richard

I agree with Pax; this is a great question, and that you would have to keep all of the annuity forms available as part of the plan termination. That an insurance company will offer "their rates" is, in my opinion, not acceptable. Now, if you apply for plan termination approval to the PBGC and IRS, bring this to their attention, and get their approval, are you OK? Frankly, I doubt it. Conceivably, an employee could sue to get the plan's basis, not the insurance company's. Can you forcibly cashout the employees' contributions, and then purchase annuities from an insurance company (without the cash refund feature required in a contributory plan)? No, becuause you cannot forcible cashout part of an employee's benefit. What can you do if you cannot find an insurance company to quote using the plan's basis? That's a problem, since an insurance company that's willing frovide the quote might be very expensive; and that would come out of the client's pocket. One idea is to purchase the annuities with the proper cash refund calculation from the PBGS. If an insurer is not able to be found, I believe the plan sponsor can buy the annuities from the PBGC. (This places the plan under PBGC trusteeship.) Unfortunately, the PBGC's interest rates are very low, and hence this is an expensive solution. I don't like the above solutions, but what do you all think about the following idea? Freeze the plan. Then purchase the annuities from an insurance company based on the insurance company's cashout calculation methodology. Then terminate the plan. Then buy the remaining "annuities" from the PBGC; i.e., place the remainder under PBGC trusteeship. Now, what is the remaining benefit liability. It is the difference between the different cash refund calculation metholologies, which (hoepfully) cannot be too expensive even at the PBGC's convservative valuation methodology.

An individual (Mr. X) has two businesses. Business #1 is set up as a sole proprietorship, with a 1040 Schedule C. No other employees other than himself. Business #2 is set up as a corporation (Corporation M), with Mr. X as the sole employee. He is setting up a 25% Money Purchase Plan. How can he set up the plan so that income from both the sole prop as well as his W2 salary from Corporation X is included for determining his contribution. (Of course, the $160,000 pay limit applies to both businesses combined.) If the plan covers both businesses, what EIN is used for the 5500 filing? If the total earnings exceeds $160,000, which business takes which deduction? Ideas? Thanks..

But if the improvements were paid for by the plan and performed by an unrelated third party, that would be OK. The plan sponsor cannot be involved in the development without needing a PT exemption.

Tracking billable hours is both a good idea and a bad idea, depending on how it's used. It is a good idea if the purpose is to honestly assess how long it takes to perform work on clients. To provide a guide on how much to bill clients in general. It can easily be a bad idea if tracking billable hours is used to monitor and reward/punish employees. That is because billable hours is, at best, an art. What counts as a billable hour? Time spent chatting with the client and keeping them happy, time spent on work that has to be redone when mistakes are made, time spent on fixing computer glitches on client work, time spent on general work that affects many clients, time spent on secretarial work, time spent supervising secretaries, etc.) If you have billable hours goals for employees, I can assume you that the requisite number of billable hours will find itself on a timesheet. Funny how that happens. Also, how willing will employees be to work on non-billable work that is valuable to your firm? Can they bill time for improving a relationship with an advisor? Resist the temptation to use billable hours as a means to monitor employee performance; other ways are much better. Also, you need a good timesheet / billing computer system. There are probably quite a few good ones available; I defer to other respondents to recommend specific ones. In short, it's a good idea if you use it to manage the firm, not to manage your employees. (The above is all my humble opinion)

Your idea can work but the plan sponsor must be very, very careful. As a practical matter, it must be an all-cash deal. That is usually a problem. Also, the investments of the plan must be diversified. Will almost 100% of the plan assets be the raw land? That's hardly diversified. Once 5500EZ filings are due, there must be a valuation of the assets. A formal appraisal is a plan cost. (I've heard the IRS is "somewhat loose" in enforcing the valuation requirement for a one-person DC plan, but I wouldn't bank on it ...) The raw land could generate income, via land lease. That's fine. Any expenses in managing the land should be borne by the plan. A potential problem is if the Employer (or the participant) is the one performing the land management services. That's a potential violation. However, if he has someone else in the real estate business perform those services, that's fine (but the plan will have to pay for those services). This is not too uncommon for real estate people. Good luck.

Let me add my three (inflation!) cents worth. Yes it will be a political decision (gee, that's a no brainer). Yes, the actuarial organizations are providing Congress with various analyses of the options (and they raise some very good points). Yes, the investment community is pushing for privatization (they have their self interest, we have ours). But I wonder if a swing to privatizing Social Security (with individual bearing the investment risk and a lump sum focus) will actually help Corporate defined benefit plans. After all, on some level, individual intuitively want balance. With the current Social Security providing a "floor" with the government assuming the mortality and investment risk, employees are comfortable with defined contribution plans. If Social Security were completely privatized (obviously an exaggeration), perhaps individuals would not be so comfortable with the risks of DC plans, and would appreciate the "guarantees" of DB plans. (Or put another way, any move toward inviduals bearing investment risk in Social Security might be met with a move toward individuals bearing less investment risk in private retirement plans.) Maybe this is wishful thinking ... any comments ...

