SoCalActuary

Usually, the supervisor is chosen (not for technical ability but) for supervisory ability. You have every right to kick this up in the IRS hierarchy to get technical advice. In addition, you are stuck with wasting your time doing the IRS' training for them on the job. However, if you are certain of your position, gently encourage the agent and supervisor to get more training to understand your position. You will probably encourter the agent again in the future.

A real taxation issue of partnerships is the allocation of pension costs between the partners. The question is very relevant every year for these entities. Another issue is that the allocated pension costs are compared to the economic value of the benefit available. For DC plans, this is a trivial problem, but for DB plans the issues include over-funding, underfunding, past service grants, interest rate changes, etc. For that reason, I like partnerships to use cash balance plan formulas.

You could certainly use a unit credit funding method to allocate the costs internally between the partners, even tho it is not the same as used for 412 compliance. How you allocate between the two is not highly regulated, so you could use the accrued present values. The IRS might like you to adopt a uniform accounting policy. I would warn you that inconsistent treatment from year to year may cause a change in accounting method.

If you have company contributions, they do not cause the contribution by the employee to exceed 100%. The annual addition can exceed 100%, which is separate from the problems with 402g. In the example given, the $28,000 profit sharing is an annual addition, but not a salary deferral. TIAA is concerned with 402g limits, because the employer contribution is not at issue in most 403b plans.

You would do better with a profit sharing or money purchase plan to meet your goals. These plans allow exclusions for job classifications. To my knowledge SEP's do not. You must cover employees uniformly if they meet the (very low) pay level and the required years of service in your document. You could however amend your existing document to require more than six months service, going as high as 3 years for eligibility. The PS or MP contribution would be the same for the eligible members, but your plan document could specifically eliminate the classes of employees you don't want to benefit. You would be required to have a plan administrator and file form 5500. Compare the cost of this against the 12.5% cost of benefits for the people you don't want to benefit. If the cost is favorable, then you are money ahead. If not, then keep your existing plan.

NIPA & ASPPA both have study notes and training on the techniques of cross-testing. Seminars and training have been available over the past 15 years since the early versions of 401(a)(4) regulations were issued. However, this training works best if you are tutored by a knowledgable practitioner.

We have done a few of these, and we figured our charges both ways: What is the normal annual charge for each return, vs. how many hours will it take. What was of concern to us after we started was the extra time not anticipated in the filings, most notably the extra time for finding trust accounting and the extra time negotiating with reluctant gov't workers. However, it's your business, so negotiate a fee that works for you.

My vote is for choice B, since we do not count compensation for years in which no credit is earned. However, this might vary according to the plan document, so I would look to the plan language to be clear. I do not believe that 415 reg's contradict choice B.

From the initial posting, I would guess that you are an HR person with a new responsibility for the 401k plan. Here are several issues you should manage: 1. Does the plan have different benefits than your other employees? Is this a good or bad thing? 2. Is the plan managed properly? Are deadlines being met, documents up to date, funds being transferred properly, expense charges reasonable? 3. Is the investment platform appropriate? Does it provide adequate range of investments? Can you get a better result by moving to the platform of your existing company? If so, who will manage the transition, black-out periods, investment education, etc.? 4. What can you learn from the people handling it now? What do the vendors do? Can you get a presentation from the existing investment, administration, pension attorney, or other persons responsible, including the in-house person? Consider spending a few dollars getting independent advice from a consultant who is not trying to sell you a solution. There are a few who are truly independent.

Someone might privately suggest to their client how much risk there is in audit. If GBurns made that point, there would be no problem. However, this is a public forum and people get upset to hear about what is probably fraudulent practice. So you understand, I know the difference between privately counseling someone of the risks and I will do so when appropriate. BUT, I don't like to see fraudulent practice openly discussed here.

If the plan has no annual addition for the Key employees, the TH min is zero. However, I guess you must have deferrals by the Key. The contribution is required to avoid disqualification (which I would guess to be unacceptable). So you should advise to make the 3% TH payment to eligible non-keys, or risk DQ.

You may be able to amend to a higher limit in the plan, since this is an increase in benefits. However, to operate within the terms of the plan document, you must refuse to accept excess deposits or move it to the next plan year. If you can move to the next year, and it was made after year end, then you don't count it for any purposes for the prior year. If you cannot do either, then you must refund, IMO.

Writing in March of 2005, how do you legally get a 2004 freeze?

