Mike Preston

Tom wrote: "would a plan limit on HCEs the lesser of 2 times or 2 points plus last years NHCE rate be definitely determinable? " Why wouldn't it be? It is definitely calculatable. The only issue would be timing. Most plans have a good feel for what the ADP is for the NHCE's before the end of the year, so establishing this as an administrative limit makes all the sense in the world, if you have HCE's, all of which want to contribute the absolute max, especially if you are using prior year testing! Tom also wrote: "obviously at the beginning of the year that amount might be overshot because it hasn't been 'determined' yet, but at some time it will be. and if hce is over that amount and age 50 would that constitute a legitiment catch up?" Great question. Currently, I think that catch up contributions are only those amounts that exceed the plan document limitations. Catch up contributions do not include those amounts that exceed an administratively imposed limitation. The IRS has time to disagree with me on this because the catch up rules haven't been finalized, have they? I didn't see this issue mentioned in the guidance we've received to date, though. But maybe I just missed it. In any event, if you have catch up contributions in a plan that imposes an administrative cap, I think the administrative policy should allow contributions up to the applicable catchup amount in excess of whatever that cap turns out to be!

No, it sounds fine to me. The client should be congratulated for wanting to have the plan document actually reflect administrative practice. On the other hand, there is no requirement to have the document state a limit with respect to HCE deferrals in order to enable a limit to be imposed. The regs make it quite clear that a plan sponsor may impose such a limit. I would like to see that the document dovetails to the regs (most do), though. So, if the document gives the plan sponsor the authority to administratively cap HCE deferrals, then the plan sponsor can implement the cap without resorting to an amendment. With all that said, even if the document gives the plan sponsor that ability, there is nothing that would preclude the plan sponsor from deciding that the best course of action is to have the plan document match the administrative methods. The only argument against it is that the Plan Sponsor may someday wish that they had the administrative flexibility that the regs allow.

Isn't this the best reason to sign a certification from a provider that hasn't yet received its determination letter from the IRS with respect to its pre-12/31/2000 DB plan? At the least it extends the RAP until sometime in 2002. Heck, it might even be 2003!

WARNING: LONG POST. The new cross-testing regs have an interesting provision. I seem to recall that this provision has been discussed somewhere on this board in the recent past. The preamble to the regs makes it clear that one can separately test under 410(B) and therefore end up separately testing under 401(a)(4) those that meet statutory eligibility and those that don't. Consider the impact of this provision on the $100 minimum benefit provision to those who are not statutorily eligible. If the $100 minimums are being provided to those that are not statutorily eligible, they don't seem to require the 5% gateway in order to enable cross-testing. My take on this is that application of this provision is going to "potentially" (see below) assist in passing the average benefits test. However, it doesn't seem like the two groups can be tested together for 401(a)(4) if one goes down this path since they are being disaggregated for 410(B). Hence, while these people will "potentially" help in the average benefits test, they don't seem to help the rate group testing. But there is a big caution that I have to throw in here. And that is why I used the word "potentially". There are some people who believe that if a plan tests 410(B) on the basis of disaggregating the statutorily eligibles, then the average beneifts test must be run separately as well! Let's not get into the argument as to whether they are right or wrong for the moment. Let's just consider the impact if that argument is true. In that case, the $100 minimums end up neither helping with the rate group testing nor with the average benefits test. Well, at least they don't HURT the testing!!! Now, the IRS has stated, from the podium, and in writing, that there is only one average benefits test. See the first question and answer from the most recent ASPA annual conference. 1. Plan has immediate entry in 401(k) and 21/1 for profit sharing allocation. When running the average benefits percentage test for pupose (sic) of the general test how are employees with less than a year handled - i.e. are they in the ABPT? A: Yes, they are in the ABPT. Does it matter if we have bifurcated for ADP testing or not? A. No, not for the ABPT. Pretty clear that the IRS folks in Washington think that there is only one ABPT. So that seems to indicate that "potentially" is more like "most likely". But I think that they are wrong. Getting into the nitty gritty one has to examine the definition of testing group for the ABPT. See 1.410(B)-7(e). If somebody else wants to read that section and let me know where I'm misinterpreting things, that would be appreciated. The key two sentences in that regulation are numbers 2 and 3. Sentence 2 reads: For this purpose, the plans in the testing group are the plan being tested and all other plans of the employer that could be permissively aggregated with that plan under paragaph (d) of this section. Sentence 3 reads: Whether two or more plans could be permissively aggregated under paragraph (d) of this section is determined: (i) wihtout regard to the rule in paragraph (d)(4) of this section that portions of two or more plans benefiting employees of the same line of business may not be aggregated if any of the plans is tested under the special rule for employer wicde plans in Section 1.414®-1©(2)(ii). (ii) without regard to paragraph (d)(5) (the same plan year requirement) of this section, and (iii) by applying paragraph (d)(2) of this section without regard to paragraphs ©(1) through ©(2) of this section." Whew! On the surface, Sentence 2 seems to agree with the IRS. Certainly it appears that the non-statutorily eligible group can be permissively aggregated under 410(B). However, let's look closer at the (iii) section of Sentence 3. What I _think_ it is saying is that you apply (d)(2) (the section that defines "Rules of disaggregaton") by looking back at the requirements for "mandatory disaggregation" defined in ©. However, I find it curious that ©(3) (the section that specifically deals with "Plans benefiting otherwise excludable employees.") is not included in (iii). My conclusion has been that if an employer chooses to apply Section 410(B) separately with respect to a portion of a plan that benefits only employees who satisfy statutory age and service conditions, then the otherwise excludable employees who participate in that plan constitute a mandatory disaggregation population with respect to the plan being tested and therefore may not be included in the testing group of 1.410(B)-7(e). That is the group that is used for the ABPT. Now, I have not gone into the detail that I could have, because the back references in (iii) require one to look at a spaghetti web of cross-references. But I don't _think_ there is anything in those sections that gets in the way of this determination. OK, so what should be done if the IRS thinks one way and I (and the very small number of people I expect to be swayed by this argument) think otherwise? I think the answer is clear: submit to the IRS with a request to have them look at the 401(a)(4) testing and get whatever plan uses this approach an LOD!!! With all that said, I'll repeat my request that if anybody can provide an analysis that indicates my logic is flawed, I would appreciate it. mike

