richard

Don N's idea of applying the Alternative Calculation methodology to the current year's Schedule B liabilities raises an interesting thought. Using the General Rule, do we have to run an actual valuation at the RIR using current year data to calculate a PVVB, or can we adjust other valuations that use the same current year data to arrive at the same result? (It is critical that we use the current year data.) For example, let's say these calculations are for the 2000 PBGC Variable Premium. Assume the RIR is 6%, and we already have computed PVVB at 5.5% and 6.5% (perhaps for funding FASB or other purposees), using 1/1/2000 data. Alternative #1 - Rather than running an additional valuation at 6%, could we average the PVVBs calculated at 5.5% and 6.5%? Perhaps. Alternative #2 - Assume instead, we have already computed PVVB at 8% (for funding purposes), and have run no other valuations. Could we "adjust" the 8% PVVB to 6% using the PBGC's adjustment factors? Perhaps. In my oft-laughed-at humble opinion, we could make a case for using either alternative #1 or #2 subject to issues of materiality and bias. (I personally would be comfortable with #1 but not with #2; though as a practical matter, I would simply perform the additional valuation at 6%.) PVVBs are not exact amounts; they are based on 1/1/2000 data (which can have hopefully immaterial errors in them). [Note that the PBGC reserves the right to audit the underlying data and require a revised calculation of PVVB.] These PVVBs are calculated using valuation systems that make approximates insofar as employee data, and use rounding conventions, and other calculation experiencies. In general, these are (hopefully) immaterial and unbiased. Would an approximation under #1 be likely to cause any material errors? Is it biased? I don't think so, hence an argument could be made to use it. Would an approximation under #2 be liked to cause any material errors? Is it biased? It can be, particularly in valuing actives and terminated vesteds. The 15 year deferral inherent in the PBGC's liability adjustment formula understates the adjustment needed in a young (weighted by liability) employee group, and overstates the adjustment needed in an old (weighted by liability) employee group. The 0.94 adjustment factor for the immediate annuity could be biased depending on the form of annuity, the underlying interest rates, and the normal retirement age. In both cases, the biases could be material especially if there is a significant diference between the interest rate used and the RIR (in my example, 8% vs. 6%). Therefore, I believe this approach could be acceptable if used carefully (e.g., adjusting from 6.1% valuation rate to 6.0% RIR), but could also be improper. Enjoy.

Are you suggesting that one might calculate (or interpret the PBGC rules to allow one to calculate) the current year's PVVB using the "roll-forward and adjust" methodology from the prior year's PVVB instead of actually calculating the current year's PVVB (based on the current year's employee data)? If so, it's an interesting suggestion although I don't think that would be allowed. The idea behind the PBGC's Alternate Method was a response to actuaries who were unable to calculate exactly the current year's PVVB in time for the PBGC's filing due date. (Yes, in large plans, the actuarial valuation for a January 1 plan year is sometimes completed between September and December of the year.) (Also, this saves the small plan actuary the hassle of calculating an additional liability -- not a big deal today with software packages.) While one virtually never does any actuarial calculation "exactly" (there are always data assumptions and valuation shortcuts), the "rollforward and adjust" approach does not use current year's data, and therefore (in my occasionally humble opinion) would not be acceptable.

In response to Pax's 11/29 message: Item 1. Allowing employees to "rollover" DC account balances to cash balance plans allows them to lock in the investment return credited in the cash balance plan. It can be a fixed return, a return tied to an economic index (such as CPI or Treasury Bill rate), or a return tied to a financial markets index (such as the S&P). Either way, this gives the employee an opportunity to tailor his/her investment choice to his risk tolerance. Can the employee find similar products in the financial markets. In some cases (such as S&P index), yes. In others (such as CPI, not exactly although inflation bonds --- TIBs are a close surrogate). Also, there are insurance products than can accomplish some of these things. But do employees know of these choices -- some do more so than others. Also, there are commissions, expenses and other fees that must be borne by the employees outside of the cash balance plan. Item 2. Also, allowing employees to "rollover" DC account balances to traditional (non cash balance) DB plans allows them to guarantee a lifetime income for this amount of money. Yes, they can accomplish this by buying a commercial annuity. However, employers might offer "better" conversion rates in return for "long and valuable service." (And if not, the employee can simply buy a commercial annuity.) So, items 1 & 2 are essentially giving employees an additional option. Item 3. These moneys and benefits would be subject to PBGC insurance. There is no insurance for DC assets. Buying a commerical annuity does get insurance at the state level; this has historically been excellent (with certain notable exceptions), but not perfect. Item 4. Finally, this would be an additional way to get employees to appreciate what DB plans (either the traditional or cash balance variety) have to offer.

