richard

Unfortunately, I'm not aware of any exception to the SAR requirement. Worse yet, consider a two participant DC plan. With even a modest level of intelligence, the non-owner employee can calculate the owner's pay exactly if it is under $160,000, or can determine that it is somewhere over $160,000 otherwise. I wouldn't be surprised that some business owners simply do not provide SARs to their employee in these cases, law and penalties notwithstanding, even if the actuary or TPA provides the SARs to the owner.

As long as you and they are comfortable about keeping track of which fiscal year the deduction for contributions applies to, there's no reason to change. And since you and they are already doing this, again there's no reason to change. However, if they have other retirement plans on a 12/31 year end and you want to aggregate them for discrimination testing purposes, you're already living with a level of complexity that would be alleviated by changing plan years.

I've just reviewed last year's 5500 filing for a cafeteria plan. They files a 5500C/R and Schedule F. However, they had 119 employees eligible and 82 employees participating. Oops. (I'll presume they have similar numbers this year.) 1. Should they have filed a 5500, complete with audit, since the 100 participant test is based on eligible participants (like 401k's)? 2. While I forget the specifics of the corridor rule (where under certain circumstances, if you are slightly over 100 participants, you are allowed to file 5500C/R, does this corridor rule apply to cafeteria plans as well as pension plans? (I can check to see if the head counts work for us here). 3. If they blew it, does anyone have experience with this type of amended filing for cafeteria plans? Any other ideas ...

We were just hired by an employer to provide consulting sevices (document, testing, etc) to a 401k plan. They are investing their assets with MFS, where each participant will have an individual account. MFS will be responsible for receiving, processing and maintaining records of employee contributions and accounts. Pretty standard stuff. MFS wants to have a service agreement signed between us and them (even though we don't work for them or get paid by them). Perhaps, it might be a condition of us being allowed to view electronically the employee/employer accounts. The service agreement requires information that we consider proprietary and confidential. It does delineate (somewhat) which organization is responsible for what functions -- which we would clarify with the client anyway -- that's OK. However, the service agreement in addition asks for things that a prospect/client might ask (fee structure, number of clients, references, ownership structure, etc.), and confidential information, and they are not the prospect/client. What's going on? What is the experience of you folks out there? We work with other investment firms and haven't seen this before. Have you? What do you do?

I hate to say it, but "so what if the Participant threatens to (or does actually) sue?" Aside from all of the other issues discussed in the other responses (which would be costly to address), there is a simple fact that the plan sponsor is operating within the plan language. The plan sponsor clearly has discretion, but is the current approach an abuse of this discretion? Doubtful. Also, this is technically a denial of benefits (since the participant is essentially claiming higher benefits than actually paid). So has the participant (and very importantly the plan sponsor) followed all of the denial of benefits rules in the Plan and SPD? Assuming the employee threatens to sue, what do you all think about "suggesting" the employee have his attorney contact the plan sponsor before filing suit. That way, the plan sponsor (or more appropriately his/her attorney) can hopefully convince the attorney not to bother. Especially if the attorney is on a contingent fee basis. (Of course, if the attorney is being paid hourly and his client is willing to keep paying, this won't work.) Since I am not an attorney, I'd be interested in the thoughts on any ERISA attorneys in the audience. Also, are there any court cases on point?

Now I never said that it was "equitable." (chuckle, chuckle) By the way, I haven't heard about many of these pension equity plans. Sounds like the cash balance (i.e. career pay) plans have taken off while the pension equity (i.e., final pay) plans haven't. So much for replacement ratio-type retirement planning. I wonder if there will be, in the future, final-pay type "updates" on cash balance accounts. Remember the concept with traditional career pay plans. A plan sponsor would like the idea of a final pay plan but didn't want to commit to it (pay inflation risk, for example). So every five years or so, the career pay accrued benefit was "updated" based on the current final average pay, and future accruals were based on career pay. The concept made sense both then and now; I wonder if this will ever be applied to cash balance plans in the future. Any thoughts.

