richard

I beg to differ somewhat. While this approach does have a lot of downside for the unsophisticated and unaware, it can be very beneficial for the sophisticated and aware. Let's face it, we are accelerating a nice tax deduction. However, we should not minimize the downside risks. The actuarial assumptions are aggressive but potentially defensible. (My preference is generally not to assume retirement before age 55, later if possible, and to use an interest rate of no less than 5.5%. The actuary can calculate the resulting contribuiton and discuss the additional contribution versus the additional audit risk.) The plan will likely be overfunded on an accrued benefits basis for the next several years. Therefore, if something goes wrong with your business and you want to terminate the plan before you turn 53 or 55, you probably will have more assets in the plan than the value of your benefits -- this would incur a large excise tax on the excess. The cost of your employee must be factored into the analysis. Also, are you prepared in the next several years to continue to make large contributions? Will your cash flow support it? There are many techniques that can be used to provide contribution flexibility, but aggressive assumptions sometimes require aggressive techniques. Your actuary should discuss this with you. Perhaps have him run some scenarios for the next several years so you can see what will result (and what he is comfortable with). Depending on the sophistication of the actuary and your facility with numbers, this is often useful. (I've seen this done particularly with clients who are scientists or engineers; they understand this stuff fairly quickly.) Good luck.

Be careful. Depending on how the plan is written and how the law operates, the rehired employee might get a windfall. I've seen it in the following situation. The former employee who was paid out his lump sum had the right to "buy back" his old service by paying back to the plan the amount of his lump sum, plus interest -- with interest at a rate of 5% per year. Worse, the former employee might have until 5 years after his subsequent termination of employment (that's right) to do so. This was particularly valuable to the former employee since the plan was a final average pay plan (it would be even more valuable if benefits had been improved in the interim). It was not clear how much of this information (i.e., the option to buy back his benefit or how truly valuable this was) was actually presented to the employee; that was up to the plan sponsor. It, as usual, was not contained in the SPD.

I agree with Paul and Andy. If an employee works at least 1,000 hours in (generally) a plan year, he/she gets a year of vesting service even if he terminates employment during the year. In other words, there is no "last day rule" here. The way I think of it is if the employee works at least 1,000 hours in "the required 12-month period," he gets a year of vesting sevice. Here, the "12-month period" extends beyond the employee's termination date, with the actual number of hours worked (or equivalencies, if used) being credited before termination date, and zero hours being credited after termination date.

A near-bankrupt plan sponsor of a PBGC-covered pension plan has decided to not make its required minimum contribuiton. As a result, they have a funding deficiency, with a resulting 10% excise tax on the deficiency. They file a timely Form 5330 (as of the due date of the contribution) without paying the 10% excise tax. (They either don't have available cash or more likely have more pressing needs for the available cash.) What are the consequences of this? Will the consequences of this change if the plan sponsor declares bankruptcy? Also, they have to notify plan participants of the funding deficiency. Does the inclusion in the SAR that "an actuary's statement indicate that they have not made the contribution requirement; the deficiency is $X," or words to that effect, meet that requirement. (I think the answer is yes.) Finally, they will be notifying the PBGC of the funding deficiency; clearly it is a reportable event. Do they have to notify the PBGC that they have not paid the IRS' excise tax? (I think the answer is no.) Some additional background. There are no controlled group issues. The plan does not have a variable premium liability (since it is based on vested benefits), but if it terminates shortly (which it will), it will not have sufficient assets to cover accrued benefits --- however, the owner is willing to reduce his benefit to cover the diffence. (This is gonna be fun!)

Other differences ... "Pay" for the purpose of the qualified plan is generally compensation AFTER deduction of the pension contribution, adjusted for FICA contribuiton. For a sole prop, an owner's "pay" for this purpose is the bottom number of 1040 Schedule C minus the pension contribution, minus a FICA adjustment. Also, note that for a sole prop, the pension contribution for the onwer is subject to FICA.

