IRS & QSERP

[Guest ircreader]

Does anybody know the IRS position on QSERPs (not SERPs)? Have they published anything?

[GBurns]

What do you regard as QSERPs ?

[david rigby]

Some reading:

http://benefitslink.com/boards/index.php?showtopic=5508

http://www.watsonwyatt.com/us/pubs/insider...ent=The+Insider

[GBurns]

Many, if not all of the articles being published regarding the JOBS bill and 409A proposed law changes, seem to take the viewpoint that both SERPs and QSERPs are affected by the new proposed law.

You might want to read those that are readily available in Benefits Buzz.

[AndyH]

pax, that is a blast from the past, but I happen to remember that one. What happened to richard, anyways? He has not posted for 3 years. He had a lot of good contributions to these boards.

gburns, would you mind elaborating on the potential impact of the changes you mention, or point me to an article? I have not managed to keep up with that.

[GBurns]

While it is still not clear what ircreader means by QSERP, the many articles address NQDC in general including SERPs. Unless QSERP is being used to mean 401(k), DB and DC pension plans etc, the articles are applicable.

Since ircreader has not responded, What do you think was meant?

Many of the articles are available by scrolling back through Benefits Buzz over the last few weeks. Here a few:

http://www.mwe.com/info/news/wp1004a.pdf

http://www.vonbriesen.com/resourcelibrary/...ation_plans.pdf

http://www.kilpatrickstockton.com/publicat...ert10.18.04.pdf

[MGB]

Let's get our nomenclature straight.

"QSERP," the name, is a copyrighted (by PwC) style of arrangement. Any consultant other than PwC may not use this name in discussing this. Although all consultants can suggest this arrangement, they just can't call it a QSERP. It is not a nonqualified plan. It is an extra accrual within a qualified plan.

A regular, qualified plan (usually at a large organization) runs a 401(a)(4) discrimination test. The outcome of that test will show how much more the HCEs could accrue without violating the test. The plan is amended to allow a one-time additional accrual. These are set up as either an additional annuity amount added to the underlying plan's annuity amount, or as a cash balance style of accrual. The underlying plan could be any design. There are no issues of coverage, rate groups, etc., because this is purely an amount produced by an amendment; it is not accrued over time under a formula. These are done on an ad hoc basis over time (if it were done every year, there is a question as to whether the IRS would see this as an integral part of the accrual of benefits within the plan and need to be tested).

If there is a nonqualified plan providing for additional benefits, typically the added QSERP amounts are subtracted from it, regardless of whether there was an original coordination between the nonqualified and qualified benefits. The net effect is to move nonqualified SERP benefits into the qualified plan to be able to get the prefunding tax advantages and/or use up surplus assets in the qualified plan. Hence, the nomenclature "QSERP."

No, these are not subject to the new law.

But, given that this will potentially move amounts "out of" the nonqualified plan that have already accrued, I wonder if the Treasury will view this as violating the distribution election under the new law? Hmmmmm, this will be interesting to see in guidance, if addressed.

[GBurns]

If "The net effect is to move nonqualified SERP benefits into the qualified plan" then without even bothering to have to rationalize any substance over form issues, there a distribution event from a SERP. Therefore I cannot see why it would be exempted from the new law.

As you describe it I cannot agree that "is not accrued over time under a formula" There is a formula, namely "A regular, qualified plan (usually at a large organization) runs a 401(a)(4) discrimination test. The outcome of that test will show how much more the HCEs could accrue without violating the test. The outcome of that test will show how much more the HCEs could accrue without violating the test". Whether it is done every year or ad hoc should not matter.

[AndyH]

GBurns, I am not sure that we are talking about the same animal. I suggest that you refer to pax' Wyatt link. That provides a good explanation.

[david rigby]

I agree. Don't see any "distribution event."

[GBurns]

AndyH

Therein lies the problem. The Wyatt description is fairly similar to the PwC description but the Wyatt plan is freely avialable but the PwC that MGB refers to is proprietary. Notice that Wyatt does not mention "copyright".

So not knowing for sure what animal we would be talking about I asked ircreader (in the 1st reply), What do you regard as QSERPs? No reply so far.

I guess we will have to wait and see what the IRS says about the issue.

[AndyH]

Ok, then I'll ask it another way.

Company A has a DB plan that would be a safe harbor except that the benefit formula is the sum of the benefit formula that applies to everyone and the additional amount, if any, itemized on Attachment A. One person and one accrued benefit is listed on Attachment A.

Question: What laws, if any, have recently or will soon change soon that might affect the person listed on Attachment A?

To ircreader: I know of no "position" of the IRS other than such a plan would be subject to the 401(a)(4) general test.

[GBurns]

Doesn't your answer to ircreader depend on what he means by QSERP?

If the DB scenario that you illustrate is not a safe harbor, would it retain its qualification with what you outlined?

As Richard pointed out in a previous thread what you are proposing is "tricky" testing, will not work for many groups and is not for the faint of heart.

There have been changes since Richard's thread way back in 2000 in particular the IRS attack on split dollar, COLI, tax shelters and executive compensation issues. Now this law change. It would be prudent to expect more in the same direction.

pax,

You are correct that in that scenario There is not yet a "distribution event", but does it matter that it is only deferred in time? However, could the IRS view such a "contribution" by the employer as a distribution or constructive receipt? Could it be viewed as an impermissable contribution or accrual?

[mbozek]

Regardless of how a QSERP is defined (and is subject to the testing rules under 401(a)(4)) there is nothing in 409A which would prevent adding another benefit level to a qualified plan which would benefit only HCEs or TH persons since 409A does not apply a qualified plan. Non discrimination testing for a Q plan today is the same as it was in 2000.

Of course putting QSerp benefits in a qualfied plan increases the plan liabilities which may not be the best thing for underfunded plans.

[Kirk Maldonado]

My understanding, from a source within PWC, is that QSERPs were designed as a way to "soak up" the overfunding in defined benefit plans. Obviously, that tactic has a lot less appeal in the current market place.

[Guest Harry O]

I don't think there is anything secret or novel about QSERPs. QSERPs are also very useful for 280G planning. My thought was the biggest issue is whether the amendment itself violates the "dash 5" 401(a)(4) reg regarding nondiscriminatory amendments.

[AndyH]

mbozek answered the questions directly, thank you.

Harry O, can you give an example of how that might apply? Are you envisioning an amendment just prior to plan termination, for example?

[Guest ircreader]

Sorry about the delayed response. MGB hit the nail on the head. It is accurately described in the Watson Wyatt link. I'm not a consultant. This was something that was done in a DB Plan of a company our company bought. They probably got the advice from PwC. Before we purchased them a couple years ago, they did one by amendment and we are considering whether it should be done this year now that we've been plan sponsor for a couple years and the funding is good. I got the assignment of finding out how the IRS feels about them but couldn't find anything in that regard. Sounds like if we proceed, it should be with an abundance of caution. Interesting discussion!