A profit dharing plan establishes 3 categories of employees, Category A, who are INELIGIBLE for the plan, and Categories B and C. The plan is Top Heavy. Do Top Heavy minimum contributions need to be provided for employees of Category A? Variation on this question. A defined benefit plan excludes employees of Category A. The plan is Top Heavy. Does the plan need to provide Top Heavy minimum accruals for employees of category A? Thanks

I don't work much with SARSEPs, so..... Company has a grandfathered SARSEP covering all employees. They decide that either a new comparability profit sharing plan or a DB plan (covering the same employees) would better meet their needs. The plan year would be the calendar year. #1. Are they prevented from having an additional plan for 1999 since they currently have a SARSEP? (I know they would be prevented if they have a "simple" 401k.) #2a. Assuming they can have a profit sharing plan for 1999, is the maximum aggregage contribution of 15% of payroll for 1999 determined based on the sum of the SARSEP deferrals and contributions, plus the profit sharing contribution? #2b. Assuming they can have a DB plan for 1999, is the 25% of pay maximum contribution determined based on the sum of the SARSEP deferrals and contributions plus the DB contribution? Thanks.

I agree with Pax. A pension equity plan (a term coined by Buck Consultants and/or Segal Company about ten years age) is a final average pay DB plan. The benefit is defined as a lump sum equal to X% of FAP times years of service (compared to the traditional DB plan where the benefit is a life annuity equal to X% of FAP times years of service). This type of plan (life cash balance plans) is a DB plan subject to all payment rules (age 59-1/2, J&S, etc.) If, however, the plan being referred to is a nonqualified plan, there are no payments rules.

Thanks Gary. I like your comment that the "Simple" plan becomes "Complex." I doubt they will go through the approach of converting the Simple contributions to wages, since the employees won't be happy. It will take too much effort, I suspect, to get them to understand that is happening. You described the "recharacterization" of the employee deferrals into wages. For my information, what about the company contribution (the 100% match up to 3%)? Would that be distributed to employees as well, and treated as wages?

Without special langange that I'll describe in a moment, the plan sponsor would have to make the required contribution to the money purchase, and it would not be deductible. I vaguely recall that the 10% excise tax might be waived in this type of situation (my memory could be faulty, though); but that would have to be researched. Now, the money purchase plan could be written so that its required contribution would be reduced so that the 25% maximum would not be exceeded. If properly done, the nondeductible issue would be solved. The language is tricky, because in order for the contribution to be definitely determinable, the calculation methodology of the defined benefit contribution would have to be specified in the money purchase plan document, including (imho) funding method and assumptions. I don't know if the IRS takes this hard line; they might accept language such as "the money purchase contribution is equal to the lesser of (a) 10% (for example) or (B) 25% minus the DB plan required contribution."

The 401(a)(4) cite is a good cite. I'd be very uncomfortable (translated, it should be disqualified) if the company had a juicy plan when it had no employees, changed to a weak plan when it hired employees, changed to a juicy plan when it had no employees, etc. But, if the company had one employee, the owner, and he changes the plan formula depending on his desire to make high or low contributions, I think the IRS's only possible argument is the one Lorraine suggests, that of not being definitely determinable. However, I've never seen the situation where the benefit formula was changed each year. Lorraine, in your experience where the benefit formula changed every two or three years, did the IRS ever raise the issue in their determination letter review?

We've all heard that the IRS would object to a plan sponsor changing the plan formula each year. What cite can they use (or have they used)? How frequent can a plan sponsor change the formula? Does anyone know of any situations where the IRS objected to frequent plan formula changes, and what was the result? (Do I want to be a test case? No!)

I agree also that amending the plan each year causes problems. And we've all heard that for several decades. How often do these plan amendments have to be before they cause "problems?" And then, what problems would be caused? Disqualification? Treatment as a profit sharing plan (so contributions over 15% of payroll wouldn't be deductible)? What would be the IRS' authority for this. Finally, does anyone have any specific situations where the IRS (or perhaps DoL) challenged a money purchase plan for too frequent amendments? And what was the result?