Derrin Watson, who hosts the Who's The Employer? column here, was kind enough to give me permission to quote one of his recent messages that he posted on the Pension Information eXchange (wording slightly changed as to tense): Perhaps it would help to understand how it is that California, as an example, uses the IRC. California's Revenue & Taxation Code has many sections which directly refer to the Internal Revenue Code. One of those is section 17501 which states: In other words, rather than having its own retirement plan provisions, the California tax law simply incorporates the IRC by reference. That takes in sections 401-424. But there's a catch: In other words, right now California law has incorporated the IRC as it stood 1/1/98. It isn't a matter of choosing to bring in catchups or 25% deductions or not. Right now, EGTRRA has absolutely zero affect on how qualified plans, their sponsors, and their participants are taxed by the state of California. That will remain true unless and until the California legislature acts. They may choose to bring in all or part of EGTRRA. It is likely that they will add a new subsection (M) saying that for taxable years after 2001, the IRC as of 1/1/02 applies. However, they may (probably will) go through and carve out various exceptions.Where do things stand now in the absence of state action? Well, as was pointed out, a profit sharing plan is limited to a 15% deduction in California, but that's probably the least of our worries. If you make a catchup contribution, it's just a normal elective deferral as far as California is concerned. It counts for 402(g); it counts for 415; it counts for ADP. Moreover, since 401(a)(30) requires a plan to limit contributions to 402(g), and since 415 requires plans to limit annual additions to 415©, a plan which provides for catchup contributions in accordance with the federal standard is not a qualified plan for California tax purposes. That means the trust is taxable on its earnings, and either the sponsor looses its deduction for contributions or the participants are taxable on their vested accounts. The same is true of a plan which provides for the $40,000/100% 415© limit. The same is true of a plan which provides for the $160,000 415(B) limit. It doesn't matter whether it provides for the higher limits by adopting an amendment, or whether it incoporated the limits by reference. Now, of course, this would be a disqualifying provision, and a normal remedial amendment period would apply. Hopefully, the state legislature will get its act together in time to avoid calamity, but that's where we stand right now.