You are right, the post-NRA accruals in the plan do not comply with the regs. (Your description of the regs is accurate.) So, you might consider calculating the benefit based on what should be in the plan. This is because you have to reflect ERISA-required provisions for minimum funding even if it isn't in the document. (By the way, a simple solution is for the plan to be amended to comply with the regs, but that would be too easy.) Now, to calculate the benefit based on the plan as stated: For adding interest to the age 65 lump sum, look at the wording in the plan. See if there is a reference to how to calculate interest. Alternatively, you might use the interest rate in the definition of actuarial equivalence (where there is an interest rate), and take the position that adding interest to the age 65 lump sum is calculating the actuarially equivalent benefit. (You could argue against using the lump sum interest rate since that rate as defined in the plan is used to convert a monthly pension to a lump sum.) Now as far as converting the lump sum to the equivalent annuity, again look at the wording in the plan document. This is a bit trickier because "actuarially equivalent" is probably defined as some interest rate/mortality combination EXCEPT for converting monthly benefits into lump sums. Here, converting a lump sum into a monthly annuity is sufficiently close to warrant using the lump sum factors. (As you can tell, I like this situation as much as you do. Yuck!)

To P. Daniels I don't understand why in a profit sharing plan would you have to specify the percentages to each group. Does anyone out there understand why? Under a recent IRS notice (of course I've forgotten which one), all you need to do is to define the groups and define the allocation methodology within each group (typically in proportion to pay within that group). At the time that the plan sponsor makes the contribution, they specify how much goes to each group.

To P. Daniels' message: Is this an adoption agreement for a money purchase plan or a profit sharing plan? To Cbanerer's message: #1 - Yes, you can base class definitions of date of hire as well as length of service (but be careful to clearly define what the date of hire is for rehires) #2 - You are correct. Employees can move from one class to another (similarly, an employee can change classes by changing job title).

As long as the PS plan doesn't "need" the DB plan, you can ignore the DB accruals for 401(a)(4) purposes. There is a section in the 401(a)(4) regs that permit separate testing and calculations of DB and DC plans. Alternatively, you could choose to aggregate both plans and use both the DB accruals converted to contributions plus the DC contributions (or DC contributions converted to accruals plus DB accruals), which might actually be better for your client (although more work for you).

Let's assume you don't get any answers from the attorney / "administrator" either before yearend, or at all. What can you do NOW to help your client? I'll assume it is a DC plan. (There was no mention of an actuary being involved in your message.) Since it is a sole prop, we know what the 1/1/98 account balance is; it is equal to his 1/1/98 assets, increased by any 1997 contribution made in 1998. (And the client should have his brokerage statements or other asset records.) Nobody has a plan document. If somebody (the client, the accountant) knows whether the plan is a money purchase plan or profit sharing plan, why not amend and restate the plan before December 31, 1998, retroactive to January 1, 1998 for non-statutory purposes, and retroactive to the applicable GATT, USERRA, etc. dates, otherwise. There would be a potential problem when applying for determination letter, since the IRS wants to see the current determination letter. You might be able to get around this by using a prototype (I know, I'm not happy with this because the client is still at risk for prior years if they are audited, but I'm not going to solve every problem in this message.) Finally, if nobody is sure whether this is a money purchase or profit sharing plan, you can tell by looking at the contribution history (by going through the client's retirement plan assets back several years) and his earnings history (from his tax returns). If the contribution divided by the earnings varies each year (and is hopefully less than 15%), it is a profit sharing plan. If it is a fixed percent above 15%, it is a money purchase plan. If it is a fixed percent 15% or less, then we still don't know (and again, I never promised perfect solutions.) The risk remains as to what happens if the client is audited and the attorney/"administrator" still hasn't provided documentation. Then, it's a good time to get an attorney. Good luck.

Chester's comment is quite accurate. Unfortunately, small companies cannot afford to have both types of plans, and mid-sized companies often don't think these issues through. Joel's dissatisfaction with DB plans is unfortunate. In a DB plan, the employer guarantees a benefit amount (calculated by formula based on your service and salary). When an employee terminates employment or retires, he/she IS ENTITLED TO A SPECIFIC BENEFIT AMOUNT, paid monthly or perhaps in a lump sum. The employer is taking on the risk of insufficient assets (cause often by poor investment performance). In that case, the employer must INCREASE CONTRIBUTIONS AND MAKE UP THE DIFFERENCE. Conversely, if there is good investment performance, the employer can either decrease contributions OR increase benefits. Sounds fair, since the employer is taking on the investment risk. (If you employees would like to have the investment risk and reward, that's called a DC plan. But remember, investments go down as well as go up!)

