ERISA1

I don't think that the problem is solved by creating a new plan for the DB participants and letting them defer into that plan. 404(a)(7)©(ii) requires that: "no amounts (other than elective deferrals) are contributed to ANY of the defined contribution plans..." Since there will be some employees accruing profit sharing contributions under a DC plan, it seems that, to avoid the 25% deduction limit, you need to both: 1. Remove the benefits of the DB participants from the actively funded DC plan; and 2. Not allow the DB participants to make 401k contributions under any plan. In fact, I'm starting to think that the DC account balances of the DB participants must be distributed entirely - not just rolled to a frozen DC plan. This, of course, is impossible with a 401k account balance. Does anyone think the following is possible without being subject to the 25% limit under 404(a)(7)?: Company sponsors a 401k psp in which all participants made deferrals. Company now wants to add a DB plan covering some former DC plan participants. Other DC plan participants will continue to accrue profit sharing contribtuions.

Exactly! One category per participant plans can open the door to a world of operational issues. In addition to the huge risk of engaging in age discrimination, I find the next most dangerous result is that you'll turn a profit sharing plan into a CODA (cash or deferred arrangement, subject to deferral limits under code section 402(g)). For example, what's to prevent two equal partners from taking different levels of profit sharing contribution? If they're partnership, shareholder or employment agreement defines their income as the sum of cash compensation and retirement contribution (as is always the case in partnerships), then any variation in profit sharing contribution is likely to constitute a coda. There are a slew of other issues; the above two are just the tip of the ice berg. So, while I agree that plan designs like this can save clients money, the tpa who undertakes to administer such plans had better be at the top of their game.

Interesting comments Andy. To me, it's all just a matter of proof. That is, if you drafted a Tier for those under 30, and give them more than those in the Tier for over 40, you'd have hands-down proof of age discrimination. I've never seen something as blatant as that. I do think that alot of contribution categories are drafted in a way that papers over the fact of age discrimination. For example, a category for filing clerks, more often than not, is designed to focus dollars on young people (most employers don't have a special affinity for filing clerks - beyond the fact that they might help hold down contribution costs). The problem for a plaintiff's lawyer is that s/he will have to be able to prove that age was the sole/primary motivating factor in creating this special contribution category. I believe that the type of plan design described by Randy Staples in the opening querry above is most prone to age abuse. Since the plan document makes every participant a separate category, it is very tempting to provide higher benefits to younger employees - because they will be the cheapest ones to get into the Rate Groups. Still, it comes down to a question of proof. An employer could single out a 25 year old because s/he made a valuable contribution to the business last year. On the other hand, if the 25 year old has no special attributes other than youth. Or, worse yet, if the tpa documents the fact that he recommends selecting the 25 year old because of her youth, I believe a judge or jury (or the EEOC) could easily enough conclude that this plan design was used as a subterfuge for age discrimination.

I appreciate the follow up question. In order to understand the problem I'm describing, you have to have some feel for cross testing and rate group testing under Code Section 401(a)(4). Here's how I see it: 1. When cross testing, you have to get a minimum number of people into the "rate groups". In my example, I described a scenario in which more is given to the 25 year old than to the younger employee, because when cross testing, you have to give more to a person who is older in order to give them the "equivalent benefit" they will need in order to get into the rate group. 2. In the abusive cases I have seen, the process of giving more to people as they age continues, but only for the limited number of people needed in order to fill up all of the rate groups. This process usually does not go on with people who are 40 or older. Even if it did extend to someone over 40, as long as there are participants who are older than that, you are giving less to those older employees simply because of their age. 3. ADEA, the anti-age discrimination law prohibits discrimination against people who are 40 and older. In my example, I am giving more to the 25 year old than to the younger employee. But the question is: How are the people over 40 being treated? If they're getting less than the people under 40, you've got an age discrimination problem. 4. Code Section 411(b)(2)(A) was added to pick up the anti-age discrimination provisions of ADEA. So, this process not only violates ADEA; it is a disqualifying action too. Does that help?

IRS confirmed the viability of these designs at the last annual ASPPA conference. HOWEVER, in addition to the numerous qualification/testing twists required by these designs, you've got to be very careful to avoid getting into trouble in other areas. For example: You should not use the flexibility of the design to select people for benefits on the basis of youth because that violates age discrimination rules under the Code and ADEA. I've seen designs that give just enough to the 21 year old to get her into the rate group. Then, they give a little more to the 25 year old, etc. The older employees end up with gateway minimums - less than the younger employees. Cases like this are headed for trouble for sure. Also, you have to be careful not to turn your profit sharing arrangement into a CODA. This happens if you let partners or shareholders vary their rate of contributions. Just because the document allows it, doesn't mean it's legit. I really question whether these designs are worth all of the effort.