Interesting. I believe that you can effectively do this, although the route to accomplishing it may not be suitable for all clients. Amend the plan to provide that those who were eligible as of a given date (1/1/02) are no longer eligible after the adoption (and potential notice period) unless they satisfy 21/1 on that date. However, having done so you need to analyze 410(B) in light of that. I think you will find that you will need to count those that were in the plan as participating but not benefitting, and therefore you may fail 410(B). On the other hand, if you disaggregate and test 410(B) based on statutory eligibles on the one hand and non-statutory eligibles on the other, it looks like only those employed on 7/1/2001 would be statutory. So it looks like it might work. You'll want to pour through the regs on this one, of course, because this route is not travelled often. But it may just work. You may not find that your document allows this type of language, so it may be an individually designed plan once you go through the process. However, maybe it can be done on a volume submitter document and maybe the IRS would allow it as a non-major modification that would allow you to remain just outside of individually designed. Good luck.

All other things being equal. 12/31/02.

I'm going to throw my opinion in here, and it doesn't coincide with the opinion of Boilerburm, either. If your client is currently on a pre-GUST specimen plan of a specific document provider (Kemper in this case) and that specific document provider has applied for a GUST opinion letter on or before 12/31/2000 as successor documents, then the adopters of the original documents have until 12/31/02, at the earliest, to adopt any GUST restatement. I don't see how an action by the document provider gets in the way of the IRS extension of the RAP.

Just a small clarification. The document definition of compensation (whether it is a 414(s) definition of compensation or not) is not the only compensation that can be used when doing non-discrimination testing. Unless the document specifies all of the non-discrimination methodology (like we used to do back when the IRS was insisting on such language, but we no longer typically do because they aren't), one can test for non-discrimination against any definition of compensation that satisfies 414(s). I don't use the system in question, but I would be shocked if there wasn't a mechanism for pointing the non-discrimination testing at a definition of compensation that is independent of the other definitions of compensation under the plan.

Thanks, Tom. I don't think I'll ever have the time that you put into this board, so please don't go retiring on my account!

I admit to potentially being too cautious in my reading of the reg in question. I am always bothered by a plan of attack that incorporates -11g, though. I would much prefer to design a plan so that -11g amendments are never planned, although sometimes useful. I don't think there is anything on point that deals with the deduction issue in a negative sense. So, I'm not aware of any cases where the IRS has gone to court and won on the issue. Nonetheless, I think this is the standard response one gets from the IRS at conferences.

Hi, Richard. The way I read the preamble to the new regs, you do not have to provide the gateway to those that can be disaggregated under 410(B). Note that this does not extend to restructuring. Here is the language from the preamble: "The general rules and regulatory definitions applicable under section 410(B) apply also for purposes of these regulations. For example, these regulations do not change the general rule prohibiting aggregation of a 401(k) plan or 401(m) plan with a plan providing nonelective contributions. Accordingly, matching contributions are not taken into account for purposes of the gateway. Similarly, pursuant to section 1.410(B)-6(B)(3), if a plan benefits employees who have not met the minimum age and service requirements of section 410(a)(1), the plan may be treated as two separate plans, one for those otherwise excludable employees and one for the other employees benefitting under the plan. Thus, if the plan is treated as two separate plans in this manner, cross-testing the portion of the plan benefitting the nonexcludable employees will not result in minimum required allocations under the gateway for the employees who have not met the section 410(a)(1) minimum age and service requirements. "

Well, back in the days that PS plans were subject to the definitely determinable standard, that language you suggested, without modification, would not have satisfied the rules. However, if you add language to your plan that pins down the exact meaning of the non-discrimination testing, including whether or not you use the ABT or permitted disparity, etc, then the language should work. Last I checked, which was quite a few years ago, the language needed was at least 2 pages worth. Haven't used it, though, in any plan since the definitely determinable issue went away with respect to profit sharing plans. Essentially, you are locked into whatever method you choose to describe once you put it into the plan document. By definition, this is less flexible than leaving it out, so it isn't done very often any more, as far as I know. You can do the same thing you want to do with an -11g amendment. There are two issues to keep in mind if you do. First, the amount contributed pursuant to an -11g amendment is deductible in the year of the -11g amendment, unless it also qualified as a 412©(8) amendment (within 2 and 1/2 months after the end of the year). Second, you "shouldn't" use -11g amendments as a planned way of passing the non-discrimination tests because there is a provision that states that a pattern of -11g amendments shouldn't be used. Very subjective, of course, so caution is advised.

