richard

It is typical in an S Corporation and now in LLCs for the owner to take a W2 salary from the corporation, "leave some money" in the corporation at the end of the year, and this amount is included on his 1040 as a corporate distribution or dividend (I'm not sure of the exact term). Does this "corporate distribution or dividend" count for various definitions of compensation which affect retirement plans. For example: Assume the owner's W2 is $25,000 and his "dividend" is $20,000. (Use higher numbers if you would like.) 1. For the 415 limit on DC and DC plans, do we use a pay of $25,000 or $45,000? 2. For the compensaton used in the denominator of the 401(a)(4) tests, do we use $25,000 or $45,000? 3. For the compensation used in the denominator of the ADP/ACP test in a 401(k) plan, do we use $25,000 (plus his deferral)or $45,000 (plus his deferral)? 4. For testing in a 401(k) plan against the 25% of pay limit, do we use $25,000 (plus his deferral) or $45,000 (plus his deferral)? 5. For determining the 15% of compensation company-wide profit sharing contribution limit, do we use $25,000 or $45,000? If we define "compensation" in the plan to include this "corporate distribution or dividend", does this help? Does it make a difference whether the company is an S Corporation or an LLC?

Probably the simplest answer is to restate the question in terms of what senior management and its Board would understand. Should they shop the fees of corporate counsel? The answers are virtually the same, from the fee ranges ($200 per hour, sometimes less, up to $400 per hour), the qualifications and background of the actuary and the firm, the type of assignments that are required, etc. The size of the company, its sophistication and the sophistication of the members of its Board usually determine the types of service providers and their fees. (In other words, large, sophisticated clients tend to be comfortable with higher professional fees, small, unsophisticated clients tend to be not as comfortable.)

I'd like the thoughts of our esteemed reader group on when do you considere a contribution to actually be made. This affects two areas. For contributions made near the tax filing deadline (plus extensions), is it deductible for the prior year. And, for defined benefit plans, what date does the actuary put on the Schedule B. Several possibilities that I could think of: 1. The client wire transfers the contribution on date X and it is posted on date X. (duh, this is simple). 2A. The client dates the check as date X, gives the check to the broker on date Y (Y usually equal to X), and it appears on the brokerage statement (i.e., the broker posts the check) on date Z. 3A. The client dates the check as date X, mails the check to the broker on date Y (Y usually equal to X), and it appears on the brokerages statement (i.e., the broker posts the check) on date Z. 2B. Same as 2A except substitute "bank" for broker. 3B. Same as 3A except subsitute "bank" for broker. Thanks

An approach I've taken at my firm (I'm an actuary) is to have the client make payment (after appropriate forms have been sent to and returned by the employee). We would only do this after complete year-end investment information is received, and generally (but not always) before employee information is received. Assuming complete investment information is received, what is the risk about not having complete employee information? If complete investment information has not bee received, sometimes (although I advise against this and charge extra), the client pays out (again with appropriate employee forms completed) something like 70% or 80% of last year's account balance, and makes up the difference plus/minus investment earnings later in the year. Other than the risk of greater than a 20% or 30% investment loss, what other problems does anyone see? Finally, while I haven't done this, you could amend the plan document to provide that benefit payments cannot be made before the date the 5500 is filed for the year the employee terminates. In that case, you could provide the employee with the section of the plan document or refer them to the SPD, and simply say "these are the rules here in black and white." Any thoughts?

I agree with Larry M (and in fact share many of his "biases" since our consulting actuarial practices are probably similar). Yes, the simplest situation is one decisionmaker with a single overriding objective; for example, the largest contribution for me, and as little as possible for my employees (gee, what a concept!). With four potential decisionmakers and conflicting goals, it is crucial that the consultant address the pros and the cons of each approach. It is the client's ultimate decision, and only though education can the client make an informed decision. It can be complex, but it is important and is worth the time. Good luck.

