Backlash from Carol Gold's Memorandum

[katieinny]

We have a client who is worried that their cross tested pension plan is in danger of being disqualified after a consultant to the firm gave them a copy of Carol Gold's October 22, 2004 memorandum.

The plan received an IRS determination letter based on the cross tested formula. We believe that Ms. Gold was not referring to cross tested plans in general, but was addressing other types of employer abuses.

Unfortunately, due to the usual year end hoopla, I haven't noticed if there had been any follow-up by the Treasury Dept. to put the minds of employers at rest. Has anything further been said about this issue?

[GBurns]

Can you give a link to this Memorandum?

[Belgarath]

Yeah, this sounds odd. The IRS is even planning to allow cross-testing in prototypes.

[Fredman]

Linkies...

Gold's memo

Corbel's take on the memo

[Belgarath]

Thanks for the links. I had seen these earlier, but forgot about them.

I don't think the IRS is attempting to outlaw cross tested plans. Rather, they are attempting to get rid of undue manipulation where hiring practices facilitate "abuse" of the nondiscrimination requirements.

Of course, the guidance to perceived abuses often uses a rather broad brush and calls into question situations that are not abusive in the sense that the guidance is meant to correct. "Twould seem to me that if you have, for example, a 1,000 hour/last day requirement with one year eligibility in a cross tested PS plan, as do most that I have seen, that it would be rather difficult to manipulate short service employees in the manner the IRS is concerned about. But maybe you can and I'm just not creative enough to see how!

[katieinny]

Fredman: Thank you for providing Corbel's article. I guess the issue is still up in the air until we see how the Department will proceed with this threat -- and hope that our client isn't one of the test cases.

[Tom Poje]

would agree it is not an attempt to outlaw cross tested plans, especially if your plan allows all NHCEs to be eligible (as opposed to those that exclude full time NHCEs but includes part time NHCEs)

notice that the memorandum's attempt appears to be aimed at the determination letter end. Thus, if you have a question about the legitimacy of your eligibility

"our plan includes owners and all mail room employees and no other NHCEs" - is this ok. while such a plan may pass nondiscrim testing because the mailroom employees are only age 16, I think the agents will say NO, this one smells.

[AndyH]

katieinny, why don't you describe the design and seek opinions on whether or not the client might haved a valid concern? I would suspect that the design of concern is not vanilla. Or is it?

[katieinny]

The plan is a DB plan with a formula that provides a significantly lower annual retirement benefit to the younger rank and file employees than it does to the older, highly compensated employees. The employer's work force is relatively stable. It's a small company. They don't hire short term, low paid employees or use other hiring shenanigans.

[Blinky the 3-eyed Fish]

Unless you are testing the DB plan on a contributions basis, this is not a cross-tested plan. Nonetheless, this is the exact opposite of the concern in the memo. The concern was giving more to short service employees which in turn affects the general testing in a manner not intended by the regs. This case is giving less, so no worries.

[AndyH]

So long as it passes 401(a)(4) that is. How is the general test being satisfied? And do you have a Favorable Determination Letter based upon a submitted general test?

[katieinny]

The plan has a favorable determination letter. The actuary does the testing and insists there isn't a problem. However, the consultant disagrees. The employer feels caught in the middle and is asking for another opinion. I'm trying to find out where other practitioners stand on this issue.

[Bird]

Given the facts in this case, I would not be concerned.

[Blinky the 3-eyed Fish]

Ask the consultant specifically why he disagrees. Is it just related to the Gold memo or other factors?

[katieinny]

The consultant is concerned that the Gold memo applies because the annual benefit formula is so dramically skewed in favor of the older HCEs, even though none of the other abuses mentioned in the memo are present.

[Blinky the 3-eyed Fish]

The IRS addressed these types of concerns at the LA Benefits Conference. They expressed the intention of the memo was not this broad, but rather the abusive situations, like short service employees. They promised clarification by way of a response to the Corbel and ASPPA letter on this issue shortly. That should alleviate your consultant's issues. Logically, though, the IRS cannot make large policy changes on a whim, so to think that the typical disparity achieved between HCE's and NHCE's via general testing is obliterated due to a memo is a sky-is-falling mentality.

[AndyH]

I am still skeptical of how the general test could be passed as described. Perhaps there is more to the sponsor's concern than the memo.

[katieinny]

I haven't seen the test results, but the actuary has been in the business for many years. I certainly hope he knows how to do the tests. He says the plan passes.

[AndyH]

Can you specify the benefit formula? And do you know if the sponsor also has a PS plan that might possibly be aggregated?

[Effen]

Everyone is entitled to his or her opinion. The client needs to decide if it’s worth the risk. You are telling him the risk is low, but his consultant thinks the risk is high. The "memo" is probably not the basis of his objection, but it does slant things in his favor. Many people think cross testing is just wrong for many reasons.

Do I see any risk in a cross-tested design? Not really, but you never know what will happen in Congress or the public. There is always risk. IBM taught us that no designs are "safe". I'm sure many of their consultants told them they were well within the rules (and they were). But things change and now cash balance is a dirty word for reasons that have little to do with Regulations.

The point is hybrid plans should not be "sold". If the client thinks they are too aggressive, then they are. Some people are happy in their Lincoln and don't really want a Viper. I have taken over and redesigned many cases that the client feels they were "sold" an aggressive design that they really weren't comfortable with. No matter what, they still have to be able to sleep

.

[Blinky the 3-eyed Fish]

but the actuary has been in the business for many years.

I am certainly not saying anything is wrong here, but some of my worst takeover cases came from actuaries who could also make this statement, so it is definitely not a comfort by any means.

[katieinny]

I think Effen is right. The issue is too subjective to be able to give a yes or no answer to our client. I guess we'll need to see a few test cases before we can tell how narrowly (or broadly) it will be applied.

[Blinky the 3-eyed Fish]

Here is some more information. As most of us thought, except the "consultant", the IRS is not changing the rules on us. The sky is not falling people.

http://www.irs.gov/pub/irs-tege/shortservice_letter.pdf

[Gruegen]

Does anyone have more information regarding the mysterious "brown envelopes" mentioned by Steven Miller at the LA Benefits Conference and the related IRS enforcement initiatives?

[E as in ERISA]

This mentions both Carol Gold's memo and the "brown envelopes"

http://www.irs.gov/pub/irs-tege/se_020705.pdf

[Effen]

Was he speaking about a literal "brown envelope" or any scheme that is too good to be true? Was he refering to something specific?

[E as in ERISA]

I was thinking that is was a general reference -- a play on the "brown paper wrapper" language -- suggesting that these ideas are "tax smut."