Which of the following types of investments are not permitted under ERISA? (Let us assume that the plan sponsor is sophisticated, has proper advice, the overall assets are properly diversified, and these "exotic investments" are used either to hedge DB plan liabilities or the other DB plan assets.) Buying stock (or index) options Selling covered stock options Buying (or selling) interest rate options Buying (or selling) interest rate futures Buying (or selling) commodity options Buying (or selling) commodity futures Buying (or selling) foreign exchange options Buying (or selling) foreign exchange futures

PBGC variable premiums based on market assumptions (politically hot) Remove 401(a)(26) for DB plans (too arcane) Increase the 401(a)(17) and 415 limits to reflect actual inflation since the 1980's (too expensive).

You know, it's interesting when talking to business owners and senior management about why they have (or do not have) retirement plans. Franklin Evans' observation of why sponsors have plans (to keep valuable employees and to maximize tax deductions) is accurate. The paternalistic "provide for the orderly retirement of our workforce" is limited to fewer and fewer companies. Which of the two objectives is paramount depends on the business owner. Often (particularly with the smallest companies), maximizing tax deductions is the only objective. In this case, if the tax laws do not allow sufficient favoritism to the owner, he/she will simply not have a plan. Therefore, the employees will be left out. The only way around this would be some sort of mandatory pension plan for all employers (remember "Minimum Universal Pension" a/k/a MUPs in the mid 1980's). As far as the other objective, attracting and retaining employees is important if the owner cares about attracting and retaining employees. If owners believe employees are interchangeable (ask management of large companies over the last 10 years what they think), why bother to provide benefits? By the way, while there can be significant abuse using DB plans, you can get a lot of abuse with DC plans. In some cases, even more than with DB plans -- consider age weighted profit sharing plans. It's just that it is easier to hide abuse in DB plans. (Or if "fair benefits" are the company's goal, they can use either DB plans or DC plans.)

I'd agree that you could amend the plan as you want to without violating 411. The only thing I'd be careful of is regarding participants who have already terminated and who haven't received their payout. For example, today is November 23. Assume an employee terminated November 12, and would be do his/her September 30 account balance. I'd be uncomfortable forcing him to wait until after December 31 and taking his December 31 account balance. So, I would make this amendment prospective only; to be safe, make the amendment apply only to employees who terminate in the quarter after the amendment is adopted or later (i.e., adopt the amendment December 10, but only applicable to employees who terminated on or after January 1).

I have very little sympathy for business owners (including independent contractors) who forgo the valuable tax deductions and tax deferrals because of fees. If the independent contractors object to the fees for SEPs (let alone for money purchase or defined benefit plans), then let them pay their taxes. Washington needs it! (Yes, I know we should be able to convince them of the value of tax deferral, but sometimes they need to learn the hard way or years later.)

I have generally taken the position that a company cannot set up a retirement plan for its independent contractors, only its employees. (See the thread on 401k Plans for independent contractors.) However, I understand there are some "employees" that by law can be considered as independent contractors for some purposes and as employees for others. Specfically, I have heard that this applies to life insurance agents. In other words, life insurance agents are technically independent contractors, but can be covered under the insurance company's retirement plan. If this is true, to what other agents/brokers does this apply. Real estate agents/brokers? Travel agents that work for an agency? Others?

For money being distributed from a DC plan after age 70-1/2: 1. If the distribution was less than the minimum required under 401(a)(9) in a previous year (say 1996), does that affect the minimum required in the current year (say 1998)? Does the answer to the previous questions change if no excise tax has been paid on the inadequate distribution? 2. Assume that nobody can reconstruct the minimum distribution methodology used in prior years (single or joint life, recalculate life expectancies or not) because data is unavailable. What rules govern the methodology to be used in the current year?

Plan sponsor forgot to file 5500C/R in time. Filing was due July 31, and extended to October 15. 1. Is the $25 per day penalty measured from July 31 or from october 15? 2. Is the penalty supposed to be paid along with the 5500C/R, or will the IRS send a bill? Are there advantages of either approach? 3. What success do plan sponsors have in avoiding the $25 per day penalty. In this case, the plan sponsor put it under a pile of papers, and ... Oops!

