MGB

Yanikowski, The $40,000 limit on all employer and employee contributions does not apply to catch up amounts. With a $1,000 catch up in 2002, the total maximum is $41,000.

That is my understanding, too. This overrides suspension of benefits. In an old EA Meeting Q&A from the Gray Book, the IRS indicated that this should be the same type of actuarial adjustment as for post-retirement actuarial adjustments. Taking that a step further, that would mean (assuming you follow the proposed regulation from 1989) this is a year-by-year calculation. First you determine the greater of the actuarial adjustment or new accrual in the first year, then the second, etc., instead of just one actuarial adjustment from 70-1/2 to 75 and comparing it to the full accrued benefit.

You can contribute the extra provided you have hit any kind of limitation. Those limitations can be legal limitations (e.g., $11,000), or limitations within the plan (e.g., 10% of pay). However, the plan will need to be amended to allow such catch-up contributions. The employee cannot force the plan to allow catch-up contributions on their own. The employer needs to make the decision to allow them.

Notice 2001-56 was released this afternoon. The effective date for the new definitions of key employees for top heaviness is determination years in 2001 (to determine top heaviness in 2002). The effective date for mandatory nonparticipation following a hardship distribution includes distributions in 2001. Therefore, the period may end at the later of 6 months or 1/1/2002. Also, Notice 2001-57 contains the model good-faith amendments (and adoption agreement language) for all of EGTRRA.

Notice 2001-56 was released this afternoon. The $200,000 compensation limit may be applied retroactively when computing average compensation for an accrued benefit calculation in 2002.

In looking at the plan document and trying to integrate law into the decision, be very careful about terminology. "Suspension" is a defined term under ERISA. Stopping the benefit payments when reemployed is NOT what suspension means. Suspension means forfeiting benefits. Suspension is an exception to the vesting requirements. When reemployed, four things can occur. 1) Suspension (stopping payment with no future adjustment for the stopped payments), 2) continued payment with offset to the future accrual of benefits for the benefits paid (which is a form of suspension), 3)continued payment with no offset to accruals, or 4) stopping payments with later resumption of an actuarial equivalent of the stopped payments. In all four of these situations, you must give additional accrual for service and earnings on top of whatever you do with the already accrued benefits. The only exception is when the formula has some type of cap (e.g., maximum years of service in benefit formula). Of course, even though additional accrual occurs, it may be offset by benefits paid under situation two. Suspension rules have been around since ERISA. The continued accrual rules are separate and have only been around since OBRA'86. In the first two situations, you may only do this if the plan is clear about it, the SPD describes it, and the individual was given the proper notice that their benefits would be suspended when they returned to work. Note that you do not have to stop the benefit payments to cause a suspension of benefits (offsets to future accruals is a suspension of benefits). The latter two situations are equivalent in value; it is only the timing of paying the person that changes. You do not need to give a suspension of benefits notice to stop payments if the actuarial equivalent is paid later upon the second retirement. Again -- stopping payments is not a suspension of payments.

I agree with you that Section 642 only allows rollovers, not service credit purchases. The new provision (Section 647) that allows tax-deferred money to be used in a trustee-to-trustee transfer for service purchase only applies to 403(B) and 457 plans. I.e., IRAs and qualified plans may not be the source of funds for this provision.

