AndyH

Ishi, I've done the same many times. I think the reverse logic is relevant; there is no distributable event without termination of employment or attainment of normal retirement age (if the plan so permits). If anybody can find a cite, MGB can, but I have never found anything concrete.

lisbetf, if you or anybody else is interested and is a member of ASPA, there was what I consider to be a reasonably good outline of the pros and cons of 412(i) plans done by Larry Starr who did a session on it at the 10/2002 ASPA national conference. I believe it can be accessed through ASPA's website in the archive section (with difficulty), but if you know anyone who attended the conference they would have access to it through the CD rom that was issued to all attendees. I did not attend the 412(i) session since there was so much negative joking about the subject that I thought that a session on it would be overkill, but I did review the outline and it is useful. Here's the link. I don't see any copying restrictions: http://aspa.org/archivepages/conferences/2...es/starr-15.pdf

kmciver, the "model" answer to your question is, as Keith suggested, a cash balance plan or a db/dc combo. Perhaps better still, you might try to get them to simply adopt a discretionary class new comparability profit sharing/401(k) plan, with each opinionated doctor in his own class. This assumes that they are willing to live with a deduction of not more than $40,000 or $41,000 if they are 50+. The latter is the approach that will minimize your aggravation, IMO.

Then you are in a gray area. You need to satisfy the requirements of 1.410(B)-4 which states in part that a classification is reasonable if "a classification is established by the employer in accordance with this paragraph (B) if and only if, based on all the facts and circumstances, the clasification is reasonable and is established under objective business criteria ......". It then goes on to give some examples. I have heard a wide variety of opinions on what satisfies this standard. Your best bet is to seek a Favorable Determination Letter by demonstrating satisfiction of coverage by satisfying average benefits. And request a ruling on this matter specifically.

No, it does not pass. The NHCE EBAR must be higher than the HCE EBAR to have a chance. You have a 0% rate group consisting of the HCE and anybody with a greater EBAR, which is nobody. So that rate group has a R/P of 0%. Each rate group in this case must have a R/P of at least 45% to pass NCE. Yours is 0%. The 45% is the midpoint from a table in the 410(B) regulations. To pass using your assumptions and methodology (there are more complicate options such as inputing permitted disparity), you'll need to give the NHCE another $700.

Your EBARS are right, although due to rounding I get an NHCE EBAR of 5.59% instead of your 5.58%, but close enough.

Ages?

Yes, if they are "allocated or treated as allocated to the account of an employee under the plan for the plan year". This is the language in 1.401(a)(4)(2)©(2) which is referenced by the final cross testing regulations.

Archimage, the gateways do not apply for coverage testing.

How about a great big 412(i) plan! Each doctor can get a huge deduction no matter how old they are and they can evenly split the meager proceeds upon plan termination. When will we start seeing nonqualified 412(i) plans? Sorry, kmciver, but this is kind of an inside joke. I couldn't resist.

Jim Holland has repeatedly said that you cannot accrue a benefit which exceeds 415. What did the resolution freezing benefits say? If it had the effect of saying that everybody is frozen except one person, then I think you have 401(a)(26), 410(B), and 401(a)(4) issues. Benefitting means experiencing an increase in one's accrued benefit.

What does the document say? If it does not say they must be vested, then they should not be vested. I understand that the vesting issue only comes about regarding corrective plan amendments, which according to1.(401)(a)(4)-(11)(g)(4) "must have substance". This is where the vesting requirement applies. You cannot arbitrarily vest someone unless the plan says so.

If the requirement for a contribution is 1,000 hours, then it looks like under the terms of the plan he gets 3%, which means that either you limit the HCEs to 9% (assuming that the percentage contribution is discretionary), or you amend the plan in some manner which gets the top heavy only person to at least 5%. As Mike pointed out, however, you might not need to do this if the person is under age 21 or has not completed 1 year of service, because you could then disaggregate "otherwise excludable employees". But if you need to amend, one way is to have an amendment that says that for the plan year ending ___, in addition to the contributution allocated pursuant to section _____ of the plan, an additional contribution shall be made to the extent necessary to get any participant entitled to any contribution to 5% of pay. If this is after the end of the plan year, then you need to look at the rules under 1.401(a)(4)(11)-(g). Of, if the plan has a last day requirement for an allocation and it is a 2002 calendar plan, you could still amend the plan to waive the 1000 requirement for the current plan year, in which case everyone other than the owners get the same percent. Another possibility is to add a third class, those who are participants, are employed on the last day, but have worked under 1,000 hours. And give that class whatever you wish (but at least 5%). Those are your options.

dmb, I'm not sure what your question(s) are. There appear to be several issues in your question. Could you clarify it please.

