richard

#1. While typically for a large group, general testing once every 3 years will suffice, in this case, I would do it every year. I'm not sure if it is merely being prudent, though. Let's me illustrate. I have a non-safe harbor DB plan covering about 600 employees. All employees (including the 20 HCEs) receive the same formula. While we might fall slightly out of compliance once in a while because of minor employee demographic changes (e.g., an old HCE gets a large raise), the 3-year cycle is OK. In your case, you will have a separate benefit formula for a few HCEs. Here, any demographic changes on those HCEs will be magnified since they have a different benefit formula. While I can't specifically say why, my gut feel is that I would feel fairly comfortable arguing 3-year demographics with the IRS in my case (one formula for all employees) than in your case (a different formula for a few HCEs). #2 - Other than the usual stuff for testing DB plans. Often, cross-testing the DB plan on contributions works if there are non-HCEs older than the "enhanced" executives. In your case, this probably doesn't work. Careful selection of groups is powerful, along with the choice of testing method (accrual, accrued-to-date and projected), choice of compensation, and choice of testing date. Often combining this with a DC plan helps (many such plan sponsors offer profit sharing plans as well). In your case, the biggest factor that will help will be imputing disparity. (This will help a lot, though the age and longevity of your executives will be a problem.) Another idea is to phase the enhancement in gradually. (In my previous post discussing a $240,000 employee, if a 1.5% formula won't work this year, try 1.2%, and if the demographics change next year, increase it to 1.3%., etc. Be careful, here. Really tricky.) #3 - Employee relations are a problem. Whether you define the "enhanced executives" by group (which will be difficult if you would like different gross-up percentages), by job title (which I like better), or by employee name (which, believe it or not, the IRS finds acceptable --- I, however, do not), you will have the issue of the SPD to consider. Some feel that employees need only receive that part of an SPD that affects them (for example, in a plan that covers hourly and salary employees, the SPD given to hourly employees doesn't have to mention the benefit formula for salaried employees, and vice versa); I'm uncomfortable with this. As a practical matter, this can be included in the body of the SPD, and (hopefully?) most employees won't notice. Alternatively, if there are enough "enhanced" HCEs so they meet 401(a)(26) on their own (unlikely, but I'll mention anyway), you could set up a separate DB plan for them (or just for the additional benefit). The other employees then won't have to be told.

I've been reading this thread for several months now. I added a comment several months ago, and I think I'll risk adding another one now. This is directed more to the pension practitioners than to jlf. Jlf obviously is in favor of DC plans, and raises arguments and numbers that the pension practitioners have taken issue with. Here's the key dilemma. I suspect that many individual employees agree with jlf. They would rather have the money in their own accounts, invest the money with their own discretion, and reap the significant rewards. Now, let's assume that most of the arguments of the pension practitioners are correct and most of jlf's arguments are wrong (jlf, please accept my apologies and bear with me). What can/should the pension practitioners do? By the time they are proven right (a 5-year bear market, for example), the damage will be done. Worse yet, think about the following. The runup in stock prices from 1990 to 2000 has perhaps been fueled (in part) by the baby boomers reaching midcareer (currently ages 35-55). You know, supply and demand. Now look at the year 2020. These baby boomers will be ages 55-75, and will be taking money out of the stock market. With this large group of money moving for the exits, who will be buying? Demographically, the was a dropoff of births after 1965 for 10, maybe 15 years, I think. Will stock prices (and hence retirement savings) drop precariously? I don't know, but by then in a DC world, it will be too late for individual employees.

Followup to Pensiondoc's response. Can we have 1 Form 5500 filing and indicate the new plan sponsor information (name, EIN) in item 2, and fill in the prior plan sponsor information (name EIN) in item 4? (I'm looking at the 1999 5500; I don't have the item numbers for the 1998 5500 in front of me.) I guess I have two questions. First, is the above approach proper (i.e., is one Form 5500 the correct approach)? And second, will it work (I suspect Pensiondoc has already answered this one in the negative). Finally, does it make a difference if, in this example, it is a sole proprietorship that incorporates?

3 doctors are incorporated, and own XYZ Corporation that employes their staff and pays other shared expenses (rent, etc.) The doctors do not owns any other businesses or practices. Each doctor's corporation receives income from patients. The doctors' corporations reimburse XYZ for expenses, and pay themselves W2 salary from their own corporation. The staff receives W2 from XYZ. The doctors want to have a pension plan that covers the 3 doctors and the staff. Would the plan be sponsored by XYZ, and base benefits on doctor's W2 salaries from their own corporations and the staff W2 salaries from XYZ. Or, would the doctors have to become employees of XYZ and receive W2 salaries from XYZ. (In this case, would the patient revenue continue to be paid to the doctor's corporation and then paid to XYZ, which would then pay the doctor a salary? Or would the patient revenue have to be paid directly to XYZ, which would thgen pay the doctor a salary?) Any ideas? What is typical?