In an initial meeting with Bill Sweetnam at Treasury, he indicated they would treat it the same as a CPI increase, i.e., no retroactivity. We, of course, made the arguments about the earlier change to $150,000 and he seemed to take it to heart. In a later meeting he was leaning towards retroactivity but gave no official answer. About a month ago, Paul Schultz from the IRS stated in a presentation (Western Pension and Benefits Conference in Denver) that they expect it to be applied retroactively. That is the last word I've heard. Originally, it was hoped that these various guidance issues would be released by the end of August. However, Sweetnam said in a speech on an ABA webcast in July (I don't know how these guys ever get anything done - they are always at meetings or giving speeches) that they expect guidance "by the end of the year." So much for getting your systems and clients prepared in time. On the issue of not accepting the increase: Historically, you could not have 401(a)(17) referenced in the plan (only 415 is allowed to be incorporated by reference) beyond the reference to the CPI changes, meaning that $150,000 is in the plan and would need an amendment to increase it by the end of the remedial amendment period. In this case, there is no issue of cutback or providing a 204(h) notice if you just don't change anything (left it at $150,000). However, it has been brought to my attention that the IRS review of determination letters has been lax in recent years and now a lot of plans do incorporate 401(a)(17) by reference. In these cases, an amendment prior to 1/1 stating that the old structure is maintained instead of the $200,000 should be no problem, but a 204(h) notice would be required.

KPMG and Hewitt have information in their surveys. Sorry, I don't think these ares available online and cost a lot to buy. Source: Hewitt SpecSummary, US Salaried 2000 (1020 major US employers, including 58% of Fortune 500) Description: Recognition of Bonus in Definition of Pay (not including sales bonuses or incentives nor commmissions or overtime) Bonus included: 67% Partially included: 2% Not included: 31% Not quite exactly the question: Source: KPMG, Retirement Benefits in the 1990s: 1998 Survey Data Description: Compensation Used in Calculating Defined Beneft Base Pay 27% W-2 26% W-2 + Nontaxed 33% Other 14%

Language of the new law: "414(v)(5) Eligible Participant... (B) with respect to whom no other elective deferrals may be made to the plan for the plan year by reason of the application of any limitation or other restriction described in paragraph (3) or comparable limitation or restriction contained in the terms of the plan." Paragraph 3 includes a reference to 401(k)(3), ADP test. That was always the Congressional intent in enacting this provision.

That is exactly what Treasury is struggling with for their upcoming guidance...when does the participant designate the catch up? One of the main problems is with plans that do not "true up" matching contributions. I.e., if a high paid person defers a high percentage of their compensation, and get cut off by 402(g) part way through the year, the employer only matches until the cutoff. The participant loses a possible match. Because of this, participants in these plans spread out their percentage so that they have a deferral in every pay period (try to hit the 402(g) limit exactly by the end of December) to get the maximum match. When can this person make a catch up? If they can't designate a catch up until they actually reach a limit, people like this would need to scramble in December to come up with their catch up instead of designating it during the year. Similar problem as above: What about eligibility for catch ups under ADP testing? All an HCE needs to have is a restriction on the amount deferred due to ADP testing, and they are eligible for a catch up. How can they do this before the end of the year? The only way is to allow the catch up during the year and then decide after the ADP test as to whether it was OK. I could write out about 20 pages of examples of problems with this that have been discussed over and over with Treasury. They really have a mess on their hands as do programmers of systems and administrators that need to handle catch ups next year. The bottom line is that a person needs to have the flexibility to elect a catch up at the beginning of the year. One proposal that has been floated to the Treasury that has merit is to base eligibility for a catch up on the PRIOR year's elective deferrals. Then all of these problems would go away.

