Mike Preston

MGB, the reasonable and consistent standard you mention lends itself to a determination that is case specific. The language itself seems to be a very loose standard and one that would easily support the "highest rate available" in some circumstances. I have always thought that there should be a good dose of practicality built into these calculations. In the original proposed regs the IRS provided a number of examples on how to implement the restrictions. They removed those examples in the final regs. In my view, the timing issue has been and continues to be more troublesome than the interest rate selection. For example, assuming a plan with 10,000 participants, with a 1/1/2001 valuation date, would the determination of x% of current liability (either 105% or 120%) require re-calculation in order to satisfy the reasonable and consistent standard? If so, at what point? Assume the determination is being made on 2/1/2002 due to a request for a lump sum on that date. Is it really reasonable to revalue a 10,000 life plan in order to establish compliance with the restrictions? I guess my point is that if the current liability calculations in the underlying valuation have been changed to reflect the higher interest rate now allowable, requiring a second current liability determination at another interest rate in order to satisfy the reasonable and consistent standard may be asking too much. This seems like an opportune time to request clarification on how to apply the restrictions from the IRS.

Yes. I don't believe that the rule you are quoting, which is a portion of the indicental benefit limitations, applies to key man insurance. I have never seen a DC plan hold key man life insurance, either. I can't say for certain, however, that there aren't circumstances where the investment loss associated with paying premiums on policies that do not mature is not more than compensated by the elimination of the risk associated with management loss. I'll leave that argument to be made by others. I think this statement doesn't look deeply enough into the pros and cons of life insurance protection. Long term programs, as opposed to short term plans, can see a dramatic increase in return rates if mortality gains are factored in. If the program is short-sighted, however, it is unlikely that mortality gains will mean anything at all. Even in those circumstances, though, the mere fact that it is unlikely doesn't necessarily eliminate the potential risk/reward equation. Just like any business deal can benefit from key-man insurance, so can a qualified plan if the trustees believe that there will be a significant reduction in future funding ability should a key member of management depart this earth.

Actually, I'm going to change my response a bit. I think my response is more suited to a defined benefit arrangement. Although it is possible to have key-man insurance in a defined contribution plan, it is very rare. It would have to be a pooled fund, I would think and not directed investments. But with that small modification, my response stands. That is, the incidental benefit rules have nothing to do with insurance on an individual where the trust is the beneficiary of the policy and all the participants share in the gain and/or loss.

Thanks for the detailed explanation. Everything seems consistent with my understandings. I think the key to this whole thing is that the loan has to be listed and the notice from the bankrupt needs to find its way to the plan administrator. Just having the participant tell the plan administrator that they are going through a bankruptcy isn't enough to automatically cease payroll withholdings. There must be something about 9th Circuit bankruptcies because I've never had a plan sponsor receive a formal notice.

Well, target benefit calculations are definitely strange. The two decision points that are most critical are: 1) are you dealing with a methodology that was set up before the non-discrimination regs came into effect? 2) Does the plan intend to conform to the safe-harbor target benefit calculations under the regs at any point? Just from your bried description it sounds like the plan was set up in a way that was inconsistent with the approach that the regulations take and they changed to an approach that is consistent with the regs at some point. Hence, you might want to reveiw 1.401(a)(4)-8(B)(3) while checking the results from any spreadsheet. The biggest change from pre-401(a)(4) regs to post-401(a)(4) regs was typically the treatment of the "theoretical reserve" and the required contribution based on that. It used to be common practice to have the theoretical reserve calculated without regard to the 415 limit and then have the required contribution be equal to the sum of the un-contributed theoretical reserve plus the newly calculated contribution. For example, let's say that the first year cost was $33,000 for a given individual, but was limited to $30,000. In the second year the cost would be $3,000 plus the cost determined, assuming the individual had a theoretical reserve of $33,000. The regs don't allow that approach. Transitioning from the old approach to the new approach was challenging. Of course, your plan may not have had that particular issue, so this may be entirely off point. Keep in mind that if the plan doesn't follow the regs, the result is merely that the plan's resulting allocation is tested as any other defined contribution plan - under the general test.

