Mike Preston

I really do feel your pain. The problem is not with the system, it is with those that either sell or must accept the system. I've seen it all, Codi. I've seen plans put in place where there is absolutely no attempt to communicate what the real results will be. I've seen attempts to communicate met with belligerent irrationality on the part of the client that either refuses to or just can't grasp the complexities. I'm not alone. Any advisor in this industry for a substantial period of time has no doubt seen the same. If you want to send me the details on the 4 other employees you had during 2001, I will be glad to tell you whether the exception I referenced before is in play or not. Feel free to email me at mike.preston@prestonactuarial.com. These boards aren't to be used for direct solicitation so I want you to know up front that I will not attempt to bill you for anything I do on your behalf, nor will I accept payment. What can I say? Your candor and attempts to do things "correctly" makes you a "good guy" in my book (whether you are male or female!). If you decide to do it, I need date of birth, date of hire, number of hours worked in 2000 and 2001, W-2 compensation, and deferral amount. There might be other pieces of information needed, in case you have anybody that is not clearly a full time employee. It won't bum me out if you decline, either. Just wanted to give you options.

Codi, from what you have described, it looks like the test is not passing. You say the plan was started on March 1, 2001. Further, you state that the employee that makes $93,000 in 2001 was first employed fifteen days before March 1, 2001. This would mean that his compensation from your company was zero in 2000, as he wasn't employed in 2000. When determining somebody's compensation in the lookback year, one only takes into account compensation paid from the plan sponsor. In this case, your company. It doesn't matter what his W-2 was from the company where he worked before he started with your company. Hence, for purposes of the test, his lookback year compensation in zero. That means that unless this individual qualifies as an HCE by virtue of owning more than 5% of your company (either stock or, if not incorporated, capital or profits interest) he is treated as an NHCE in your test. By the way, the fact that he signed up for the plan or didn't sign up for the plan is not particularly relevant. If he was an eligible employee at any time during the year (2001) then he gets counted in the test. Do you have any employees in this category who might have been eligible but did not sign up? They count as zeroes in your test. I know that isn't what you wanted to hear. Now, what to do, what to do......hmmmmm....... I would suggest that you find out whether the test is being done correctly and whether it is being done in a manner that is most beneficial to you. First, see if doing the test based on 401(k)(3)(F) works to your advantage. I'm giving you the cite so that you can repeat it to your provider. Basically, it groups you only with those NHCE's that have more than 1 year of service and are age 21. This would exclude the individual you are mentioning. So, if all the other participants are long service employees, you can at least exclude this individual from the test, thereby leaving the average at 5.50%. If there is another of the 4 employee participants, though, that are recent hires (like the gentleman making 93k) and their contribution is similarly low (or zero) then excluding that person from the test, too, will bring the average up even further. Keep in mind that it is an all or nothing type of test. You either exclude everybody who is short service/under age, or you include everybody in the test. Also, was there a match? If so, consider whether the plan provides for turning those matches into what are called QMAC's (qualified matching contributions). If so, then those monies can be counted as deferrals and maybe your ADP test will pass. Can't hurt to do the calculations. Good luck, but is sounds like you have some refunds coming from the plan if none of the facts are changed.

Good catch, Kirk. I meant to say that the way the termination is handled, you will end up with the same thing as if they had waived. Instead, you merely have them (and their spouses) sign an agreement agreeing to accept less than their full benefit, and relieving PBGC from any liability. The form of document I've used is something like the following. This was originally drafted pursuant to the old PBGC reg 4041.7(B), and there may be a corresponding provision in the new regs, but I found this first, and that is good enough for a Friday afternoon: [PBGC Reg § 4041.7(B)(a)] A sample waiver form follows: Waiver of Benefits I, , being a majority owner of , and a participant in the plan hereby agree to accept a benefit that is lower than my accrued benefit under the terms of the Plan if, upon termination of the Plan and allocation of assets pursuant to plan section , assets are insufficient to cover all such benefits. I understand that my signature on this form will release the Pension Benefit Guaranty Corporation from any and all liability to myself or my beneficiaries with respect to my benefits under the above mentioned plan. Date: Signed: Participant/Majority Owner Married: Yes No As the spouse of the majority owner mentioned above, I also agree to release the Pension Benefit Guaranty Corporation from any liability to myself or my beneficiaries with respect to benefits under the above mentioned plan. I understand that by signing this form I may be giving up valuable benefits under the plan. Date: Signed: Date: Signed: (Witness or Notary) All defined benefit plans have language that allow for benefits to be paid only to the extent funded. Further, the IRS typically allows the allocation of assets on plan termination to be consistent with RR 80-229 (basically requiring that the allocation be non-discriminatory). Having the owners stand last in line is usually consistent with RR 80-229. The IRS will most assuredly approve any such termination and the PBGC is happy to go along with it. There is the distinct possibility that a majority owner or spouse may have buyer's remorse and bring an action later, but that is a small risk to undertake, IMO.

