Chester

LCARUSI, please see IRS Code Section 412c(10) for timing requirements concerning contributions made for plan years.

This company has big problems if they still want the contribution to count towards the plan year ending 12/31/97. The regs clearly state the contribution must be made within 8 1/2 months of the end of the plan year. We are way beyond that point, so the deposit, if it is made, must be allocated for the plan year ending 12/31/98. It is too late to make a deposit for the 1997 plan year, so the employees need new statements generated showing no contribution was made for the 1997 plan year. Ouch!!

Your plan document should define what happens in this situation. If the plan document is ambiguous, then I would consult a pension lawyer. Good luck!

The total contribution will be 3% of payroll, which means that those employees earning less than the wage base will get slightly less than 3% of pay for a contribution, and those employees earning more than the wage base will receive slightly more than 3% of pay (assuming the contribution is based on eligible payroll). Please keep in mind that the excess percentage (percentage applied to pay in excess of the integration level) can not be more than double the base percentage(the percentage applied to pay not in excess of the integration level). Therefore, the 4.3% spread may not be allowable, if it results in an excess percentage which is more than double the base percentage. The base and excess percentages can be determined through simple algebra once you know the total contribution amount, total eligible pay below the integration level, and total eligible pay above the integration level.

Section 1501 of the Taxpayer Relief Act specifically provides that matching contributions for self-employed individuals(as defined in Section 401©) shall not be treated as an elective contribution for a 401(k) plan. This also means that you would not treat the match as a deferral for the ADP/ACP tests as well as the 402(g) limit. This change is effective for years beginning after 12/31/97.

If the pension benefits are being paid entirely from the qualified plan assets for the two officers, and the officers are highly compensated, then this early retirement window would not pass discrimination testing and would be considered discriminatory by the IRS upon audit. However, if the enhanced portion of the benefits paid to the two officers is paid as a non-qualified benefit (paid out of general assets of the employer and not from the qualified pension fund) then this is legal, as the employer can choose to discriminate in favor of highly compensated employees on a non-qualified basis.

Yes, you can still make a contribution to a Roth IRA. The Roth IRA is not considered a qualified pension plan under the IRS Code, so the contribution limits applicable to 401(k)plans do not apply to the Roth IRA.

My understanding is that the 70 1/2 distribution option is a protected right, and the employee must be given the option of receiving the 70 1/2 distribution or deferring it, regardless of how many hours the employee is working. This option can be eliminated only for employees who attain age 70 1/2 in or after a calendar year that begins after the later of December 31, 1998 or the adoption date of the amendment.

Since you said he was a pension attorney, I suspect he might belong to the American Bar Association, so I would start there. If that pathway is blocked, I would report this situation to the Department of Labor. Good luck and I hope this helps!

My understanding is that the SBJPA changed Section 415 only in terms of being able to include amounts contributed to cafeteria plans. However, Section 404 still requires that these amounts be excluded from compensation.

The interest rate can be as low as the plan sponsor desires. Section 417(e) serves as a floor for lump sums, but the ceiling is open. However, from a practical point of view, you would not want to set the interest rate too low, because the plan needs to be adequately funded in order to pay out lump sums, and the actuary is constrained by IRS regulations to the use of explicitly reasonable interest rate assumptions for the valuation of plan liabilities and costs. Therefore, if the actuary has been using a 7% interest rate for valuing plan costs, but the lump sum rate is 3%, the plan will end up paying out more in lump sums than the actuary was funding for, and the plan will eventually become underfunded.

Gary, one more addition to my previous posting. The plan document must specify that the $10,000 annual benefit is a minimum benefit, and it would have to apply to everyone in the plan.

Gary, there is a special minimum benefit allowable under Section 415 of the IRS Code. This minimum benefit provides that if the employer never sponsored a defined contribution plan in which the employee participated, a $10,000 annual benefit can be provided, regardless of compensation.

Using 1983GAM table in 1998 is not a big deal, as mortality has not significantly changed in the 15 years since this table was established. The Society of Actuaries is working on an updated mortality table based on 1994 data, but I don't believe this table has been published yet--in any case you would have to wait for IRS blessing to use this table for 415 and 417 calculations.

I'm not sure what point ESOPwizard was trying to make with the plan termination argument, because DC plans also terminate, and employees lose the future contributions they were expecting to earn in that situation. I think it's highly erroneous to say that DB plans are worthless, because the optimum situation for a plan sponsor is to have both a DB and a DC plan. The overwhelming majority of large plan sponsors have both a DB and a DC plan, which appeals to both the highly mobile employee as well as the long-term career employee. The DB plan provides a base level of retirement income to the employees and the DC plan serves as a supplement to the DB plan. I have a feeling some of the people who have posted messages here are ignorant of the benefits of DB plans, and probably primarily are involved in the administration of DC plans. An employer is best served if they sponsor both a DB and a DC plan, and those pension professionals who only peddle DC plans to their clients are really doing a disservice to clients. The argument that DB plans are too expensive is highly fallacious, as a DB plan can be designed to be inexpensive and to serve many different purposes. The devil is in the details of the plan design, and that is where an experienced and knowledgeable defined benefit expert can come in handy (such as an enrolled actuary whose forte is designing defined benefit plans).

My understanding is that 12/31/98 remains the due date for restatement of a tax-exempt employer's calendar year plans for TRA '86, but a separate deadline of 12/31/99 exists for restatement of plans for tax-exempt employers due to SBJPA required amendments.

