Mike Preston

I don't disagree with the results of what you are protecting against, David, but I have to say that there are a number of situations where increasing the savings rate outweighs those concerns.

You have to provide the gateway, otherwise you aren't allowed to cross-test. If you aren't allowed to cross-test, the fact that the cross-test "passes" is irrelevant.

Typically, no. The right to the lump sum can't be taken away except in very unusual circumstances. The plan would have to apply to the Secretary of Labor for approval, and unless the company was seriously in jeopardy of not being able to continue in the absence of being allowed to compromise your entitlement to a lump sum with respect to benefits accrued through December 31, 2000, I don't think there is a snowball's chance in Hades that the Secretary of Labor would approve it.

Me thinks that R. Butler has hit the nail on the head. I'm not sure whether the comment about passing the bar is correct, but if it is congratulations are in order. In any event, this is about a turf war. And the folks fighting for more turf are the state bars, or in this case, the NC state bar. It is an attempt to take turf from the federal authorities, who have seen fit to enable more than attornies as representatives. What makes this situation different from Florida, where this issue has already been decided?

*** WARNING: LONG POST *** It is hard to agree or disagree with what you are attempting to communicate because specific numbers weren't provided. However, it is not unusual to have a "subsidized early retirement" benefit available to you if you continue to work until age 57, but if you calculate your benefit entitlement at age 51 it comes in as 30%-40% of what you would get if you waited until eligible for normal retirement at, say, age 62. ERISA and the Internal Revenue Code preclude most plans (like one sponsored by a private sector employer) from reducing benefits to which you have already become entitled. If you work for a non-private sector employer, like a governmental agency, ERISA and the Internal Revenue Code don't provide that protection. However,it is a rare situation where a governmental employer will attempt to reduce benefits to which you have already become entitled. One of the benefits that you have earned is the right to an unreduced benefit at age 57, assuming you continue to be employed until then. This unreduced benefit that you have earned is based on your service through today. You didn't provide numbers, but let's put some sample numbers on the table and you can modify them to fit your situation. I'm going to make some simplifying assumptions, so my calculations may not be applicable to your individual calculation. First, I'm going to assume that your pension is a flat percentage of your average compensation, multiplied by your years of service. Second, I'm going to assume that your average compensation today is $40,000. Third, I'm going to assume that the flat percentage is 2%. That means that today, you have earned a benefit of $40,000 * 2% * 34 / 12 = $2,266.67 per month, beginning at your normal retirement age. I'm going to assume that your normal retirement age is age 62. If you were to quit right now, you would be able to wait until you are age 62 and then get a pension of $2,266.67 per month. Alternatively, your plan might provide that you could get a pension starting at an age earlier than 62, but that pension would likely be reduced to account for the fact that you are expected to get it for more years (you are younger than age 62 when you start), and also reduced because you are getting it earlier. The question is at what age your plan allows you to start getting payments if you quit right now? For ease of comparison, I'm going to assume that you can get your pension at the same age that you mentioned above, at 57. Using some standard actuarial factors (there are many available, so the use of any specific factor in this illustration might not be a good estimate of what your plan provides), if you begin your benefit at age 57, instead of being $2,266.67 per month it would be about $1,500 per month. (For those that want to confirm my numbers, I used the GAR94 mortality table and 6% interest). However, if you continue to work until age 57, as I understand what you have said, because your plan provides you with a benefit that is "unreduced", you would expect to get a benefit that is no less than $2,266.67. Note that this is probably only provided to you if you continue to work to age 57 with the company. So, let's attempt to answer what I think your question is, based on the above. If your company replaces your current plan with a cash balance plan, is there an option that you MUST be able to choose which will guarantee that you can receive, at age 57, assuming you continue to work until then, a benefit that is at least as big as what you have already earned ($2,266.67)? The answer is yes. Now, the company might give you a choice, once the plan is changed. One of those choices might be to convert your current benefit, based on your current age and service, into an opening cash balance, and then to accrue future benefits in accordance with a new formula that is based on a percentage of your pay. If you elect this choice, and you continue to work until age 57, then your benefit from the plan, as modified, might be lower than the $2,266.67 calculated above. If it is indeed lower, then you would still be entitled at age 57, if you decided to retire then, to a benefit of $2,266.67/month. To recap, if you have already earned a benefit (e.g., $2,266.67 per month) that you can take at age 57, by just continuing to work until age 57, even if your benefit doesn't otherwise go up, then it doesn't matter how the company changes the plan, you must be able to get that benefit if you continue to work until age 57. At least, that is my opinion. Based on what I've read in the papers, it appears that some companies are attempting to give participants a "choice" of benefits, on conversion, that in some circumstances would result in a lower benefit than what has already been accrued under the plan at the point in time when the plan is changed over to a cash balance plan. I'm a bit skeptical of that actually happening, because ERISA and the Internal Revenue Code prohibit that sort of reduction, in my opinion. Every case I've investigated on behalf of a participant (I've done it three times, I think), the plan is not reducing what has already been earned, but instead reducing what the participant might have earned in the future. ERISA and the Internal Revenue Code protect what has already been earned. They do not protect the right to earn more benefits in the future. Or, stated a different way, a company does not have to offer a pension plan. If they choose to offer a pension plan, once benefits are earned, they can't be reduced. But any benefit that might be earned in the future can be eliminated by the company terminating the plan. Let's extend my illustration above. Using the same formula as above, let's look at what the benefit might be if you continued to be employed until age 57. In addition to the 6 additional years of service, let's assume one other thing changes - your salary. Let's assume that you get 6 pay raises between age 51 and 57 so that your average pay increases from its current $40,000 to $48,000. That is a little more than 3% per year. Recaculating the benefit you are expecting to get at age 57 it is: $48,000 * 2% * 40 / 12 = $3,200.00 per month. Many people seem to feel that the company is unfairly reducing benefits if they modify their plan to provide for a benefit, in this case, of less than $3,200 per month at age 57. That simply isn't true, in my opinion. If the company were to terminate the plan today, the benefit that is earned through the date of termination ($2,266.67/month payable at age 57, but only if the person continues to be employed until age 57) must be provided. But there is no requirement to provide a benefit that would have been earned ($3,200.00/month payable at age 57, assuming the actual salary increase mentioned). The logic of the prior paragraph is also extended to plan changes and conversions. It isn't limited to plan terminations. If a company modifes or converts their plan (such as a formula change or a full blown conversion to a cash balance plan), they are not required to provide benefits as they might have been earned under the unmodified plan to existing employees. They are only required to guarantee that benefits already earned are not reduced or eliminated. I hope this answers your questions. If not, please post back. This is a very timely issue and it is therefore a very important discussion.