Tom, I think you are right, but some documents have specific language to that effect. Our volume documents were written with some "catchall" language about the intent of satisfying the gateway regulations that our legal department feels authorizes such an increase (from less than 5 to 5) if necessary. Kind of like a gateway failsafe provision. It was approved. Other companies have documents which are specific to this point, or so I've been told. But absent such language, you need either a class that covers only such people (as Sal Tripodi suggested at ASPA) or you will need a corrective amendment. This is even more of an issue with SHNECS because then you have to deal with terminated people as well.

Right, and to clarify, the fact that it excludes some people is not a 401(a)(4) issue, it is a 410(B) issue, so the applicable test is a coverage test under 410(B), and based on what you've said you have a ratio/percentage of 100% so it is an easy pass. If I understand what you are saying you are covering 50% of nonexcludable NHCES and 50% of nonexcludable HCES, so you have a ratio percentage of 50/50=100%. For 401(a)(4), you must see if it satisfies one of the safe harbors.

Merlin, I think your last sentence is right, but let's back up a step. What are you testing for? Situation #1. Safe harbor plan but eligibility is defined as all employees with red hair. The test is coverage only. Because eligibility is not reasonable, Average benefits is not available. Must pass R/P. If R/P passes, done. Situation #2. Eligibility is 21/1 Year of Service. You can use either R/P or Average Benefits for Coverage Testing, regardless of what the allocations are. 2A If in #2 allocations are uniform, pro-rata, safe harbor, you are done. 2B If in #2, allocations are to classes that have definitions that do not satisfy the reasonable criteria, you must do rate group testing for 401(a)(4), which is comprised of the NCT (but you get a free pass by the reasonable requirement since it is rate group testing), so the rate groups must satisfy the mid point and the allocations in total must pass the 70% ABPT. 2C If in #2, allocations are to classes that are reasonable. Testing is exactly identical to 2B, as I see it.

I think you can do just about any of the above, although you are right about the vesting part. yes, you need to be careful about 411(d)(6). Our 11-(g) amendments, and failsafe provisions (which we've had to remove) specified that there were two contributions, the normal, and the corrective one. That way it at least appeared that this was something being added, not something being re-distributed. And our (now deceased) standard failsafe provision was comprised of an individual allocation to the youngest NHCE in the failing rate group to the extent necessary to elevate him to above the HCE in that group, then if that still fails, go to the next youngest, etc. until the test passes (whether by ratio or average benefits). And, p.s. all of your comments and concerns are valid, but there is great flexibility available with such corrective amendment.

No, Merlin. The plan as a whole would need to pass R/P for coverage purposes. But then you still need to do (a)(4) testing if allocations do not meet the safe harbor rules, and the rate groups need not all be 70%. There is a "free pass" into the ABPT for purposes of rate group testing under the general test provided that each group exceeds the mid point. So the "reasonable" requirement applies only to testing the plan as a whole, and whether or not the Average Benefits test is allowed for coverage testing, at least that is how I understand it. And, thanks, Blinky.

Well, I was told by a second person who saw the proposal that the projected dividends in the proposal were in fact 9%, and that at 9% the cash surrender value of the contract would not equal the dollars contributed until 15 years had elapsed. So that must be the trick. Investment income is consumed by "expenses", ala a life insurance policy.

Yes, if the document does not specify another method of correction. And you have up to 9 1/2 months after the end of the plan year. 1.401(a)(4)(11)-(g)

Well, this plague is spreading to the east coast. I took a call yesterday from a broker with some ethics. He said an accountant for a client of his who is age 46 and had a spouse of the same age had recommended a 412(i) plan with annual contributions for the two of them of about $300,000. He asked my view. I said it is bogus. It reminded me of this situation. The proposal as it was explained to me was for this program to last 5 years, at which time some type of "purchase" of the contract would be made. Sounds like some type of springing cash value scam. Apparently the proposal projects 9% dividends, which of course are backloaded, so even if true it would take many years just to recoup the dollars contributed. And in 5 years the 415 limits would be no more than 1/2 of the dollars contributed, so I can't see how a termination would make sense. I told the broker that whoever sells this should be sued in 5 years when the reality of the situation becomes apparent.

Blinky, I see your point but that's not the issue I'm trying to get at. I think that what is causing some confusion is: Does the use of allocation classes which are not "reasonable", in a plan which has a "reasonable" class of people covered (e.g. 21 and 1 YOS) prevent the use of the average benefits test for coverage purposes? I think the answer is NO, that classifications for allocation purposes have no effect on coverage testing, with one exception. The exception is that if one class (a named person for example) receives 0% or $0, then that has the same effect as if the person was excluded from the plan by name, which would be an unreasonable class for eligibility purposes. And an unreasonable eligibility provision prevents the use of average benefits for coverage testing.

I agree with Blinky, but there may be some confusion resulting from the ANNEVB's earlier thread, because Tom didn't seem to agree on that one, at least that was my take. Blinky, it might be helpful if you looked at both and commented. Here is the first thread: http://benefitslink.com/boards/index.php?showtopic=17267

Unless they are HCGs, that is.