H.R. 4126

[Guest kudler]

Hi, is anyone concerned about the proposed legislation in H.R. 4126 or is the general consensus that it could never pass?

[J Simmons]

It does concern me. It will likely mean that many non-HCEs currently receiving 5% of pay contributions from the company as a gateway minimum will be scaled back to at best a 3% (the safe harbor contribution), and perhaps the safe harbor match (limited to those that non-HCEs that can afford to put part of their pay into the plan). Given the make-up of current, 111th Congress, if stopping cross-testing is going to happen in the next 20 years, it will happen by the end of 2010.

The problem with this legislation is that its merits will not even be considered by 90% of those voting in Congress, but votes will be cast for quid pro quo reasons.

[Tom Poje]

ASPPA is concerned as well. just a few comments from one of its members

"Obviously, we are taking this proposal extremely seriously.... Although we are confident we will ultimately defeat this proposal, we do recognize the concern the proposal will engender among the members given how many of them work with plans that utilize cross-testing.

Further, we are likely to employ some targeted grass roots efforts so that the bills co-sponsors clearly appreciate what they are doing and to help prevent others from co-sponsoring.

Simply put, this bill is a plan killer and would result in millions of Americans losing their valuable retirement benefits. We cannot let that happen."

I do not often get into plugging membership in any organization, but it is a good reminder about some of the work ASPPA does. You might not even be aware of this.

[Bill Presson]

We're contacting Congressman Artur Davis about this. I would encourage everyone to get involved in this if they can.

Silly congress...

[SRM]

Please contact your congressman if they are a member of the ways and means committee. While I would hope that this does not go anywhere in congress, I think it is important to note that a member of the presidents cabinet (director of OMB) was one of the driving forces attacking cross testing last time around (see www.cbpp.org/3-2-00tax.htm) so there may be more support in Washington than a small number of House members.

[Bird]

Y'know, cross-testing (and ASPPA too) been berry, berry good to me, but I can't argue with a straight face that the loss of cross-testing is the end of the world. As a taxpayer, I'm not so sure that letting Dr. X get a 20% contribution @ 5% for the staff is really worth it (or cherry-picking a handful of NHCEs in a 50-life plan and giving zippo to everyone else). Part of the retirement problem we have seems to stem from the mis-perception that just because you are covered by a plan, you will have adequate retirement income...5% might as well be 3% because it's still not enough. FWIW.

[pmacduff]

Bird - I do see what you are saying, but we are in the REALLY small plan market and I can say with certainty that the majority (if not all) of our small plan sponsors would eliminate the plan entirely if not for the availability of cross-testing to maximize the owners. A qualified plan would no longer be worth it for them. It would probably put us out of business as well (in our market). Gone are the days when the Employer worried about it's employees' retirement future.....

[Kevin C]

The cross testing ban gets all the attention, but the bill also includes a provision that only vested contributions for NHCE's would count under 401(a)(4). That seems an underhanded way to require 100% immediate vesting. We have a number of clients who feel strongly that a vesting schedule is a critical part of what they want their plans to accomplish. They use the vesting schedule to provide a huge incentive for newer employees to stay.

[rcline46]

Only one SOAPBOX comment here - creeping socialism.

[Kevin C]

Since you brought out the SOAPBOX, this bill may be the least of our worries.

Did anyone else see the Government Accountability Office report in the Benefitslink news section about three months ago?

http://www.gao.gov/new.items/d09642.pdf

The report discusses alternatives to our pension system. There is a summary of what they consider the four main alternatives on page 74 of the .pdf (page 69 of the report). Two of the alternatives amount to a direct government takeover of the private pension system. One alternative includes government management of the pension system. The other option replaces 403(b) and 401(k) plans with a Super Simple Saving Plan.

A government agency is running simulations on a government takeover of the private pension system. Now, that's scary.

[Jim Norman]

A government agency is running simulations on a government takeover of the private pension system. Now, that's scary.

Scary but not surprising, once they've got health care nationalized, rolling up retirement plans should be easy.