The plan sponsor can't afford this.... hmmmm, did the plan administrator give timely information on the required contribution? Has the plan sponsor been informed of the cost of dis-qualification, excise tax on minimum funding, etc? Maybe I'm not being sufficiently sympathetic here, but I would explain the cost of failure, insist the funds be deposited (even if the business owner must make a loan from their own account), and advise that a proper plan administration should be done each year. This wouldn't happen to be one of those horror stories of "do-it-yourself" broker sponsored plans, would it?

The early version of the PWBA (now EBSA) forms prohibit use of an Adobe pdf format file in creating the form sent as the official filing. The EBSA web site stated that the postscript language did not produce a proper 2-dimensional scan. Now I see some mail that TPAs can create their 5500 forms in PDF format and send it to the client for signature. I don't remember the source of this advice. Either the rules have changed, the Adobe programs have been adapted, the EBSA software has changed, or maybe some practitioners are wrong. What did I miss?

We have had other discussion forums in which prices for services are discussed. You should watch out for shared discussions of pricing, so you can avoid the appearance of price collusion, in general. Your prices should be based on your own business model. What are your costs, and what profit do you plan to obtain. From my perspective, amendments have a high threshold of risk to the TPA, since failure to amend can cause dis-qualification, claims against EO insurance, etc. So I don't tend to make them a bargain, unless it is part of a larger process, such as a complete restatement of a plan.

From another perspective, you should consider this: Tha actuarial equivalent benefit is identical before and after the plan year. In the prior year, the participant was eligible for a benefit at say 65 and a larger benefit at the next year (say 66). One year later, the benefit at age 66 is still the same. The only change is that the age benefits commence is not 65, but 66. For evaluation and testing purposes, the benefit payable at 65 did not increase by retirement at age 66. For the same retirement age, 66 in the current year of testing, the benefit remained identical.

try drawing the 6 from the ending point, i.e., the middle of the figure.

Jay - I'm in agreement. The plan rates in the CB plan produce the benefit at retirement, not the 8.5% rates you can use in the cross-tested DC. This produces a lower benefit for the same dollar account balance, and less favorable results. On an editorial note, we have been able to promote DC plans because their interest rate is not tied to any realistic economic rates, while DB plans are tied up with about a dozen different interest rate restraints, and not all consistent either. What would happen if cross-tested plans had to use the proposed new funding rates with interest rates tied to the yield on bond maturities? The DB plans would start looking a lot better!

Thanks for the research Penman. I gave you a simplified way to look at the analysis, assuming that the Dr. took the maximum 415 limit at time of termination. There are some exceptions to worry over. The person might have had some grandfathered extra amount from before 1986 that exceeded the 1993 limits based on retirement age below 62. On the other hand, the Dr. might have had 415e fraction reductions, waived some benefits, or otherwise had benefits much less than the 415 limit. Lacking any better information, you can suggest that the $170,000 minus the $115,641 is probably a safe benefit to fund. If your new plan design is at age 65, then you would have at least 3 years of maximum benefit accruals available. If it is for age 62 or younger, the 115,641 limit at 65 became 75% x 115,641 = 86730.75 at age 62 for someone with SSRA 66. This would leave more than $83,000 of remaining 415 limit at age 62.

12 years ago you had a maximum DB limit of 90k at age SSRA. Now you have 170k at age 62. You could tell the Dr. that you will assume he took the maximum allowed under the old law, and only allow him to fund the difference in the new plan. This should still get you about 4 years of maximum funding in the DB. If that's not good enough for him, then he needs to get his old records.

You were unjustly enriched. The moneys you received were not properly determined. The correction is being made because you were not entitled to it.

The description of this plan in operation was interesting. At the LABC, an IRS actuary described audits of a number of 412i plans, including document provisions and plan operations. They found that none of the plans audited met their definition of a 412i as intended in the regulations. This plan appears to also fail, since the plan benefit is not the cash value of the policy. On a separate note, the top-heavy benefit would be met by the formula you describe, and you might need to have a side fund for top-heavy, which would require an investment policy. You probably also have PBGC non-compliance on past premiums, assuming this is a plan sponsor covered by PBGC rules.

Your point is well worth reminding all of us. If you tell a participant or their representative about their benefits, you should follow up in writing immediately. This puts them on notice of your decision and locks in the date of the opinion.

Holland mentioned the issue of a "soft-freeze", where the non-keys could get an increase in their TH min with new salaries. If so, then you don't have a requirement to do a change in funding method. But I do not recall any statement that you must do a soft-freeze post-EGTRRA. I stand with Blinky on his interpretation that you can ignore compensation in years where no top-heavy accrual occurs. Thus, a freeze becomes a hard freeze if properly documented.