The delayed payout might seem unfair and archaic (and perhaps for the administrative convenience of the TPA or the employer). And, yes it seems somewhat silly(?) in our perfect(?) world of electronics and computers. And, I'm not in favor of "forcing" terminated particants to wait ten months. (By the way, I suggest to my clients in these circumstances that they make a payout early in the year, even before the contribution is made or the 5500 is filed.) And, daily valuations can solve this problem, albeit with a cost to the employer that (guess what) will be borne by the employees (either in plan expenses or reduced company contributions). A small per capita cost for a large company, but a large per capita cost for a small company. However, lest you think you are getting the shaft, consider the following. All of the employees who terminated in the past 15 years had to wait some period of time (up to ten months) to get their account balances. And they didn't get credit for investment earnings. Who got it? Continuing participants such as yourself. So, to the extend you have been "hurt" for investment earnigs over the last ten months, you have probably been helped for similar practices over the past 15 years. It's not to say the two wrongs make a right. However, this approach has been a practical one for many years, and terminating employees are not getting the shaft as much as they think.

Not knowing the sophistication of your client and its management, let me add one additional point to Lorraine's typically salient comments. A business that has dramatically turned south (if it has) sometimes closes its eye to its obligations. The trustee may think the plan has terminated, the client may think the plan has terminated, but unless and until the plan is terminated, it ain't terminated. (Freezing accruals -- good idea, of course.) Lest the client be tempted to shut its eyes, just waive in front of them the continued requirements, the PENALTIES for ignoring the requirements (including the rarely enforced but egregious DoL penalties). I've done this with several clients who were so tempted (the "two-by-four" approach), and the plans were properly terminated. (And all was well ...)

Companies A and B are NOT in the same controlled group (or affiliated service group, etc.) However, there is overlap among these two companies, for historical reasons. Company A and B each sponsor calendar year pension plans. Management of Company A "administers" both plans. (Don't worry, the named Plan Administrator is the plan sponsor of each plan.) An employee of B terminated employment and was paid a lump sum -- out of Plan A's assets. Oops! The lump sum represented about 0.01% of Plan A's assets and 1.5% of Plan B's assets. Quite minor. Now, how to correct? APRSC? VCR? Other? Any time restrictions? (It happened around October 1998; we just discovered it.) (There is no history of errors or abuses, both plans are properly administered; just "an inadvertent screw-up").

Husband H is a 50% owner of business X. Unrelated person A owns the other 50%. There are several employees. Wife W is a 100% owner of her own sole proprietorship Y; there are no employees. X and Y are completely unrelated with no overlap of employees, work, etc. Both Companies are in California (Community Property State). Question: Are X and Y within the same controlled group? (i.e., can the wife have a pension plan without affecting or being affected by what plan her husband's business has?)

Why has Corbel decided to stop providing language for volume submitted profit sharing plans? Is there something we out here should know? Like, is the IRS changing their position on these plans (they issued an announcement of sorts several months ago expressly permitting this in documents)? Age does enter into the discrimination testing, the mechanics of which would take too long to describe. However, you can set up the allocation methodology such that, WITHIN EACH CLASS OF EMPLOYEES (shareholders and others, as suggested by Chip Brown), all employees receive the same percentage of pay. For example, each shareholder might get an allocation of 17.2% of his/her pay and each non-shareholder might get 4.5% of his/her pay. (These percentages will vary each year as the demographics change.) Note that within each class, all employees are treated alike, regardless of age --- hence "age-neutral." (By the way, this is not the only allocation methodology permitted within each class of employees, but it is the simplest. Other methodologies are left to the discretion and dementia of the reader.)

Assuming you client has a calendar year 1998 plan year, they cannot change the allocation formula after December 31, 1998. In your situation, it sounds like they have a flat or integrated or some other allocation formula for 1998, and they would like to change it (for 1998) to something else that requires cross testing to pass the nondiscrimination rules. They cannot do so after 12/31/98. So, you are correct. Sorry.