A QSERP is a "qualified SERP." As odd as that sounds, here's how it works. Say you've got a 1% final average pay DB plan. An executive earns $240,000 (150% of the 401(a)(17) limit). The regular qualified DB plan cannot recognize any part of his pay above $160,000. A common design is a non-qualified SERP that provides a "make-up" benefit, equal to the "regular DB formula" based on his entire pay, minus the qualified DB benefit. The SERP is, of course, non-qualified; and results in various issues(benefit security, income taxation, and FICA taxation). Various approaches (Rabbi Trusts, Secular Trusts, COLI, etc.) have been used to deal with these issues. The QSERP is an attempt to "put" the non-qualified SERP into the qualified DB plan. Since the DB plan cannot EXPLICITLY reflect the executive's entire pay, the QSERP accomplishes this using the back-door approach. The QSERP is actually the exiting DB plan, modified as follows. In this example, the DB plan would provide a 1% of final average pay benefit for all employees except for the executive, and a 1.5% of final average pay benefit for the executive. This is not a safe-harbor formula, and must be tested using the general test under 401(a)(4). [in many cases, the general test will work. However, the testing is very tricky, and significanly different from the approaches typically used to get a "new comparability" profit sharing plan to pass. Also, the general test must be performed each year.] Also, the plan formula for the executive must be (in theory) modified periodically. This would need to occur as the ratio of the executive's pay changes relative to the inflation-adjusted 401(a)(17) limit. (Stated differently, the execitive's formula would have to change if his pay raises were different from inflation.) Tricky stuff, probably not in the spirit in which the 401(a)(4) regulations were designed, probably not for the faint-of-heart, but creative.

Actually, the IRS' logic that as a rank & file employee gets older, he gets a higher contribution percentage is not necessarily true in a cross-tested profit sharing plan. The key isn't simply the employee's age; rather, it is the employee's age compared to the HCE's age. Consider a pure age-weighted plan. Assume in 1999, the HCE is age 50, and rank & file employees are ages 25, 30 and 35. In 2000, the HCE is age 51, and rank & file employees are ages 26, 31 and 36. Assume pay increases by the same X% for each employee. Assume nobody is affected by top heavy minimums or by 401(a)(17) (or the 401(a)(17) limit increases by X%). Assume disparity isn't imputed in the cross testing calculations. If the same dollar contribution is made in 2000 and 1999, each employee would receive the same dollar allocation in each year. If the 2000 contribution is X% higher than the 1999 contribution, each employee's allocation will be exactly X% higher in 2000 than in 1999. So, the older employee isn't "growing into" higher contributions in a pure age weighted plan. Now consider a new comparability plan, with the same group of employees except let's add a 55-year old rank and file employee in 1999 (who will, if my actuarial calculations are correct, will be 56 years old in 2000). Under the same set of assumptions above, I expect that we could draw the same conclusion. In other words, the rank & file wouldn't be growing into a higher contribution either. The IRS's fallacy here is thinking that the actual allocations are a percentage of pay. This would be true in an age weighted money purchase plan or a new comparability money purchase plan. But not necessarily true in a profit sharing plan. So, while there might be some merit in what the IRS wants to accomplish (though I'll not discuss this issue here), their rationale that age weighted profit sharing plans are OK because employees can grow into higher allocations as they age, and new comparability profit sharing plans are not because the employees cannot, is wrong. Now, does that mean that both types of plans should be allowed? Or that both types of plan should not be allowed? I don't know, but they should not be treated differently because of the "ability to grow older" into a higher contribution. In simply isn't so.

Aside from improved investment eduction, the most increase in participation apparently comes from increasing the match at the lower levels --- say from 0 to 25%, or from 25% to 50% ---- rather than increasing the match beyond 50%.

Is the reason you (lifeweb) want to change to a beginning of year valuation to allow the client to make (and deduct) a 1999 contribution? If so, your approach will work. Assuming they are in full funding at the end of 1999, this will delay when they will get out of full funding (simply because there is more money in the plan). But, all that does is enables the client to make and deduct a contribution now rather than later. One risk, however, is that this will exacerbate the plan's overfunding -- a potential problem if you want to terminate the plan due to the excise tax on reversions.

Lorriane: How about changing the valuation date to December 31, either using the automatic approval (if available) or going through the application process?