If your ex-spouse has violated the Marital Settlement Agreement (MSA), your attorney will be able to tell you what, if anything, you can do. Generally speaking, the pension isn't terribly different from any other asset. If he violated the MSA your attorney will go about trying to make you whole (or tell you why state law gets in the way of you being made whole).

I believe the accrual rules allow you to use Participation or Service. Further, the only restriction on past service would be that imposted by 401(a)(4). I can see situations where past service might be acceptable. I can see situations where past service might not be a good idea.

It depends on what type of formula you want to implement (it seems like everybody has their own favorite). But how about 3.35% per year up to 10 years, 1.675% per year over 10 up to 20 and 2.5125% per year over 20 up to 33, all fractionally accrued.

As a preliminary step, you might consider sending your divorce agreement to the plan as a DRO and ask them whether it satisfies their definition of a QDRO. If your settlement agreement is rather specific as to the name of the plan and how the benefits are to be divided, the plan just might accept it. At the least, it will put them on notice that something is being done (again). This is truly a shot in the dark, though, because it is most unusual for a marital settlement agreement to be drafted in a way that satisfies the QDRO rules. Or, you can take a look at the previously submitted DRO that was rejected and see what the reasons for rejection were. See if those reasons can be cured simply (something tells me they can't, though). If they can, submit another version modified to address those concerns. It can't be stressed enough though that what you should be doing is getting yourself lined up with a lawyer that can advise YOU on your options.

Unit accrual is front-loaded in the sense that it is the same percentage for every participant in each year, while flat benefit accrual for those with more than 25 projected years (or more than X/.7 projected years in the case of the design based safe harbor - which is usually even better than the safe harbor flat benefit accrual using a minimum of 25 years) will have differing accrual rates for typically HCE's, i.e., higher. David, the problem with mutliple tier benefit formulas is that most actuarial calculation systems don't have the options available to calculate the benefits automatically. I don't know whether you meant to imply this or not, but I usually use 3 tiers, not 2 tiers in the benefit formulas designed under 3b4ic1. Works even better.

