richard

I figured as much, but it was worth a shot.

I would argue against an interest rate reduction for several reasons. In relation to the plan loan, the plan sponsor (or is it the plan administrator?) is playing the role of a "bank." As a fiduciary, it must set the interest rate consistent with what other financial institutions in the geographic area are charging for similarly situated (i.e. similarly secured) loans. Now, if you were a bank and a secured loan that you had issued was defaulted on, and if you couldn't (for various reasons) foreclose on the security, would you as the bank reduce the interest rate on the loan. I wouldn't. Also, as a fiduciary, how could you justify to the Department of Labor why you reduced the interest rate to 5% when you could otherwise get 8%? Finally, while I understand the administrative simplicity argument, the counter argument is that reducing the loan interest rate to 5% is taking away from the plan the ability to encourage the Plan Participant to repay the loan. After all, while the loan is outstanding, the Participant is "losing" 3%. This alone should encourage the Participant to repay the loan as soon as he has funds available. He might pay this off in 3 or 4 years; if you reduce the interest rate to 5%, he might as well wait until he turns age 65! (In fact, I wouldn't blame the Participant from waiting until age 65, since he would in effect have a long term loan at 5%, too good a deal to pass up.)

What if the second 401(k) plan is established BEFORE the first 401(k) plan terminates? (Yes, in this situation, the employee could defer into either or both 401k plans!) For example, if the second 401(k) plan is started in March, Year 1; and the first 401(k) plan is terminated in September, Year 1. And, the employees receive their account balances from the first 401(k) plan in October, Year 1, and roll them into IRAs. Does this avoid the successor plan rules? Any takers?

Can an employer terminate a 401(k) plan, allow employees to rollover their balances into an IRA, and then start a new 401(k) plan? The employer is continuing operations, and none of the employees have terminated. The employer does not want to freeze the old 401k plan because of maintenance costs. There are various reasons why an employer might want to do this. He might want to change the investment options, but not want to incur back-end loads (the employees could continue the investments in their IRAs). Or, there could be problems with the old 401k plan, that the employer would like to be kept separate from the new 401k plan. Or, there are more generous provisions in the old 401k plan that he would like to eliminate in the new 401k plan. Anyway, whatever the motivations, can the employer terminate the old, allow IRA rollovers, and start a new?

I know the DoL doesn't allow a plan's payment of Settlor Expenses. (I forget the cite, can someone help on this.) However, is the following rationale correct? The termination of a pension plan involves two types of activities (and related fees). The first type of activity is the business decision of whether or not to terminate the plan. The issues to be considered include the cost of termination, the need to fully vest employees, the adverse employee relations, etc. This is a business decision, so I believe the fees charged here could not be paid by plan assets. However, the second type of activity are those tasks in implementing a plan termination; these are part of the administration and continued qualification of a plan. These tasks include plan amendments (or at least the GUST amendments), the 5310 filing, and the administration of employee notices, elections, and benefit payments. So, I believe these can be paid from plan assets. Since often the decision-making process is fairly cut & dried ("I cannot afford anything for my employees!"), most of the expenses could be paid from plan assets. OK, let's hear your thoughts. Any actual discussions with DoL on this? Also, has anyone actually had the DoL object to such payments? Thanks.

Plan sponsor neglected to file Form 5500 for calendar plan year 1991 and 1992. Oops! In 1994, this was discovered, and after discussions with the IRS (who were very amenable to the client sending the forms with an explanation), the client sent in the filings. (let's say this was done in October 1994). Neither the client nor us received any response from the IRS in Atlanta area after the filing was sent it. As a practical matter, they are most likely fine. Technically speaking, what is the statute of limitations beyond which time the IRS cannot assess the $25 per day fine. Is is 3 years, 5 years, 6 years, or other? Does it run from when the filing was due, or when the filing was made? Technically speaking, any thoughts?

