Mike Preston

Oh, High 3. Got it. Back in a few minutes.

What is H3?

Well, I did say it was *ONE* of the criteria, not the sole criteria. Judging from the tone of the message, my guess is that he has a significant chunk of change passing through on his K-1. My calculations yield a DB accrual for somebody age 30 in 2009 which exceeds the DC max (excluding catchup). So, a DB plan really does make sense for a relatively young person if the other criteria line up. Keep in mind that a DB plan put in 10 years ago at the youngest age where the benefit accrued was the DC 415 $ limit at that time ($30,000), which was 35 or so, would have a 415 dollar limit associated with that first year of $100,000 now, which is 1/10th the dollar limit payable at age 45. You have to assume a constant rate of return of nearly 13% to pretend that there wouldn't be additional contributions beyond that initial $30,000 just to use 1/10th of the dollar limit in effect 10 years later. So, I submit that it is not merely the contribution for the year in question, but also the contributions for future years which will pyramid that must be taken into account. It is an interesting trade-off in the sense that the DC contribution itself can be viewed as a "use it or lose it" kind of thing, since there is no making up for missed contributions in the DC plan. But in a DB plan you can take the opposite approach and claim that the DB plan provides the ultimate in establishing the potential for large future contributions. Certainly until the IRS comes out with regulations that implement 415(b)(5) [the 10 year phase in of the 415$ limit], you are establishing a very large potential, even if you put in what I call a "placeholder" plan at a modest level, well below the 415 $ limit at the outset. Whether that potential can ever be realized usually revolves around the answer to the question I initially posed: Are you in the last 10 or 11 years of a business where your income generation will be such that you will want to save more than 20% of income? If the answer is yes, it hardly seems wrong to implement the DB plan, because after the 10 years has run, since the answer to the question itself means that a DC plan can adequately serve the client's needs after that point. As you know, it is very difficult to predict when those 10 years actually take place. My experience has been that when people think they have a fixed horizon income opportunity, they establish themselves as competent business people during that time period and the income continues on long after they thought it would end. If so, they probably would have been better off with putting in a DC plan until, .... untill... when? Well, go back to the question: Are you in the last 10 or 11 years of a business where your income generation will be such that you will want to save more than 20% of income? It is definitely not an exact science. Combine all this with the fact that deferrals no longer reduce 415 compensation (which always argues for layering a DB on top of a 401(k) plan), and the 404a7 limitation affecting the maximum that can go into a PS plan in many cases and you have all the criteria you need to do a great plan design!

That is like saying that if you amend the plan to pay 500% of pay you wouldn't have an issue with paying the full benefit. Doesn't work that way. The 415 regs put the kabosh on annual factors for benefits accrued after the effective date of the regs. Unless you can get the IRS to agree that annual rates are ok for all benefits, including those earned after the effective date of the regs, of course.

Andy, one of the criteria that I use to determine whether a DB plan makes sense for a prospective client is the answer to this question: Are you in the last 10 or 11 years of a business where your income generation will be such that you will want to save more than 20% of income? If that can be predicted with any degree of certainty, then doesn't it make sense for anybody, no matter how young?

Forget the SEP. Anything you can contribute to a plan that is NOT the DB plan can be contributed to the PS/401(k) plan. If you are NOT contributing the DB plan for the year, your contribution to the PS plan can be greater than 6%. You really need to have this discussion with the entity that helps you with your PS/401(k) plan. They should know the rules and be willing to discuss them with you.

It is ok. Those who are in the habit of throwing around unsubstantiated opinion as reasoned arguments rarely have the fortitude to respond point by point. It is so taxing on their systems to maintain a logical outlook.

Huh? I don't think that I implied that $3,949 was a limit on deferrals. It was the limit on emplorER funds, but I used the wrong percentage. I should have used 20%, not 25%, so the actual limit is $3,159. But any use of employer contributions wouldn't change the fact that the maximum total that can be put into the plan is the net earned income. Since the net earned income is less than the 402(g) limitation, the maximum can be structured as solely a 401(k) deferral and there is no need to complicate things with an employer contribution.

So, is drakecohen really John Bury?