Does that mean that a TPA domiciled in a state that does not require a license cannot service a client based in a state that does require a license (e.g., Texas, Kentucky or Ohio)? What about a client that is based in a state that does not require a license but has employees covered in the plan in a state that does require a license? And while we are on the topic, for the purpose of licensing, what does "TPA" mean? After all, TPAs do lots of things, including administration (with full fiduciary responsiblity), ministerial administration (without fiduciation responsbility, if structured correctly), consulting, actuarial services, etc.

There are some nonqualified plans that are subject to SOME of the requirements of ERISA. (e.g., a Top Hat Plan). There are some nonqualified plans that are subject to ALL of the requirements of ERISA (e.g. a Defined Benefit Plan covering all employees of a company that provides for 20 year vesting). And, there may be nonqualified plans that are subject to NONE of the requirements of ERISA (I cannot think of any examples, however). The appropriate person to answer this is an ERISA attorney (which I am not) -- especially if particular details are involved, and not simply any attorney.

Employer XYZ has two owners; nobody else works for this company. The two owners are paid through a "leasing organization" ABC; their W2's show the EIN of ABC. They show no W2 income from their own EIN. (I think this is how this is structured.) Can XYZ sponsor a pension plan using this income? What other questions are important in this situation?

There is a fly in the ointment. The client is a cash-basis taxpayer (in Connecticut, if this matters). His accountant has no problem with the contribution in 2000 not being deductible in 1999 (because of the timing of the contribution). However, he indicates that it cannot be deducted in the corporation's 2000 tax return because it is for a prior year --- 1999 --- and not for 2000. The fact that cash basis taxpayers can deduct pension contributions accrued at yearend is a specific exception to usual treatment of expenses by cash-basis taxpayers. That's not the issue here. It sounds like the situation here doesn't apparently fall within this exception. Unless I have a specific cite to the contrary, I prefer not to disagree with the accountant. (So, if you all have some specific cites, I appreciate them.) (By the way, does it matter if this is an S or C Corp?) So, in my example, the $35,000 would not be deducted in 1999 or in 2000! Following this logic, it would never be deducted. Would it become part of the basis upon benefit payout? Also, would it be subject to 10% excise tax each year until them? Thanks.

Very interesting issues you raise. Some observations. I don't know of any authority that would permit (or prohibit) transferring DC accounting into DB plans and crediting them "benefit accrual -- cash balance type" interest. However, assuming one can do so, I believe that these assets and liabilities becomes part of the DB plan, since the investment risk is transferred to the plan and away from the participant. (Note the contrast with 414k accounts.) That being said, these assets and liabilities would be subject to PBGC insurance premiums. Also, these assets and liabilities would not be DC accounts, so the PBGC shouldn't have any problem insuring them. (In fact, they would welcome it, since, at least initially, the liabilities would essentially be fully funded.) Would the rollover assets be so large that the DB plan would no longer be a DB plan? Since, according to my logic, these become part of the DB liabilities, your question becomes moot. I have seen 414k assets and liabilities (which are DC accounts in DB plans) being as large as 75% of the total plan (DB+DC) assets without problems, however. As far as crediting higher interest accruals for HCEs vs nonHCEs, this is no different than in a regular cash balance plan. It can be done but can cause major problems. Although the actual rollover would not be subject to 401(a)(4) [except for the effective availability requirements, so you couldn't offer the ability to rollover only to HCEs], the interest accruals are subject to 401(a)(4) just as any other benefit accrual, and would have to be tested accordingly. Different interest crediting rates could cause other problems involving 417(e) and 411(a) backloading as well. If it sounds complicated, it is. And from a public policy perspective, I believe these rollovers do make quite a bit of sense. (All of this represents my very humble opinion, and should be considered as such.)