Here is my wish list: (1) Repeal Top Heavy requirements (2) Eliminate 150% Current Liability Full Funding Limitation and RPA '94 Override (3) Eliminate Restricted Benefit provisions for HCEs (4) Eliminate or reduce PBGC premiums for well-funded DB plans (5) Eliminate 401(a)(17) compensation limits (or increase them to the pre-1994 levels increased with inflation since that time) (6) Eliminate combined plan deduction limits for combination DB/DC plans (7) Eliminate quarterly contribution requirements for all DB plans (8) Modify maximum deduction for large DB plans from 100% of current liability to 100% of plan termination liability (9) Change definition of key employee to the current definition of highly compensated employee (salary exceeds $80,000 or 5% owner) (10) Change permitted disparity rules to eliminate uniformity requirement (so fractional rule integrated plans could be safe harbor with less than 35 years of service)

I got the impression from your posting that the 410(B) ratio test did not pass. However, that does not automatically mean thatyour plan does not pass the coverage test. If your plan passes the non-discriminatory classification test and the average benefits test, then your plan is deemed to satisfy the coverage test. For more information, please see IRS Regs 1.410(B)-4 and 1.410(B)-5.

My concern about DC plans is that there will probably be many baby boomers retiring in the next 10-15 years who will have insufficient funds to live comfortably in retirement. It is foolhardy to continue to expect to have the kinds of returns in the stock market that we have been experiencing the past 4-5 years. In fact, the long-term average return on equities (based on a 70+ year history) is about a 10% annual yield. In addition, most employees are putting money into a DC plan without the faintest idea of whether or not their contribution rate will be sufficient to provide an adequate level of retirement income. In fact, I would venture to guess that for participants in a 401(k) plan, most participants only put in enough deferrals to get the maximum match from their employer. I also have qualms about the ability of most employees to be prudent investors. Most of the employees lack enough sophistication/training to make informed, intelligent investment decisions. I also take issue with the notion that DC plans cost less than DB plans--ADP/ACP tests, investment management fees, administration fees, etc. for a 401(k) plan can get pretty expensive compared to a plain, vanilla DB plan. We administer both DC and DB plans at our firm, so I have first hand knowledge of what I have been speaking about. DB plans have their proper place, just as DC plans do, but it is entirely erroneous to say that DB plans are dinosaurs, or that they do not serve their purpose any longer. The next great American crisis will be the insufficiency of retirement income that DC plans provide (because the stock market will not continue to provide 20-30% annual returns that people have become accustomed to).

I am caught between a rock and a hard place, and I am looking for some advice/guidance. The Taxpayer Relief Act of 1997 amended the Current Liability Full Funding Limitation, and changed the amortization period for the FFL bases to 20 years from 10 years. The Conference Report for TRA '97 states that existing amortization bases will use the 20 year period reduced by the number of years since the base was established (to also get the existing bases on a 20 year schedule). The Conference Report also states that no amortization is required with respect to funding methods that do not provide for amortization bases. Our firm uses the Aggregate Method and we have many plans which have been maintaining FFL amortization bases. We also use a beginning of year valuation date, and so we will begin to process 1/1/99 valuations in January. Assuming the IRS does not come out with any guidance between now and then, here is my conundrum: Do we continue to set up amortization bases and maintain existing amortization bases, since what is in the Conference Report did not make it into the IRS Code yet? If that reasoning is followed, then we should not be using a 20 year period for the existing bases, since that change was also in the Conference Report. Or do we follow the Conference Report and get rid of the FFL amortization bases? Or do we just not set up new FFL amortization bases, but continue to maintain the existing bases? Is anyone else in this predicament? I am desperately trying to find out how others are interpreting this regulation.

Ray, I do not know enough about your situation to know if you have any alternatives, but I will throw out a scenario where you could recalculate the costs to factor in the improved funding picture for the plan. Assume the valuation is done on the first day of the plan year, and the Schedule B has not yet been filed for the last plan year that has ended. You could change the cost method to value the plan as of the last day of the plan year, which would take into account the investment performance of the plan for the year (assuming the investment results were good). Then, as long as the necessary minimum contribution is made within 8 1/2 months of the end of the plan year, and the Schedule B is timely filed (perhaps using Form 5558 to extend the filing date another 2 1/2 months, if needed), the costs would reflect the investment performance of the plan, which it appears from your question that you would like to have happen. Hope this helps!

My understanding is that if this is an ERISA plan, the payments should be remitted to the insurance policy as soon as administratively feasible. In fact, for 401(k) plans, the DOL has ruled that employee deferrals should be deposited no later than 15 days following the end of the month in which the contributions were made. I would expect that this employer would have problems defending this practice if they were ever audited. The fact that employees are losing interest on their own contributions should be cause for concern, and I would recommend that the employer cease this practice immediately.In fact, consideration should be given to filing a VCR submission to the IRS if this is an ERISA plan.

You can obtain this guide from the American Society of Pension Actuaries (ASPA), as they use this reference as a study aid for the exams that they administer. You can call them at (703)516-9300 if you want more information.

In the 1997 practitioner edition of 'Qualified Retirement and Other Employee Benefit Plans' on page 340, the paragraph states "If the participant has not yet retired, the amount of payments under the QDRO will be based upon the present value of the participant's normal retirement benefits accrued to date (thereby disregarding any possible employer subsidy for early retirement, although the QDRO may provide for recalculation of the amount if the participant actually retires with such a subsidy)."

Yes, a DB plan can accept a rollover, as long as the plan document permits the acceptance of rollovers. The money should be kept in a separate account, or at a minimum, accounted for separately from the other DB assets.