While I don't disagree with the conclusion, I'm not sure what the 100% of pay 415 limit has to do with this conversation. If earned income is exactly 17k, then 1/2 of the FICA reduction is $1,201, and a 100% deferral is $15,799. The 100% of pay limit is also $15,799, but this would be limited by the 25% of pay limit to 15799 * .25 = $3,949. But any contribution made as a profit sharing contribution lowers the total, doesn't it?

I have already said that 8% might be a bit too high in today's economic environment, but the above evidences a stark ignorance of the relationship between the real rate of return and inflation. Even if we accept your philosophy that, in general, the price of equivalent goods rises with inflation (it doesn't, but this isn't a board that is intended to educate about economics), your argument above is that inflation will be 8% per annum in the intervening years. A bit of the hyperbole, wouldn't you say? You lose all of your street cred (to the extent you had any) when you flail around like this and throw false conclusions around like facts when they can't be supported upon the slightest inspection. I think the above, as is typical from you, is a populist argument meant to denigrate the IRS. That is Populism 101. If you throw stones at the IRS who is to stand up for them, since to do so goes against the grain of those who despise governmental intervention? I am aware of precisely one government employee who "cashed in" on cross-testing upon leaving the government. The vast majority of people who participated in the drafting of the 401(a)(4) regulations are actually still at the IRS, or have left within the last few years. So, if you think that your assertions in this second paragraph have any validity beyond your desire to "stir the pot", you are sadly mistaken. No, industry doesn't have anywhere close to the influence you ascribe to them. Certainly they are nowhere close to "writing their own rules." Do they work within the system to argue for modifications by writing comment letters and the like? Of course they do. It is beyond comprehension to say that doing so is the equivalent to writing their own rules. You might want to get involved with an industry group that does participate in the process. I'm sure you would be surprised at how difficult it is to move the regulators in any specific direction. So you admit that the IRS, at times, strains logic to get at the result they would like to see. How does that bolster your argument that industry, and not the IRS, wrote these rules? This is like a holistic medicine man claiming that heart surgery exists solely for the economic well being of the heart surgeon. Others have made the point that given the tax rate structure that currently exists, the relationship between owners and employees has to take the marginal tax rate into consideration when designing tax incentives. Again, as you like to point out, Government 101. If you lower the marginal rate (which, although it hasn't changed in a number of years, it is much lower today than it was when ERISA was first enacted - can somebody back this up with a numeric example?), the cost for tax-based social engineering goes up. Do I need to explain to you why? The fact is that it isn't, as you put it, a scam, but a system firmly based in economic reality. As far as your other assertion that dismantling the entire private pension system in favor of funding the rank and file's benefits from the increased taxes which would be generated by eliminating the retirement tax break entirely, all I can say is that I'd rather have the private system funding a benefit payable in 30 years than a public system doing the same thing. Why? Well, Government 101, of course. How much does the government spend of that theoretical $21,000 towards its intended use? Think toilet seats that cost the Pentagon thousands of dollars. If you think the net remainder of that $21,000 which ends up benefitting the non-highly compensated employees would be anywhere close to the purchasing power of the privately invested pension account, even after 30 years of inflation, you need to take off your rose colored glasses.

I don't know. I'll check. Anything on the DC side?