The moratorium only applies to cash balance conversions, not cash balance plans in general. And, yes, just because the IRS is telling us that they will sit on the application doesn't give us the right to delay the delivery of the egg!

I just knew you were a quick study!

You bet. One small caveat, of course. The other plan participants must be fully paid their benefits. But you knew that.

It is my understanding that they are giving it serious consideration.

My copy of Treasury Circular 230 specifically includes 404. Not that I disagree with the susbstance of the comment, though. "Practice as an enrolled actuary is limited to representation with respect to issues involving the following statutory provisions: 401 (qualification. of employee plans) 403(a), (relating to whether an annuity plan meets the requirements of section 404(a)(2)) 404 (deductibility of employer contributions) 405 (qualification of bond purchase plans) 412 (funding requirements for certain employee plans) 413 (application of qualification requirements to collectively bargained plans and to plans maintained by more than one employer) 414 (containing definitions and special rules relating to the employee plan area) 4971 (relating to excise taxes payable as a result of an accumulated funding deficiency under section 412) 6057 (annual registration of plans) 6058 (information required in connection with certain plans of deferred compensation) 6059 (periodic report of actuary) 6652(e) (failure to file annual registration and other notifications by pension plan) 6652(f) (failure to file information required in connection with certain plans of deferred compensation) 6692 (failure to file actuarial report) 7805(B) (relating to the extent, if any, to which an Internal Revenue Service ruling or determination letter coming under the herein listed statutory provisions shall be applied without retroactive effect) and 29 US.C. 1083 (relating to waiver of funding for nonqualified plans)."

IF they are participants (which they are) and they are employed on the last day of the year (which they are) they get the top-heavy minimum. As far as the date goes, there is no deadline I'm aware of. There are provisions of the Code and Regs that serve to encourage a contribution before the date that is 30 days after the due date of the tax return. Contributions made after 30 days after the due date of the tax return are applied to the current limitation year (See 415 regs). For example, if this is a corporation on extension until 9/15, you have until 10/15. If it is deposited after 10/15, then you have to hope and pray, effectively, that these individuals continue to have 415 comp in the current limitation year or you have a violation of 415. Yuck.

I so seldom work on career average type plans that I didn't focus on them as part of my response. I agree with MGB.

OP asked: I have a plan with a valuation date of 2/28/2002 (an end of year valuation). What 415 $ limit would I use for this plan, the 2001 = $140,000 or the 2002 $160,000? 1. Document amended to incorporate EGTRRA limits by 5/15/02: $160,000. 2. Document not amended to incorporate EGTRRA limits, document does not incorporate Section 415 by reference (note: irrelevant whether document incorporates COLA by reference, as the EGTRRA change did not change the COLA, just the base): $140,000. 3. Document not amended to incorporate EGTRRA limits, as document DOES incorporate Section 415 by reference, plan not amended before 5/15/02 to eliminate pop-up, per IRS announcement that one can eliminate the pop-up with an amendment adopted before 6/30/2002, but for funding purposes, amendment not adopted by 412©(8) deadline ignored for funding purposes: $160,000. [Note: I haven't re-checked this point, and it is an interesting one, but I presume that 412©(8) still controls, even though the 411d6 protection was eliminated for amendments adopted through 6/30/2002. Can somebody verify that the dates don't change just because it isn't a calendar year plan?] 4 Document not ameded to incorporate EGTRRA limits, as document DOES incorporate Section 415 by reference, plan IS amended before 5/15/02 to eliminate pop-up: $140,000. Any other options I left out?

You will need to make your own judgement on that one. If the result of the calculations is that the top-heavy ratio is not greater than 60%, then the plan is not top-heavy as of the determination date. The same determination date is used to determine top-heavy status in both the first year and second year of a plan (assuming no other plans, including terminated ones, in the last five years for 2001, but only the last year for 2002). So, if there are no other plans and there haven't been for the past 5 years, my calculations are that you are at slightly less than 60%, but certainly not more than 60% based on the numbers you have provided.

