Blinky the 3-eyed Fish

1. Absolutely 2. Right on brother! 3. Good one also. While testing a cash balance plan for nondiscrimination is not going to be different than a traditional DB, the ability to seamlessly give similar cash balance allocations to younger versus older employees is helpful to pass testing. My #4: a cash balance plan can control the escalating costs that are inherent with the unit credit funding method. They are an advantage if that is a concern. P.S. Prepare for "are you crazy!" comment from mbozek for considering a cash balance plan. But I say that with love, because he may be right in the end that these plans will blow up. Personally, I don't hold that view.

I don't agree with the last 2 posts. What's to stop the new eligibility requirements from being applied to EVERYONE? Those that had met the old requirements, but wouldn't meet the new more stringent requirements would retain their account balances, but would cease to become active participants in the plan until they met the new requirements. It is not a protected right that I know of.

The old-law benefits are those that do not take into account the GATT changes and are determined based on AE in effect on 12/7/94. PFEA modified the GATT changes for 415 purposes by replacing (temporarily at this point) the 417(e) rate with 5.5%. But since the old-law benefits don't factor in the GATT changes, they certainly aren't affected by PFEA. The "B" amounts or new law benefits are affected by the PFEA changes. Now the real applications of old and new-law benefits in Rev. Rul. 98-1 are very limited when it comes to determining maximum 415 limits. I think you will find that unless a person was at a compensation limit, the EGTRRA increases clearly provide higher 415 amounts than anything derived from 98-1 methodology, so I am curious as to the details of your situation. The last date possible for old-law benefits being earned was the last day of the plan year ending in 2000, which means new-law benefits would beginning accruing then, so I am not sure what you mean by this question.

No, a near 0% AE definition would maximize LS payouts for those not at the 415 limit, although what employer wants to do that? Gary, I hope you are thinking of amending as the situation warrants. This is a temporary law, which may or may not become permanent. As penman said, 5.5% and 94GAR AE will get you the max 415.

A matching contribution is an employer contribution that would trigger 404(a)(7). Here is the cite. 404(a)(7)©(ii) "If, in connection with 1 or more defined contribution plans and 1 or more defined benefit plans, no amounts (other than elective deferrals (as defined in section 402(g)(3))) are contributed to any of the defined contribution plans for the taxable year, then subparagraph (A) shall not apply with respect to any of such defined contribution plans and defined benefit plans."

Three cheers for "the sales guy". You are correct that once you fail to satisfy the requirements of 412(i), then by default you no longer have a 412(i) plan. There would be no reason why you couldn't restate it into a prototype document, but are you sure that is necessary? I would imagine there would be language in the existing document that addresses the scenario where the 412(i) requirements are no longer met.

I don't agree with Chris' response. Sal says it all.

Not legitimately.

And neither do I. (We should hug now.)

Huh?

Newell is an IRS actuary in California. He is also the leading hater of certain DB offset arrangements. He often speaks at the LA Benefits Conference but I guess doesn't venture east. Logically IMHO, it seems silly to test under 417(e) rates as they have expired once the testing can be run for all those who did not receive a distribution.

Penman, did you read my last post? As illustrated, whether or not IA covers anything depends on the formula. It may generate funding to cover the benefit earned or it may not. You can't just make a blanket statement about it though. In any event, if concerned about the funded status near termination, there is always the UCL max deduction available each year. It works well if no amendment to raise HCE benefits occurred in the last 2 years.

Frank, whether or not IA funding will cause the plan to be underfunded entirely depends on the DB formula. Using IA in this situation may even cause more funding to the plan versus unit credit. Consider a unit formula of 1% of pay per year of participation, here is how the funding would look for a new entrant who is 25 years old: (assume 6% interest) UC: $20,000 * 1% * APR65 / (1.06)^(65-25) = 19.44*APR IA: $20,000 * 1% * 40yrs * APR65 / (1.06)^(65-25) = 777.78*APR 777.78*APR / 15.9491 = 48.77 APR See how IA funds 2.5 times UC? Now of course IA can fund less, when there is a cap on the benefit or the projected benefit hits a 415 limit. Here if a 10 YOP cap is put in place then the UC would remain unchanged but the IA would change to: IA: $20,000 * 1% * 10yrs * APR65 / (1.06)^(65-25) = 194.44*APR 194.44*APR / 15.9491 = 12.19 APR So to answer Bob's question is the funding method just needs to be reasonable. As as side note, who says you have to assume that the business will die once A retires? Is it not possible that someone will be groomed to take it over?

