flosfur

Thanks Andy. That's very helpful. This is what I was missing. --------- What is arbitrary? Since this is subjective, how does one know where one stands? Here is what I have - Employees are split into two groups: Group A (component plan A) consists of HCE 1 & 2 and some NHCEs. Group B (component plan B) consists of HCE 3 & 4 and NHCEs not in Group A. Both groups (/sub-plans) pass the 410(b) easily. Benefit formula for Group A is X% of avg comp reduced for YOP <25. Benefit formula for Group B is Y% (much lower than X%) of avg comp reduced for YOP <25. Since both sub-plans have safe harbor formulas I think the above should be OK - except for the arbitrary selection of the groups? ---------- As a separate question: is there a problem with using names of employees instead of job titles when defining groups or excluding someone from a plan? Thnaks for help.

Ok Andy - I have a DB plan which could benefit by breaking it into component plans and having different formulas for the compenent plans. I want to stick to just one DB plan and but not split into DB/DC plans. In a handout from an ASPA conference (2002 Summer Academy) on plan restructuring, one of the listed requirements is: Each component plan must satisfy 410(b) ....and then goes on to say "The special rules for rate groups (where the rate group is deemed to be a non-discriminatory classification) does not apply to component plans...." Questions 1. I could not find where this is stated in 1.401(a)-9. Is it mentioned somewhere else? 2. Which deemed non-classification provisions of the regs/code does this refer to? Is this referring to the non-classification test in 1.401(a)(4)-2©(3)(ii) - rate group's ratio % between safe/non-safe ratios .. ? 3. If it is 1.401(a)(4)-2©(3)(ii), does this mean each rate group has to have 70% or better ratio? If that’s the case, wouldn’t the average benefit % test for rate groups become redundant? Of course the above only applies if a component has a non-safe design. ------------------ Any special/common pitfalls one should look out for? Being new at this, I am treading with care. Thanks.

FWIW. Well the IRS came back sooner after my last post and they are sticking to their postion (but they have not given any cite). So I have been busy researching on the subject. The people who had previously assured me that my approach was OK are now changing their opinion. During my research, I came across someone who has been designing the non-safe harbor DBs using "all service" for the projected benefits but participation service for the accrual fraction and using all service as the testing service. He told me he was receiving favorable determination letters in the past but recently, the IRS has started objecting to his approach. He is still debating with the IRS on this issue. Well, I have decided to change my approach and will be using the same service for both the projected and the accrued benefits and if some plans are not do-able, they are not do-able.

It is not the same road. On that thread we were travelling down one road, namely non-aggreagted DB plan only and the testing service that can be used. Here we have two roads merging into one, DB & DC plans aggregated - so the issue is not the same. As an analogy: For the DB & DC separately, one can use the annual method or accrued to date method (as well as the projected mehotd for the DB plan). But when aggregated, same method should be used for both plans.

I don't mean the "same years" of service but rather the "same type" of service, e.g. benefiting service or any other permitted type of service. Well, the jury is still out on that - see the Testing Service thread I started. I can give the philosophical justification for it but that is not at issue here. As I have said before, if the pre-plan service could not be taken into account for Testing Service, then I cannot see how those 250% for the Owner and $100 for the Other type of plan designs presented at the conferences and seminars could pass the 401(a)(4)?

Yes, that's what I was trying to say - Form 5500 was filed but Sch B was not (because the Sch B was not prepared). I was also trying to generalize the quesion into two questions: 1. As above, Form 5500 was filed but Sch B was neither prepared nor filed. 2. What if both the Form 5500 and Sch B were not filed. to see if it makes any difference.

One cannot change the Funding Method if the filing deadline has past. Is there such a restriction on changing the assumptions? What if Form 5500 was filed but the Sch B was not?

I'wll try again: In summary Reg 1.401(a)-8(b)(2) says- after having computed the Equiv. annual benefit, the rate is computed by dividing the Equiv benefit by the number of years in which the employee benefited under the plan during the measurement period. Let's take the simple case where no employee is participating in both the DC and the DB plan. Per the regs, in applying the accrued-to-date method to the DC plan, one is using (as one must) the benifiting (participation) service to determine Equiv "DB" accrual rate. Whereas in applying the accrued-to-date method to the DB plan, one can (and one would want to) use employment service from the date the employee met the participation requirement (i.e. from the date he could have entered the plan, had the plan been effect at that time). Obviously, for a DB plan in which benefits are based on participation service, the accrual rates using the testing service which includes pre-participation service produces lower accrual rates Vs. using the participation (benefiting) service only. So in the above, is the "same" method being used for computing accrual rates in both plans? -------------------- As an aside, I just remembered, when testing an aggregated DB/DC plan in one of the commercial softwares I worked with, one simply entered the DC account balances in certian fields without entering anywhere the benefiting service in the DC plan. So the DC's Equiv rates ended up being computed using the same testing service as the service used for DB plan - doesn't look right!

I am looking for a plan document provider who has a document for a government plan - preferrably a Prototype, on a per document basis. I have a inherited a small Govt. plan for which the prior TPA used a regular prototype DB by overriding certain non-applicable sections, such S417(e)(3).

Componing (my terminology) a plan is fine in theory and may be easily accomplished in large plans but for the small plans is not a practical proposition because of the sponsors' unwillingness to pay for the time and effort involved. Unless one is doing this day in and day out, one can spend eternity on just one plan trying to figure out the right components and still come up with no solution.

