Lorraine Dorsa

Most cross-tested (and most non cross-tested, for that matter) plans do not specify the correction method to be used if any of the non-discrimination rules are satisfied, and there is no requirement that they do so. Our firm does a lot of these plans and it is our strong preference that the document NOT specify the testing or corrective methods. If the document does not mandate methods, we can use all possible options for testing and, if we do fail, choose the correction method which is most cost-effective and best meets the employer's needs. Each year is independent--you can select the testing and correction method which works best, regardless of the method you selected last year. We admininister some plans which specific testing and/or correction methods and they can extremely frustrating--sometimes we can pass the tests using other than the method specified but cannot since we must follow the terms of the document; other times we can make a simple correction to pass but cannot since again we must follow the terms of the document. ------------------

In reply to MWyatt, I'm in the middle of compiling the data for ASPA's survey and the results so far support my recollection that a significant number of our cross-tested plans are NOT $30,000 to big shots, 3% to everyone else. We have of plans in which the employer wanted the design to provide the entire staff with a contribution of 5%/6%/7% or so. Other plans we have provide different levels of contributions to various groups of HCEs/NHCEs. Still other plans are 401(k)'s with cross-tested profit sharing contributions which provide profit sharing contributions of $15-20,000 to HCEs and 3-5% to the staff. Finally, in a number of case, we find that to pass the non-disc tests we need contributions to the staff in the range of 5%, not 3%. I don't know if our practice is different--using cross-testing to meet employer desires re providing different levels of contributions to different groups of employees, rather than just using them to maximize owner/minimize staff--but I can't imagine everyone else has missed these opportunities and limited cross-testing to only those situations which fit the $30,000/3% model. ------------------

There is no requirement that any plan cover all employees of a business (other than those who meet the statutory exclusions) and in fact, in larger businesses these types of plans are quite common. As long as your plan can satisfy the minimum coverage (IRC 410(B)) and minimum participation rules (IRC 401(a)(26), applicable only to DB plans) then your plan is perfectly acceptable. [That's why there are minimum coverage and participation rules--because there is no requirement that everyone be included.) Re the determination letter, I always recommend getting a letter and I would do so in this case, but not because I see this case as anything unusual or questionable. ------------------

We've done a variety of this on occasion, but in most cases the employer was trying to move to a 401k plan and terminate the DB plan so we ceased not only new participation but benefit accruals in the DB plan and then allowed everyone to join the 401k plan. We have had a few cases where we've ceased new participation in the DB plan and left benefit accruals (usually reduced) in place, with the goal of trying to keep the older employees who were relying on the DB plan benefits relatively whole (bfts under new DB + value of 401k deferrals at retirement = bfts under old DB). As AndyH says, you must be sure you continue to satisfy 401(a)(26) [although there is an exemption for DB plans covered by the PBGC which are not sufficient to terminate) and 410(B). In a low turnover small company or a large company with both new HCEs and NHCEs being hired after the cease of accruals, this should not be too much of problem. If you have a small closely held business with lots of turnover or growth, you'll be faced with 410(B) problems fairly quickly. I do take exception to IRC401's statement that the 401(k) plan will and should be the most valuable benefit and therefore the new employees are being treated better than the old employees. For younger employees, his statement may be correct in the sense that a younger employee might end up with more $ at retirement, but you also need to consider that the employer was paying the full cost of the DB plan and in the 401k plan the employee is likely paying a majority of the cost. For an older employee, he might end up with not only less $ at retirement from the reduced DB + 401k combination, but also will have paid a portion of the cost. , but for older employees, the DB may be more valuable (although everyone is so brainwashed about 401k plans even most of the employees will think ------------------