I will take that to mean that you have no understanding of how compound interest works. Above conjecture confirmed. Please explain how it is a greatly discounted value. You said that you were talking about those that were "making the rules". Most people know that the IRS were the ones that came up with the regulations under 401(a)(4). If you meant Congressmen and Senators, I concur that many have an understanding of this issue that seems to rival your own. It is hard to respond to populist drivel, but I shall try. Smearing the integrity of pension actuaries with such a broad-brushed insinuation is, or should be, in my opinion, actionable. First, the "guys" that got together were the IRS in formulating the regulations under 401(a)(4). Are you accusing the IRS of being innumerate? Are you somehow accusing the IRS of knowingly establishing a system which discriminates against younger employees? Second, are you one of those people that believes consultants (be they actuaries or not) should ignore governmental rules that would benefit our clients if we would not have written those rules ourselves? Ever heard of Judge Learned Hand? Read anything he wrote? You are entitled to your opinion, of course. I suppose the nuances associated with tax incentive based social engineering, an experiment implemented in our country to great effect when it works and cries of discrimination and tax dodging when it either doesn't or is not understood, escape you. Look, if you want to ignore the fact that tax incentives are a prime motivating factor in our country, be my guest. But blaming those who don't for acting upon those factors seems disingenuous. [And just in case it isn't clear, "those" means the folks that wrote the regulations: the IRS.] Do you have any studies indicating how your theoretically discriminated against younger employees would fare based on a modified system that doesn't include the rules you seem to dislike? Don't you think it is jumping the gun a bit to call something a tax dodge when you can't say that there is a better system? Or that you can replace what employees can expect today with something where they will be better off, at an acceptable cost to our country? I, for one, believe the 10% excise tax on early distributions of employer monies is far too low. It is about right for salary deferrals. Perhaps it should be increased to 15% on salary deferrals by 1/2% per year over a 10 year period. We should be encouraging long term growth of the country's retirement savings accounts and raising the excise tax is the single most effective way I can think of to do so. But I think it should be matched with a corresponding carrot meant to reward those who do leave their retirement monies in the retirement system. Perhaps a lower tax rate on distributions after NRA not in excess of a lifetime draw down. Punish early withdrawal, reward appropriately timed withdrawals of proper amounts. If there is one argument that makes any sense at all when dealing with cross-testing it is the fact that the interest rates in the economy were at an all time high when the regulations were being developed. If you can believe it, the 8 and 1/2% interest rate used in the regulations was believed to be a long term risk free rate of return by many at the IRS at the time. Should the interest rates allowed be reduced somewhat to account for the fact that rates are nowhere near what they were when the rules were initially put in place? Perhaps. But keep in mind that once they are reduced (*if* they are reduced) then the changes made to the regulations since the early days of 1992-1993 need to be revisited as well. For example, reducing the interest rate would lessen the logic for a gateway of any sort. I don't support the bill attempting to do away with cross-testing. I think it is short sighted (and smells of populism) to even contemplate it. But a sharpening of the tax incentive axe is always fair game. Just make sure that the axe's blade is pointed in the right direction and for the right reasons.

Can you give an example of a provision that, if not amended by 12/31/2009, would create a problem for a plan sponsor?

Gee, could it also be that "A gets it at their NRA and B gets it as their NRA", as well? If A were to take the money out of the plan and go to an insurance company and ask: how much of an annuity, as a percentage of my pay, would you provide to me at my normal retirement age? How much do you think the insurance company would provide? For argument's sake, let's say the insurance company would guarantee 8% for the period between the point in time when the contract was sold and the point in time when the participant would reach NRA. If B were to take the money out of the plan and go to an insurance company and ask: how much of an annuity, as a percentage of my pay, would you provide to me at my normal retirement age? How much do you think the insurance company would provide? For argument's sake, let's say the insurance company would guarantee 8% for the period between the point in time when the contract was sold and the point in time when the participant would reach NRA. It is difficult having an intelligent conversation with somebody who throws around statements like that. Do you really think that those making the rules are "innumerate"? I thought that TH still applied. It doesn't? Silly me, I thought that if a participant is in a cross-tested plan, the gateway of 5% is higher than the DC top-heavy minimum by 66%. Care to give an example of how "requiring minimum service for full benefits" relates to the discussion at hand? Curious minds want to know. Great. You had me worried there for a moment. If you are blaming the doctor for the fact that the employee will not take advantage of the opportunity to leave the money sheltered for retirement, does it follow that the doctor should maintain control over the money until retirement age? Or that the 10% excise tax is too low?

Always listen to the actuary. Especially if he will be kind enough to provide a citation.

They are certainly key, but I'm not so sure you have a controlled entity. Who said they were controlled? Is it controlled via the affiliated service group rules? Or am I missing something?

Agreed.

What makes you think it is ignored?

IRC Section 1402(a)(5). One of my favorite code sections. Drives people nuts.

What if there was no AFTAP issued, at all?

It is not unanswered, SoCal did.

Maybe I'm missing something, but even if a participant has $245000 in base compensation, and therefore receives $24,500 in the money purchase plan, when the maximum deferral of $16,500 is added to it, you don't go over the 415 maximum of $49,000. What am I missing?

No reason to limit the percentage to 100%.

No.