richard

It's been quiet lately on the new comparability front. My understanding is that if a company has no qualified plan, they can put a new comparabily plan in for 2000 and 2001 (and use the current testing rules). However, if they already have a qualified plan in place, the IRS's position is that they cannot convert it to a new comparability plan (or more accurately, they would be subject to the IRS's new interpretation of the rules). If a company currently only has a SEP in place, can they put in a new comparability plan for 2000 and 2001 (and use the current testing rules)?

It is my understanding that instead of providing the participant with a Summary Annual Report, the plan sponsor can provide the entire 5500C (with schedules). Since starting in 2000, we have new 5500s (which are not the most readable), I wonder if any plan sponsors will be providing participants with the new 5500s rather than SARs. I am bringing this up because, under proposed DoL regulations (I think), the SAR has to include additional information in order to avoid the requirement that a plan with fewer than 100 participants obtain an audit.

And, I've found many situations where the client was totally unaware of this.

Also, watch out if it was in fact a 204(h) notice and those dates are accurate. If the target benefit plan were amended to freeze benefit accruals with an effective date of 5/26/99 but the 204(h) notice was distributed 5/15/99, then the 15-day requirement was violated, and the amendment might be void.

Actually, my key concern is in fact preserving the ability to do an IRA rollover when the plan is subsequently terminated. Additional background -- it is a DB plan. The employee is married. The benefit election has not been made yet. The plan doesn't provide for installment payments (but we can have an amendment signed in the bathtub to allow installment payments if this preserves the future rollover). The reason for delayed plan termination is related to potential bankruptcy issues for the next several years.

The sole employee retires after NRD, and starts taking a life annuity. 2 years later, the plan terminates, and he would like to have the remaining value of his annuity paid to him as a lump sum and transferred to an IRA. Can this be done? (The plan can be amended accordingly on plan termination if needed.)

A prototype adoption agreement was incompletely filled out and signed December 1999, effective 1/1/99. Almost all (about 90%) of the entries were properly filled out, but a key entry (the normal form of annuity) was left blank. A brokerage account in the name of the plan was also established in December 1999. Was the plan in effect on 1/1/99? If the plan sponsor doesn't completely and properly fill out the adoption agreement, I believe (but please correct me if I'm wrong) that the plan sponsor cannot rely on prototype status; an IRS determination letter would clearly be advisable. (If I'm wrong in this statement, then we have no plan for 1999 and the rest of this message is moot.) Maybe we don't have a plan for 1999 because we don't have definitely determinable benefits. I'm concerned here, since the form of benefits is crucial (the few other entries left blank were minor). Can this be solved by amending the adoption agreement now (April 2000, unfortuantely, we're past March 15) retroactive to 1/1/99 specifying the normal form of annuity (and cleaning up the other stuff)? FYI - the question for normal form of annuity had two alternative boxes to be checked -- (1) "Standard - Life Annuity", and (2) "Other", with a blank to be filled in. "Standard" was used throughout the adoption agreement; the plan sponsor checked the "Standard" box for virtually each question in which "Standard" was indicated. It could perhaps be argued that the intent(?) was for the normal form to be a life annuity? Hmmm. Finally, if this can be deemed a qualified plan for 1999 (subject to determination letter request), what normal form of benefit should the actuary assume for 1999? (I wished they called me 4 months ago!)

Jarel - your first comment leads to an interesting plan design. In your comment, you say that if you have a 401k and DB plan that have to be aggregated for testing, both plans are Top Heavy. However, if the key employee has met the 401k eligility but doesn't defer, the minimum contribution to the 401k plan for non-keys is zero. Note that the key employee is receiving an accrual in the other plan (the DB Plan), but it is apparently being ignored for the Top Heavy minimum in the 401k plan. This point is critical. Let's say instead that we have 2 DC plans. The first plan covers the key employee at 0% of pay and all other employees at 2% of pay. The second plan covers the key employee at 15% of pay; no other employees are eligible. The plans must be aggregated for testing; let's assume they pass using cross-testing. Both plans are Top Heavy. The Top Heavy minimum contribution in the first plan is zero because the contribution for the key employee in the first plan is zero; hence the 2% contribution for nonkeys in the first plan meets the Top Heavy rules. In the second plan, no nonkeys are eligible, so no benefits are required for nonkeys. Somehow, this doesn't seem right, but what am I missing?

As an actuary, I too like AndyH's method. If GATT or Treasury Bill interest rates increase in the interim, it would be hard to explain why the $20,000 actually decreased. (Actually, it would be easy for me as an actuary to explain, it would just be unpalatable to the employee.) And AndyH is right, the 417(e) could be a problem if interest rates decreased in the interim.