[J Simmons]

If you look at it from the business owner's perspective, if I don't have a plan and make any contributions to it, I can do IRAs and with the rest of what I might have contributed to a plan, I get to keep all of it after I've paid the income tax. That is, in the absence of a plan, the money (what remains after tax) is all the owner's anyway.

Looking at it from the employee retirement plan perspective, why should any employee be treated any differently than any other?

Cross-testing has actually been a good balance struck between these two perspectives. For the owner to get, say, 20% of pay accruals on a tax advantaged basis, he must fund in 5% of pay for the other employees.

You take that away, and I would suspect as pmacduff observed, many micro employers will stop their plans altogether, and simply keep what's leftover after income taxation of the amount that otherwise would have been contributed.

That will further burden and strain the Social Security system.

[jpod]

The notion that it is costing the owners an additional 5% of pay (or 3% or whatever) for employees assumes that the retirement plan contributions for employees is not a substitute for what would otherwise be necessary to pay as cash wages. Any consensus out there as to whether the 5% would actually end up in the owners' pockets or whether the owners would end up having to pay that amount anyway in cash or other forms of compensation?

[Bird]

We're in the micro plan market too, and it might put us out of business. Setting that aside, I find it hard to get indignant about it for the reasons mentioned.

As far as creeping socialism, people can take as much taxable income as they want in this country, for the most part. But it's perfectly logical to have some non-discrimination rules where tax-qualified money is concerned.

And as far as SS...it is what it is. People might wish they had more SS as a result of having less from a qualified plan, but unless that system is changed to reflect need, this won't impact SS.

Ed Snyder

(might regret outing myself but don't want to be argumentative behind a handle)

[Guest Sieve]

There was a time--remember?--when there were no new-comp plans and no 401(k) plans. As jpod suggests, the absence of new comp plans will simply mean that owners still will spend the NHCE 3-5% (either on a plan or as comp--it's a cost of doing business) and the rest that can't be sheltered into a plan will simply become after-tax salary (as was done back in the early ERISA dark ages). I do not see plans going away--in fact, there still will be new comp plans, it's just that the HCE/NHCE spread won't be as great. The dire prediction of death to non-elective plans is a bit premature--there will be new designs galore, you can bet the store. We'll see a lot more SH plans, where 3% of comp will be traded for $22,000 (rather than 5% of comp. traded for $54,000).

We all weathered the drastic cut in comp back in 1994 from nearly $240,000 to $150,000 (we're just now making it back to 1993 levels, you know!), and the DC 415 limit from about $45,000 to $25,000, if I recall correctly, back in the late 70's/early '80's, and this will be no different. Expectations will adjust, and the market place will soon flood again.

[J Simmons]

Ed Snyder

(might regret outing myself but don't want to be argumentative behind a handle)

Welcome to the outed world. Didn't quite see your post as very argumentative, though--just a point of view.

[pmacduff]

jpod - I can tell you with our client base that the $$ not going in to the Plan would not be going to the Employees another way (i.e. pay increases or other benefits). I'm not trying to trash our clients, I just know that the majority if not all of our owners would not keep the expense of the Qualified Plan if they could not be reaching the individual max of $49,000 ($54,500 with catchup) with a lower contribution percentage to their rank & file employees and certainly would not boost another benefit or payroll because the plan goes away; even if it costs them more in taxes.

I understand what Sieve is saying about history and all that, I'm just reiterating that in our area these plan will go away if cross-testing is eliminated or even just changed/reduced so that the owner is not realizing what he or she perceives to be a MUCH larger benefit than the rank and file. It's the way of life here in our neck of the woods. It may be premature to assume this is going to happen, it's just that for us the impact would be so widespread and devastating to our practice it's hard not to react passionately!

I'll be done now.........

(edited for spelling)

[Kevin C]

I have trouble seeing how eliminating cross testing will cause mass plan terminations in the small/micro plan market. I'll buy reduced employer contribution levels, but not plan terminations.