The funding of a cash balance plan is just like the funding of any other defined benefit pension plan ... you have a great deal of flexibility. The client (at least technically) selects the funding method, and the actuary selects the assumptions. In your example, if the pure unit credit method was used, and if the actuary assumes investment earnings of 5% per year, no turnover and no preretirement mortality, the first year contribution would be exactly 4% of payroll. In future years, investment gains or losses (compared to this 5% assumptions) would decrease or increase the contribution. However, additional flexibility can be obtained as follows. An investment return assumption above 5% along with pure unit credit funding would result in a contribution of less than 4% of payroll. Alternatively, using a projected benefit funding method (e.g., entry age, projected unit credit, aggregate) along with a 5% investment return assumption would produce a contribution above 4% of payroll, Naturally, the ultimate annual cost is a function of the actual investment results, and in your example, the ultimate annual cost would probably be below 5% of payroll. (For simplicity, let's not get into turnover and mortality assumptions in the above discussion.) I would recommend using funding methods that create a contribution range. One advantage of a cash balance plan over a money purchase plan is that the contribution can be varied depending on the client's cash position. A money purchase plan offers no such flexibility. (Technically, you do not have to base your contribution on the present value of the age 65 annuity if your plan design allows you to pay out lump sums equal to the cash balance plan account balance, as long as you assume that 100% of terminating or retiring employees elect the lump sum.) On your question about top heavy benefits, yes, the minimum is a 2% annuity. If a lump sum is being provided (as it clearly is in a cash balance plan), the lump sum dollar amount must be at least equal to the actuarial equivalent of the 2% annuity.

OK, let me answer your questions by number. #1 - yes, the "frozen" lump sum will increase due to age. As far as the impact of changes in interest rates on the "frozen" lump sum, it depends on the lump sum conversion factors in the prior, traditional DB plan. If lump sums were based on the floating (e.g., PBGC or GATT) interest rates, then yes, the "frozen lump sum" will vary based on the actual PBGC or GATT factors in effect at the employee's termination. However, if the lump sum conversion factors were more favorable, such as a flat 5% (always, of course subject to the PBGC/GATT rates if more favorable), then the flat 5% might have to be used (again, as long as it were more favorable than the PBGC/GATT rates at the employee's termination). #2 - it depends on the plan design. The company could convert the accrued benefit into an initial account balance, and then add on future "interest and contribution credits" to this account balance. The employee would receive his new account balance, subject to the grandfathering requirement of his accrued benefit when the plan was switched to a cash balance plan (see #1 above). Note that the conversion of accured benefit to an initial account balance can be done using the plan's lump sum factors or more restrictive lump sum factors. If the latter is used, the employee will likely be affected by the grandfathered minimum for a longer period of time. Alternatively, the company could freeze the old accrued benefit (and keep it completely separate), and start a cash balance starting with a zero initial account balance. This would avoid the employee misunderstanding of cutbacks, etc. a la Wall Street Journal. This is like having two separate plans, the traditional DB plan being frozen and the cash balance plan ongoing (which, by the way, the employer could do). I could also see an initial account balance being set up based on a formula unrelated to benefit from the old DB plan. The initial account balance would be computed by this formula, and the account balance would increase with "interest and contribution credits," again being subject to the usual grandfathered minimum, per #1. Choices of other approaches are limited only by the plan sponsor's and actuary's imagination. #3 - The problem you describe is known as the "whipsaw" effect. Here, the account balance must be defined in terms of an accrued benefit payable at NRD (say age 65). This is usually defined in terms of the interest crediting rate, and is calculated by projecting the account balance to age 65 with this interest crediting rate, and dividing by an immediate annuity factor (using this interest rate and the plan's stated mortality rate). With this deferred annuity calculated, the lump sum payable would be calculated by using the PBGC or GATT rate (or the plan's rate, if more favorable --- let's ignore this possibility, however). If the interest crediting rate were higher than the PBGC or GATT rate, the lump sum required to be paid to a terminating employee would be higher than the employee's current account balance. This is a particularly serious problem, since the appeal of cash balance plans is for the employer to credit the employees with a favorable interest, not merely a money market type rate. The situation was worse pre-GATT due to the artificially low 417(e) PBGC rates; it has become somewhat better with the GATT rates. The solution of an employer not offering lump sums prior to age 65 would theoretically solve the problem, but would be impractical. The inherent appeal of cash balance plans is not only allowing the employee to see his/her lump sum grow, but for him/her to take it when they leave. The IRS issued a Revenue Ruling (or Notice or Announcement, I forget which) in early 1998. In it, they said that the 415(e) rates would not apply (and hence the whipsaw problem would go away) if the plan used one of several interest crediting rates. I believe these allowable rates were all tied to Treasuty Rates (or CPI), with a small margin allowed in some cases (such as 1 year Treasury Bond Rate plus 0.5%, I think). This, at least, is something, but it still doesn't solve the whipsaw problem for those companies that would like to credit a higher interest rate. I have heard of rumblings of some innovative solutions to this problem, but they tend to be complex. Then again, if they work, the complexity is worth it. Hope this helps.