Take your pick. I've seen the following, all of which would be reasonable. T-Bill rate used to calculate 1/1/1999 lump sum. T-Bill rate used to calculate 1/1/2000 lump sum. Average of the above. Money market rate. Money market rate plus 1% or 2% (depending on the client)

Let's put some numbers into this situation. Doctors Smith, Jones and Williams each earn $100,000. XYZ Corp has 10 employees, each earning $20,000. The total payroll of the affiliated service group is therefore $500,000. Doctors Smith, Jones and Williams each pay for the expenses of XYZ Corp, based on some allocation method (e.g., use of staff, supplies, rent, etc.). Under the profit sharing plan, contributions of 20% of each doctor's pay will be made ($20,000 for each doctor, or a total of $60,000), and 3% of the pay of each of the employees of XYZ ($600 for each employee, or a total of $6,000). A grand total of $66,000 would be contributed, which is less than 15% of $500,000. (Stated differently, $66,000 would be contributed in total, and allocated $20,000 to each doctor and $600 to each staff employee.) I would like to have each doctor contribute (and deduct) $20,000, and XYZ would contribute (and deduct) $6,000. This is the approach suggested in Lorraine Dorsa's message. However, I'm concerned about RHP's point about the 15% of pay limit applying to each doctor. To solve this: How about each doctor contributing (and deducting) $15,000, for a total of $45,000. XYZ would contribute $6,000 for its employees and $5,000 for each of the three doctors, for a total of $21,000. A grand total of $66,000 would still be contributed. Each doctor would deduct $15,000 (under IRC 404). Each doctor would also reimburse XYZ for $5,000 (deductible to each doctor's corp as a business expense, and not under IRC 404). XYZ would take $15,000 into income, and deduct $21,000 (under IRC 404). Note that XYZ could deduct under IRC 404 the full $21,000, since $21,000 is less than 15% of its payroll of $200,000, and the $21,000 applies to its own employees and employees in the affiliated service group. Does this (complicated) approach solve the problem? Is this necessary (or overkill)? Or have I missed something?

RHP raises an interesting point. Assuming we have an affiliated service group and not a controlled group: 1.414(m)-3©(1) indicates that "the plan will be considered to be maintained by more than one employer for purposes of ... 413©(6) (relating to deductions)." Now, 413©(6) indicates that for plans maintained by more than one employer, the deduction limits under 404(a) apply to each employer separately. That seems to imply that the 15% limit applies to each doctor separately, which is what RHP suggests (which is what I'd like to avoid, though). However, I observe that the last sentense in 1.414(m)-3©(1) concludes that "Therefore, a member of an affiliated service group may deduct contributions on behalf of individuals who are not employees of that member, if the individuals are employed by another member of that affiliated service group." I don't understand how this conclusion is reached in the regulation. But, assuming the conclusion is valid, can it be used so that if Doctor Smith contributes 25% of his pay to the profit sharing plan but can only deduct 15% of his pay, XYZ Corporation could deduct the remaining 10% of his pay, as long as the 15% limit isn't violated by XYZ Corporation? (In other words, the 10% of Doctor Smith's pay plus the contribution for XYZ's staff employees cannot exceed 15% of XYZ's staff employees' pay.)

I agree that the IRS "probably" will be forgiving in this situation, and if not, the accountant (and his/her attorney or malpractice insurance company) will be significantly involved (one plan, how many years of missed filings? the other plan, how many years of materially incorrect filings?) While you want to file it correctly for this year (at a minimum, to cover yourself). However, you may want to have the client (and perhaps his accountant) determine how to actually go about it. Perhaps, sending 2 5500's with a cover letter describing the situation (perhaps, with last year's 5500 attached). What plan number will be assigned to the 2 plans? Should one plan have the old number, and use a new number for the other plan; or use two new numbers? Is this an EZ or a C/R? (I presume under 100 participants.)

If no Suspension of Benefits notice is provided, then each year the employee receives the greater of the actuarial increase of his beginning of year accrued benefit or the "regular" benefit accrual in the year. This calculation is done each year starting at age 65. So, between ages 65 and 68, merely receiving the accruals under the "regular formula" might not be enough (particularly true for long service employees, employees not receiving large pay increases, or for nonpay related plans). After age 68, the "regular accrual" is zero, so the actuarial increase must be provided. (All of this assumes your employee is working a minimum of 40hours per month, I think.)

