Money Purchase Plan -- Min Contribution

[Alan Simpson]

If the employer wants to be able to vary the contribution percentage why not just put in a profit sharing plan?

[Guest JB2]

Is it acceptable to adopt a MP with a low contribution %(1-3%) but the employer consistently wants to exceed this minimum? Does it make a difference if the higher percent is not made consistently, but one time?

Do they have to adopt an amendment prior to making the larger contribution?

[Jean]

Well, that's my first question too.

Seems the thought process here is that by using the MP with a small % which you are comfortable commiting to, you can communicate the % to your employees.

This is perceived by the employer as having a bigger impact than the PS because you don't commit (and if you do state in writing that a PS contribution will be made -- and the expected % -- then then you probably will be required to make the contribution).

So if I adopt a 5% MP for 1998, can I pay 7% for 1998, 8% for 1999, 5.5% for 2000, etc.?

[richard]

I think you have two options.

Add a profit sharing plan and make the discretionary contribution to it. You get the PR advantage of having TWO retirement plans, but also the expense of administering two plans.

Alternatively, make the additional contribution to the MPP. You will need a plan amendment each year.

Now, will the IRS be upset? Frankly, I doubt it unless you want to contribute above 15% of payroll. (Essentially, the series of amendments would be like treating the MPP like a PSP, but if you don't contribute over 15%, you wouldn't be violating the "PSP" limit.)

Would you have a benefit cutback (and hence 100% vesting) if you have several years of additional contributions (each with its own amendment), and then no additional contributions in future years? I doubt it.

I like the second approach better in your situation. I cannot justify the added expense of the second plan.

[Alan Simpson]

Let's play out this scenerio, EEs must work 1,000 hours to get a contribution and the rate is 8% for 1999. The company makes the contribution at that rate and goes merrily along. However, during 2000 the company decides to change the contribution rate to 5%. However, this decision is not made until late in the year after the employees have already worked 1,000 hours and are entitled to a contribution at 8%. Opps, the company is now MAD because someone forget to tell them to change the rate before the participants accrued the right to receive that benefit. Okay, to solve this problem the contribution rate will be decided upon by the end of, lets say, May since generically an employee must work almost half the calendar year to have worked 1,000 hours.

But what if there are some employees working a lot of overtime and actually accrue 1,000 by the end of April. Should they get a contribution at 8% while the others get a contribution at 5%? Talk about PR problems with employees.

Okay, to solve this problem the rate is changed to 1% every January. Note the plan will have to be amended twice each year (once to 1% and once to the percentage the company wishes to contribute). Sounds like an amendment nightmare to me. Now that we are amending the plan anywhere from one to two times a year how are you going to track the Summary of Material Modifications that need to be give to all participants/beneficiaries. (The definition of material cannot be found in ERISA or the regulations, however, the general view is that any amendment that changes the information found in the Summary Plan Description is material and must be disclosed in the SMM). Yes, you can forgo the SMM if an updated SPD is prepared and distributed within 210 days after the close of the plan year. So now we have to provide a SPD to each participant/beneficiary each year or the SMM.

I am not saying that the response given by Richard wouldn't work, just that there are some pitfalls that must be considered. Therefore, to eliminate the accrued benefit and notification problems I still think that a PS plan is better. Besides, if the company is willing to commit to a small contribution rate for the MP plan, why not go ahead and install a PS plan and tell the EEs the percentage that the company intends to contribute. I have never heard an employee complain because the company contributed more to their account than what they were told.

To sum up my lengthy response I would either put MP and PS plans in place OR only a PS plan.

[This message has been edited by Alan Simpson (edited 04-29-99).]

[Guest ESOPwizard]

In response to the original question, see IRC 401(a)(27)(b).

Don't forget to remind the client that all of those amendments will cost $250/ hr. (Any client that wants to do what is being suggested should be charged at least $250/hr.) --and don't forget to explain all of those stupid annuity rules that they will need to comply with for no apparent reason.

[Wessex]

A 204(h) notice is also required if a plan amendment to a money purchase pension plan reduces the contribution formula.

[Guest blaster]

It would appear to be the best Public Relations move to make the plan a profit sharing plan. This provides maximum flexibility and gives the participant an idea that the benefit can change. The final piece of this plan is good communication. The employer, prior to the beginning of the plan year, should inform all participants of the "guaranteed" contribution level for the year. Then, if the year is better, contribute more. For good harmony, the employer will want to follow through on these "guarantees."

[imchipbrown]

Let's talk about definetely (sp) determinable benefits. I always consel my clients that amending plan formulas more than once every three years or so is asking for trouble.

In a Plan Audit, you're asked for a copy of the Plan and all amendments since the last DL.

Two plans is the way to go. Administration should generally be 1 1/2 times a single plan, no?