Although the catch up is not subject to the testing, it can impact it. This will all depend on how the Treasury decides in its guidance as to how to signify catch up contributions. For example, let's say that an HCE defers $10,000. Knowing that their plan regularly fails an ADP test, an election is made (assuming Treasury says this method is an allowable one) that any amount that may not be recognized as a elective deferral be automatically treated as a catch up contribution. In the test, let's say that this HCE is limited to $8,500, and gets a $500 catch up. That seems all clean, except: There is an effect on the under-50 HCEs by doing this. There are ways to construct this example further that hurt the under-50 people. Let's say that because the test failed, some others had their deferrals limited, too. However, they are not allowed catch ups, so their deferrals are returned (or recharacterized as after-tax). If, on the other hand, this HCE had elected an $8,000 deferral and a $1,000 catch up from the start, it may be that the under-50 people no longer need a return of their deferrals and the test passes. Of course, our HCE now has not hit the limit in the test, so they are not eligible for a deferral. Naturally, a procedure may be in place (assuming Treasury allows this), to shift some of the $1,000 catch up to a deferral because our HCE is not at the limit. In this case, it may only take $100 or $200 to "max out" the ADP test without affecting other HCEs. So, depending on the procedures in place to determine which money is elective deferral and which is catch up, there can be adverse consequences in the ADP test. These are the issues that Treasury is struggling with in coming up with guidance on how to establish procedures for signifiying what is deferral and what is catch up. Another example: Assume an HCE designates maximum deferral plus some catch up from the beginning of the year and it is withheld ratably during the year. The HCE terminates late in the year. Now, all of the money may need to kick down to deferral because the person is not eligible for the catch up (did not hit any limit). This could affect the ADP just like the first example. For a general discussion of the law (no examples like this, though), see: http://www.milliman.com/empl_ben/publicati...eginfobulletins

We have been having an internal debate for nearly a year as to when the report to the participants must be made that a missed quarterly has occurred. I say it should be as soon as practical. Others want to wait until the SAR (note that this is for a quarterly, not just the after-the-year-end contribution). No one can find a reference. I did find a reference in an EA meeting transcript from quite a few years ago that indicated the SAR was OK. I've contacted the presenter and he cannot recall why he said that and probably wouldn't concur with that now. PAX, you included a link to the reportable events forms at the PBGC after your statement that the SAR would be too late. However, I did not see any reference in there about the participant notice. Did I miss something? For richard: If you are already after the end of the year (not a missed quarterly issue), and it just so happens that the SAR issuance is a reasonable time period after missing the minimum requirement, I see no reason why you could not include it with the SAR.

I concur that references to 457 and catch up should only be in the context of governmental plans. This is true with most of the 457 plan changes in the law. The issue that makes the distinction is funding. A 457 plan of a governmental employer must be funded in a trust. A 457 plan of a tax-exempt employer is an unfunded arrangement. Catch up contributions should only be made to funded plans. This is also why many other provisions only apply to the funded types of 457 plans, also.

The language of the law allows the catch up in any type of plan (including DB). However, Treasury has indicated it will issue guidance that only plans that can have elective deferrals (and 457 plans, which technically are not elective deferrals) will be allowed.

I would think that the employer would recognize it as income. Then take a deduction for paying it into the plan. A DC plan is allowed to have "deemed compensation" for disabled participants to allow an employer contribution. (See 415©(3)©.) It must be the rate of pay when they went on disability. (Note that EGTRRA just changed to also include this in an employer's aggregate compensation for the base to apply 25% limitations to.) However, this can only be used for NHCEs. Now, is it EE comp and then deferred? Gray area. I'd be more inclined to call it an employer contribution. But, what if there are no profit sharing contributions allowed? I guess I've convinced myself that it is deferred comp. However, prior to 2002, I don't know how you could do a 100% deferral. If it is a deferral, then who pays the FICA? I seem to have raised more questions than I've answered.

Note, too, that the "(including extensions thereof)" only applies if an extension is actually filed for. For example, if the tax return is filed by the original due date, the contribution needs to made by then, also. You cannot make use of the extension period unless it is applied for.

EGTRRA Section 642 "Rollovers of IRAs into Workplace Retirement Plans," only amends Section 408 of the Code. That is traditional IRAs. There is nothing changing the distribution rules in 408A, Roth IRAs. So, I'd say that Roths may not be rolled into an employer's plan's Roth account. However, rolling from an individual Roth to a deemed Roth IRA within an employer's plan should be OK. The deemed Roth IRA is treated for all purposes as an individual Roth IRA. I don't see any reason why this could not occur. (I don't know much about Roth IRAs; I assume they may be transferred from one to another similar to traditional IRAs.)

This sounds like one that needs Treasury/IRS guidance. I am unaware of their looking at it or realizing it is an issue. I'll add it to a list of "need guidance" in communications with them.