Plans of Professional Service Employers with fewer than 25 active participants are not covered by the PBGC. How broad can one define Professional Service Employer (ERISA 4021(B) and © have the statutory language.) Any cites? Thanks

Company has a Simple IRA (with 100% match up to 3%) in effect for calendar 1999. Decision has been made to replace it with a profit sharing plan effective 1/1/2000. Simple IRS will be terminated 12/31/1999. 1) Can profit sharing plan be adopted in late 1999 with an effective date 1/1/2000, or must is be adopted during 2000? (I suspect the former is OK.) 2) Other than no new money going into the Simple IRA after 1999, what happens to the existing money? 3) The plan sponsor would have preferred to have the profit sharing plan in effect 1/1/99. It is prevented from doing so because of the Simple IRA. Can the Simple IRA be retroactively "converted" into a profit sharing plan? (I suspect any solution in this area would be complex and not worth the trouble.) Thanks

Yes. Several choices. 1. Reduce the monthly pension for all future years by the actuarial equivalent of the overpayment. 2. Have the employee repay the plan a lump sum equal to $100 times the number of monthly payments made (with or most likely without interest). Then reduce his pension prospectively to the original correct amount. 3. Underpay the employee $100 for the same number of future payments that he was overpaid (perhaps adjusting this for interest, probably not). After these payments are made, start paying him the originai correct payment. 4. Stop making payments to the employee (i.e., pay him zero dollars) until the overpayments are used up. 5. Reduce the pension prospectively to the correct amount but not ask for any correction of the overpayment. 6. Keep paying him the higher incorrect pension. Number 6 would only be possible if the employee could claim that he relied on the extra $100 per month for a certain lifestyle. Unlikely. Number 5 would be easy, but wouldn't involve any correction. The plan would be out the overpayment. If politically a problem, this is acceptable, and this is done sometimes. Number 1 is often done, but the actuarial equivalence is sometimes tricky for the employee. Also, he now has a permanent pension that is less than his promised pension; while actuarially correct, might be difficult to swallow. Number 3 is a nice crude solution, and is clear to the employee. Actuaries (like myself) won't like ignoring interest and will also worry about the risk of the employee dying before the overpayments are completely offset, but actuaries (like myself) like to worry too much. Number 2 is unlikely because of the hardship to the retiree, and I don't like money going into the pension plan. Number 3 is also unlikely because of the zero monthly pension would be a hardship. If the plan is to be made whole, I personally like number 3 or number 1. If the plan cannot (politically) be made whole, then number 5. Number 6 would be unusual, and I don't like number 2 or number 4. Numbers 1, 3 and 5 are the most commonly done.

I agree. I see it as a violation.

I suspect there are some situations where the IRS could still look for a determination letter. Perhaps if the amendment is retroactive, the IRS could want a determination letter (at least on the old plan). I agree that a 401(a)(4) determination letter might be useful. Apart from all of this, what do you all think about at least notifying the client (in writing) that not filing for an approval letter might not cover all situations (either document or operationally) --- to at least cover yourself. I've also seen situations where the client (with the help of his/her advisors) attempted to bury past sins using a standardized prototype, and I'm waiting for the IRS to get wise to this. And, if you give the client something that he wants to get for free (e.g., the standardized prototype) and it later blows up, guess who gets the blame?

Let's say a company has 2 divisions, Division A and Division B, each with a $1 million payroll. The company has a defined benefit plan which costs 20% of payroll covering only employees of Division A. The company has a defined contribution plan which costs 10% of payroll covering employees of both divisions. The total contribution is $400,000, as shown below. Division A - $200,000 cost for DB, $100,000 cost for DC. Division B - no cost for DB, $100,000 cost for DC. What is the company's total deduction? 1. $350,000 ($250,000 for Division A, because Division A's deduction is limited to 25% of $1 million), plus $100,000 for Division b), with $50,000 carried forward to next year. OR 2. $400,000 ($300,000 for Division A plus $100,000 for Division b), since the total deduction is limited to 25% of the total payroll of $2 million.

If a company maintains both a DB and a DC plan, its total deduction is limited to the greater of 25% of payroll or the DB minimum. [401(a)(7)] If the DC plan is a 401(k) plan (with no company match), does the above limitation apply? If so, do the employee deferrals to the 401(k) plan count against the limit? Example: Company payroll is $400,000, DB contribution requirement is $80,000 and total 401(k) deferrals are $40,000. 25% of $400,000 is $100,000. Can the company deduct $120,000 ($80,000 for the DB plus $40,000), since the 401(k) deferrals do not count against the $100,000 limit? Or is the deduction limited to $100,000 ($60,000 for the DB plus $40,000 for the 401k plan, with $20,000 carried forward to next year), since 401(k) deferrals are counted against the $100,000 limit? Or, ... something else? (It would seem unfortunate that a hypothetical company with a pension contribution above 25% of payroll could hurt themselves by starting a deferral-only 401k plan; even if it excludes the owners from participating in the 401k plan.)