Jpod, mbozek, do you have any cites for your position? I don't disagree with it on a theoretical level, but I'm having a bit of difficulty on a practical level. What would the trigger be for cessation of payroll withholding? Would the bankruptcy court formally notifying the plan of being an unsecured creditor be required? That is, in the absence of the bankruptcy court formally notifying the plan that the loan is not to be repaid, can the plan stop payroll withholding just because the plan administrator is "aware" of a bankruptcy filing? I would think not. If my conclusion is correct and the bankruptcy court doesn't formally notify the plan, then the loan continues to be paid. If my conclusion is correct and the bankruptcy court is intending to formally notify the plan, then it is up to the bankrupt's lawyer to convince the court to exclude the plan from being on the list. I've known of quite a few bankruptcies and the court has never included the plan loan on any formal list. Hence, the loans have been continued, at the option of the participant, of course. Here, in California, if the employee withdraws their authorization for payroll withholding, most employers will go along with that request, even if it means that the loan is defaulted.

You are correct. I should have said that you need to allow the eligible employees the options of contributing not only in excess of the 402(g) limit, but also in excess of the plan limits. If your election form doesn't state the specific plan limits, however, and instead references the SPD, then the form needn't be changed. If it does, I agree that the form should probably be modified.

But aren't most plan loans secured? In that case, is there still a requirement to cease payroll reductions?

Ervin, have you considered calling the prior actuary and asking him/her?

I don't believe there are any limitations. The incidental benefits rules relate to the provision of benefits to participants. The type of insurance being contemplated here, it seems to me, is an investment of the plan, essentially providing for advance funding should the plan sponsor's management team take a direct hit. As long as the existence of the insurance doesn't create a specific benefit increase under the terms of the plan, the incidental limits should not hinder you in any way. OTOH (you KNEW there had to be one, right?), whether or not this sort of investment makes any sense is something that should be reviewed by ERISA counsel, IMO.

Frank, weeding through the law, the answer is yes, as noted. Just one addition. It appears that the recalculation of the current liability is effective for all purposes, including the pre-termination restrictions of the non-discrimination regs under 1.401(a)(4)-5(B)(3)(iv).

With the proposed regs written as they are, there is really no specific need for a catch-up form. The plan, and the participant, determine whether a catch-up contribution was made on a retroactive basis, after all is said and done. About the only thing you need to do is allow the participant to elect the higher annual limit ($12,000 in 2002) only if when 50 is added to their birthyear you end up with the current year (or sooner). Hence, if birth is in 1952 or earlier in 2002, go for it.

Both prior links included puncttuation at the end. For those whose browsers don't allow them to manually eliminate the offending characters, try this: http://www.treas.gov/press/releases/po2002.htm

Nothing implicit. If using prior year, it might fail.