I don't have an RFP for actuaries, but my firm does actuarial work for a number of TPAs and I can tell you what they usually ask us. (I'm assuming here you are looking for an outside actuary, not an employee.) What kind/size/design of plans do you have experience with: DB plans for small companies, large companies, split funded, with FAS35/87/88 calcs, etc? Cash balance plans? DC plans (401k, ESOP, cross-tested, etc)? What experience do you have re designing plans for above kind/size/designs? What is your philosophy re the role of the actuary (e.g. actuary should be conservative and stay well within the tried and true; actuary should be reasonable and stay within his personal area of comfort but I'm willing to look at things with an open mind; I'm rather aggressive and willing to give any reasonable interpretation a try with client disclosure)? What are your credentials (EA, MAAA, MSPA, FCA, FSPA, FSA, ASA, CEBS, QPA,CPC)? Do you work alone or does your firm have a staff of DB administrators? Who would we work with? Will you provide us with a resume for yourself (and the DB administrator(s), if any, in your firm who will be working on our plans)? Will you do certifications only (we run the valuation under your direction)? Will you run the complete valuation (we send you the data, you do the valuation report, participant certifiates, etc)? Will you sign Schedules B we draft under your supervision? Will you prepare and sign the Schedules B yourself? Will you prepare PBGC-1 & Schedule A forms? Will you work with us/our attorney to draft plan documents for new/amended plans? What are your procedures for working with firms like us? What is your turnaround time? What software system(s) do you work with? How many other TPAs do you provide actuarial services to? Can we call a few of them who are similar to us (re type/size/number of plans) for references? What are your fees? Of course, you'll have more questions specific to the types of plans and clients you work with, but these are the types of questions we are asked over and over. Hope this helps. ------------------

Each entity makes the contribution for their employees (and takes the deduction). Unless assets are held in separate pools for each of the participating employer (technical issue, unlikely to be the case), a single Form 5500 is filed. ------------------

Probably the easiest way to do this is to have one of the 4 entities, XYZ for example, sponsor the plan and have the other 3 entities adopt the plan as participating employers. ------------------

It is my understanding that the testing period must match the benefit being tested. ------------------

ASPA is spearheading a campaign to generate grassroots support of cross-tested plans. See other topics on this message board re sample letters ASPA has prepared for employers and retirement plan professionals to mail/email to their senators and representatives. ASPA is also asking for employers/professionals in key areas (Florida, Louisiana, Montana, Texas (Houston), Ohio (Cincinnati) and Maryland (Baltimore)) to mail/fax paper copies of the letters to regional coordinators who will go to Washington to personally present them to members of Congress. I am the coordinator for Florida--email me for more information. ------------------

These letters can also be accessed on ASPA's website (www.aspa.org) and emailed directly to your senator/representative. ------------------

I made a presentation at a Tennessee Society of CPAs re getting into the pension business. I sketched out some costs for starting up and operating a firm--about $100,000 in start up costs and an annual ongoing costs of about $150,000. If you would like a copy of my notes (I do not have a formal handout), drop me a line at ldorsa@lda-fcpa.com. ------------------

Following up on Keith's comment re 404(a)(1)(D)--does anyone know of any guidance re exactly how this amount is computed in the case of a plan termination? 404(a)(1)(D) itself refers to "unfunded current liability under 412(l)" and 412(l) defines the benefits to be valued and prescribes the range of interest rates and the mortality table to be used. On an ongoing basis, by applying the 412 rules re funding methods and therefore valuation dates and the statement in 404(a)(1)(A) that methods and assumptions used in 412 apply to 404, it seems pretty clear to me that the unfunded current liability is determined as of the valuation date. Since I have not found any guidance re any special rules which apply in a plan termination, I assume the same rules apply--specifically, that the calculation is done as of the valuation date. In my case (100+ life plan), the plan's valuation date was January 1, 1999 and the plan terminated on and assets distributed on December 31, 1999. At this time, the value of the plan assets were less than they were as of January 1 and therefore the plan sponsor had to make a larger than expected contribution to make the plan sufficient to terminate. He would like to deduct as much of this extra contribution as possible in 1999. If I could use the unfunded CL as of December 31, 1999, his deduction is larger than if I have to use the unfunded CL as of January 1, 1999. Does anyone know of any guidance which permits use of the unfunded CL as of the date of distribution in determing the deductible limit under 404(a)(1)(D)? ------------------