Treasury is aware of these and other problems with the catch-up rules (e.g., people with multiple employers - how do you know they hit the 402(g) limit?). One possibility that they are looking at is to apply 410 rules. For example, disaggregation and separate lines of business. Those in union-negotiated wouldn't need to be included in the "everyone must" requirement. This would also disregard the DB issue that you state. Under the current language, the DB people you refer to would need to be allowed to do the catch up in the DB plan (ALL plans can have catch ups, not just 401(k)). Note that participants in the DB have a 0% deferral limit in the plan. Therefore, everyone over age 50 is eligible for catch up. This may be overridden with the 410 approach that Treasury is considering.

(Assuming a non-PBGC plan can do this under EGTRRA.) Preliminary statements by Treasury have been that they will only allow the new EGTRRA provisions to terminations after 12/31/01, not carryovers. However, that is probably not the final word. This is something they need to provide guidance on. Note that the legislative history is that this provision should not apply to non-PBGC'd plans. It was a drafting error in the conference committee that overrode this section. I expect a technical correction in the future.

No, that is not true. The credit is ONLY for plans established after 12/31/01. Exact language of the law: "Effective date -- The amendments made by this section shall apply to costs paid or incurred in taxable years beginning after December 31, 2001, with respect to qualified employer plans established after such date." For a complete description of the new law, see the following Legislative Information Bulletins (long) that I was the main author on: http://www.milliman.com/empl_ben/publicati...eginfobulletins

A 401(k) plan in 2002 can do what you describe (I am not an expert in conversions, so I won't comment on that). No matter if he has other employees or not, the hitting the 415 limit of $40,000 makes him eligible for the catch up contribution. The catch-up is not subject to 415.

There is ambiguity in the effective date. EGTRRA states "years" beginning in 2002. It does not say "limitation years", nor "plan years", etc. The law (in general, not just EGTRRA) does not have any reference to limitation years. This is purely a concept from regulations. In the regulations that define limitation years, it states that the limit for a limitation year is the limit for the calendar "year" that the limitation year ends in. Taking a very stretched view of EGTRRA's statement of "year", one can say that the new law is for the calendar "year" of 2002. Therefore, a limitation year ending in 2002 would be able to use the new limits. This is the interpretation that was referenced in the Corbel seminar. Having been involved in lobbying during the drafting the language of this section of EGTRRA, we tried to get both DC and DB to state the new limits were effective for limitation years ending in 2002. However, no reference could be made to limitation years because they are not a concept of the law. This was a part of the wrangling over phase-ins (both DB and DC limits were to be phased in over many years). When they dropped the phase-ins (about 2 a.m. the night before finalizing in conference committee) the final language got messed around and only the DB came out the way it did. I still think the DC is ambiguous and a person could make a strong case that the DC limit is effective for limitation years ending in 2002. Having said all that, the Treasury has already indicated it will issue guidance that the DC limits are only effective for limitation years beginning in 2002, no matter what the law says. Note that this means noncalendar year limitation years will never be subject to one of the limits in the future. The $40,000 will undoubtedly increase every year (with the new $1,000 increments, it only takes a 2.5% CPI). Assume the future limits are 2003: $41,000, 2004: $42,000, etc. For 2002-2003 noncalendar yar, $40,000 is in effect. For 2003-2004, $42,000 is in effect. The $41,000 is skipped over.

What does the provision actually do? Let's assume it says early retirement at age 55. What happens if the person terminates at age 50? Do they have the same options as a person age 55 (i.e., a lump sum)? If they do, then getting rid of the early retirement language is of no consequence and can be gotten rid of. In this case it really isn't a provision, it is just empty language. However, if you can only receive a payment (annuity or lump sum) at early retirement age and not at a regular termination of employment, then you have an accrued right under the plan that cannot be taken away. I would say this cannot be taken away for funds already in the plan. For new funds, taking away the option would be possible.