Keith, I'm pretty sure that Lorraine drafted the response. I saw it when it came out and I don't remember the Reish firm being mentioned at the time. I could be wrong though. Lorraine could of course clarify things, since she moderates this section of the message boards, too. The response indicated that 1% was provided in the db plan, without any potential offset. In a floor offset you might have a benefit that is 10 times as big before offset, yet reduced to zero because of the account balance in the offset plan. It is my understanding that one measures the benefit for purposes of the "meaningful" standard before the offset in most cases. I have heard that floor-offsets that provide 4/10ths of 1% of pay per year of benefit accrual offset by the dc account balance have been known to get approval from the IRS. mike

Interesting situation. If it is a calendar year plan, and if the 415 limits are referenced in the qualified plan, then the qualified plan will automatically provide bigger benefits on 1/1/02. However, if the 415 limits are spelled out in the plan, then there must be an amendment to the qualified plan before the benefits increase. In either event, the client still has time to amend the plan before 1/1/02 to preclude a pop up in benefits under the qualified plan, specifically for those individuals who might be impacted by your FICA recoupment. However, this might not be the best thing to do if 401(a)(4) issues might pop up in the future. One other thing you might want to check is whether the increase in the qualified plan will apply to those in pay status. It probably will, but it is worth checking anyway. How many people do you have in this category? I can't imagine it is many people. If they began payments immediately upon retirement then they either: 1) started early in the year and there has been ample time for the recouping to complete; or 2) they started late in the year and they already paid a majority of their 2001 FICA taxes through payroll, leaving very little to be advanced, and therefore very little needing to be recouped. It is only a major issue for those who started late in 2001, but who were otherwise not on payroll, thereby potentially creating over $6,000 in FICA taxes due. hth mike

Interesting. Does it have a TRA'86 LOD? If so, at least you should have reliance until you submit for GUST. I have no familiarity with railroad plans or offsets related thereto. Maybe there is some exception that applies. Have you charted out the 411(B) accrual pattern for each potential participant in the plan? Is there a minor modification you can make such that the plan sponsor retains as much of their design as possible? Do you have access to the design team that set this up? If so, have you asked them how the design meets the accrual requirements of 411? On the offset thing, you are correct that the basic offset percentage was 83.33%, but in order for that percentage to be used one must be dealing with a plan that had absolutely no death benefit. The smallest reduction in the integration percentage was typically for a plan with a lump sum benefit and a single life annuity as the normal form payable at age 65. In that case, you ended up 74.07%. I suppose it is possible to have the 83.33% factor actually in use (or some other number higher than 74.07%), I just never ran into a plan that did so. Good luck.

The Brown rule is actually a shorthand abbreviation for a number of cases that have reinforced the "time rule" for divorces in California. See this page for some clarification: http://www.split-up.com/splitgen/sp/ca/pen...italportion.htm The Brown case itself stood for a somewhat esoteric issue revolving around whether to include non-vested benefits in the time rule determination. Per the Brown decision, all benefits, whether or not vested are appropriately considered as part of the marital estate. This does not preclude valuation per a discount, if appropriate, to take into consideration the potential that the non-vested benefit may never become vested. hth

I don't think it is ignored, but you may not have a problem with it, either. Is this a holdover from a pre-TRA plan design that was based on integration under 71-446? The offset was allowed to be as much as 74.07%. Those plans passed 411(B) only on the basis of the fractional rule, as the other rules didn't work. So, assuming you apply the rules of 1.410(B) applicable to social security offsets (things are expected to stay the same in the future) and you accrue the benefit using the fractional rule, if the result is that the benefit in the early years turns out to be zero you still satisfy the rules. This is going back a ways, so let me add that all of this should be appended by "IIRC".

If the IRS is going to be consistent (and I think they will be), then if your plan is a safe-harbor plan you may implement the higher limits retroactively as of the earliest date possible and your plan will retain its safe-harbor status without being subject to any non-discrimination testing. If your plan is general tested, then the increase will be tested in the year it is implemented. If the plan is a safe-harbor plan and the implementation date is delayed beyond the earliest date possible, the amendment will be subject to the non-discrimination rules applicable to amendments.