The existence of a qualified plan and any liabilities of the selling employer with regard to that plan should have been addressed before the acquistion took place. Generally, if the sale is an asset sale, the plan, the plan remains with the seller and the seller continues to be responsible for it, but if the sale is a stock sale, the acquirer becomes the sponsor of the plan and now has all obligations of the plan (unless it was terminated prior to the sale). In many cases, the plan is specifically addressed in the purchase negotiations and purchase documents. If in this case it was not, you need to do the analysis now to determine who is responsible for the plan. If you (the acquirer) are responsible for the plan, you need to decide what you want to do with it. In many cases, the plans are merged for simplicity, cost and employee relations reasons, but it is perfectly acceptable to maintain separate plans for separate locations/divisions/etc provided certain non-discrimination rules are satisfied (talk to your pension consultant or attorney). ------------------

There is no one simple answer to your question. When I deal with situations like this I usually first design the plan or plans the client wants for the ongoing business, and then go back and figure out how to get there from the existing plans. If the existing plans are as straightfoward as your message implies and the client wants the same pattern of plans going forward (MP + PS), the easiest thing might just be to merge the plans and go forward. This has the advantage of being less complicated and generally less expensive. However, if the existing plans have significantly different provisions or, as I've seen in some cases, the members of each former practice want to keep existing plan account balances/assets confidential, terminating the plans and then establishing new plans might be appropriate. ------------------

Assuming the existing plan is properly terminated (amended for current pension law, etc), I see no problems (other than the expense involved) with your scenario. If the plan was covered by the PBGC and there were a reversion of assets, there might be an issue with regard to reversion followed by a replacement plan, but since you say the sole participant is the employer (owner) PBGC is not an issue. Re 415 limits, be careful if (as is highly likely) the plan assets upon termination are not exactly equal to the plan benefits--presumably either 1) excess assets will be reallocated which increases the participant's benefit or 2) unfunded benefits waived which decreases his benefit. ------------------

There is no definitive answer to your question re "too often." Under ERISA, benefits/contributions must be "definitely determinable." The IRS has stated at various meetings/seminars that the benefits/contributions in a plan that has its formula amended every year is probably not "definitely determinable" since they change each year. ------------------

I agree with Joshua--the floor offset is the way to go here. One comment, if you are trying to translate this design to a slightly larger group--father, son and 1 employee--having the father waive out of the DC plan will cause the DB to fail the 401(a)(4) amounts safe harbor. In this case you might want to leave the father in the DC plan (he'll receive most of his bft from the DB and the portion which was offset from the DB, he'll get in the DC so you can avoid general testing. ------------------

You also need to consider the service levels provided and the wide variation in fees from firm to firm, even for the same services. Our firm does a lot of DB work all over the country and prospective clients sometimes tell me that they are paying twice the fee I have quoted, and other times half, with no obvious differences in the services to be provided. In the DB area, some firms do all the work in house and others outsource the work so this may also cause a variation in fees and service levels. People I know from software user groups and other professional organizations who work in firms which handle only DC plans tell me that there is a lot of competition in the DC (particularly 401k) area and a lot of downward pressure on fees, often due to the offset of fees by asset charges which makes apples to apples comparison difficult. What you need is some survey of fees, but I don't know of any. Most professional organizations make a point of refusing to discuss fees at their meetings to avoid any possible hint of collusion. Good luck with your research. ------------------

We've had to build our own case tracking system (we've done it on Access) because we could not find a commercial one which would work for us. The major problems I found with the commercial ones I looked at were the inability to roll blocks of plans over to a new year and the level of detail attempting to be tracked (I only want to track big steps in the process, not every little increment of work). If anyone has any information about one which allows tracking of data requested/received, reports sent, 5500/PBGC1s due/sent, I would be interested in knowing about it. ------------------