With a safe harbor match, an age 50 owner with $245,000 in compensation can defer $22,000 and receive a $9,800 match. The employees only receive the SH match. In our clients' plans, the SH match averages less than 3% of covered payroll, but let's assume it is 3% on average. So, the owner gets $31,800 and the employees get 3% of pay on average. If the owner hires his/her spouse, it gets even better. Either way, it's still a lot better than an IRA. And, it wasn't that long ago that the 415 limit was $30,000.

[Lou S.]

I remember when cross-testing first became somewhat popular. At the time most practitioners said the IRS is going to kill this but much to the surprise of many of us not only did they not kill it they blessed it in the regs. If it goes away I'm sure some small plans will terminate but it's not like this is the first time IRS policy had impacted employer decisions.

[J Simmons]

In my experience, I had two ERs/clients bag their x-tested plans when the minimum gateway requirement was added and they could no longer just cross-test off of the TH minimum.

[goldtpa]

I agree with pmacduff. The PSP market will disappear. Doctors are all to happy to max out while giving their employees 5%. With the reduction in psp contributions due to the proposed Cross Testing regs, Doctors will stop their psp contributions and stick with the SH 401k.

[Belgarath]

It's an interesting sort of thing that I'll call "sales pyschology" for lack of a better term. Back when the "best" PS plan design was an integrated plan, tons of clients had them. And were very happy with them. Then comes the cross-tested plan. And everyone switched due to the greed factor.

If you then take away the cross-testing, and they have to go back to integrated which they previously perceived as a very good plan, they now say, "This stinks, and I don't want it."

Certainly it would damage the small plan market. I won't go so far as to say it will destroy it, because I don't think it will. I do, however, agree that it will cut into the business of those of us who specialize in the small plan market.

Ah well, having food and shelter was getting boring anyway...

[Guest careful1]

Before anesthesia was invented a shot of whiskey was good enough. But sometimes things change for the better. I think it's a harsh mischaracterization to label a business owner that wants to save for retirement, provide a retirement benefit to employees, and reduce taxes as "greedy". As mendtioned, in the small plan market, overall the rank and file employees do better under cross-tested plans. I can't see how that's a bad thing. And the tax break is an important incentive to provide these employee benefits. I don't think the majority of Americans can count on social security and personal savings for an adequate retirement. "Take aways" like removing cross-testing would be a critical error in terms of providing financial security at retirement for the rank and file workforce.

[Belgarath]

"I think it's a harsh mischaracterization to label a business owner that wants to save for retirement, provide a retirement benefit to employees, and reduce taxes as "greedy"

When I refer to the "greed factor" that's merely our internal term for plan design purposes. Almost without exception, small employers' (ours anyway, you must run with a more generous or altruistic class of clients) first design is "I want the maximum, and I don't want to give ANYTHING to my employees." Small employer plans are, in my experience, set up without any intention whatsoever to fund a retirement benefit for employees.

Naturally, we then explain that this isn't generally possible, and if you want to max yourself, then you must contribute a certain amount for your employees. Then they go to "who can we exclude." "If we fire them and rehire them part time, can we not cover them? What if we terminate them and lease them back from a leasing company? Can I set up two corporations and only cover myself in one and not cover the employees in the other?" "Can I fire them before they become vested?" Etc., ad nauseaum.

Now, I don't dispute for a moment that a 5% gateway is better than 100% of nothing, if the employer actually is going to terminate a plan if they can no longer cross-test.

Personally, I don't think it will pass. The probability of this is at lest 90% according to a voice in my head that tells me meaningless and unfounded statistics to use.

[drakecohen]

What about the underlying theory behind cross-testing as examined here for a simple age-weighted plan:

http://blog.nj.com/njv_johnbury/2009/12/pe..._betrayals.html

[Bill Presson]

What about the underlying theory behind cross-testing as examined here for a simple age-weighted plan:

http://blog.nj.com/njv_johnbury/2009/12/pe..._betrayals.html

I'm shocked, shocked that John Bury feels this way.