If I read the PWBA Press Release correctly, it is clear that the 7/31/00 deadlines that would normally apply for calendar year plans is extended to 10/15/00 without the need to file for an extension. Be careful that they are NOT extending an 8/31/00 deadlines (for 2/1/99-1/31/00 plan years) to 10/15/00 without the need to file for an extension. These plans still must filed for extension; of course, the extension can be to 11/15/00. This caveat also applies for 3/1/99-2/29/00 (deadline 9/30/00) and for certain short plans years as well.

Followup on this situation. The mechanics of this will work as Lorraine Dorsa describes (thanks, Lorraine). One plan. Each business entity adopts it. One asset pool. One 5500. It turns out this is going to be a new comparability profit sharing plan. (I guess I should have posted this in that thread.) 401(a)(4) testing is easy. Is the 15% of payroll contribution maximum applied for each business entity separately, or for the entire plan in the aggregate. In other words, if the contribution for each doctor is 20% of his/her pay and the contribution for each staff employee is 5% of his/her pay, and the total contribution turns out to be less than 15% of everyone's pays (doctors plus staff), is the entire contribution deductible?

And if it turns out that he does have a claim to a benefit and you didn't give him the document, you've got an ERISA violation, with penalties of $$$

Delete "might throw them out of a safe harbor comp definition, though" from my previous comment.

Or, client could amend plan to exclude such compensation (might throw them out of a safe harbor comp definition, though). Alternatively, client could reduce the intended severance pay by the increased value of the pension benefit. This is sometimes done with large companies undergoing layoffs.

Agreed. This approach is common with larger clients. Discrimination testing is usually not a problem because of the client's size (and since this isn't really an attempt to favor the highly paid). 401(a)(26) can become a problem over the years, so watch out. Once it looks like you will fail 401(a)(26), you can terminate the DB plan, and provide the affected employees with age-based profit sharing contributions (not contingent on their making deferrals) in the 401(k) plan (or in a separate profit sharing plan). It's tricky, but it works and can keep these employees whole.

If a calendar year DB plan has a variable premium for 2000, my understanding is that an employee notice is required unless either: 1. the current liability ratio (assets divided by current liability) as of 12/31/99 is at least 90%, or 2. 80% < 12/31/99 CLRatio < 90%, 12/31/98 CLRatio > 90%, and 12/31/97 CLRatio > 90%, or 3. 80% < 12/31/99 CLRatio < 90%, 12/31/97 CLRatio > 90%, and 12/31/96 CLRatio > 90%. Where the CLRatios in each case are the current liability (measured using the highest allowable interest rate at the date) divided by the market value of assets at that date. This applies to plans with both over 100 participants as well as those with under 100 participants. Is this an accurate statement of when the employee notice can be avoided?

It appears that small (say, under 20 employees or so) companies that provides stock options to all (or most) of its employees are likely to have Top Heavy 401(k) plans. Is this correct? What I am thinking about is that key employees include the 10 employees with the most stock, including stock options (assume they all make over $30,000). [416(i)(A)(ii)] In a fairly small company with stock options for everyone (or nearly everyone), there will almost automatically be 10 key employees under clause (ii). There probably won't be any other key employees under (i), (iii) or(iv) since they generally will already be included under (ii). Now, if the company only has 15-20 employees and 10 are key, isn't it almost a certainty that a 401(k) plan would be Top heavy? In that case, wouldn't 3% company contributions required for all of the non-keys, even if they don't defer? The "key" here appears to be stock options? What have I missed?

If XYZ sponsors the plan and each doctor's business adopts the plan as a participating employer, as Lorraine Dorsa describes: 1. How would the contribution and deduction work? Would a contribution be made to the fund and deducted by XYZ for the staff employees. And would each doctor make a contribution to the fund and deduct that amount for his/her business? Or would all contributions be made (and deductions taken) by XYZ? 2. Would there be 1 5500 filing using the EIN of XYZ, or 4 separate 5500 filings, each with the EIN of the sponsor or participating employer? What is normally done? (Or is there a "normally"?)

To Ted and Andy: I've seen Ted's approach, and the IRS response (or nonresponse) is quite typical. My personal preference (call it style) is to not name individuals or specific dollar amounts. But that's just my preference and comfort level.

In my humble and biased opinion: Mwyatt's observations are entirely correct. We only use standardized prototypes when the provisions are acceptable (using these are only acceptable if there are no employees other than the owner). And yes, we've taken over plans with standardized documents that have been screwed-up royally; the client has learned a costly lesson. And that's the real message. What appears to cost zero may actually cost a lot. But, some have to find that out the hard way.