I see this as both a document and communications issue potentally. Document - does your document even allow for allocations that put a theoretical balance above the 415 limit? It is possible that the allocations need to be capped so that the balance never exceeds the limit. Communications - a bit of a pickle if the document does not limit the contribution credits. If you don't show the full cash balance then it is possible that your EOY balance from the prior year will not equal the BOY balance from the current year simply because of a COLA increase. I suppose you could flow that change through in "earnings", but I don't like it because it's not accurate. Also, are you really computing the immediate lump sum 415 limit for each person each year on a termination basis? That seems like a lot of work. But as long as you are doing that, why not show the cash balance and caveat with the current LS payout limit? That seems to cover your bases.

It doesn't sound fishy at all to me. Matching contributions were made throughout the year, yet it turned out the business had no net income. It happens. I also think it's clear it's the PLLC with no net income, not the plan. That being said, check the document for treatment of the match and deferrals under a 415 violation. Normal language is that the match will be held in suspense as you suggested. Normal language for the deferrals is that they will be refunded with earnings.

Can you provide a cite? Anyway, what about the 415 limit? 415 compensation is aggregated amongst the related employers and your net comp would be $0, resulting in $0 allowable annual additions.

Penman, here is how I see it. Ultra-conservative: no DB plan can happen for 2004 Less Conservative: start a new PS plan and transfer balances for those that will be in the DB before the adoption of the DB plan Aggressive: don't worry about moving balances, just don't give a DC employer contribution to those in the DB First, a transfer is much easier than providing rollovers and it preserves the retirement benefits. Plus you would be restricted from 401(k) distributions anyway. But I agree the whole excercise is silly. I could say that about other issues as well, but that won't help you if the IRS disagrees.

No, that is not the issue at all. Let me say it again. 404(a)(7)©(ii) is clear that if an employer contribution is not made to the DC plan, then the limits of 404(a)(7) do not apply. It can't be clearer than that. The PLR issue is when you have participants in both plans and an employer contribution is made, but not to anyone who is a participant in the DB plan. That is not what 404(a)(7)©(ii) says or means at all. This is the same question being debated here though. This actuary is being aggressive being that there isn't formal guidance on this situation, but I can't say he's definitely wrong.

If she truly was an independent contractor then her hire date is 10/1/2004. However, what about her job changed that created this change all of a sudden? Classifying people as independent contractors when they are truly employees is rampant and this may be one of those situations. If it is, her hire date would be earlier potentially.

Yeah, that's one I learned from Mike Preston. I thought maybe though you had some additional information, so I figured I'd ask.

No, a traditional 401(k) is better versus a Roth from purely a tax standpoint if taxes are lower than when the contribution was made.

The answers depend on how your coverage test turns out. If the PS plan is able to pass coverage on its own, then: 1. It's a safe harbor 3. No Now, if the plan fails coverage on it's own, it would seem unnecessary to need to aggregate the 401(k) plan because from your post it appears as if no PS contribution is being made. Instead you would have to correct the 410(b) failure (depending how your document reads of course) by beginning to add some NHCE's to the benefiting group. But if that is not correct and you have to aggregate for some strange reason then: 1. I don't know because I don't know what the formula would be 3. Yes

Tom, can you elaborate on this?

You say that to assume they pass 410(b), but you other questions make me want to explore this further. What are your nonexcludable HCE and NHCE counts for both the salaried employees and everyone else?

Yes, that is exactly what it means. If I recall correctly, the old rules used current compensation as a factor for HCE determination. But if these former employers did it that way under the new rules, well I wonder what other rules they made up.