Literally speaking, the number of participants at 1/1 can be different from the previous 12/31; the difference being the number who entered (or who left) on 1/1 (and similarly for non-calendar year plans). For those who have followed this rigorously, has the IRS or DoL objected to there being a difference? In particular, has anyone received a computer-generated letter from the IRS (or DoL) asking why the counts are different? For the flip side, on audit, has the IRS or DoL challenged a 5500 that excluded participants who enter on 1/1 from the beginning of year count?

In response to John A: For a new or takeover client, we get the basic information via phone or an in-person meeting, or through their accountant (or other advisor). For ongoing clients, we preprint the current information and ask them to make any corrections, as necessary. We also ask yes/no questions as part of our census, similar to the 5500 questions. The asset review is an additional level of checking, so if we see something "funny" in the assets, we ask questions (like, we noticed $50,000 disappeared from the assets for a couple of months ... what happened to it?) Per tjmartens' comment; we have found getting basic information on takeover plans to be fairly simple, as long as the existing documents and 5500s can be located.

We prepare a partially filled-in "fill in the blanks" format. The ask for information on all employees as of end-of-year; we then determine eligibility. For assets, in lieu of the client filing out a form, we also accept copies of monthly, quarterly or annual investment statements, and we then reconcile the assets. The brick wall, as well as partially (or incorrectly) filled out forms is still a problem with some of our clients. How often are fee surcharges used for poorly prepared data from clients?

Notice that no citation was provided in Mr. Givens' book!

What is typically done when a participant continues to make quarterly loan payments 60-75 days late? Assuming the plan document, loan policy and loan document/promissory note are silent on this, is it typical to charge (i.e., accrue) additional interest during the delinquent period? If so, is this accrued interest added to the loan principal resulting in a larger level amortization payment or does it extend the amortization period (assuming the period was originally under 5 years). Does it make a difference if the plan covers only the owner of the business (so the investment returns on these additional loan interest payments would be tax deferred)? Thanks

Assume you use a January 1, 2000 valuation date for a calendar year plan year. If there is a plan amendment adopted July 1, 2000 retroactive to January 1, 2000, do you reflect it in full, in part, or not at all for the 2000 valuation? If there is a plan amendment adopted March 1, 2001 retroactive to January 1, 2000, do you reflect it in full, in part, or not at all for the 2000 valuation? Same pair of questions except assume you are using a December 31, 2000 valuation date for the 2000 valuation. (I vaguely remember there was an old Revenue Ruling that dealt with this -- something like Rev. Rul. 77-2 or so.)

Adoption agreement of prototype document was checked off defining compensation as to W2 plus 401k deferrals plus Cafeteria plan deferrals. Plan year end is 9/30. 1. In determining the denominator in the ADP (and ACP) test, must we use W2 plus 401k deferrals plus Cafeteria plan deferrals? If we want to use simply W2, can we? Or, what, if anything can be done to allow W2 to be used in the denominator? 2. An employee had a W2 compensation slightly under $80,000 for the PYE 9/30/99. But, his W2 plus 401k deferrals plus Cafeteria plan deferrals were over $80,000. Is he an HCE for PYE 9/30/00? Can anything be done at this time to avoid him from being an HCE for PYE 9/30/00? Thanks

What I can suggest in your comparison is to compare apples to apples. Some firms charge less (or will only accept the business) if they hold the assets (or have an affiliation with the firm that holds the assets). This is particularly true with 401(k) plans. This is because they receive additional compensation related to the investments. This also holds true for certain firms associated with insurance companies. I suggest, for comparison purpose, that either (1) the additional income be added to (or indicated separately from) the consulting/administrative fees, or (2) you limit the comparison to firms that do not accept such additional fees.

Does the company "know" it will terminate existance in year 2? While a plan must be designed to be permanent, the plan can terminate in a relatively short number of years (even, believe it or not, one year) due to unforeseen events (e.g., legislative changes making the plan inappropriate or unaffordable, business decline, merger or acquisition, etc.). I haven't seen any specific statutory rules (though I'd be interested in them if anyone has cites). What I generally tell clients, beyond what I said in the previous paragraph, is that as a practical matter 5 years is generally OK, 1 year is generally bad, anything in between is a gray area, depending on the situation, the IRS mood, etc. Can we expand this question to ask if anyone knows of any specific situations where the IRS actually took action (e.g., disqualification or other action) on a plan that was in existance for too short a time period. (By the way, if the company were considering a profit sharing plan, I agree with Malou that a SEP would in general be better.)