You need a lawyer. If you agreed to have your ex's lawyer draw up the QDRO and it hasn't been completed, shouldn't you contact that lawyer and ask what his or her plan of attack is? At the same time, you might want to contact the plan and ask them whether they are intending to wait for a QDRO before allowing any distributions, or, because it has been so long since the original DRO was rejected, it no longer forces the plan to put a hold on your ex's accounts. Have I mentioned you need a lawyer? If the plan says that the original DRO has put the plan in a position of not allowing a distribution until a QDRO comes through, ask for confirmation in writing. If the plan won't give it to you in writing, or if they say that there is no hold, give the lawyer very little time (if any at all) to draft a letter to the plan saying, in effect, that a DRO is pending and that the plan should take no action before receiving the DRO. If the lawyer won't do it, you do it. And each and every step mentioned in this post which refers to "you" can, and perhaps should, be done by a lawyer you hire.

I haven't checked the programs for this year's conferences (The ASPA Summer Academy and ASPA's Annual Conference) but they usually have a few sessions devoted to non-discrimination testing. Larry Deutsch frequently prsents one of them. You might consder one of those conferences. In addition, Larry presents an annual (or sometimes more frequent) "Non-Discrimination Symposium" which has 1 or 2 full days of introductory concepts and then 2 days of really, really, really advanced concepts. I don't think there is a more thorough educational program in the country with respect to non-discrimination testing. Corbel offers various courses which are intended to address this topic (as well as many other topics). As does McKay-Hochman. I'm sure there are others out there, as well.

If they are eligible for buy-back (that is, they haven't incurred the five breaks) they are deemed to have bought back the moment they reenter the plan.

Sure. When I say "coverage" I mean satisfaction of 410(b) in any way that "works."

I have heard that they are scheduled to be released before 4/30/2003. Of course, the 1987 401k regs were originally scheduled to be released in 1984. So look for them some time before 2006. Until they actually go out the door, delay is possible. Please, please, please let them clarify that it is acceptable to amend the Top-Paid Group election until the due date of the IRS Form 5500 for the year, with extensions.

Citations are a bit tough in this area because to complete the circle requires a lot of cross-referencing. You might start with 1.401(k)-1(g)(11), though.

A good argument can be made for the latter, if it is indeed the case.

Yes. Yes. Yes. ;-) If coverage flunks, the employer must bring others into the plan and provide an employer contribution pursuant to EPCRS. I believe that amount is the average of the ADP for the NHCE's who participated in the plan.

You are such a stickler.

Ah, yes. Good citation. However, I'm not sure its applicability is universal. It includes the following: "This ruling also does not apply to transfers of nonstatutory stock options, unfunded deferred compensation rights, or other future income rights to the extent such options or rights are unvested at the time of transfer or to the extent that the transferor's rights to such income are subject to substantial contingencies at the time of the transfer. " I'm not sure whether the "substantial contingencies" referenced above is the same as the "substantial risk of forfeiture" provision which precludes immediate taxation to the participant in the non-qualified plan. Because of the uncertainty, I have heard that non-qualified plans are reluctant to incorporate the equivalent of QDRO procedures.

After-tax contributions are also controlled by the ACP test. I'm not aware of any specific write-up on after tax contributions, although I'm sure one exists somewhere.

I'm from the camp that says the flexibility gained from the approach far outweighs the disadvantages. The non-discrimination testing is certainly no worse than it would have been had the plan been amended to provide the specific allocation or groupings necessary to implement whatever the plan sponsor chooses. I don't see how the IRS could have possibly approved the use of groups being pre-defined with one participant per group if that would give rise to a claim of being subject to the rules of 401(k). As to the third one, while communication is different, it seems to me to be easier than in the case of a plan that is amended to accomplish different allocation methodologies in different plan years. Andy, are you aware of any citation from the IRS on the CODA issue?

Stacy, the original poster indicated that the entity in question was a C-Corp, not a partnership. Hence, the participants in this case are not "partners".

It depends on what it really was, doesn't it? If it was a deferral, then it exceeded income and should be returned. If it was a contribution pursuant to a PS portion of the plan, to the extent it exceeded the 415 limit it again needs to be "dealt with". By "dealt with" I mean whatever the document says about contributions in excess of the 415 limit (refund, hold in suspense). Those 50-75 pages sometimes have some good information in there. What does yours say?

There is usually a good reason for that. DRO's rarely influence non-qualfied plans. Why? Because there is no IRC Section 414(p) to enable taxation to the alternate payee. If a non-qualified plan were to segregate a benefit on behalf of a spouse, the benefit would still be taxable to the participant. Hence, most non-qualified plans "dont' even go there." If the employee is supposed to turn something over to the spouse, they can do so from their benefits. The plan doesn't have to be the one paying the spouse. And usually, it won't.