Mike Preston

Your understanding is correct. Nobody I've dealt with has mentioned this "new" method, so I haven't had to undo it for my purposes.

My 1.401(a)(4)-9©(1) doesn't say anything of the sort. Where is the language you cited "since each component plan has only 1 allocation formula" found?

I think you'll have to talk to Sal about why he thinks the already cited section, which deals with different allocation requirements, doesn't apply to the restructured plan in question.

What type of plan? Are the fiscal years and plan years coincident?

ASPPA has published it more than once and I think, if memory serves, that an Employee Plan News article echoed it.

I see the same two possibilities, except I'm not sure I'd describe it as a huge mistake. The fact is, that in most circumstances, the allocations will satisfy the general test on a contributions basis.

What does one have to do with the other?

I would go back to Fidelity and find out explicitly what kind of account the father had and what kind of accounts were set up for the kids. Is it remotely possible that the father's account really was an IRA rollover from his Keogh? Is it remotely possible that the children's accounts are inherited IRA's? Until you rule out that possibility, definitively, I would drill until you reach China.

My guess is that your software marked it as amended for you automatically.

I think the DOL has it right. The idea of home office/other breakdown sounds like a good approach. If you take the DOL at its word, it is looking for a situation where the only potential reason for the plan being bifurcated is the audit fee. In such a situation, you would still find all the assets under, say, 1 contract with a provider, or in the case of pooled funds, a single investment fund with the investment advisor. Taken together, considering all facts, if you can't come up with something that administratively separates the plans then the DOL will probably prevail, if it ever bothers to go after somebody for doing this. I suspect that the lawyer's opinion is a bit distilled and that their complete opinion includes homage to a more discerning differentiation.

I know we are approaching the point where people start talking about angels and pins, but I'm just not quite on board with your conclusion. Let's stipulate that we aren't talking about Standardized plans, because if the plan in question uses a Standardized plan of course there is no general testing - ever. Moving to a VS plan the language that you cited doesn't give me comfort when dealing with the combination of a 3% SH and a separate ER allocation formula. Sure, the note says that if you elect JUST the separate ER allocation formula mentioned, you have reliance. But it doesn't explicitly say that adding a 3% SH to what would otherwise be a formula you can rely on does not obliterate your reliance (as specified in the regulation). I think we have drilled down to the crux of the matter and people will just have to make up their own mind, if they have a VS plan, whether they want to go one direction or the other.

To both Kevin C and Larry, the response is the same: I wish it were so, but it is not. The safe-harbor regulations under 401(a)(4) make it crystal clear (and they even have an example on point) that if you have two SH formulas, you end up not being eligible for SH treatment if the allocation conditions are not identical. Since the formulas in question provide for disparate allocation conditions, the mere fact that you elected two SH formulas doesn't insulate you from the need to test under 401(a)(4). Kevin, I don't disagree with what your VS document says: if you elect a SINGLE safe harbor formula you have reliance. It is the combination of the two employer sources that causes the problem. So, even though you start with a single source that, if the only source of employer funds, provides reliance and then you add a vanilla 3% SH contribution on top, you lose the ability, under the regs, to rely on SH treatment. Get back to me if this still doesn't make sense to you. I have seen all sorts of anomalies in approved documents over the years. So I certainly believe you that a standardized prototype shouldn't allow an allocation formula, in conjunction with a SH formula, if said allocation formula doesn't automatically pass the general test unless the allocation formula has the same conditions for an allocation. If the IRS has made an exception for standardized plans in this instance, I would hope they would extend the exception to VS plans, too.

Show the full benefit. Explain in an attachment that the big cheese will agree to accept a benefit smaller than otherwise entitled to. Have said cheese sign a "I agree to forgo my entire benefit" form, have it approved by the spouse and prepare to have the IRS ask for it. If you want to try and do something other than this (like a pro-rata reduction for other participants), see an ERISA lawyer, because the IRS has recently started putting up a fight.

KJ, in the second paragraph of buckaroo's original post, he details why the restructured plans are not considered a safe-harbor plan under the regs. Does that, combined with my slightly different explanation above answer your question? Personally, I think the IRS would, if they were crafting the a4 regs today include a SH formula as an exception to the uniformity requirement and then the restructured plan WOULD be a safe harbor.

Of course if no crosstesting, no gateway. I read what you were trying to do as restructure into component plans in order to avoid 401(a)(4) testing. I don't think it works that way. I think you can restructure but then you have to do your 401(a)(4) testing on each restructured plan. In re-reading what you originally wrote, I think you are in agreement with me; or better I should say, me with you. But there is a subtle nuance here that I'm not sure I'm communicating well. What you end up with is two component plans that you test under a4, separately, other than the gateway issue, which is never separate, unless you have actual separate plans (and a few other things that shall remain nameless here, but if you want a list, go to -9©(3)(i) of the a4 regs). As you have pointed out, if you choose to restructure like this, since the formulas are not available on the same terms to all employees, you end up not satisfying the rules needed to be classified as a safe-harbor. This means that you have to do a general test on that portion of the plan. Note that in the general test, you are pointed to a4-7 for the rules on permitted disparity. Those rules are less flexible than the rules under 401(l). Basically, you have to use 5.7% and the full wagebase in your calculations; you can't use the 80% of the taxable wage base and 5.4% you have in your formula. So, while you most likely will still pass, you do have to do the a4 general test on the combination of the 3% and the integrated allocation. If you pass on a contributions basis, great. If you have to resort to cross-testing, then you have the gateway rules which come into play. And, if they come into play on this group, they apply to everybody in the plan, not just those in this restructured component. Confusing, I know.