Yes, it is often simply due to differences in interest rates. This was common pre-GATT when a plan sponsor had to use the PBGC interest rates which subsidized lump sums. The conversion to initial cash balance account was done using more reasonable interest rates (such as 30-year treasuries). Since the 30-year treasuries were higher than the PBGC interest rates, the opening cash balance account was lower than the lump sum the employee could have received if he terminated employment (if the plan permitted a lump sum). Of course, no reduction in the lump sum is permitted, so the actual lump sum payable on termination is "frozen" at the old level until the cash balance account catches up. Several items on this that have been missed in the popular press. Although the employe's lump sum might be frozen for a while, he is still earning additional monthly accrued benefits. This increase is equal to the "contribution credit" to the cash balance account, converted to an annuity at age 65. Second, the plan sponsor is simply removing the mandatory lump sum subsidy required under pre-GATT rules. Arguably (although I don't really think employees will buy this), they are losing something (the subsidy) that they really should never have had! AS far as whether or not there are restrictions on the lump sum interest rate, I'm not sure. I presume anything that is reasonable is OK. And that applies to both the interest rate and mortality table used in the conversion.

Yes you can merge them. You would do the discrimination tests one of two ways. (1) Test the MPP (for its six months) separately from the combinated PSP (for its twelve months). Here, you would, most likely, conclude the MPP passes nondiscrimination because it is a safe harbor (I premuse) integrated formula. You would test the PSP using cross testing, without imputing disparity in the test. As a practical matter, losing the ability to impute disparity in the cross testing of the PSP doesn't cost you that much. (2) Test the two plans combined. Here, you could impute disparity based on the combined level of contributions for each employee. In this case, you would not be relying on the safe harbor for the MPP, but rather on the general 401(a)(4) regulations for both plans combined.

I agree with Needtokno about the Microsoft case. Clearly, if the employer has misclassified individual as an independent contractor, the employer must include that individual in the discrimination testing. Whether or not that individual must be included in the retirement plan depends on the language in the retirement plan. Microsoft's language was inadequate. It is my understanding from attorneys that I've spoken to is that most plan language is similarly inadequate. However, my original question was intended to deal with the situation whereby the individual is truly an independent contractor and not an employee. Is there a situation where that individual can be covered my the "employer's" pension plan. (Let's assume the "employer" wants to cover the independent contractor.)

I don't know the answer but isn't the Plan Administrator is still liable for all compliance aspects of the plan. Now if the Plan Administrator is the owner of the company (personally), he/she is still personally liable. If the Plan Administrator is the corporation, would the officers of the corporation have potential liability? I don't like the idea of the Trustee taking the role of the Plan Administrator.

Calendar year profit sharing plan. All employees are terminated toward the end of 1998. Business has filed for bankruptcy. Profit sharing plan will terminate in June 1999, and file with IRS for determination. Client would like to hold off on distributing benefits until end of 1999, when favorable IRS determination letter is expected to be received. Problem -- plan provides that benefits are paid at the end of the plan year in which the employee terminates employment. In practice, benefits have been paid early in the following year (between March and May), when the asset results are known and the allocation is performed. Can the plan sponsor choose to delay payments until IRS determination letter is received? If all employees elect to receive their benefits now and are paid their benefits now, there would be no assets or participants included in the determination letter filing.)

David, that's what I thought. I think the code reference is 415©(3)(D), but I believe it's effective for plan years beginning after 12/31/97.

For the purpose of the 25% of compensation 415 limit, do you define compensation by starting with the employee's pay and subtracting the 401(k) employee deferrals as well as the Section 125 plan deferrals. For example, an employee earns $100,000. He defers $10,000 into the 401(k) and another $5,000 into the Section 125 plan. Is his 415 limit equal to 25% of $100,000, $95,000, $90,000 or $85,000. (Please ignore the issue if his pay is above $160,000) Thanks

Calendar year profit sharing plan. All employees are terminated toward the end of 1998. Business has filed for bankruptcy. Profit sharing plan will terminate in June 1999, and file with IRS for determination. Client would like to hold off on distributing benefits until end of 1999, when favorable IRS determination letter is expected to be received. Problem -- plan provides that benefits are paid at the end of the plan year in which the employee terminates employment. In practice, benefits have been paid early in the following year (between March and May), when the asset results are known and the allocation is performed. Can the plan sponsor choose to delay payments until IRS determination letter is received? (If all employees elect to receive their benefits now and are paid their benefits now, there would be no assets or participants included in the determination letter filing.)

