Mike Preston

First, the plan has to allow catch-up contributions for those over age 50. Not all plans do. Some plans allow folks to make catch-up contributions in excess of the otherwise applicable limit (for example, 20% in this case). Other plans say that you can defer up to a specified limit (for example, 75%) and IF that exceeds what you can otherwise contribute under 402(g) [$13,000 in 2004], then anything above that limit can be counted as a catch-up. Hence, if this plan has a limit of 20% then the catch-up contributions must be allowed ON TOP of that 20% limit.

Change the facts a little. Assume the plan provides for past service such that the participants as of 1/1/2003 have an accrued benefit. Further, assume the plan sponsor does not make the election in 412(l)(7)(D)(iv) to take into account past service (hence, the default action is to ignore past service). Is your interpretation that the flat rate premium would apply, since the participants clearly have a benefit under the terms of the plan, but that the variable rate premium would not apply since the effective current liability is 0% phased in?

If the plan document does not provide the formula, then it doesn't satisfy the gateway, even if the resulting allocations would satisfy the gateway had it been written into the plan.

This is a slightly different twist on the issue. An individual who is not a key employee can be somebody who was never a key employee or somebody who was at one point in the past a key employee. If the latter, then that individual is known as a "formerly key" employee. Account balances of people who are formerly key employees employees do not count in the top-heavy test. Neither the numerator or the denominator.

Boy, the word entropy comes to mind. Tom stated it right at the beginning of his post, in that the plan had to be top-heavy for the schedule indicated to be invalid as far as avoiding gateway. The end of Tom's post didn't reverse that, but was trying to decode the IRC's intent as to why such a schedule didn't work if the plan was top-heavy. Andy, I'm saying that if the plan is not top-heavy, it works fine. If the plan is top-heavy, then the gateway is not satisfied.

Hard to be a minor son and be over 21 at the same time.

What does "We obviously fail coverage in the rate bands" mean? Also, I don't understand your last paragraph. If the plan is top heavy you have to provide a 3% minimum. If it isn't, you don't. If you don't, then the lowest band can be less than 1%. If you do, then if the lowest band is less than 1% you fail.

DeePa: No. Would you settle for a Code cite instead of a reg cite? 416(i)(1)(A). It used to say: "The term 'key employee' means an employee who, at any time during the plan year or any of the 4 preceding plan years, is......". Now, it says: "The term 'key employee' means an employee who, at any time during the plan year is......".

No.

There is an overriding section of ERISA that controls their actions in cases such as these. A pension plan has many circumstances where a participant, on one day, is not entitled to a benefit, but at a later date (maybe just one day later) is entitled to a larger benefit. The drafters of ERISA recognized that there exists the potential that an employer would look into its crystal ball and essentially say: "Gee, if X continues to work for us until (fill in the blank - maybe the next day, maybe the end of the year, maybe even further!) ________________, we will incur an expense that is greater than what we will incur if employment is terminated. Let's terminate X's employment now and save some money." Since that potential can't be eliminated, they provided X with ERISA Section 510. It is short, but I'll shorten even more by highlighting the words that are applicable to what you have described: "It shall be unlawful for any person to discharge .......a participant ....for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan." For you to qualify for the early retirement subsidy you would need to convince your employer (or have a court decide in your favor) that your employment was terminated in violation of ERISA Section 510. As you might guess, this is an extremely sensitive subject to be talking about on a public bulletin board, because you might prejudice your ability to have your benefits restored if you put information into the public domain. What you need to do is contact somebody who can help you decide what the best course of action is. You have many choices, some less expensive than others, some quicker than others. You can contact the Department of Labor and see whether they might be willing to look into your facts. Inexpensive, but not one you or I can predict the timetable with respect to. You can contact an ERISA attorney. You can appeal the decision to deny your entitlement to the early retirement subsidy yourself to the Committee (probably the action the attorney would take first) yourself, but you have to decide, after consultation with an attorney would be best, whether even that action might take away some of your rights prematurely. There may be other options you have that others will post. Good luck.

I think it will be a very cold day in a very warm place before you earn a wow, or a WOW. At least from me. I don't mean to sidestep the issue, but there is another important piece to the puzzle besides the Code and regs. The IRS also has issued some revenue rulings to help us understand when a plan is entitled to be classified as a 412(i) plan. Revenue Ruling 81-196 is one of these. I seem to recall that there was a revenue ruling (and the number 106 is sticking in my head, but darn if I can find it now) that also laid out some specifics. But lets just look at the regs for a second. They are amazingly short. But they clearly state that the plan must be funded exclusively by the purchase of contracts from an insurance company and that there is an exception for accrued benefits from employee contributions. The 416 exception doesn't appear here, it appears in the 416 regs. How do you satisfy that if the accrued benefit at any point in time exceeds the csv? If a fully vested participant terminates you would have to satisfy the benefits via a supplemental payment. As stated in my prior message, that is an "Oopsies!". I think you are reading 1.412(i)(b)(2)(iii) the wrong way. "The benefits provided by the plan for each individual participant must be equal to the benefits provided under his individual contracts at his normal retirement age under the plan provisions." I think this section is there to ensure that there not be any unfunded benefits at NRD (no backloading). Nothing more. It doesn't imply that you can frontload, however, by providing for benefits in excess of what the insurance contracts will pay in the interim. I'm going to keep searching for the RR (or whatever other source I think exists - I know it is out there, I just can't find it at the moment). It might provide a clearer path to what I'm trying to communicate.

