David MacLennan

I hired a programmer to develop this data request software and I'm very pleased with the results. I am now using a preliminary version (still needs more testing and additional features). It's a Windows program that was developed in Microsoft Access. Along with data request management, it will also do client management stuff (tracks 5500 & PBGC due dates, client communication log, task list, "waiting for" list, etc.).

Wanted to get some confirmation or input on the following hypothetical case: Husband has sole proprietor business and wife helps out. They have always filed a Sch C with a single Sch SE with the husbands name on the Sch SE. They now want to sponsor a Keogh plan with the wife participating. I have always advised they must form a partnership or pay the wife a W-2 comp as an employee for her to participate in the plan, so that she has earned income. Filing 2 Schedule SE's is not an option, because if the husband and wife are in business together, the IRS would say they have a partnership and must file a partnership return (and the partnership K-1's would show earned income for both). Community property laws in Texas, CA, etc. don't impact this analysis, as the earned income is assigned to one spouse per the Sch SE instructions and Pub 533 on Community Property and Income. Correct? Thoughts or comments? Thanks.

I have a prospective sole-proprietor client with a money purchase and a profit sharing plan, who has never filed a 5500EZ. The plans were established in 1990, and assets exceeded 100K prob in 93 or 94. Does anyone have any experience on what penalties the IRS will assess if he comes forward voluntarily and files all the late 5500EZ's now? Or, does anyone have any experience on how the IRS may treat this if discovered during an audit?

I have a client with a cross-tested PS plan. He wants to adopt a 401(k) plan for his staff using a plan offered by his payroll service. I specialize mainly in DB plans and don't want to do any 401k administration (my eyes glaze over with the mention of 401k issues, in the same way that others often do for DB plan topics). I would like to continue doing the X-tested PS plan admin. Would it be advisable (or ill-advised) to have 2 plans, the 401k offered by the payroll service and the existing cross-tested PS plan? Seems the payroll service 401k could have a 3% non-elective to satisfy the safe-harbor and top-heavy needs, allowing the 401k plan to stand alone more easily and work together with the existing cross-tested plan. I presume the payroll service 401k uses a standardized document. With 2 plans, the standardized prototype 401k offered by the payroll svc would no longer qualify for reliance on the opinion letter, so it would have to be submitted to the IRS. Comments? Has anyone had bad/good experience with a payroll service 401k that I can pass along to my client as a precaution? Any thoughts/comments on this would be appreciated.

I think everyone agrees that the first proposal Sampat got was way out there and must have had lots of insurance products. Might as well give the money to charity for a deduction than give it away to a salesman. Re Andy's Concern 1, in my opinion the 55K earned income does not in itself mean age 55 retirement is unreasonable. Remember that the DB plan would accumulate over 1 million for both of them by age 55, and most people can retire on 1 million. Also, the 55K is the earned income from the S-Corp, and there may be other income and income from personal sources as well. Andy's Concern 2 is a valid point especially if the plan has to terminate early, but the GATT rates are generally not critical at the beginning of the plan's life. I would recommend that before the 415 $ limit 10 yr proration is up, say in year 7 or 8, that the GATT interest and mortality be monitored. One could then pull back on the funding, and if necessary freeze benefits, if the 5% assumption was way off. Also, increases in the 415 $ limit and perhaps updating of mortality would help this out over time. No one really knows what the GATT rate will be in 10-15 years, and 5% or so is not an unreasonable guess. I believe an actuary could reasonably set the investment return assumption at a lower rate for the first 2 years regardless of the type of investment, then revise the assumptions based on experience. Going to 8% would certainly lower the contribution, but unless the FFL applies he is still much better off than with a DC plan alone (and the DC option is always there for him). He doesn't have to limit his investments for the plan to work for him; that said, it can happen that investments do so well that future contributions just don't happen as expected and create real problems. [i set up a plan 2 yrs ago and only 10K was contributed in the first year. Now he has over 225K in the plan just by investment return! I can only hope the 415 proration catches up with the assets.] My personal opinion based on the well over a hundred DB takeover cases I've had in the last few years is that most small plan actuaries do a poor job of being advocates for the plan sponsor or communicating the complexities of a DB plan. This often occurs because they are not working directly with the plan sponsor, or, because they assume a role of giving conservative black and white options when there are really shades of grey. Has anyone had any recent experience with actuarial assumptions challenged during audit? This would be very useful for our discussion.

Yes, I would agree with Richard. I understand Andy's point of view, but based on my experience he has overstated the situation somewhat. However, we all have had different experiences! Andy, if you have had some DB plans audited where similiar assumptions were challenged, I would be interested in hearing more about it. At this point I too don't feel age 55 retirement age assumption is necessarily unreasonable in a small plan. Also, I prefer to explain any risk and/or grey area to the client and let them make the decision, as long as my professional standards as an actuary are not compromised.

I mean a database/program that would store all the info needed to do the administration of a small plan (excluding the census info which presumably would come from the valuation software), track the status of a data request for a given client, do very simple trust accounting for the clients confirmation, print out data requests, and print out user input data for final client confirmation, etc.