Person X owns 100% of Companies A and B; hence both companies are in the same controlled group. Both companies have employees, and both are calendar year companies. Effective June 1, 1999 (for example), X sells his entire interest of Company B to an unrelated person Y. When are both companies no longer in the same controlled group? Can Company A set up a pension plan effective June 1, 1999 (say for a 7 month initial plan year) and ignore employees of Company B? Or, must Company A wait until January 1, 2000 to set up a pension plan? (In other words, are A and B in the same controlled group for the entire 1999 year?) Or, must Company A wait until 2001 (or later)because ownership (for determining controlled group status) includes ownership interests in the last 5 years? Would the answers to the above be any different if the original companies were in the same brother-sister controlled group, and the ownership change resulted in them no longer being in the same brother-sister controlled group? Never dull!

A sole proprioetor has no employees. The profit sharing plan contribuition is 15% of compensation. What is "compensaton" for this purpose. I know there are certain adjustments to the bottom-line number in the Schedule C to reflect Social Security -- what are these adjustments? Thanks

On 401a26, watch out for changes in employment in future years. This might require enlarging the group covered by the DB plan in the future.

I think you have two options. Add a profit sharing plan and make the discretionary contribution to it. You get the PR advantage of having TWO retirement plans, but also the expense of administering two plans. Alternatively, make the additional contribution to the MPP. You will need a plan amendment each year. Now, will the IRS be upset? Frankly, I doubt it unless you want to contribute above 15% of payroll. (Essentially, the series of amendments would be like treating the MPP like a PSP, but if you don't contribute over 15%, you wouldn't be violating the "PSP" limit.) Would you have a benefit cutback (and hence 100% vesting) if you have several years of additional contributions (each with its own amendment), and then no additional contributions in future years? I doubt it. I like the second approach better in your situation. I cannot justify the added expense of the second plan.

What is the filing deadline for a short plan year; let's say from January 1, 1999 to June 30, 1999? Is it - (a) 7 months after the end of the short plan year, or January 31, 2000, or (B) 7 months after 12 months after the beginning of the short plan year, or July 31, 2000. I vaguely recall the answer is (B), although I can't remember WHAT THE CITE IS. Also, is the filing deadline for a short plan year different depending on the reason for the short plan year? For example, short plan years typically occur in the following three situations: 1. When converting from one 12-month period to a different 12-month period, there is a short plan year in between. 2. When merging two plans that are on different plan years, one of the plans has a short plan year. 3. When starting a new plan in the middle of the year (such as a 401k plan), one has a short plan year to allow future plan years to be the calendar year. Thanks for your help.

I agree with jkirshbaum's comments. Let it never be said that the public (or the mass media) get it right. Now, here's some food for thought. Does anyone feel that there will be a resurgence of DB plans? Cash balance plans, currently being criticized, do allow easy portability and are understandable. Will employees want them if (or when) the equity markets tumble? Will employers be able to afford them at that time? Any thoughts?

I thought this was resolved about a decade ago! I just picked up a prototype DB plan that is funded with insurance. They are using a different mortality table for lump sum equivalence for males and females. When I discussed it with them, they indicated that the Norris decision only applied to plans with at least 15 participants (this plan has three participants), and that they have a 1995 IRS approval. Did I miss something? Isn't there something in the Code about this? Meanwhile, I have to calculate a lump sum based on the terms of the plan document, which for now has a different mortality table for males and females! What did I miss?

Nope, I haven't received mine yet.

Employer is a corporation, with a calendar year tax year. Employer sponsors a defined benefit pension plan, also on a calendar year. Employer's tax filing deadline for 1997 is 3/15/98. Employer extends the deadline to 9/15/98. Employer makes required contribution to pension plan on 8/15/98. However, employer DOES NOT file corporate tax return until after 9/15/98 (oops!). Is the employer's pension contribution deductible for 1997? Related question: safe facts except that the employer has a profit sharing plan instead of a pension plan. Is the result different?