I have a problem with the $1/month benefit. IRC 1.401(a)(26)-3 states that all DB plans have a prior benefit structure, that the prior benefit structure is defined as all accrued benefits as of the beginning of a plan year and that the prior benefit structure satisfies 401(a)(26) if either 50/40%/2 employees are currently accruing "meaningful benefits" or if 50/40%/2 employees have "meaningful" accrued benefits. Unfortunately, the definition of "meaningful" is a facts and circumstances definition, but I find it hard to believe that $1/month would be meaningful. Applying this concept to the proposed plan, in year 2 of the plan, the prior benefit structure will be an AB of whatever for the daughter and an AB of $1/month for the father. Unless you can figure out a way to show that $1/month is meaningful, 40/50%/2 employees are neither currently accruing meaningful benefit or have previously accrued meaningful benefits. I do understand what the goal here and I think this is an unintended consequence of 401(a)(26), but I don't see a way to get around it under the current regulations. [Maybe they should just hire one of the grandkids and let him/her benefit so grandpa can be excluded :-)] ------------------

I know of no exception. ------------------

There are several issues here--the plan termination and distribution of assets, the suit to recover assets and the ownership of the assets. Legally, the most important issues are the ownership of the assets and the suit to recover. Practically, termination/distribution is the issue, but I think it must take back seat to the legal issues. I'm not an attorney, but it would seem to me that for the plan to bring suit to recover assets, the plan must exist. Therefore, I think the plan must continue to exist until the suit is settled. Transferring/assigning the asset to the employer would solve the problem of the existence of the owner of the asset, but wouldn't this be a reversion of assets to the employer (which raised issues of plan disqualification/prohibited transctions/excise taxes and all sort of other nasty stuff)? In similar situations in which the plan terminated, paid out all benefits and filed final 5500's, PBGC 501, 1099's and then later found a forgottten asset, I've been told by practitioners that they have reopened the plan, distributed the asset in accordance with plan terms and then filed another final 5500. If the plan was not going to file a lawsuit to recover assets, but rather attempt an informal recovery (e.g. employer or trustee attempts to put pressure on investment provider, short of filing a lawsuit), I'd suggest the method in the paragraph above, but this is not consistent with the ongoing existence of the plan. This a a real mess. What does the attorney handling the lawsuit say? Has he consulted with an ERISA attorney? ------------------

Many, but not all, DB plans are covered by the PBGC and thus must pay PBGC premiums. The most important categories of plans exempt from PBGC coverage are 1) plans covering only owners and 2) plans with less than 26 participants sponsored by professional employers (drs, attnys, etc). In a DB plan, contributions atttributible to older employees are higher because the plan promises to provide a certain monthly benefit at retirement (e.g. 50% of monthly compensation) and since there are less years to make contributions and less time for the contributions to earn interest, larger contributions are required. FYI - Places to look for intro material on DB plans: - ASPA PA1A Pension Administrators Course, chapter 13 - ASPA 1999 Pension Conference materials, handout for session "DB Plan Administration" ------------------

I don't see any problem with defining the classes by name. In fact, I seem to remember it being asked of the IRS at one of the ASPA or other meetings and they said they saw nothing wrong with it. The IRS' main concern appears to be the "definitely determinable" nature of the class definitions (and name is certainly definite). I have plans in which classes are defined by name, but have been careful to warn my clients that they need to make sure that this does not become an impermissible cash or deferred arrangement (deferals greater than the 402(g) limit and/or deferrals by HCEs only), which it could easily become if each individual doctor chose his own contribution level and such contribution directly reduced his compensation. I tell my clients that classes can be named by individual, but that the board of directors (or equivalent) must determine and specify in writing the amount to be contributed to each class. (Yes, I know that the individual doctors sit on the board and that the board also sets the compensation of each doctor, but the directors are acting in their capacity as directors, not as individuals, when making these determinations.) ------------------

At the DB panel discussion at the ASPA conference, one of the speakers mentioned that a DC plan cannot be amended to have a short plan year (e.g. 11/1/99-12/31/99) so that a DB plan can be established with a calendar plan year beginning 1/1/00 with no 415(e) limitations? The reason given was that a plan cannot be amended to accelerate the effective date of legislation. In this case, the amendment would be the amendment of the limitation year to the calendar year since the effective date of the 415(e) repeal is for the limitation year beginning after 12/31/99. Does anyone have a cite for this? ------------------