Is anyone aware of stand-alone software that automates the annual data collection process for small plans? It seems a good software package would facilitate having a relatively low-skilled worker to collect all the data, freeing up a lot of time for consultants, and the standardization would have side benefits too. If no such software is available, is anyone out there interested in it? I may pay a programmer to have it developed.

I would agree that the 79K ctb level for a 42 yr old probably has some kind of insurance product to increase the ctb. However, I tend to disagree with earlier comments in that I think a ctb of 75% of comp (or 42K or so) can be provided in a DB plan for a 42 yr old using acceptable actuarial assumptions (I happen to be 42 and did a study for myself recently). I don't think it is purely a matter of opinion what is aggressive and what isn't, since this can be based on audit experience, audit guidelines, the multiple tax court cases that the IRS lost when they challenged truly aggressive assumptions, etc. Certainly the assumptions I used were not "substantially unreasonable" in the sense of the court opinion. Also, I tend to think that when an actuary says something is risky or aggressive, they often fail to mention the risk is 1 in 1000 or smaller and the worst case scenario is not that bad! I would also add that the 55K comp from the S-Corp must be W-2 on which soc sec tax is paid, no pass through income can be counted. Also, the age of the 3rd ee is important. If he/she is not in their early 20's or ineligible due to <1000 hrs/yr, they would get a substantial benefit from the DB plan, although vesting would help to limit this if they ended up being a short-service ee. Another option not mentioned so far is funding both a DB and a money purchase plan at the same time using the flip-flop method of taking deductions. I have not employed this method yet but it has been discussed a lot recently. You would fund both plans and deduct 2 yrs of DB ctbs one year, and deduct 2 yrs of MP plan ctbs the next yr, etc. Using this method you can avoid the 25% 404a7 limits. However, the ctbs must be timed carefully, requiring ready cash, and you cannot extend your corp tax return.

In my experience, most DB plan documents have "414(k)" provisions in them, but they are not referred to as such. They are usually called "separate account" provisions and are found in the late retirement benefit section of the document. Usually, the document language is something like "upon reaching normal retirement age, the particpant may elect to have his lump-sum benefit transferred to a separate account, which shall remain a part of the trust and share in any gains and losses . . .", etc. The account is often specified to be a segregated investment account, but favorable determination letters have been issued on separate accounts that are just a pro-rata type of allocation. However, Code section 414k is much more general and does not specify separate accounts to be limited to this purpose, it only states how they are to be treated under the Code. From my small plan perspective, the advantage of 414k accounts in a DB plan is that 414k states unequivocally they are to be treated like DC plans for most purposes, including code section 415. In a small DB plan, this can be very valuable to prevent overfunding, especially in an era of 30%/yr investment returns (2000 excluded!). In larger plans the advantage is mainly for the participant - he/she can control the investments. One footnote: I spoke to a Reish & Luftman attorney recently who attended the LA benefits conference. Apparently, and this is all second-hand as I was not there, Wickersham made statements to the effect that 414k did not allow for DB 415 limit protections on overfunding. This remark elicited a "WHAT???" from all present (again, I was not in attendance but this is the attorney's account). The sentiment was that one would have to pretend 414k did not exist to justify this. The Reish & Luftman tax attorney stated to me he would "love to trounce the IRS in tax court if they ever tried this". Would love to hear more opinions on this. Perhaps someone else can contribute more on the coverage and discrimination issues.

Interesting discussion. Derrin Watson's book "Who's the Employer" has a good discussion of the concurrent entity issue for controlled groups on page 183-187 (an excellent reference book, if you don't already have it - this book has made me look very smart many times). I agree you don't have to aggregate the two for 415 limit purposes, but I don't see how you can pull prior comp history and YOP for 415(B) purposes. 415 references the "Employer" for these items, and if they are not a controlled group, the prior company can't be the "Employer". You can of course make your benefit formula include predecessor service, but that doesn't mean you can include it for 415. I believe this doesn't apply where there is a mere "change of form", such as a sole proprietor incorporating, and I seem to recall there is some IRS promulgation that blesses this exception. Also, Derrin Watson suggests you should not try to double up on 415 limits where there is a mere change of form, and cites IRC 368(a)(1)(F) (I haven't read this code section). One comment on the favorable determination letter and plan audits. Due to lack of sophistication of the reviewers/auditors, especially with DB plans, I don't think it is very meaningful to pass those tests, if the client actually wants to comply with the law vs getting away with something.

I don't have any recent experience with this, but I believe that the PBGC now has more discretion in these cases, particularly if you can show the benefits under a delayed termination date would result in zero additional benefits, which can sometimes happen if interest rates go up, etc. However, a word of warning: working with the PBGC can be frustrating - I had a case like yours and it took the PBGC over 2 years to make a decision, but this was in 1993-1995, some time ago. Nullifying the termination means the prior termination date is null and void, meaning actuarial valuations may be needed for subsequent plan years, and possible top-heavy accruals.