I guess Americans are just following the example set by their President. After winning his 54% "mandate", he said: "I'm not planning on saving my capital. I'm gonna spend it."

Thanks Tom. I get the impression that IRS offers only one solution - pay up. What if the Employer is insolvent? Do you think the document in this case leaves any room to argue that it is not hard wired?

I would agree with Tom. IRS Notice 98-52 says that notice must be "given to each participant". We've always understood that to require delivery; not merely posting. By the way, I'm facing a doozy of a safe harbor notice question. I've made a posting under the Correction of Plan Defects part of the discussion boards. It involves the failure to give notice in a plan that may be "hard wired" for safe harbor. I'd really appreciate any feedback.

I have a prospective client. They are on a pre-GUST prototype document prepared by The Benefit National Companies. It has a provision which reads: "Within the time period described below, the Employer will provide written notice to each Participant that the Employer will make...(a 3% non elective safe harbor contribution)" The employer DID NOT give notice within the required time frame. I have 2 questions, and will appreciate your input, particularly, on the second: 1. Do you think the plan is subject to a safe harbor contribution requirement? Even though the document says the employer will give notice, he did not do so. Would you agree that this would be an operational violation that can be self-corrected by applying the ADP test? 2. At the recent ASPA Annual Conference, General Session 4 involved IRS Q&As. Question 16 (from the handout materials) spoke of a truly hard wired safe harbor election. In that question, NO notice was given. The questioner asked (a) must the plan perform the ADP test, and (b) must the 3% still be contributed. THE IRS RESPONSE was: "No; You have an operational defect which should be corrected under EPCRS. This will be additionally discussed from the podium." DID ANYONE HEAR WHAT RESPONSE WAS GIVEN FROM THE PODIUM? What is the operational failure, and how is it to be corrected? Thank you very much!!!

I've got an existing 401(k) profit sharing plan and want to add a DB plan. I intend to amend the DC plan to prohibit allocations of forfeitures, or employer profit sharing or match amounts to those employees who will become DB plan participants. Will I be able to deduct the full DB cost and the profit sharing contribution for those employees who do not participate in the DB plan? I think the answer should be yes. However, I'm concerned that the regulations under Code section 404(a)(7) speak in terms of no one being a "beneficiary" under both plans. My DB plan participants will be beneficiaries under the DC plan because they will have 'frozen' profit sharing balances. Reg section 1.404(a)-13(a) seem to go further by providing an exception if an employee is not "covered" under both plans. I'm not sure what the term "cover" means. Can I read it to mean the same as "benefitting"? If that's the case, I'm all set. Do you think I'm ok? Any guidance will be greatly appreciated.

I've got an employer that sponsors two separate 401(k) plans. Each plan satisfies 410(b) and all other tests separately (i.e., aggregation is not required). The employer wants to make a 3% non-elective safe harbor election with respect to one, but not the other, plan. Employees participate in one plan or the other; no one participates in more than one plan. I know you couldn't make catch-up contributions available in one plan only, but it seems to me you can limit a safe harbor to the participants who are eligible in just one of the plans. Along the same lines, do you think that one plan could be cross tested and the other not? Any thoughts?

I believe the IRS has gone on the record to say that a sponsor can end a 3% non-elective safe harbor committment Before the end of a 12 month plan year if the sponsor terminates the plan. I've got someone proposing to terminate such a plan and immediately replace it with 401(k) plan that does not have a safe harbor. I can't believe this is possible. There must be a rule prohibiting a successor plan. Can any one cite an IRS pronouncement on terminating safe harbor elections and prohibiting successor plans? If you can, can you also tell me what a successor plan is? For example, would that be any plan adopted within 12 months? Thank you.

I thought long term care coverage was eliminated from cafeteria plans under Code Section 125(f), for policies issued after 1998. Am I misreading this?

I've got an S-Corp as a client. They want to adopt a "premium only" cafeteria plan. I understand that 2%+ shareholders are treated the same as sole proprietors and partners (i.e., they can't benefit from tax-free treatment for medical insurance, and a cafeteria plan won't help to make the cost of coverage tax-free). I've heard it said, however, that if the spouse of an owner is a legitimate employee, then the spouse can buy coverage tax-free through a cafeteria plan, because the spouse is not an owner-employee. This seems too easy. Shouldn't the spouse be treated as an owner, as a result of the attribution of ownership rules under code section 318? (e.g., spouses are always treated as key employees as a result of 318.) RIA's research service seems to confirm my reading. Has anyone heard of this back door approach? Have you seen any thing published by IRS that would support this approach?