Can a DB or DC plan established in 1997 have the following provisions for active employees (non-5% owners) over age 70-1/2? A. Assuming they are still actively employed, they must start taking their distribution by age 70-1/2 (actually the April 1st, etc.) as if they were 5% owners. B. Assuming they are still actively employed, they must wait to take their distribution until they terminate employment. (No problem here, right) C. Assuming they are still actively employed, they are given THE CHOICE of taking their minimum distribution by age 70-1/2 (and each succeeding year) or waiting until they actually terminate employment to receive their distribution. (Any issues of contructive receipt here?) Any differences between DB and DC Plans? Any differences between plans in effect prior to SBJPA and those established after SBJPA? Thanks.

Question: Can an individual who is eligibile to participate in a 401(k) plan but chooses not to do so contribute to a deductible IRA? An individual earning above a certain dollar level cannot contribute to a deductible IRA if he is a participant in a qualified plan. In a profit sharing plan, to "participate" means to receive an allocation of contribution or forfeiture. Also, an employee cannot "waive" participation in a plan to become eligibile for a deductible IRA. So, what about a 401(k) Plan? If an employee is eligibile for the 401(k) plan and doesn't elect to defer, can he make a deductible IRA contribution? Does it matter whether or not there is a match? Thanks.

An individual terminated employment from Company X, and rolled his DC balance into a rollover IRA. He is now employed with Company Y which maintains a DC plan. This DC Plan accepts IRA rollovers. He would like to roll over PART BUT NOT ALL of his IRA account into Company Y's DC plan. Does the IRS allow him to do so?

Does the following idea work (or what's wrong with what I have in mind?) Company X sponsors a DB plan for its one employee. Both the business and the plan are 12/31. 1999 minimum required contribution is $60,000 and maximum deductible is $80,000, similar to prior years. The business owner would like a small deduction for 1999, around $25,000, and then return to his "usual" deductions (60-80K) in future years. Let's assume that changing the plan formula, assumptions, funding method, etc. are not options. I propose that he make a $25,000 contribution on or before 3/15/00, NOT go on corporate tax extension for 1999, and make the remaining $35,000 contribution between 3/16/00 and 7/31/00. With this approach, he will have made his required 1999 minimum contribution by 7/31/00 (and met minimum funding standards), but only $25,000 would be deductible for 1999 (since the other $35,000 was made after the corporate tax deadline). I think that works for 1999. But what about 2000? Assuming the min/max for 2000 is again 60-80K, I would suggest him contributing $45,000 on or before 3/15/01, NOT going on tax extension for 2000, and contributing the remaining $15,000 between 3/16/01 and 7/31/01. In this case, the minimum funding requirement of $60,000 would be met for 2000 (the $45,000 contribution and the $15,000 contribution). $80,000 would be deductible for 2000 (the $35,000 contributed in early 2000 for 1999 but not deducted because it was contributed after 3/15/00, plus the $45,000 contributed before 3/15/01 for 2000). The $15,000 contributed before 7/31/01 (which was used to meet the 2000 minimum funding requirement) would be deducted for 2001. 2001 and later years would be treated similarly. Did I miss anything? [several points. I recognize that the contribution timing is extremely critical and must be coordinated carefully with the tax filing deadline. That's OK because the client is very sophisticated. Also, I don't think there is a 10% excise tax for any nondeductible contributions as long as these contributions are made in the same year as the deduction. For example, there is no excise tax on the $35,000 contribution made in early 2000 that is used for 1999 minimum funding and is deductible for 2000. Finally, I recognize that starting in 2000, we might have to do two actuarial valuations each year because there are different asset values (one for 412 minimum and one for 404 maximum).] Thanks. would like to deduct

Do any of the timing requirements discussed above change if there is the 1-3% company match or the 2% nonelective company contribution? Also, what are the plan document requirements for Simple IRAs?

Several questions regarding safe harbor 401(k) plans. 1. The employees must be notified at least one month in advance of the plan's effective date. Where can I find what the notice must contain? 2. Can the first plan year for a Safe Harbor 401(k) Plan be less than 12 months? 3. Can a Safe Harbor 401(k) Plan have a non-calendar plan year that is (a) the same as the corporation's fiscal year, or (B) different from the corporation's fiscal year. 4. What IRS notices, rulings, regulations etc. contain information on these plans? Thanks

Thanks, L. Turner. Life, sometimes, is simple. Now for a followup. Same situation. Let's focus on the trustee issue. The client would like the employer to be the trustee (rather than the individual owner). So far, pretty normal. By now, the client has already formed his corporation (XYZ LLC), and therefore the documents will indicate that this corporation is the trustee. However, the plan will be adopted shortly and be effective retroactively to 1/1/99; technically, XYZ LLC didn't exist prior to late 1999. So, technically, shouldn't John Smith, A Sole Proprietorship also be a trustee, at least for the period prior to the formation of XYZ LLC? Or am I worrying about nothing --- again? Thanks.

