but not routine for Schwab (or others). That's why the people on this thread exist, because there are a lot of complex rules that become simple only after 10-20 years experience.

In the situation at hand, there actually is an old determination letter (from 1986 --- yeah , I know, there will be other problems when we restate at the end of this year). And the client is willing to indicate that this is the current plan.

It is typically not the best practice for an actuary to sign a Schedule B if the client (or his advisor) provides only an unsigned plan document. But, it is a violation of ERISA, etc., if an actuary does so? On takeover cases, I've sometimes seen prototypes (either standardized or nonstandardized) that are unsigned. That doesn't necessarily mean that there isn't a copy somewhere that has been signed. And the actuarial valuation and Schedule B signed by the prior actuary reflects plan terms consistent with the unsigned document. And when I push, a signed document is generally sent to me. However, what happens if the original signed documents simply do not exist. Assuming (for the moment) that they were truly signed, there is obviously no direct evidence of the existance of a plan. The indirect evidence would be -- the client has been operating assuming he has a valid plan, the prior actuary has been operating assuming he has a valid plan, the investment firm has been operating assuming he has a valid plan, etc. Now, this would of course become an issue when obtaining a determination letter, but that is often delayed, courtesy of 401(B). Meanwhile, there is an ongoing valuation requirement and a 5500 requirement. What to do in this imperfect situation --- ideas?