[Tom Poje]

lets see, this article says the NHCE only gets 3%.

huh? for most corss tested plans, the minimum is 5% under the gateway minimum rules. while true in an age weighted plan the younger employees might end up at the 3% top heavy minimum, the older nhces end up with more than 3%

the comments do mention that the owners compensation is capped at whatever - $245,000. but then use that figure when it talks about everyone getting an equal % of pay, that is not quite true. try dividing by the doctors actual comp.

the comments say the individual will receive 0% interest after the owner/doctor whomever retires. not true. its true the individual may recevive no more contributions, but that is not built into the nondiscrimination formula gee, by that logic lets tell everyone not to put into an IRA either (or roll your funds into an IRA after the doctor quits), because we know they will earn 0% until you retire also.

......................

ah yes, the good old days, when everyone receive the same percentage of pay or adjusted for integration. and then the plans had 10 year cliff vesting and strangely enough, people were terminated after 8 or 9 years.

[goldtpa]

The cross testing has certainly taken center stage. However, the bill also seems to get more part-timers into the 410b coverage test. That would be bad news for 401ks as more companies would have to provide benefits for part-timers. The small business market already hates the fact that they have to provide 401k benefits to employees who work 25 hours per week. I cant imagine telling a small business owner that they fail the 410b coverage test and tell them to start covering the part time employees who work 15 hours per week.

[Guest Sieve]

The decisions really will depend on the pre-tax/after-tax numbers.

Say a small employer can put $40,000 for herself and $10,000 for her staff in a cross-tested plan today. Assuming an effective tax-rate (fed, state) of 40%, the owner turns $30,000 of after-tax $$ into $50,000 in the plan, $40,000 to her account. Uncle Sam and Aunt Michigan pay a big hunk of this contribution (although, of course, it's eventually taxable). Why give taxing authorities $20,000 when you can turn it into employee (and your) dollars?--assuming, of course, she can afford to do without the after-tax $30,000 in the first place.

Say, now, after law changes, she has to contribute $25,000 (an increase to staff of 150%) to get her $40,000 in the plan. Yes, it will cost her $10,000 more after tax ($40,000), but that becomes $65,000 in the plan--the tax collectors pay her staff's contributions. In that scenario, all her taxes on that amount are being redirected to her staff. Why pay the feds money when you can redirect it all to your employees? Again, this assumes she is willing and able to do without $40,000 after tax.

The numbers won't always work for every employer--some will drop back 15 yards and punt. But, just like we got used to significantly reduced 415 and compensation limitations in past years, we'll successfully work with this (if it even passes).

Small employers treat qualified plans as shelters for themselves, and not as a cost of doing business. If we sell a plan as a shelter, and not as a cost of doing business, then what do we expect when the shelter loses some of its luster?

[J Simmons]

Small employers treat qualified plans as shelters for themselves, and not as a cost of doing business. If we sell a plan as a shelter, and not as a cost of doing business, then what do we expect when the shelter loses some of its luster?

Well, I'd expect many micro employers--tired of paying for document amendments and restatements, Forms 5500, etc. and having to fix operational errors when discovered--to dump their plans. For them it is, as you point out, not a cost of doing business. Micro employers can get employees without having a plan. So for these employers, a plan is, also as you say, entirely about the shelter. When Congress/IRS pops a few more gaping holes in the roof of that shelter, time to move on.

[Guest JPIngold]

I couldn't agree more. As a CPA and TPA, I am often using the plan as a tax shelter with my clients. If a client is getting 80% of the contribution and getting a 35% (plus state tax) deduction, he is willing to fund the gateway, knowing that although he will pay tax on his benefits someday, the efficiency of the tax deferral is worth it.

For example --- small business owner has $60,000 of discretionary income available at year-end. He can contribute $60,000 to the plan, allocating $50,000 of it to his account using cross-testing, and save $23,000 in taxes. That means $10,000 to his employees. Assuming he ends up paying tax on the $50,000 someday at 25% (when income is lower), he ends up with $37,500 (ignoring all of the earnings, etc.).