Husband (H) and Wife (W) own a company with an overfunded DB plan (assets > PVAB) and a DC plan. Naturally (since this is California), they are getting divorced. As part of the divorce agreement, wife wants to waive all rights to the DB plan and the DC plan (presumably in return for the house, the kids, the dog, whatever). 1. She needs two QDROs, right? 2. His DB benefit for himself and his benefit from his wife (i.e. as an alternate payee?) would be separately subject to IRC 415, not combined. Correct? (What code/reg cites do you have?) 3. Also, the "transfer" of his wife's DC account balance would not count as an annual addition. Correct? (Let's ignore 415(e) for now since it looks like it will go away in about 10 months.) Thanks

If the wording in the amendment is clear, then the answer is easy. If this wording in the amendment is not clear, then it's dicey. However you interpret the (unclear) wording will affect future benefit calculations (you've set a precedent). But, if the intent of the amendment was to essentially use a lower pay and the amendment was poorly written, the employee would have a right to sue. What was said in the new SPD (or SMM)? This could help. How have you done other post-1996 terminations? You may have already set a precedent? Good luck.

This has been an administrative problem for years. I believe the PBGC's program for DB plans is a step in the right direction, and hopefully it will be extended to DC plans. For non-terminating DC plans, I agree with the comment "what's the big deal, just keep track of him." For terminating DC plans, I've heard and seen over the years various interesting approaches (some of which have been discussed here); I'm not sure what the IRS actually does in a plan termination if the plan sponsor does something they don't like. By the way, does anyone have a thought on the following idea for terminating a DC plan with missing participants. Do a spinoff of the plan into two plans; Plan A with all of the participants that can be located, and Plan B with the missing participants. (Obviously, a prototype document would keep costs down.) Then, terminate both plans. And, if the IRS doesn't like what you have done with Plan B and they disqualify it, what is the damage? Plan A, I belive, would be safe. (Maybe this is a lot of work for nothing, but for clients who are very concerned about this, ... )

Even if you do get plan documents and find an error in your benefit benefit amounts, I don't think the insurance company would be liable for the difference; after all, they committed to pay specified benefit amounts based on information provided by your employer. Technically, your former employer would be liable for any deficiency, but they are bankrupt so that's no help. However, when they went bankrupt, was whatever was left acquired by another company? (If so and if the acquisition was poorly structured, the acquirer may have unknowingly contracted for additional liability.) I wonder if the PBGC would have any liability here. Technically, the Plan wouldn't have been terminated properly (since all benefits haven't been paid), but there isn't much the PBGC could do to a company that has been bankrupt for 12 years. You might be able to get plan documents or SPDs from your former coworkers (if any of them saved them from 12 years ago). Good luck.

A privately held corporation will be setting up a profit sharing plan. Somewhere between 10% and 50% of the Plan assets will be invested in the stock of the corporation. Can the Plan meet nondiscrimination rules using cross testing? For example, can the Plan use an age-weighted allocation in its allocation formula?

Here is another reason not to have separate plans; one covering Group A employees (let's say the owners) and the second covering Group B employees (as if this horse hasn't already been beaten to death): To be safe, the client would have to have substantially the same investments in both plans. Otherwise, if the plan for Group A employees has better investment results than the plan for Group B employees, wouldn't this be discriminatory? As an extreme example, the Group A plan is invested in a stock market index fund that earns (over the long term), say 8% per year, and the Group B plan is invested in a money market fund that earns say 4% per year. (Remember that the owners who are covered by Plan A is also making the investment decisions for both plans.) I'm not sure exactly what section of the Code the IRS would object to (or for that matter what specific section of ERISA the Dept of Labor would object to), but it could be messy.

Larry M is correct. You would have had to amended the plan to the change allocation structure before December 31.

Assuming the standard "return of contribution due to mistake in fact" language in a plan document, can the employer recover their contribution in the following situations? 1. The employer contributes an amount to a profit sharing plan in excess of 15% of payroll. (The employer made the contribution early in the year in anticipation of a certain level of payroll which didn't materialize.) 2. The employer contributes $X to a profit sharing plan early in the year. At the end of the year, the employer determines that they have no profit (so the $X wouldn't be deductible). 3. The employer sends a check to the trustee as payment for trustee fees. The trustee deposits into the pension plan. The employer does not want this to be included as a contribution to be deductible under Section 404 (let's assume they are in full funding). The employer would rather deduct these payments under Section 162 as has been done in the past (when the trustee did not deposit it into the pension plan). 4. In a small plan maintained by the business owner's corporation, the business owner personally (and of course erroniously) makes the contribution to the plan. Let's also assume these are one-time events, and are clearly due to a slip-up. So, what can we do? Thanks