You are asking two questions: 1. Can you allow a terminated vested individual to take an immediate lump sum without offering an immediate QJSA? No. The immediate annuity (admitted a very small monthly dollar amount) must be offered, although, as a practical matter, virtually no employees will take the tiny monthly payments. I wouldn't be surprised, however, if these monthly amounts are not being calculated or offered in practice --- the employee's won't mind, but would the IRS? 2. Assuming you offer the alternative of a QJSA, can you permit a terminated vested individual to take an immediatly lump sum only if he rolles it over to the employer's new plan? This question, in a slightly different form, was asked recently in an IRS conference is the Los Angeles area. The questions that was asked was "assuming you offer the alternative of a QJSA, can you permit a terminated vested individual to take a lump sum ONLY as a direct rollover to an IRA." The intend of the question was twofold -- to keep money in the retirement system (prevent leakage), and to help the plan sponsor avoid the administrative hassle of the 20% witholding and related filing. The IRS representative indicated he thought it would NOT be permitted, although it was late in the session and (subjective opinion follows) the questions was somewhat unclearly presented. Any thoughts or experience by other readers ...

OK, it's a profit sharing plan. Here's a suggestion that might work if and only if there have been no benefit payments in the interim. Let me caveat this by saying that I have had informal discussions with the IRS and they disagree with my approach, however. Assuming that no benefits payments have been made, I would calculate what the allocation of contribution should have been in each of the affected years. I would also recalculate what the allocation of investment earnings should have been in each year. In effect, I would be redoing the allocations for each year, as they should have been done. This places the plan (and the employee accounts) in exactly the same position as it would have been had the work originally been done correctly. My rationale is that allocations must be done annually; however, I am not aware of anything that prevents one from doing the allocation FOR a given year several years later. Also note that no changes in Form 5500 would be required. Now this falls apart in several circumstances. If benefits have already been paid based on the original inaccurate allocations, this doesn't work. If benefit staetments had been provided, this probably doesn't work. If the terms of the profit sharing allocation require a specific allocation of contributions to categories of employees (for example, with the new comparability plans), it is harder to argue that the specific allocation can be determined several years after the plan year. Again, the IRS informally doesn't buy this (I actually discussed this with them in the context of a hypothetical situation involving obtaining revised salary information for past years, but the concept is the same). I haven't had to use this approach in an actual situation, but perhaps this might help. Richard

I presume what you've described is a profit sharing plan. If however, you have a plan with an explicit contribution for rank & file of 5.75% and an explicit contribution for owners of 25% (thus maximizing their contribution), you've got a money purchase plan. And now, you have funding deficiencies, with penalties (and 5330 filings) and the need to refile old 5500s. I'm probably wrong (I hope) and that your plan is technically a profit sharing plan. In that case, refer to the other comments in this thread.

I was able to get the mortality rates from the prior actuary for this 1993 GAM table. When I get a chance, the plan will be amended to use a more common mortality table. But, it looks like I've gotten what I need.

Is there anything that would prevent a new profit sharing plan require immediate payment of lump sum benefits only if the amount of lump sum is less than $2,500 (not $5,000)? Also, what would be the impact on 401(a)(4) testing if the same profit sharing plan allowed participants to receive their lump sums (above $2,500) immediately upon termination only if they are over age 55, while participants who terminate under age 55 would have to wait two years to receive their lump sum. During the two years, the lump sum would participate in investment performance of the plan. The catch is the only participant over age 55 is, naturally, the owner! I'm thinking about benefits, rights, or features here. (The business owner's rationale is to prevent his employees from quitting work solely to get their hands on the lump sum. It's not a highly educated work force.) Thanks

For a small company that is terminating a PBGC-covered DB plan that is underfunded on a termination basis: If I understand the rules correctly, a standard termination (as opposed to a distress termination) can be used if either (1) the plan sponsor (a corporation) agrees to contribute the amount necessary to make the plan sufficient, or (2) the majority owner agrees to take a benefit cutback. Is this correct? I also feel that item 2 is superior to item 1, since the plan sponsor probably cannot use the tax deduction. Does this make sense. Finally, if there are two 50% owners (exactly 50%), does that mean that both must agree to a cutback, either can, or neither can (since neither is a majority owner). [in this case, one of the two owners died about a year ago, which contributed to the demise of the business, etc.] Thanks

Does anyone have a copy of the 1993 GAM Table, for males and females? (1993, not 1983) I cannot find it. I'm having trouble using The Society of Actuaries mortality table feature, although it appears that this table isn't listed in their tables, anyway. If you've got it in text or excel formal (or a link to the actual q's), I'd appreciate it. Thanks

While the DoL's position is that certain payment of expenses are not allowed, are there any specific situations where the DoL has challenged an actual payment. And what happened? Did they fine the plan sponsor? Did they just negotiate so the plan sponsor reimbursed the plan for all (or some) of the payment. Or did they do something more serious?