But here is the problem (or may be it is not a problem?): Under the Accrued-To-Date method the testing service for the DC plan must be the "Benefiting Service". Whereas for the DB plan, the testing service can be the service from the date eligibility was met - regs 1.401(a)(4)-11(d)(3)(i)(B) (I know some on this Board don't agree with this). If this testing service was not permitted then the DB plan on its own or the aggregated DC/DB plan will not pass 401(a)(4) unless HCEs' benefits are reduced or NHCs' benefits are increased to the point which makes the DB plan unattractive to the employer. So is this approach considered using the same method? Needless to say, the plans will be submitted to the IRS for a DL but it would be better to know the answer before finalizing the design and implementation of the plans.

I do all that and have started labelling it as Computed Funding Amount (not Cost) and even tell the clients not to look at and get hung up on the funding cost (which is function of cost method and assumptions used) but rather look at the PVAB of the benefit accruing during the year - which, ignoring the vesting, is the true cost of providing the benefit accruing during the year. But do clients buy that? NO!

The small plan sponsors invariably want to know the plan cost attributable to each participant. For the Individual Aggregate and Unit Credit methods, this question is easily answered. However, answering this question for the EAN and the FIL methods has always been a challenge and problematic. I have used the following approach to allocate the Min/Max funding to each participant. (a) Allocate Normal Cost in proportion to each participant’s EAN NC. Plus (b) Allocate S412/S404 net Amortization Charges in proportion to each participant’s UAL, where each participant’s UAL = Total UAL * Participant’s EAN AL / Total EAN AL. However, at times the results produced are not palatable to the sponsors and are not consistent from year to year, even after allowing for changes in wages etc! Your thoughts on and approach to this would be appreciated.

Mutli-part question. Non-safe Harbor DC plan. 1) Has anyone ever used an Accrued-To-Date method for a DC plan? If so, how are the Accrual Rates determined? (i) Each participant's accrued benefit is determined using the Current Account Balance Or the Total Employer Contributions allocated to date (ie. ignoring gains and losses to date)? (ii) Testing Service is the Service from the date participation eligibility (age 21/1 yr service) was met - regs 1.401(a)(4)-11(d)(3)(i)(B). (iii) If the "Years during which a participant benefited" is used as the Testing Service, does this include only the Years during which the participant actually received an allocation of Employer Contribution or All Participation Service whether or not an allocation was received during a year (eg. the employer skipped contribution to its PSP for some years)? DB/DC Combo (not an Offset arrangement). Situation: DB/DC plans are aggregated to pass the 410(b) coverage test and hence must be aggregated to test for 401(a)(4). For 401(a)(4), must both plan use the same method to determine the accrual rates i.e. for both plans, use either the Annual method or the Accrued-To-Date method?

An update on this issue.... I checked with my other sources (including a fee based legal search service) about using (a) All Service with the Employer Or (b) Service from the date an employee met the participation eligibility requirement as the Testing Service when a plan's benefits are based on Participation Service and the answer was: (a) was doubtful but (b) would be OK. The reference given was the same as I cited in my initial posting, namely regs 1.401(a)(4)-11(d)(3)(i)(B) & ©. I responded to the IRS reviewer with this cite and have not heard back from him since, almost 7 weeks, but on the other hand I have not received the DL yet either. Either he accepted the response and the case is working its way through the process or the case was sent to the National Office for review and is sitting there. I will report back the outcome.

Need more than that - such as why and where is it prohibited?

Assuming the 401(a)(26) and 410(b) are satisfied and, if applicable, top heavy accruals provided, can a DB plan have a "last day employment" to accrue a benefit (other than the Top Heavy) under the plan formula? I have never seen it yet but that doesn't mean it is impermissible.

Mike - don't the contributions have to be made before they can be deducted on the tax retrurn even if the employer's accounting is on accrual basis- unless, they are not going to deduct the contributions to be made after the tax return filing, of course.

RMD is the Required "Minimum". This does not stop a participant taking more than the RMD, if the plan allows in-service distribution. Since the whole idea of the RMD is to make sure taxes are not deferred forever, why would the IRS object to someone taking more than the RMD - more the better so they can collect higher taxes now than later? Which specific part of 401(a)(9) gives you the impression otherwise?

The software developer is relying on this too. Where? I searched this site but nothing came up addressing this issue I have submitted plans with SSRA as the testing age and no one has raised an objection. But that may be just because the reviewrs may not be looking at it closlely and thus doesn't provide me with the general assurance that it is OK to use SSRA as the testing age.

A (nationally marketed) commercial software has an option to use Social Security RA (SSRA) or Normal RA as the testing age (whether or not the plan has uniform NRA). I looked in 1.401(a)(4)-12 (definitions) and did not see SSRA being an option for testing age. Is there a statute, regulation or IRS opinion that permits using SSRA as the tesing age?

The IRS' required information list asks for Form 1120, 1120S, 1040 or 1065 (including all statements, schedules and attachments) filed by the employer for the year under audit. The information in Form 1120, 1120S and 1065 is limited to the employer's business and giving them to the IRS is not a problem. But Form 1040 (for a sole prop) mostly includes non-business and non-pension plan related info and that could present a problem as the examinar may go on a fishing trip through the whole return! Can the IRS demand to look at the complete Form 1040 when auditing a pension plan? Can one provide Page 1 of 1040 and Sch C only and refuse to to provide the rest of the return?

Among other items, the IRS is asking for the actuarial reports for succeeding year, year under examination and preceeding 4 years - that's six valuations and takes the audit well beyond the "last 3 years" from the audit letter date!? I have not seen this before. Is this new and it in the audit guidlines? Where can I download the audit guidelines from?

I searched using both "Predecessor Employer" & "Successor Employer" but nothing came out. Without the quotes, I get millions of hits for the Employer!

I never understood the distinction between a Stock sale & an Assets sale. I better read up on it. Be as it may... It is a medical practice - Doctor X sold the practice to Doctor Y. X is no longer there and Y never worked in this practice before buying it. Y did not sponsor the DB plan maintained by X. I presume this is both a Stock & Assets sale, whatever that implies !?