Mike Preston

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?

So, Tom, what do you want them to be? (I've always wanted to say that.)

Blinky, I think that is exactly what Timeout was saying, unless I misunderstood his/her comment.

mwyatt, I'm not sure we are on the same wavelength. First, I was saying that I do not use the limit in place at the BOY, even if I'm doing a BOY val. Except in a very few cases I can remember over the years. Second, my definition of incorporation by reference does not mean that the limit increases automatically with cost of living. Those are two entirely different things. Yes, the Corbel, etc. docs include automatic cost of living increases, but they do not incorporate the rest of 415 by reference. If you interpreted those docs as automatically incorporating the increased limits of EGTRRA, I'm afraid you've got some non-deductible contributions hiding in a closet somewhere. Unless, of course, your VS docs are different from those I've seen elsewhere by the various-sized marine life. On the bright side, you have some really cool credit balances, too. (g, d & r)