It depends on your view of the value of the FICA taxes being paid. If someone's compensation would be less than the wage base and the only issue is whether a single dollar becomes additional compensation which is then deferred, or, is contributed to the plan as an employer contribution, the numeric results are as follows. Assume a total budget of $64,590. Optioin 1: a) Compensation is paid in the amount of $60,000 b) Assume that a salary deferral of $100 reduces taxable compensation to $59,900 b) EE FICA taxes of 7.65% = $4,590 c) ER FICA taxes of 7.65% = $4,590 Option 2: a) Compensation is paid in the amount of $59,907.11 b) Assume that a company contribution of $100 goes directly into the plan b) EE FICA taxes of 7.65% = $4,582.89 c) ER FICA taxes of 7.65% = $4,582.89 Assume marginal federal/state tax rate is 35%. Employee paid income taxes on $59,900 in either event. In second option, employee paid income taxes on an additionl $7.11 in earnings. Therefore, employee paid an additional $2.49 in federal/state taxes Employee receives $100 into a plan in either event. Employer's outlay is the same. Employee's net check is now $59,907.11 - $4,582.89 - $2.49 = $55,321.73. This compares to a net spendable of $59,900 - -$4,590 = $55,310 under option 1. Of course, this employee's Social Security benefit is now taking into account only $59,907.11, not $60,000. Whether the reduction in Social Security benefits compensates or overcompensates for the increase in current cash to the employee can fuel a lively debate. The above analysis only holds water if the individual is the owner of a company that is incorporated. The results are similar, but not the same if the employer is assumed to pay the same compensation, just vary the contribution between a regular employer contribution and a salary deferral. In this case, option 2 would likely change to: Option 2b: a) Compensation is paid in the amount of $59,900.00 b) Assume that a company contribution of $100 goes directly into the plan b) EE FICA taxes of 7.65% = $4,582.35 c) ER FICA taxes of 7.65% = $4,582.35 Assume marginal federal/state tax rate is 35%. Employee paid income taxes on $59,900 in either event. Employee receives $100 into a plan in either event. Employer's outlay is no longer $64,590. Instead it is: $64,582.35. Hence, the employer saves $7.65. Employee's net check is now $59,900.00 - $4,582.35 = $55,317.65. This compares to a net spendable of $59,900 - -$4,590 = $55,310 under option 1. Of course, this employee's Social Security benefit is now taking into account only $59,900.00, not $60,000. Whether the reduction in Social Security benefits compensates or overcompensates for the increase in current cash to the employee can fuel a lively debate. The third, and final scenario is when the individual is a sole proprietor or a partner. In this case, the individual gets a deduction for 1/2 of the FICA taxes paid. I'm out of time tonight, so does anybody want to do the comparison on that basis?

Yes. BTW, is your caps key broken?

May I ask a favor? Please keep us posted as things develop, even if you don't have further questions. I'm sure I speak for more than myself when I say that there is keen interest in seeing how this actually plays out!

Since ADP refunds are by nature being made to HCE's, and since they are treated as annual additions under 415, I would think that in the absence of a clear cite that excludes them one should include them. I haven't had to grapple with this issue for a while, so I don't know off the top of my head whether there is s clear cite. This is another reason why plans that have internal fail safe provisions for 401(a)(4) testing are more difficult to administer. Same goes in reverse, by the way. If you have an NHCE with a 402(g) refund, that amount is not included as an annual addition, so I wouldn't think that would be included. Same comment as to fail safe.

The only reason not to would be if it were not appropriate to do so. The IRS has intimated that the method of testing must be specified in the plan. The IRS has not made it clear when this specification must take place, and whether, once it is in place, it can be changed. The conservative view is that one must decide on the testing methodology before the beginning of the year! In the case of a new plan that would be on the date it is adopted, assuming it is adopted after the first day of the year. Nobody knows to what extent the normal 401(B) RAP will enable a plan to be amended. My suggestion is that if one wishes to make an amendment to the testing method after the beginning of the year that the amendment be submitted to the IRS for approval.

Sounds right to me. This is the same logic that has been used for many years in the exclusion of "middle-tier" employees from top-heavy minimums. Hence, you will frequently find an "associates" plan that is tested separately for 410(B) purposes.

http://www.benefitslink.com/taxregs/1.414v...-proposed.shtml are the regs. For non-discrimination purposes, the catch-up contribution is treated just like a regular deferral except that the contribution itself is exempt from the ADP test. Hence, the individual you describe is not getting a match of $6,000 on a "deferral" of $11,000, but a match of $6,000 on a "deferral" of $12,000. Hence, it is non-discriminatory.

Document specific provision. But almost all sponsors I'm aware of are choosing $6,000. Given that the IRS has been very generous in their determination of catch-up contribution timing, it is almost impossible to administer a match any other way.

Legal is right.

Just respectfully disagree and suggest that you would like a conference with his/her supervisor.

maverick, It is a bit different in that it requires a subscription. It is meant to operate off of private software (although it can be accessed via email) called WOD, which is fully compliant with all WIN9x or later operating systems. Here's a link. I'm pretty sure it is current. Send a message to Derrin to confirm. http://www.benefitslink.com/articles/pix.html