I recognize there is no such thing as a "normal" match to a 401(k) plan. It depends on the company size, their industry, whether or not there they offer other plans, their compensation philosophy (pay vs. benefits), etc. Ignoring all of that, what is a "normal" match --- more specifically, in the internet, software, computer industry. Admittedly, surveys can only provide rough guidance. But, I'll take what I can get. (My starting point for a match in consulting situations is 50% for the first 6% of compensation. Gee, what a concept. And then I go up or down depending on affordability, etc. But here, the issue is not only affordability, but business competitiveness.) Thanks

I do make sure that SSAs are filed timely. However, I recognize that if a participant is subsequently paid out and he isn't "un-SSAed", there could be confusion 20+ years from now. I wonder what proof must be provided and who must provide it in this case. Can the former participant place the burden of proof on the plan sponsor by saying "here is the notice by the Social Security Administration." Can the plan sponsor simply say that we paid you (and not provide any further proof), and we did not have to un-SSA you? Even without a SSA requirement (or for that matter, let's say that an SSA wasn't done), what proof does a 65-year-old have to provide in claiming a benefit, and what proof does a plan sponsor have to provide in a benefit denial? Even a large plan sponsor is unlikely to be able to access 20-year-old data (even without a change in recordkeeper/administration). Now a small or mid-sized company, I suspect, will not only have gone through several recordkeepers/administrators, but the plan will probably have been terminated and all assets distributed in the interim. So now we would have the participant claiming a benefit from a plan long since terminated. Any thoughts on who has to prove what? (Gee, I hope I'm unSSAing these people!)

Greg, The word "stupid" does come to mind. And in consulting in a situation such as this, I'd probably be able to convince management that this isn't the best way to go (I hope). However, there have been many times that management has disagreed with me, and then it's my role to make it work as best as I can. That includes making sure that the legal niceties are all lined up, and advising them on some of these employee relations / communications issues. And then I duck! Yeah, "stupid" does come to mind. (Seriously, though, I'd be interested in what advantages this approach would have for management.)

Let's assume the company properly defined who is an HCE, the plan is properly amended (or contains language that allows discretion in restricting deferrals by HCEs), and the SPD/SMMs are issued properly and timely. Let's think about this from the company point of view. They could do nothing, and after the end of the year, retroactively cut back the HCEs using the IRS's procedures specified in their regulations (or was it a revenue ruling). Or, they could prohibit HCEs earning above a specified pay level (say $170,000) from future deferrals. This might be workable especially if the company has a nonqualified 401(k) make-up plan in place. Or, they could limit future deferrals for all HCEs to a certain percent of pay. Maybe, limiting them to 3% of pay prospectively. The lottery approach dramatically hurts some HCEs and doesn't affect other HCEs. I'd say the approach is unusual, but probably is allowed if done carefully. However, to avoid hurt feelings, they should have made the lottery known to employees before doing it. Essentially, they could say that rather than giving a little pain to a large group of employees, they'd rather give more than a little pain but to a small group of employees. (OK communications consultants out there, you can say this better than I.) Even in a large organization, the total number of HCEs should be manageable, and they should have been contacted beforehand. It's unfortunate that this approach caused hard feelings. My personal bias would be to inflict a small amount of pain on a large number of HCEs, but thats just my thought.

The letter you describe might work. I'd prefer filing an incomplete 5500. If it bounces, then I'd use the letter. If it doesn't bounds, then make an amended filing later on. The DoL has said in public forums they'd be lenient. What lenient means is anyone's guess. Also, if being lenient means backing off after they send a nasty letter to the client, I'd have a different definition.

This is a typical problem for small companies starting DB plans. While the dollar amount of PBGC premium is small (as long as you don't have unfunded vested liabilities), the timing for the first year is problematic. This is particularly true with an end-of-year valuation, whereby work for 1999 (for example) isn't generally done until early 2000. By the way, what is the penalty for the late PBGC filing. If it's interest on the late premium (due to time value of money) plus interest on the late premium (because you've been a "bad boy"), aren't the amounts pretty small? If so, how about filing late for 1999 without an interest payment, and let the PBGC send a bill for a tiny amount. If you don't file at all for 1999 and the PBGC sends you a notice, what is the potential penalty?

Interesting point you make. Since there is still a requirement that the 5500 be filed with the IRS, perhaps one can take the position that since the DoL will forward the 5500 to the IRS, you are in effect filing with the IRS.