Cash balance plans are defined benefit plans, and are accounted under FAS87 as defined benefit plans. Even though cash balance plans are described as having "lump-sum" accounts that increase with an employee's service, each "lump sum" can be converted to a deferred annuity. So, the pattern of lump sum accounts over an employee's career can be translated into a pattern of deferred annuities (i.e., accrued benefits) over the employee's career. Standard FAS-87 treatment can then be applied. Several issues present themselves. First of all, is the ABO equal to the lump sum. No. The ABO is the lump sum convered to a deferred annuity (based on the terms of the plan), and then discounted to the present time by the FAS87 settlement rate. They would only be equal if the settlement rate happened to equal the interest crediting rate under the plan. Also, the "benefits attribution" in FAS87 was designed with final average pay plans in mind, cash balance plans (which are akin to career pay plans) are therefore tricky. The disclosures are identical to any other defined benefit plan. There are quite a few other unique cash balance issues, but the above should get you started. Good luck

The DB vs. DC debate is lengthy, far from over, and often based on whether or not your business is being helped or hurt. That being said, there is a lot of misinformation out there that has led to the popularity of DC plans. Also, the unwillingness of sponsors of DB plans (and their advisors) to accomodate the desires of employees has hurt DB plans. Finally, Congress and the IRS have (with their own biases and agenda) affected the mix. For example: Issue #1: Are DB plans are more expensive than DC plans? Answer #1 - You can design an inexpensive DB plan (such as 0.2% of earnings per year of service) or an expensive DC plan (such as 10% of pay). Issue #2 - DC plans have quicker vesting and more liberal eligibility than DB plans. Answer #2 - That is based on plan design; not law. Issue #3 - DC plans are more portable than DB plans. Answer #3 - Both types of plans can be designed to allow immediate lump sums that can be rolled over (i.e., portable). That DB plans often do not do this (and hence are not portable) is by the choice of the plan sponsor. Issue #4 - DC plans allow employees to get large investment gains. Answer #4 - Of course, there can be investment losses. More importantly, the cost of a DB plan is also based on the investment performance of the fund. The same favorable investment performance that allows large employee retirement benefits in DC plans can be used to provide equally large retirement benefits in DB plans (if, and that's a big if, the employer uses the investment gains to provide these benefits.) Issue #5 - employees prefer a lump sum to a deferred (or immediate annuity) Answer #5 - That's a biggie. When a 65-year old (in "normal" health) is given the choice between an immediate life annuity of $1,000 per month and a lump sum of, say, $90,000, most would prefer the lump sum. Now, the actuarial value of that lump sum is, say $120,000. So, if you were an employer and your employees tell you they would prefer $90,000 vs. something "worth" $120,000, which would you provide? (Perhaps, as a matter of public policy, there is a need for some education!) Issue #6 - Congress and the IRS does not provide a level playing field between DB and DC plans. Answer #6 - (OK, this is my bias). This is one of the more critical reasons why DC plans have flourished. Congress applies 401(a)(26) only to DB plans. Congress only an employee to make tax-deductible contributions only to DC plans (i.e., 401k plans); employee contributions to DB plans are not deductible to the employee (even employee contrutions to health care plans are deductible under Section 125 Cafeteria Plans). DB plans have to offer annuities with their resulting complexity; some DC plans (profit sharing and 401k plans) do not. DB plans have a critical distinction from DC plans -- namely shifting the investment and life expectance risk and reward to the employer. In fact, if you ignore the life expectancy risk, then the only difference should really be who bears the investment risk. All other plan design factors can be found in DB or DC plans; sometimes though hybrid plans that make certain aspects of DB plans look like DC plans, and vice versa. (For example, cash balance plans are a solution to many of these issues. Cash balance plans, for those not familiar, are defined benefit plans that look like defined contribution plans. So are "pension equity plans" which are the final pay version of cash balance plans. And target benefit and age wseighted DC plans are DC plans that attempt to reflect the way benefits are earned in a DB plan throughout an employee's career.) Of course, other factors such an employee-choice and self-reliance, and changing nature of the employer-employee relationship, etc. are integral to this discussion. However, how about someone else discussing these factors; you all have probably heard enough from me.

Rather than running the 10 (let's say) independent contractors through a single multiple-employer plan, it might simpler to set up 10 (let's say) single employer plans. Sometimes, brute force is a lot more effective, rather than worrying about the unique issues involving multiple employer plans (availability of prototype, filing requirements, etc.). Also, setting up single employer plans allows the independent contractor to decide what is best for him/her; whether it is a SEP, 401(k), defined benefit, etc.

What was the law/regulation/IRS Notice or other that allows pension plans to pay lump sums with a 7 day waiting period rather than forcing the employee to wait 30 days? (I understand the plan doesn't have to be amended to provide for the 7-day waiting period until the end of the remedial amendment period. But, it can be operated with the 7-day wait if appropriate notice is provided.) What is the content of the waiver notice that the plan must give the employee (and spouse, if applicable) to take advantage of the 7 day wait? Is this content in electronic format?

A company has a profit sharing plan that allows in service distributions. There are 3 participants in the plan. An employee under age 59-1/2 (who happens to be the owner) took an in service distribution and rolls it into an IRA. Shortly thereafter (within the same year), the profit sharing plan was terminated. He took his remaining distribution and rolled it into an IRA. Were both distributions in fact eligible to be rolled over?