Hmmm. I defer to Lorraine's good catch. Now, let's see what other bright (?) ideas I can come up with. I presume the father is working at least 1,000 hours, and isn't likely to "take it easy." I presume that adding the father and reducing the daughter's benefit so that the total cost of the plan is unchanged isn't an acceptable solution. How about chewing on the following idea (alright, maybe it's a bit tricky and circumvents the intent of 401a26, but so be it). Allow the father participate. Set normal retirement equal to age 65 (not 65 and 5 years of participation). Allow for unlimited lump sums. Allow employees past normal retirement (or past age 70.5) to take their full accrued benefit ... as a lump sum. Let's say the father's pension accrual for the year is $100 per month. The normal cost for his is, say $12,000. This amount (along with the amount for the daughter) is contributed during the year by the business into the plan. At the end of the year, the father exercises his right to take his full accrued pension in cash as a lump sum -- the accrued pension is $100 per month, the cashout is $12,000. Meanwhile, the father takes a salary from the business of $12,000 less than he otherwise would have. If I've done the flows correctly, all of these hijinks put the father (and the business) in exactly the same cash position they would have been had 401(a)(26) not existed. Yes, there are some timing issues. And, yes, the funding lump sum factors would have to be set equal to the plan's lump sum factors for the father. And, yes, this is complicated. But, yes, maybe this avoids 401(a)(26). I never said it would be simple. Seriously, while this might not be the most practical solution, are there any issues that I've missed? Richard

I don't know of any easy way to add the $1 benefit to a prototype document without changing it to an individually designed plan. However, while "technically" this would become an individually designed plan, I'm not sure if the IRS would really review it (in practice) as such. Especially if it were a non-standarized prototype and you get a determination letter, this might work. I've used the technique of modifying prototypes and it has worked (maybe it's been luck so far); I haven't used the one-dollar technique, but that shouldn't be a problem. (I prefer to use volume submitter documents, especially for DB and most DC plans, because of such issues. It takes an awful lot of extra changes for the IRS to view a volume submitter document as an individually designed plan.) By the way, why does the father want to waive participation? That might give us some other ideas. Richard

I agree with Chip that you've got 8.5 months to make the minimum funding contribution. However, I'm not sure that I'm in agreement with Chip about the availability of amending the corporate return to deduct the additional contribution. Case #1 --If the corporate return was due 12/15/99 and they did not go on extension, and now they would like to amend the return to deduct a contribution made after 12/15/99, I don't believe this would be deductible (for FYE 8/99). Case #2 -- However, if the corporate return was due 12/15/99 and they went on extension to, let's say, 3/15/00, and they would like to amend the return (before 3/15/00) to deduct a contribution made after 12/15/99 and before 3/15/00, I believe this could be done and the contribution would be deductible (for FYE 8/99) I'm not really sure on either situation (hence, these are my caveated opinions), but I think this is interesting enough to warrant additional input from the readers of this thread. ...

How about giving thre father a $1 benefit?

Well, actually the "indexing" in a cash balance plan vs. a traditional DB plan is more apparent than real. Let me illustrate by way of example. Let say that Jim, a 45 year old, terminates employment with a traditional DB pension of $100 per month commencing at age 65. That is "worth" approximately approximately $3,740 when he terminates employment. (Based on an age 65 immediate pension of $1 per month being worth $120 and an interest-only discount of 6% for each of the 20 years prior to benefit commencement). If he waits one year until age 46, he is still entitled to $100 per month commencing at age 65. That pension is now worth approximately $3,965 ($120 factor discounted for 19 years at 6% per year). Now his friend John terminates employment at age 45 with a cash balance "account" equal to $3,740. The plan continues to credit 6% to account balances of terminated vested employees. (If the plan didn't credit any interest to terminated vested employees, as a practical matter, it would run afoul of IRS rules). So, one year later at age 46, his cash balance "account" is equal to $3,965. So, it appears that John's cash balance plan is indexing benefits for him after he terminates employment. But, in reality, he is just receiving the same interest that is inherent in Jim's discounted pension. (By the way, if John were to receive an interest credit of 8%, then I would agree that he would be receiving essentially a 2% COLA. However, current IRS rules make it very difficult to credit high interest rates to employees.)

Can a trade association provide a profit sharing (or other retirement-type) plan for its members? If so, what are some of the design, administration, legal issues? In the situation I have in mind, the members are individual business owners (typically with no employees). The trade association is not a union, so a multiemployer plan won't work. I suspect that here a multiple employer plan could potentially apply. If so, what would be the difference between one multiple employer plan covering participating employers, and having each employer set up separate profit sharing (or DB) plans for himself? How common are these types of plans? (I remember working on one about 15 years ago, and one key issue was whether or not screw-ups are the individual participating employer level could jeopardize the other participating employers or the overall plan.) Thanks

It's a DC plan. No 401(a)(26). Sounds fine to me.