So, tired of the red tape, administration costs, etc., the client is content to take the $60,000, pay $21,000 in tax now, and take his $39,000 and put it in an investment savings account. Result ------ the employees lose the $10,000.

Granted, I left out the impact of tax-deferred earnings, present values, etc., but for a general illustration, which is what our fearless leaders need in order to understand it, I can see half of my plans terminating as 60% of them are now cross-tested.

James

[Bird]

So, tired of the red tape, administration costs, etc., the client is content to take the $60,000, pay $21,000 in tax now, and take his $39,000 and put it in an investment savings account. Result ------ the employees lose the $10,000.

And that's where your government wonk might say "mmm, why not? We'll take the $21,000, and give $10,000 to the employees in some form of a government-run plan, and have $11,000 left over!"

I'm not saying I'm in favor of it (it would probably cost $30,000 in waste to give the employees the $10,000) but if it really costs $21,000 in taxes to get $10,000 to the employees, as a taxpayer, I have to question whether it is worth it.

[drakecohen]

So, tired of the red tape, administration costs, etc., the client is content to take the $60,000, pay $21,000 in tax now, and take his $39,000 and put it in an investment savings account. Result ------ the employees lose the $10,000.

And that's where your government wonk might say "mmm, why not? We'll take the $21,000, and give $10,000 to the employees in some form of a government-run plan, and have $11,000 left over!"

I'm not saying I'm in favor of it (it would probably cost $30,000 in waste to give the employees the $10,000) but if it really costs $21,000 in taxes to get $10,000 to the employees, as a taxpayer, I have to question whether it is worth it.

Good point and it hasn't escaped me that this may be a government ploy to get that $21,000.

Cross-testing and safe-harbor match 401(k) plans have yielded plan designs that are so abusive (providing the possibility that some rank-and-file employees get either 3%-of-pay annual contribuitons subject to vesting or nothing, respectively) that even government bureaucrats pick up on it. Combine that with the faulty reasoning underlying cross-testing and you have an easy target.

[jpod]

drakecohen: What, in your opinion, is the faulty reasoning?

[drakecohen]

drakecohen: What, in your opinion, is the faulty reasoning?

It's gone into here:

http://blog.nj.com/njv_johnbury/2009/12/pe..._betrayals.html

but it occurred to me a few years ago when I wrote out the example that I've attached as a pdf file.

Basically, it's supposed to be fair and it sounds fair if you don't think about it too much (or have a financial incentive to think it's fair) but it's really not. What's ignored is the interest from the time the doctor (A) gets the money (2011) to when the receoptionist (B) gets the money (2041).

Age_Weighting_1_.pdf

[Mike Preston]

What makes you think it is ignored?

[Tom Poje]

4 scorched and many years ago, while doing support for the old Pentabs system someone asked if it was possible to calculate an ideal salary for an age weighted plan on the system. of course my answer was 'no' but give me half a chance and I will see if I can figure something out. I figured it would be the typical small plan, but no, turns out it was around 100 lives, 20 people needed ideal salary calcs. I did 'create' a way using the target benefit module, the results on the 100 lives being within a few pennies of expected results. I think the maximum difference on any one individual was 4 cents. In other words, took the $ amount generated by the target plan and ran it as an age weighted plan (along with the comps calculated for the ideal salary)

the conclusion being, that a first year target (non integrated) produces the same results as a first year age weighted. assuming the formula for the target generates the same amount of contribution as the age weighted) I'm sure the individual who condems the age weighted plan as being unfair has no problem with a target plan. hmmm, despite the fact they produce similar results.

[drakecohen]

What makes you think it is ignored?

You promise the same percentage of pay but A gets it at their NRA and B gets it 30 years after that. The difference in what that percentage of pay will buy 30 years apart is ignored.