An individual has been running a business as a sole prop for several years (John Smith, A Sole Proprietorship), and in November 1999, converts it to an LLC (XYZ, LLC), using a tax free asset conversion. He wants to establish a pension plan effective 1/1/99. (The tax years of the business and LLC are both 12/31). The plan is being established with both entities (John Smith, A Sole Proprietorship and XYZ, LLC) being defined as "employers" For 1999, the sole prop will take most of the deduction since most of the earnings was run through the sole prop. However, by the time the majority of the contribution is made (in early 2000), the sole prop will cease to exist and its assets will have been transferred to the LLC. Can the LLC make the contribution in early 2000, and have the sole prop take the deduction for it? Am I worrying too much for nothing? Is there a real issue? What other ideas or issues are there? Thanks.

Controlled Group consists of two companies, Company A (with a 10/31 fiscal year) and Company B (with a 12/31 fiscal year). There are owners in each company. They want to start a profit sharing plan (or plans) covering both companies. Under the plan(s), HCEs will receive between 15% and 20% of pay; nonHCEs will receive 3% (older owners, as usual). How can this plan (or plans) be structured to accelerate the deduction for Company A? [Note that as we speak, we are in early November!] 1. If we have two separate plans (one for Company A with a plan year ending 10/31 and one for Company B with a plan year ending 12/31), the first year for Company A's plan would have to be 11/1/99 to 10/31/00 and the first year for Company B's plan could be calendar year 1999. OK to start with, but can we do better? 2. If we have one plan (with a plan year ending 12/31) covering both companies, the first plan year could be 1/1/99 to 12/31/99. The deduction allocable to Company B would clearly be for calendar year 1999. However, how could the deduction allocation to Company A be structured to accelerate the deduction? Can any part of it be allocated to its fiscal year ended 10/31/99 because the plan was in effect for the entire calendar year? 3. Same as #2 with two separate plans. (I don't think this helps, but it's a thought). Any other ideas?

Thanks, that's what I thought.

Are adult children of 5% owners automatically HCEs? Are minor children of 5% owners automatically HCEs? What are the cross testing ramifications of this? It seems per IRC 318 that adult and minor children of 5% owners are HCEs. This would cause difficults in a typical cross testing situation because of their youth. (Typical situation being defined as a company with one or two older owners and a bunch of young and middle aged rank & file employees. Now add a couple children of the owners on the payroll.) They would have to get a small contribution %, not the large contribution % like other HCes. If the children are in fact HCEs, what solutions are out there in these typical situations?

Bill, Exactly where you said it would be. Thank you.

