AndyH

We have a client who put an early retirement window in who wants it to be recognized in a beginning of year valuation. We'd be interested in any comments as to whether this is feasible, practical, or impossible, and what might have to be done to accomodate this (i.e. change the valuation date?) I don't know all the details, but I think it's a calendar year plan with maybe 200 actives. A window was put in mid-year 2000. The 2000 val was done before the window was put in. The client wants the val revised to reflect the cost of the window. We're looking to (1) talk him out of it, or (2) tell him it is not practical or is problematic, or (3) tell him, if we do that, here's the approach we suggest (which we haven't figured out yet). Obviously, as of 1/1/2000, we don't know the actual experience of who took the window and how much that increased liabilities, so is it proper to change the val date? Any comments or experiences would be appreciated.

Kirk, Understood. But if anyone ever needed pro bono work ......!

Richard, it wasn't George Foreman, was it?!

All but the $3,000 can be rolled over. I can try to find a cite if nobody else knows one off hand. Richard, I can't easily find one cite, but it's clear from any distribution textbook that the balance to the credit can be rolled over unless it meets one of 9 exceptions: Periodic substantially equal pmts over 10+ years 401(a)(9) minimums the portion of a distribution not taxable distribution of excess 415 deferrals other similar 401(k) refunds loans treated as deemed distributions dividends undr 404(k) ps 58 costs "similar items designated by the IRS". IRS publication 575 is probably the best place other than a textbook to find this in print.

That's an excellent suggestion. Sorry to change topics for a minute, people, but Kirk, I'd sure like to hear your thoughts about poor sampat over in the DB board hot topic.

David, I certainly respect your opinions and your comments. I have never been through a small plan actuarial audit. I and the actuaries I have worked with happened to think that the IRS had a point, to a limited degree, so we did away with all 5% preretirement interest rates, and COLAs, J&S funding, etc. many years ago. Plus, it just wasn't worth the business risk. I agree that nra of 55 is defendable in some cases. I just think that people making $55,000 retiring at age 55 (not to mention age 53!) is a tough argument. A comment stands out in my mind that came up at a conference years ago that I did not attend; it's second hand information, but I was told that an IRS official made the comment that if a sponsor can only earn 5% long term on money in a (then) 8% treasury environment, he'd say they had breached their fiduciary responsibility. I can't argue with that, even now.

Beyond the actuarial assumptions, I'm hung up on a few things: the $55,000 salary-if we were talking about each the husband and wife with $500,000 in salary, maybe I could get by concern 1. Concern 2 is 415. How is 5% funding going to be paid out with GATT rates between 6.63% and 5.49% over the last year. Are we gambling about decreases in the GATT rates? What if the economy sours and GATT rates rise? Then where is he? Concern 3 is the investment return. Does anyone really believe he should put the money in low return investments just to get a deduction? What if the fund earns 8.5% or more? Then what are the deduction levels? Concern 4 is the assumptions. If an actuary is willing to sign off on NRA 53 and 5%, maybe that's fine, but the client needs to fully understand the downside, and that most actuaries would probably not sign off on these assumptions. At least, those I've worked with certainly would not. But, most importantly is the disclosure and education process, which seems lacking to me, as several of the posts here have pointed out as well. Knowing what I know, if I were in Sampat's situation, it would not be worth it. Just an opinion. Sampat, you've got some good comments in the posts here. If you were using one of the actuaries here, I'd feel much more comfortable with their recommendations. It's just that there are sharks in the water.

I couldn't agree more with rhp. I think the spirit of the EPCRS is that you should make participants "whole", which I would suggest means give them interest on what they would have earned. I took over a project which involved cleaning up a similar situation and that was the conclusion that I and our legal staff arrived at. I'm not sure there is anything that requires this. I think it's the right thing to do, and the prudent thing to do from a fiduciary perspective.

Sampat: I've set up many dozens if not a couple hundred of these plans over 20 years. I think this is a very, very bad idea. I assume you went on this message board to seek advice. My advice is, don't do this. Period. Find another consultant who either doesn't want to sell you anything or doesn't think he should limit your investment return to maximize your deductions. Bad idea. Bad advice. This is a sophisticated arrangement you're talking about, loaded with downside risk. At your age, there isn't much upside reward. My advice is stay with what you've got till you're 45 or 46. There are a number of complications with the situation you've described. The complications are simply not worth the tax benefits, in my opinion. When you're ready, find somebody top shelf to set this up. I don't think top shelf people set up what you've described.

Now this ought to get interesting. Do we think that the use of a retirement age of 53 and interest of 5% is aggressive? Appropriate?

Keith's comments about the contribution levels echo my thoughts precisely. Somebody's selling you something you don't want. I want to defer to the actuaries on this Board for the contribution levels, since the maximum deduction will depend upon how aggressive an actuary is willing to be. Having said that, I think you can get a deduction of no more than 1/2 your salary, and that's by using either aggressive assumptions or a funding method which front-loads the costs, which creates a potential risk. You should be able to get a deduction in excess of the 25% limit applicable to your existing plans, the question is how much above, and whether it is worth the risks and the expense. My advice is to consult with an actuary who does not sell anything. If you went with a DB plan with a contribution exceeding 25% of pay, I'd advise you to terminate the money purchase plan, and probably the profit sharing plan as well, but I'd probably keep that inactive for a couple of years, in case the DB contribution goes below 25% or payroll, in which case you could fund it. Your maximum deduction would be the greate of the DB required amount or 25% of eligible payroll, and the profit sharing contribution alone would be limited to 15% in any event.