It's a DB concept applied to DC plans to sell DC plans so that the innumerate making the rules and getting shorted on benefits buy in. The rules that somewhat curb discrimination in DB plans (TH and requiring minimum service for full benefits) aren't applicable to DC.

Understand, I'm not against it except on principle. If it sells plans - fine and I've got a bunch of them. It certainly improves the retirement picture for the doctor who puts money in his plan instead of paying himself and the IRS but it should not be construed that the young B getting 3% of pay contributions that will likely be cashed in at higher tax rates and with a 10% excise tax in the near future is getting a significant benefit.

[Mike Preston]

You promise the same percentage of pay but A gets it at their NRA and B gets it 30 years after that. The difference in what that percentage of pay will buy 30 years apart is ignored.

Gee, could it also be that "A gets it at their NRA and B gets it as their NRA", as well?

If A were to take the money out of the plan and go to an insurance company and ask: how much of an annuity, as a percentage of my pay, would you provide to me at my normal retirement age? How much do you think the insurance company would provide? For argument's sake, let's say the insurance company would guarantee 8% for the period between the point in time when the contract was sold and the point in time when the participant would reach NRA.

If B were to take the money out of the plan and go to an insurance company and ask: how much of an annuity, as a percentage of my pay, would you provide to me at my normal retirement age? How much do you think the insurance company would provide? For argument's sake, let's say the insurance company would guarantee 8% for the period between the point in time when the contract was sold and the point in time when the participant would reach NRA.

It's a DB concept applied to DC plans to sell DC plans so that the innumerate making the rules and getting shorted on benefits buy in.

It is difficult having an intelligent conversation with somebody who throws around statements like that. Do you really think that those making the rules are "innumerate"?

The rules that somewhat curb discrimination in DB plans (TH and requiring minimum service for full benefits) aren't applicable to DC.

I thought that TH still applied. It doesn't? Silly me, I thought that if a participant is in a cross-tested plan, the gateway of 5% is higher than the DC top-heavy minimum by 66%. Care to give an example of how "requiring minimum service for full benefits" relates to the discussion at hand? Curious minds want to know.

Understand, I'm not against it except on principle.

Great. You had me worried there for a moment.

If it sells plans - fine and I've got a bunch of them. It certainly improves the retirement picture for the doctor who puts money in his plan instead of paying himself and the IRS but it should not be construed that the young B getting 3% of pay contributions that will likely be cashed in at higher tax rates and with a 10% excise tax in the near future is getting a significant benefit.

If you are blaming the doctor for the fact that the employee will not take advantage of the opportunity to leave the money sheltered for retirement, does it follow that the doctor should maintain control over the money until retirement age? Or that the 10% excise tax is too low?

[drakecohen]

Don't know how the annuity example relates except to confuse. Both A and B would get annuities but B would get theirs 30 years later which, if interest continues to apply, would be at a greatly discounted value.

The idea that members of Congress or their staff understand 401(a)(4) is too silly to entertain.

Perhaps this is off the point but there is a bigger issue here: the integrity of pension actuaries. Some guys get together and figure out a way to sell more plans by severely discriminating against younger employees and it gets codified. Because of this (combined with the selling of 401(k)s as pensions) a vast majority of the working population will be retiring without adequate funds though taxpayers have heavily subsidized the system.

Again, if the majority are gulled into legalizing it then I have no problem using it for clients where appropriate but I find the hypocrisy of calling it anything nobler than an over-elaborate tax dodge a bit much.

[Mike Preston]

Don't know how the annuity example relates except to confuse.

I will take that to mean that you have no understanding of how compound interest works.

Both A and B would get annuities but B would get theirs 30 years later which, if interest continues to apply, would be at a greatly discounted value.

Above conjecture confirmed. Please explain how it is a greatly discounted value.

The idea that members of Congress or their staff understand 401(a)(4) is too silly to entertain.

You said that you were talking about those that were "making the rules". Most people know that the IRS were the ones that came up with the regulations under 401(a)(4). If you meant Congressmen and Senators, I concur that many have an understanding of this issue that seems to rival your own.