At the risk of entering this age-old debate, here goes: Suffice it to say that the major difference between DB and DC plans is who bears the investment risk/reward --- company or employees. Aside from that, one can make a DB plan behave like a DC plan, and vice versa. Let's look at some examples. 1. Pattern of earning benefits over an employee's career: A traditional DB plan backloads benefit accruals; in a traditional DC plan, allocations are more evenly spread over a career. Well, a cash balance DB plan evenly spreads benefit accruals over a career. Alternatively, a target benefit DC plan (or an age-based DC plan) has the same backloaded accrual pattern as in a DB plan. So, you can have an employee earn benefits in a DB plan much like in a DC plan, and vice versa. 2. Portability and vesting. Clearly a DC plan pays benefits in lump sums, and often has more rapid vesting than DB plans. One of the complaints about DB plans is lack of portability. Well, an employer can provide the same more rapid vesting in a DB plan. Often, lumps sums (over $5,000) aren't offered in a DB plan. Well, an employer can provide lump sums without limit. So, both types of plans can have the same portability. 3. Spousal protection Spouses in DB plans are protected by law, while spouses in some DC plans are not. So what. The DC plan can be designed with a similar (alright not exactly the same) protection as in a DB plan. Hence, similar spousal protection. 4. Risk of outliving one's DC account. Certainly, with a DB annuity, there is no such risk. With a DC plan, there is such a risk. However, the employee can roll over his/her lump sum into an IRA and buy an annuity; hence, no risk of outliving the DC account. I've heard of large companies that sponsor both a DB and a DC plan addressing this problem by allowing the retiring individual to "transfer" his DC assets into the DB plan and "buy" the annuity through the DB plan. 5. Risk of inflation erosion. Equity investments in a DC plan, in theory, protect the retiree against inflation. (And let's face it, even in a modest 3% inflation environment, there will be a 45% purchasing power erosion by the twentieth year.) I say in theory because during the inflationary 1970's, the equity markets did poorly. But, let's not get into that issue here. Well a DB plan can provide automatic unlimited COLAs. Now why do corporate sponsors not do this. Partly because of the risk. But also because of the employee's lack of appreciation of the value of a COLA. A $1,000 per month annuity increasing at a 5% COLA is roughly equivalent in value to a $1,450 per month level annuity (for the actuaries in the audience, I assumed a twenty year certain payout and a 9% discount rate). Now, if you were a corporate plan sponsor, which do you think is more saleable to your employees? (By the way, the inflation risk can be hedged by many techniques that Fortune 500 CFO and investment banks are well aware of, including equity-linked bonds, among others.) So, it's not that DC plans are better able to protect against inflation risk, it's that private sector employees don't want DB plans that do. (Editorial -- public sector plan do have COLA protection. And their employees do appreciate it, because heaven help the government entity that tries to take away the COLA --- end of editorial.) So, if DB and DC plans can be made largely equivalent except for the investment risk, then it is in fact the investment risk that is the key element. Who wants to bear this risk, and therefore gain the reward? Now, there are two other differences (other than who bears investment risk) between DB and DC that I haven't mentioned yet (and I will here) that cannot be avoided by clever plan design. One is government (PBGC) insurance. Clearly, the government cannot insure a DC plan; it's hard enough for them to insure DB plans (adverse selection, moral hazard, put option and political process are the key historical problems discussed in the literature). Of what "value" is PBGC insurance? That's debatable, and I'll let that remain for a further thread. The other statutory difference is employee contributions. While an employer can (and often would like to) condition benefits on employee contributions, the employer cannot condition DB benefits on "deductible" employee contributions; only "nondeductible" employee contributions can be used. Of course, in a DC plan, these employer "benefits" (i.e., contributions) are conditioned on deductible employee contributions -- this is one of the key reasons that 401(k) plans are so popular. (Editorial -- now, if we had a level playing field, we would allow deductible employee contributions to be in a DB plan -- end of editorial.) So, if you've gotten this far, it all boils down to investment risk/reward. Who wants it? Who doesn't want it? Who gets it? End of commentary. (I await your arrows!)

I agree with Dave Baker's comments in his final paragraph. While we do not "insist" on money being contributed before the end of the year (especially with a plan being installed in the last week of December), we "strongly recommend" that a contribution be made. (As a practical matter, we are almost "insisting.) Never had any IRS problems with the few plans that had initial contributions made after December 31.

Regarding IRS assignment of TINs, in California, in lieu of faxing the request, we are able to call the IRS at a specified number and they will assign a TIN on the spot. We then fax the completed SS-4 to them (at a different number) for their records. We are getting a new client in the Chicago area. Does anyone know if the IRS there has a similar procedure. Or, if not, the IRS fax number for assignment on a TIN. Thanks

I think you are right in that no controlled group exists. But be very careful in that determination. Clearly no parent-subsidiary controlled group exists. However, the brother-sister controlled group rules (1.414©-3) are very tricky. In this case, I think no controlled group exists because the brother-sister threshold is MORE THAN 50% ownership. But, again, be careful.

Can a pension or profit sharing plan invest in futures contracts? (In futures contracts, a deposit is made that is akin to a margin account, and is adjusted similar to buying stocks on margin. Hence, I suspect these investments cannot be made.) Can a pension or profit sharing plan invest (long, not short) in options? (With options, the entire purchase price is paid for up from. Also, the maximum loss is the total price paid for the options. Hence, I suspect these investments can be made.) For this purpose, let's steer clear of all diversification/appropriateness issues. Thanks.