More on the "horizontal termination" issue: According to Harry O and 1.411(d)-2(B)(2), "a horizontal partial termination may occur when a DB plan is amended to decrease the rate of future accruals and a result of such decrease THE POTENTIAL AMOUNT OF REVERSION TO THE EMPLOYER IS INCREASED." (emphasis added) Not all conversions from tradition DB plans to cash balance DB plans are designed to save the company money. Some are designed to provide the same level of benefits, but to provide them with a career pay - lump sum orientation. So, switching from an X% final average pay plan to a Y% cash balance plan might cost the employer the same amount (either measured as a per cent of payroll or as the present value of total benefits promised). In this case, the potential reversion is not increased, so a partial plan termination shouldn't occur. Now, some will say that some employees are helped (will have higher future benefits) and some employees are hurt (will have lower future benefits) due to the switch to a cash balance plan, so there is a partial plan termination (at least with respect to the employees who are hurt). If that were the case, then ANY change in plan formula could potentially be ruled as a partial plan termination. That would include the following changes that are intended to be "cost-neutral" - (1) changes from a 1.0%/1.5% integrated plan to a 1.2% nonintegrated plan, (2) changes from a 1.0% final pay plan to a 2.0% career pay plan. Unless the benefit formula were clearly a reduction in overall projected benefits, I believe a strong argument against a partial plan termination can be made --- IMHO of course.

You are correct, employees of B and C have to be treated as being employed by the same employers. A practical problem which I have encountered in these situations is due to the relationship among A, B, and C. As far as B and C are concerned, they (sometimes) don't care about each other. They just happen to be owned by the same parent, that overseas company "A". Company A, being overseas, doesn't really understand why B and C have to be combined (for testing purposes); these silly US rules you know. And if your client is Company B (and you have no access to Company A, the parent, or Company C), Company B has to get you Company C's information. Company C might not be willing to share that information with Company B. (By the way, if you can get the necessary data and still cannot pass the 410(B)/401(a)(4) tests, consider using the separate lines of businesses rules.) Good luck.

I agree, there would be no reversion as long as the traditional DB plan is amended into a cash balance DB plan. And, it would be silly to terminate the traditional DB plan to get the reversion, and then start a new cash balance plan. That is because all accured benefits in the traditional DB plan would have to be fully vested and there is an excise tax on the reversion.

To MWeddell: Thank you for your observations on Ms. Schultz bias. Much appreciated.

The comments in this thread on the Wall Street Journal's recent articles on cash balance plans are accurate. However, the Journal's articles (including a new one on December 31) are not a balanced presentation of cash balance plans, as most practitioners can easily see. Can employees be hurt by a switch from a traditional DB plan to a cash balance plan? Yes. Can they be helped? Also, yes. Can employees be hurt by a switch to a 401k plan? Yes. Can they be hurt by a switch to a 401k plan? Also, yes. While I've expected negative employee reactions to the articles, companies can view these articles as, "Hmmm, these can be an interesting way to reduce our employee costs." Shortsighted? Perhaps, but it is done. Why is the Wall Street Journal not presenting a balanced approach? Perhaps they don't fully understand these plans. Perhaps they think 401(k) plans are the answer to every problem in the world and are trying to discredit every other type of plan (they already don't like "dinosaurs" like traditional DB plans despite the fact that DB plans still cover a majority of workers in large companies). Cash balance plans can be a good alternative or a good complement to either 401(k), profit sharing or traditional DB plans. They should be included in the types of plans considered by plan sponsors. While they can be used to help certain types of employees, as well as to "hurt" other types of employees, the same can be said about 401(k) plans, profit sharing plans and traditional DB plans as well.

When a benefit accrual rate is reduced prospectively or frozen, DoL regulations require a 15-day (or is it 14 day) notice. Is this notice required when a 401(k) plan changes the employer match from 25% to a match that is at the complete discretion of the employer? Here, the guaranteed match is decreasing from 25% to 0%, but the employer may decide to match at the end of the year. If this were not a profit sharing plan, the answer would clearly be yes. But since 401k plans are profit sharing plans, is the DoL notice required?