Fred, there is an exception in the regs in the cite I noted above when a plan is general tested, but not cross tested. I'm not sure this is common knowledge. Paul, thanks for the quick feedback.

Based upon your ages, I think it's unlikely that a DB will be much if any better for you, but a couple of additional items would be helpful. First, is your company a corporation or a proprietorship or partnership? Is the $55,000 a total income figure (i.e. W2 or just base pay, and if base are there bonuses?). If not W2 income, net Schedule C or K1 income would be needed. Is your past income greater or less than your current income? If greater, a 3 year average would be helpful. In my experience, DB plans produce higher deductions at around age 45 or higher, but it all depends upon the assumptions that actuaries are willing to use, which will differ. I don't know the answer about the non-citizen question, but I can tell you that the inclusion or exclusion should be the same whether it is a DB or a profit sharing or money purchase plan. Is this person being paid U.S. dollars for work here, or for work in another country?

Is there any way around having to add the DB employee benefit percentages to the DC EBARS for purposes of the average benefits percentage test component of the general test? Assuming the DC plan does not have all rate groups at 70%, does the DB need to be added? It appears to me that the DB does not needed to be added if the DC is tested on a contributions basis (1.410(B)-5(e)(3)), but must be added if the DC is cross tested. Correct? To any of the DB people out there: Isn't this true with a DB general test as well-i.e. if the DB is tested on a benefits basis, the DC can be ignored?

You should look at DOL reg 2530.200b-1. While I did not go through it thoroughly, it appears to specifically state that a year of vesting service must be credited regardless of whether the person is employed at the end of the computation period.

You have to give the daughter the lowest contribution rate, i.e. the same as Dad will always fail with this size group. If Dad gets 5%, give the daughter 1%. That's the only way this will work as a cross tested plan. The daughter's EBAR must get below the NHCE's.

Thank you both for the suggestions. I will pursue them, and they are helpful, but I would welcome others. I am familiar with two of the three, (but I could be more impressed with either the product or the service of both), and the third does not seem to offer such a package as a stand-alone. There don't seem to be many options. Maybe the board regulars here could someday start another!

It seems to me that the money should absolutely be deposited with general assets of the plan. Period. Then decisions can be made as to whether it is appropriate to pay expenses from the Trust, but one should not be dependent upon the other. Clearly the sponsor should not base the expense payment decision on whether a class action lawsuit is won or lost (provided the sponsor did not directly pay legal fees). I do agree that whether the accounts are pooled or self directed is a practical consideration, but in theory it should not affect the decision to deposit such receipts with other Trust assets.

In many cross tested designs with sons or daughters of the owners, the most effective formula for the owner will be to "shaft" an HCE or two, i.e. bring them into a contribution rate lower or equal to most NHCEs. With this situation and a larger group, it is sometimes effective to break it into component plans, with one component being the owner and some NHCEs, tested on a benefits basis, and the other being the son/daughter and other NHCEs, which your typically would test on a contributions basis. After you've done it a couple of times, it isn't so hard to figure out.

The loan should have been taken with documentation which included a loan agreement and written provisions in the plan document, or at least a written loan program outside the document. Clearly the payments must be made one way or the other, but I suggest that you read the documentation, because it should provide you with guidelines as to when the loan is considered in default. It may require you to demand full repayment or else deem it to be in default (resulting in taxation among other problems).

Can anyone recommend a stand-alone 401(a)(4) software package for DB (or DB and DC), or is this not available in a stand-alone setting? We are very happy with our administrative/valuation software but do not like the testing package at all.

I agree with the last response from michaelv. Plus, I would think such a provision would need to be in the document, which would normally be the subject of a determination letter application, so I would insist the client amend the plan subject to IRS approval and seek one before implementing such a policy.

This may be a dumb question, but I'm having a brain cramp. If the profit sharing portion of a 401(k)/ps combination plan is cross tested for (a)(4) purposes, and it excludes "otherwise excludable employees" (minimum age/service) for ADP testing, does this require the same treatment for cross testing (i.e. excludable HCE's in the (a)(4) test but excludable NHCE's out)?

Fred, perhaps some clarification may help produce the answer. The more the specific the question, the more likely it is you'll get responses. What GATT provisions are you concerned about? Are we talking about 415(e), 415 limits for a retirement age prior to 65, or something else? Some GATT provisions can be anticipated in funding by including an attachment to the Schedule B. I believe 415(B) is one of them. Others can confirm this if this is the issue of concern. Regarding other amendment items, I cannot think of any provisions that must be amended prior to the GUST remedial amendment period assuming that the document was in pre-GUST order. One thing that is important is have the client make a decision on the application of the GATT rate (i.e. monthly, annual). We have clients sign something confirming the decision.

Our "standard" corrective amendment calls for an increase in the contribution for the youngest NHCE in the failing rate group. The contribution is increased in an amount sufficient to raise his EBAR above that of the failing HCE. Once done, the next youngest is increased in the same manner if needed. Many of our plans have this language as a "failsafe provision". On submission, the IRS reviewers have almost always approved it without challenge.