Let me see. Three things can possibly happen. 1. The filing can be accepted in its entirety for 2000 by the IRS/DOL. Everyone's happy. 2. The entire filing will be rejected because one page doesn't have the requisite bar codes. This would be an unfortunate result (note my penchant for understatement.) I suspect that this would be unlikely (but don't quote me) because the filing of the Schedule P is optional. 3. The filing can be accepted except for the Schedule P. Now, if I understand correctly, the Schedule P starts the statute of limitations period for the fiduciary for whom it is filed. In other words, it protects Putnam. So, if I am correct in this, Putnam is (in theory) hurting themselves. Am I correct? (By the way, I suspect that they will all get their act together in the next year or two, and the IRS/DOL will be extremely lenient.)

Several years ago, the IRS (or Joint Board, I forgot who) pronounced that an actuary must have verification that a contribution was actually made in order to sign a Schedule B reflecting that contribution. That essentially prohibited the then popular "to be made before September 15" on Schedule B's, and often leads to timing difficulties approaching the filing deadline. First of all, who made the pronouncement, and what is the cite? Second of all, which of the following would, by itself, be considered as acceptable verification? 1. Copy of cancelled check 2. Copy of investment or bank statement showing the posting of the contribution. 3. Signed statement by the plan sponsor stating that "a contribution of $X was made on ________. 4. Signed statement by the plan sponsor stating that "a contribution of $x will be made on _____. 5. Oral statement by the plan sponsor stating that "a contribution of $X was made on ______. 6. Oral statement by the plan sponsor stating that " a contribution of $X will be made on ____. 7-10. Items 3-6 provided by the plan sponsor's accountant. 11-14. Items 3-6 provided by the plan sponsor's investment advisor/stock broker. I feel comfortable with accepting #1, and not accepting any of the oral statements (by either the plan sponsor, the accountant, or the investment advisor/stock broker. I'm also not comfortable with any of the signed statements by the accountant or investment advisor/stock broker. What is everyone out there comfortable with? Third of all, does anyone know whether the Joint Board or IRS disciplined any actuary for failure to comply with this pronouncement?

The California IRS agents give us no problems when we request TINs for pension/profit sharing trusts. I suggest you thank the agent for his/her time, and dial again. Odds are you'll get another agent!

There are many varous types of early retirement subsidies (reducing or waiving the early retirement reduction, granting additional years of service, increasing pension amoutns by 10%, or whatever else the mind can come up with). The time frame that you require the employee to make a decision must be reasonable --- you cannot say on Monday that we must have your decision by Friday! Watch out for employees who retired shortly before your announcement of this window -- they may want to be included. In fact, there have been recent situations where the company's managers must tell employees of possible early retirement windows -- even before they have been finalized. (Generally, at some point when the windows are being seriously considered, that fact must be disclosed!) FAS88 issues can be summarized and the amounts estimated by your actuary. Don't forget to consider the impact on any post employment benefits (health care, etc.) that you may offer. Will this be extended to them as well? The benefit increase must not be discriminatory under 401(a)(4). From a cost standpoint, you can calculate the maximum potential cost if every eligible employee took the window. Now you can limit the cost by saying only the first 50 eligible employees (for example) who apply for retirement can get the window. (The calculation of "cost" is very tricky, since it is not only the pension cost but the additional business costs --- salary, other benefits, retraining, etc. --- as well.) A major issue, more a business issue than merely a pension issue, is "who will take the window, and who will remain." In the early days of this stuff (about 15-20 years ago), the "good" workers took the generous windows, and the workers who you would prefer if they left actually stayed. So, companies had to rehire their good employees, either as employees (which raises other issues) or as consultants. If you're a public company, think about what you'll say on your SEC filings. Can be very tricky stuff, so think it out thoroughly.

A 75-employee company has a non-standardized prototype 401(k) plan. The adoption agreement provides for entry no sooner than the first of the quarter after employment, which the company selected. The company has been administering the plan to allow employees to participate immediately upon hire, with no wait. Many employees did so. They are willing prospectively to make employees wait until the beginning of the quarter, but the plan has been administered contrary to the document for the last 18 months. What to do? The company DOES NOT want to repay the employees who deferred to early. So, I don't believe self correction under the IRS APRSC program would work, since they aren't correcting anything. (The amount's are probably at least several hundred dollars for at least a dozen or so employees.) I also don't thing the VCR or SVC program will work, since again they do not want to repay the employees. (Let's assume that no HCEs were in the affected group. I'm not sure about this, however.) Any ideas?