Lorraine Dorsa

I have had this discussion with a number of my clients who are TPAs and trying to figure out what to say in the SPDs they prepare for their plan sponsor clients. In most cases, the SPD has been drafted to list/define the classes and then explain how the contribution will be allocated between the classes and within the class. The explanations are usually general, for example: "the contribution made by the employer to each class is allocated on a compensation ratio basis to the members of the class." I have not actually done this, but some practitioners have suggested separate plans for each class (they would be aggregated for testing) so that you don't have to disclose to participants in any class what other classes are getting. This might be an issue if the document provides for an allocation of 25% to the class of big shots and an allocation of 3% to the little shots, but with the new IRS guidance, you don't have to put the %'s in the document so it probably is of less interest now.

I am the Chairman of ASPA's PA-1 Committee and a local course coordinator for ASPA. I've also taught the PA-1 course as a training class for large groups of new 401k administrators. Please feel free to email me for more information about PA-1. My address is lda@leading.net

K-1 income can be used as compensation in pension plans, so there is no need (for pension purposes) to make it W-2 income. The K-1 income is treated the same as Schedule C income for a sole proprietor in that the K-1 income (after contributions to the plan on behalf of r&f employees) is reduced by 1/2 FICA and then the remaining amount is split between plan compensation and plan contribution.

The plan is required to pay him the additional benefit that is owed. The question is then the mechanics of how to do this. The safest course would be to notify the participant of the add'l benefit and have him elect (with spousal consent, if appropriate) how he wishes to receive the benefit. In practice, if the adjustment is determined within a very short time after the lump sum was paid or after monthly payments started, some practitioners simply make an add'l payment (lump sum or catch up on monthly payments) based on the original election.

Depending on the ages of the parties involved (works if the owner is older and the employee/new owner is younger) is to set up a defined benefit plan and consider some/all of the benefits accrued in the DB plan for the older owner in the buy/sell. This way, the larger contribution to the older owner over his remaining years (tax deductible to business and tax deferred to owner as individual), which increase the $ the older owner takes out of the business and presumably reduce the profitability (and therefore maybe value of stock)which will be purchased by the employee/new owner. A lot more information is required to see if this will work in your situation. I suggest you work with a pension professional and attorney to review your situation.

I have suggested that this message be reposted in the Litigation and Claims message board.

The type of plan you describe is sometimes called an "ageless" plan. It is mostly of theoretical interest because of the high level of contributions required to a group of NHCEs. This type of plan imputes defined contribution permitted disparity to support the contributions to the HCEs. This requires a contribution of about 13% of pay to a group of NHCEs in order to support a $30,000 contribution to the HCEs. I've considered it for some clients, but have only found 1 or 2 situations in which it made sense (younger HCEs, a group of NHCEs to whom the er wanted to make a large contribution, lots of other NHCEs).

I don't see any alternative to making a large contribution to the plan since any correction is going to include adding these poeple back in and, since it is a defined benefit plan, funding for their retirement benefit. The mechanics of the correction methodology within the EPCRS correction program (APRSC, VCR, CAP) will depend on the specific circumstances, status of plan document, etc.

The DB plan could be designed to provide equal benefits to the married and unmarried, or it can be designed to provide larger benefits to the married. Same benefit Example: the normal form of benefit is a life annuity and all other benefits are defined as the actuarial equivalent (= of equal value using the actuarial factors defined in the plan) In this case, both the married and unmarried are entitled to a monthly benefit of the same value. (If the participant is married, the plan must pay out the benefit in the form of a joint and survivor annuity unless both employee and spouse agree to waive the j&s benefit in favor of somthing else.) The benefits, which are all actuarially equivalent, might be (made up numbers, but you'll see how it works): life annuity $100 per month 50% j&s annuity $ 90 per month Therefore, regardless of whether benefits are paid to married or unmarried participants or in the form of life annuities or j&s annuities, the value is the same. Higher benefits for married The plan could provide larger benefits to the marrried participants by subsidizing the j&s benefit. In this case, the 50% j&s annuity would be $100 per month, even though that is worth more than the $100 life annuity.

Yes, 401(a)(26) still applies to DB plans.

At the last 2 ASPA meetings and in various discussions over the last 2 years the IRS has consistently taken the position that once a participant in a profit sharing plan becomes eligible to share in the allocation, he is entitled to his share of the profit sharing contribution made to that plan as allocated under the allocation formula in effect at the time he became eligible. Depending on the document, a participant becomes eligible on the last day or 1000 hours or last day & 1000 hours or 500 hrs & terminated or even deceased on 1st day of the plan year. Therefore, once any participant has become eligible, it is too late to amend the formula in the plan. The argument that the contribution is discretionary and therefore can be changed does not work because while the AMOUNT of the contribution is discretionary, the allocation METHOD is not. (To be qualified, a profit sharing plan must have a definitely determinable allocation formula.) To provide flexibility for my plans, I am using a 1000 hrs/ last day requirement (no exception for deceased, retired, disabled) on all my profit sharing plans. This allows the plan to be amended at any time before the end of the plan year. If you have a plan with other than last day requirements and someone has already become eligible under the current formula (which is probably the case with most standardized prototypes or 1000 hour only plans by this late date in the plan year), there is no reason why you could not adopt a 2nd profit sharing plan with the new formula and then have the employer contribute $0 to the old plan and $X to the new plan. (Dave suggests something that sounds similiar in his message above. My concern with his method is that he would be changing the allocation formula in the plan after someone has become eligible - e.g. changing from non-integrated to by classes. Maybe he could argue that he is adding a second and unrelated profit sharing feature to the plan, but that's too far a stretch for me.)

We operate solely on a fee for service basis and have been successful. Specifically, we target clients for whom we can provide value added services (specialized plan design, administration of complex plans, defined benefit plans, etc) rather than what are perceived as "plain vanilla plans" (not that there is really such a thing given the complexity of pension law). I've found many referral sources who appreciate having a pension plan professional who is not a competitor to whom to refer his clients. I see fee for service pension consulting as a niche business--you just need to find the niche that needs your services and give up on those clients who think that because they do not receive a bill which says "pension consulting & administration" that someone is providing these services free.

Since a defined benefit plan promises stated retirement benefits regardless of the value of plan assets (not an account balance based on the value of plan assets), the defined benefit plan must be terminated before the DB $ can be transferred to the DC plan. (This applies regardless of whether J&S applies to the DC plan.) The issue is that retirement benefits cannot be promised in a DC plan because a DC plan, by definition, holds its assets in account balances which may be worth more or less than the value of the promised retirement benefit. As you suggest, the appropriate method would be for the DB plan to be terminated and participants to elect rollovers. By electing rollovers, both the DB and J&S characteristics of the old plan $ are removed (participants had the option to take a J&S distribution of monthly retirement benefits, but elected the lump sum instead) and the $ roll into the PS plan without any "taint" of other rights.

The best place to look for information regarding the history of 401(a)(4) and cross-testing would be in the course material for the seminars sponsored ASPA or Corbel or PPD or other entities from about 1989 to date. Many people keep their course materials for several years so you should be able to find this material. Another alternative is CCH or one of the other services. I remember seeing a good historical summary of just this issue in CCH a few years ago when I was researching a talk I was giving on non-discrimination testing.

I've discussed this issue with many practitioners, ASPA Gov't Affairs committee reps, insurance company lobbyists, Sen. Graham's office, etc. and everyone agrees that there is no action in the works to "unrepeal" 415(e). So unless something comes out of left field at the last minute, it looks like the 415(e) limitations will no longer apply for plan years beginning after 12/31/99.