When an employee reaches age 70-1/2 and starts receiving minimum distribution (either as a 5% owner or for employees not affected by Small Business Job Protection Act), when does he elect his form of benefit? Is the plan sponsor required to offer the employee the election at age 70-1/2 (and each later year), or can the plan sponsor force the employee to defer the eleciton until actual retirement? In the first alternative, at age 70-1/2, the employee might elect a J&50, and be locked into that form. Then a year later, he might elect a life annuity for the additional benefit earned. Then a year later, he might elect a lump sum for the additional benefit earned, etc. (Wonderful for plan administration.) In the second alternative, he waits until he actually retires. If he dies while active, his death benefit is based on the active employee rules (i.e., the 50% survivor benefit if he is married). What is done in practice? What cites are there? Does this have to do with Annuity Starting Date? [The situation is that the plan sponsor offers lump sums as a benefit form. If the employee can elect his benefit form at 70-1/2, he can elect a lump sum. If he has to wait until actual retirement and he dies while active, his spouse would get the 50% survivor piece. The plan sponsor would like the latter, to encourage him to retire.] Help.

An individual is a participant in a 403b and has an IRA. He is over 70-1/2, and has to make minimum distribution payments. Can he aggregate the 403b and IRA, and make the minimum distribution out of either or both, as long as the total payment meets 401(a)(9), or must he meet the minimum separately from each plan?

A company has a 401(k) plan on a 2/1-1/31 plan year (2/1-1/31 limitation year also). They amend the plan effective 1/1/99 to a calendar year (with a calendar limitation year), thus creating an eleven-month plan year (2/1/98 to 12/31/98) with an eleven-month limitation year. Meanwhile, they start a profit sharing plan effective 1/1/98, with a calendar plan year and a calendar limitation year. Starting in 1999, life is simple, since the limitation years are both the calendar year. However, for 1998, what is the maximum 415 contribution for the owner, based on the following? 1998 pay (full year) = $100,000 1998 pay (from 2/1/98 to 12/31/98) = $91,666 1998 401(k) deferral = $10,000 for the calendar year. (Don't worry about the 15% of payroll aggregate limit; there are enough other employees around.) If we were simply on a calendar year, the limit would be 25% of $100,000, or $25,000; and the maximum allocation to the profit for him would be $15,000. But, we have an eleven-month limitation year for the 401(k) plan -- 2/1/98 to 12/31/98. The regulations discuss the 415 limit for a short limitation year at 1.415-2(B)(4)(iii) with an example at 1.415-2(B)(4)(iv). In this case, the 415 limit is prorated downward, and the pay used is the pay during the short limitation year. However, the regulations are vague when an employee is covered by 2 DC plans with different limitation years; with the only reference that I could find at 1.415--2(B)(3): "Election of multiple limitation years. Any employer that maintains more than one qualified plan may elect to use different limnitation years for each such plan in accordance with rules determined by the Commissioner." I could find no further guidance. Is his 415 limit equal to 25% of $100,000, 25% of $91,667, 25% of something else? Any ideas?

A full time employee was hired 6/1/98 at a payrate of $10,000 per month ($120,000 per year). The 401k plan is a calendar year plan year, with a 1 year waiting period, and entry dates of July 1 and January 1. Our employee becomes eligible for the plan on 7/1/99. In performing the ADP (and ACP) tests for 1999, is he an HCE? (Note that his 1998 earnings for the part of the year that he worked was $70,000 and his 1999 earnings was $120,000.) Case 1: The plan is not using the look-back rule. Here, since his 1999 pay was $120,000, I believe that he is an HCE for 1999. Is this correct? Case 2: The plan is using the look-back rule. Here, I believe he is not an HCE for 1998, but is an HCE for 1999. However, he does enter the ADP test for 1999 as an HCE. Is this correct? Thanks.