I don't think the rule is any different than it has been in the past, with the exception that the floor is now $200,000. Hence, you can use the $222,220 only in the determination of the benefit accrued through the plan year ending in 1994. (Or is it the end of the plan year beginning in 1993?). In any event, if you are doing a calculation of an accrued benefit after the effective date of EGTRRA, you can use $200,000 going back. You can't use $222,220 or any higher amount.

This is perhaps the best example to draw a distinction between the 2-tier, 3-tier and 4-tier integrated allocation formulas. Which one do you have? If you have a 4-tier allocation formula, then you can contribute just enough to make the plan not top-heavy, which according to my calculations would be a contribution of $8,986.83. You need to determine whether you are comfortable with that close of a result. If not, you can increase the contribution a bit, but certainly not all the way up to $9958.35. However, if you have just a 2-tier formula, you are stuck with a regular integrated allocation. In that case, you will find that you will need the entire 3%, plus the 3% to those over the wage base, plus the 3% in excess of the wage base. If you drop $1 beneath that threshold, the allocation under the plan will leave at least one person with a contribution that doesn't satisfy top-heavy. I don't have a 3-tier formula handy, but I think that it might be the same as a 4-tier formula for this purpose. Does that make it clear?

I think the $2,000 is available for a hardship, unless there is some portion of that $2,000 which can be borrowed. The regs make it clear that you can't take a hardship if there is a loan available, from this plan or any other. I see no reason to "double" secure the loan. The loan is fully secured by the potential of a default. The only potential for loss, before the regs came out, was if a participant defaulted and the interest on the loan ate up the remaining account balance. Now that interest stops accruing when a loan is defaulted, there is absolutely no need to provide for additional security. One might even argue that the code (Section 72) might be changed to eliminate the 50% rule, but that isn't going to happen any time soon.

I can see why loans might be in bondage because of hardships, but not why harships would be in bondage because of loans. Can you clarify that a bit? The only thing I'm thinking is possible is that the participant is now eligible for a second loan (we don't know how much the first loan was for or how much is currently in the account), but hardships can only be taken if the participant has fully exhausted their ability to take a loan, either from this plan or another plan of the employer.

(hehe)

I didn't see your second follow-up before I posted my prior. If the plan's allocation formula is pro-rata to everybody, and you previously stated that a full 3% contribution results in the plan being not top-heavy, then your most recent statement that allocating 3% across the board would make the plan more top-heavy is at the least inconsistent. I think you'll need to play with the numbers a bit in order to figure out what I'm saying. Feel free to post some statistics if you think it will clarify things.

I don't know what you mean by: contributing the top-heavy minimum alone will not satisfy the requirement. It might. I don't know. It is possible that the plan allocates the first 3% to non-key employees, on a pro-rata basis. If so, then contributing the top-heavy requriement will most assuredly do the same thing as following the plan's allocation formaula, because they are functionally identical.

No, it will not be top-heavy because the ratio is less than 60%. However, neither will the first year be top-heavy. Hence, you can't just deposit the 3% top-heavy minimum. You must deposit an amount, which when allocated in accordance with the regular allocation rules of the plan (not the top-heavy rules), creates a top-heavy ratio of less than 60%. Now, these two may be the same, but it depends on the terms of the allocation formula under the plan. There really is no substitute for doing the work. Pick a number, allocate it in accordance with the plan's provisions, and see what you get.

After-tax would be included.

It still kind of depends on the allocation language. Is it 2-tier, 3-tier or 4-tier integrated allocation language? Does it use reverse language or bottom up (which is normal)? In any event, I think you will find that there is a level of contribution below 3% of pay to everybody which will result in the plan not being top-heavy.

mwyatt: Yes, the vals are performed only after the increase is known, typically. Sometimes they are performed on an estimated basis before they are known, but the Sch. B is completed using the val performed after the increase is known. Why did EGTRRA implement the DB increases one limitation year prior to the DC increases for non-calendar year limitation years? I don't know.

MGB: Your statement is not true. Is this another of those things that the IRS has continually stated at conferences that is acceptable, but that some citation exists which purports to say the opposite? I agree that there is certainly nothing wrong with not using the EOY limit, other than potentially underfunding a plan, which can be kind of critical in the last year of a plan!

You haven't said what type of allocation formula is built into the plan. What usually happens is that the plan sponsor deposits enough money so that the plan's top-heavy ratio is just beneath 60%. The plan is therefore usually not top-heavy for the first or the second year. This can be a difficult thing to accomplish if the plan's allocation formula is specialized in some manner. Worst case scenario, though, is that the plan gets a contribution which is essentially the same as if the plan was top-heavy. Care to share the details?