Well, that means that you have some folks over 9%, so the 3% won't satisfy the gateway. It sounds like the gateway would be about 3.16%. Oops. Sorry, that doesn't count the 3% SH. OK, ignore this line of thought, as the gateway would be nearly 4% of pay. Also, I don't think you can restructure around gateway, except for statutorily ineligible. Another option is to limit the PS contribution so that no HCE gets more than 9%. That sounds like about 3.6% + 3.6% if the integration formula in your document ratchets down according to the normal 2 for 1 rule.

Are any of the HCE's making more than $194,645?

My oh my. SoCal, maybe veba is quoting the rules for a multi-employer plan. Or, it is very possible that the "old" calculations will always result in a contribution which fits within the new rules on the cases that they have, so maybe somebody's internal instructions may have been: stay the course. One general point of clarification: the cost of insurance, to the extent there is ANY, that is reflected in a valuation must be based on a coherent set of assumptions. Hence, unless you have a pre-retirement decrement, you don't have a "cost of insurance". Then, once you do decide to value the plan utilizing a pre-retirement decrement, you now have to follow the regulations as to how one values an ancillary benefit. Those rules are not trivial so I won't repeat them here. Besides, SoCal has heard me describe them in detail during a session at ASPPA last year so I'll pass the baton to him if he wants to lay them out. Suffice it to say that they are not terribly intuitive. The rules for calculation vary by whether the death benefit is a function of service or not. My guess is that "all the face amount we can possibly get with the maximum premium determined by application of the incidental benefit limitations" is NOT a service based benefit, but I'd have to read the regs again to be sure. As I said: not trivial. ret: There is a disaster waiting to happen if I have understood what you wrote. You seem to be implying that the plan can purchase all the insurance that it wants, and the only ramification of having purchased "too much" are that the plan sponsor is limited to deducting only the amount that could have been purchased under the incidental benefit test. While what you have described may be theoretically possible if the plan document appropriately limits the death benefit to the participant so that the incidental limitations are satisfied, I can tell you from experience that the IRS doesn't like those provisions and they will therefore scrounge around for another reason, sometimes a far-fetched one, to make the plan sponsor's life miserable. And if the plan document doesn't pay homage to the incidental benefit limitations at all you have a complete disaster (disqualified plan).

Is it? I know you can't impute more permitted disparity than 100% of the allowable disparity, but if your imputation methodology splits it up between the two, does that work? I just don't have time to look it up right now, otherwise I would be answering my own question!

What does your attorney say?

As a general rule, the IRS has been clear from the beginning that elections must be for specific dollar amounts. The final regulations actually eased up on this a bit with respect to standing elections, but they did so in a manner that has very little helpful effect since all standing elections are effective only as of the last day they could otherwise be given effect. Doesn't this address both points #2 and #3? As far as the discount methodology goes, I favor some attempt to recognize that there would be an additional component of 5% for late amounts. I understand that the literal reading of the law was (and remains) that said additional component does not apply to amounts determined before the plan's valuation date (an obvious drafting error, but there it is). So, the ability to escape the 5% adjustment entirely must fail on a BOY valuation and should, IMO, on an EOY val. But with respect to years before the effective date(s) of the final regulations, you can of course do whatever you think satisfies the rules as they exist(ed). Keep in mind we still don't have final regs for 430(j) [quarterlies].

It seems unlikely that a divorce decree and/or a QDRO could require this, unless the the plan already permitted it. My experience has been that the "sale" can only favor somebody who is otherwise entitled to alternate payee status. Otherwise, the plan will, as indicated, reject it.

As long as we all agree that the limit is an employer limit and not an individual employee limit, I also agree. But what if the Davis Bacon wages constitute only 10% of the total wages of the company? In that case, the percentage that could go to the Davis Bacon plan might be well in excess of 25% of the Davis Bacon wages. On an individual level, the limit is 100% of compensation paid. Example: an individual makes $15,000 as Davis Bacon wages and $25,000 otherwise. That would mean the limit of PS contributions for this individual would be $40,000. If there were a contract in place that allowed the employer to take gross Davis Bacon wages of $55,000 for this inidividual and split it up so that $40,000 went to the plan and the net Davis Bacon wages were then the aforementioned $15,000 the individual limit would not be violated. If there were enough other people in the company such that the amount over 25% of pay ($30,000 in this case) did not cause the overall plan contribution to exceed 25% of pay then there is no limitation being violated.

Before I would take such a draconian position, I would need to see more facts. What type of employer? What is the earned income/taxable income in future years? In general, a non-deductible contribution from an earlier year is deductible in a future year, but the national office of the IRS does think there are some constraints. In practice, the auditors at the local level think there are fewer than the national office does.