I agree with QDROphile. However, the issue is what to do once a plan has been informed of something that it didn't go looking to find, such as the ancillary arrangements found in this case. Again, QDROphile has it right. Hie thee to an ERISA attorney.

Maybe not. It is deeply buried and I might have read it wrong. But it seems right to me. 1.401(a)(4)-8(b)(1)(iv)(D) is entitled: "Minimum allocation rates permitted." and (1) is a few lines lower, but doesn't have a title.

411b1F indeed only says that the ab must be AT LEAST as large as the csv. But as I tried to communicate, but obviously did a bad job of it, if the ab is anything other than the csv, then you have a plan that will fail to satisfy one of the other 412i requirements. Don't have time to research the particular sections today, but, IIRC, one of the requirements is that the contributions be determined on a level premium basis. If the ab is greater than the csv then, if someone terminates, the net result is that there must be additional funds found somewhere. Oopsies! No 412i. The only exception is the allowance for a side fund specifically for top-heavy benefits. So, think of the language of 411b1F as allowing the top-heavy side fund, but no other.

Lame Duck is right on in this case. I don't think emphasizing that a SIMPLE IRA is a potential alternative is a bad thing. I know that *I* don't run across many plans that lend themselves to SIMPLE's of any sort and it could very well be that the more experienced the person the less likely they are to have familiarity with options that are, well, simple. And sometimes they ARE the best alternatives for the client. In this case, though, I seriously doubt it, although it depends on how many hours the employees work for sprinklerguy and when they were hired. It is starting to look like a SEP-IRA may make the most sense, especially if the employees have been with sprinklerguy for less than 3 years and sprinklerguy has been in business for longer than that. Ah, census. So easy when you have it available. So difficult when it isn't.

Great cite, Everett. Keep in mind, though, that the 9th Circuit holding is a bit more than just the 204(h) issue. It also applies to the basic rule of 411(d)(6). It would be interesting to see whether Michael v. Riverside would be ruled differently today.

I'm not sure I understand. The requirements of 411B1f seem clear to me. If the AB is not at least equal to the CSV, the plan fails. Are you saying that the argument above is not logical because a 50% vested employee can receive a benefit equal to 50% of the csv?

It is ok. It is not a CODA, in my opinion, as long as the ultimate decision as to whether they get a contribution (or not) and what level, is vested with the employer and not the specific individual. There is a significant issue here and that is the way things are done. If the HCE's in question sign a form at the beginning of the year that says: "I elect to defer no salary this year." then I agree with QDROphile that this is a CODA. Instead, is the decision as to what will be contributed made by the employer in some fashion? Then I don't think it is a CODA, even if the individual HCE's participate in the decision making process and make their preferences known. Form is exceedingly important here. But there is one other issue to be aware of. If a new comp plan has any classes where individuals otherwise eligible for a contribution end up with none, then the IRS has stated, and I concur, that the net effect is that the plan can not use the Average Benefit Test. This means very little if the plan meets the 70% threshold. However, if it doesn't, then there will need to be additional NHCE's that benefit. This will happen most frequently when there are terminated NHCE's with hours in excess of 500. Isn't it easier to provide via plan documentation that HCE's that do not wish to participate be excluded from the plan?

If this plan is top-heavy, the 0.6% rate will fail the requirement found in 1.401(a)(4)-8(b)(1)(iv)(D)(1).

There is no guidance that I'm aware of as to what constitutes a significant reduction. Better to be safe than sorry. In a rational world, one would expect the 204(h) determination to be based on the totality of the amendment. Not so, says the 9th Circuit. See Michael v. Riverside Cement. A most illogical ruling that can only be attributed to the fact that the 9th Circuit Judges have historically looked for ways to prove that, if they had their way, the 9th Circuit would not be part of the USA. Strong letter to follow. http://www.groom.com/articles_display.asp?display=120

I agree that it must be at least equal to the CSV. But if it is more, and it is NOT merely because of the top-heavy exception, then I think the net effect is that you end up with a non-412i plan.

You need to contact somebody that handles small plans. Have a Yellow Pages handy? You will want that person to have some credentials that indicate they understand the types of plans that you can enter into. Ask what they have and then post back indicating what they are and somebody will provide you with a description of what those credentials mean. The person you end up talking to must ask you for a complete listing of what you pay your employees (including yourself and your spouse for this purpose). They should ask your birth dates and the hire dates. They should ask how many hours each employee works in a given year. They should ask how much you can afford to save over and above the amounts you are paying, or are willing to pay, yourself and your spouse. They will ask how much of your income you have historically taken as "pass through dividends". They will ask what year you are talking about saving money on behalf of (2003 or 2004). If they don't ask all those questions then they don't have enough knowledge to provide you with the choices that you should have. Good luck.

The values certainly seem reasonable to me. Ignoring the discimiination issues is hard, though........(stop... don't type that.....uh, ok....no, wait....AGGHHHH!....^H^H^H^H^H^H^H^H^^H^H^H^H^H.........)

Yes, the son is attributed the stock owned by the Dad in Entity 2. And, as pointed out, since son owns nothing of 1 directly and is not attributed the stock of the Dad in Entity 1, the entities are not controlled.

That, at least, is a good thing. My understanding is that the AB is indeed the value of the contract.