Perhaps this is off the point but there is a bigger issue here: the integrity of pension actuaries. Some guys get together and figure out a way to sell more plans by severely discriminating against younger employees and it gets codified. Because of this (combined with the selling of 401(k)s as pensions) a vast majority of the working population will be retiring without adequate funds though taxpayers have heavily subsidized the system.

It is hard to respond to populist drivel, but I shall try. Smearing the integrity of pension actuaries with such a broad-brushed insinuation is, or should be, in my opinion, actionable. First, the "guys" that got together were the IRS in formulating the regulations under 401(a)(4). Are you accusing the IRS of being innumerate? Are you somehow accusing the IRS of knowingly establishing a system which discriminates against younger employees? Second, are you one of those people that believes consultants (be they actuaries or not) should ignore governmental rules that would benefit our clients if we would not have written those rules ourselves? Ever heard of Judge Learned Hand? Read anything he wrote?

Again, if the majority are gulled into legalizing it then I have no problem using it for clients where appropriate but I find the hypocrisy of calling it anything nobler than an over-elaborate tax dodge a bit much.

You are entitled to your opinion, of course. I suppose the nuances associated with tax incentive based social engineering, an experiment implemented in our country to great effect when it works and cries of discrimination and tax dodging when it either doesn't or is not understood, escape you.

Look, if you want to ignore the fact that tax incentives are a prime motivating factor in our country, be my guest. But blaming those who don't for acting upon those factors seems disingenuous. [And just in case it isn't clear, "those" means the folks that wrote the regulations: the IRS.]

Do you have any studies indicating how your theoretically discriminated against younger employees would fare based on a modified system that doesn't include the rules you seem to dislike? Don't you think it is jumping the gun a bit to call something a tax dodge when you can't say that there is a better system? Or that you can replace what employees can expect today with something where they will be better off, at an acceptable cost to our country?

I, for one, believe the 10% excise tax on early distributions of employer monies is far too low. It is about right for salary deferrals. Perhaps it should be increased to 15% on salary deferrals by 1/2% per year over a 10 year period. We should be encouraging long term growth of the country's retirement savings accounts and raising the excise tax is the single most effective way I can think of to do so. But I think it should be matched with a corresponding carrot meant to reward those who do leave their retirement monies in the retirement system. Perhaps a lower tax rate on distributions after NRA not in excess of a lifetime draw down. Punish early withdrawal, reward appropriately timed withdrawals of proper amounts.

If there is one argument that makes any sense at all when dealing with cross-testing it is the fact that the interest rates in the economy were at an all time high when the regulations were being developed. If you can believe it, the 8 and 1/2% interest rate used in the regulations was believed to be a long term risk free rate of return by many at the IRS at the time. Should the interest rates allowed be reduced somewhat to account for the fact that rates are nowhere near what they were when the rules were initially put in place? Perhaps. But keep in mind that once they are reduced (*if* they are reduced) then the changes made to the regulations since the early days of 1992-1993 need to be revisited as well. For example, reducing the interest rate would lessen the logic for a gateway of any sort.

I don't support the bill attempting to do away with cross-testing. I think it is short sighted (and smells of populism) to even contemplate it. But a sharpening of the tax incentive axe is always fair game. Just make sure that the axe's blade is pointed in the right direction and for the right reasons.

[david rigby]

Boom! Well done, Mike.

[drakecohen]

1) Cross-testing is based on the premise that it's fair if you give B $1 at the same time you give A $10 because A is retiring now and B is able to invest that dollar for 30 years to get to $10 and buy the same widget that A bought - that's the flaw. The forces operating to increase that $1 to $10 in 30 years are also operating to raise the price of that widget to $100. OK, I'm pretty much out of examples without resorting to semaphore.

2) Assuming the IRS operates like other parts of the government you get people from the industry essentially 'advising' lawmakers and lately writing their own rules since the glorified-event-planners manning the legislative staffs couldn't reason their way past a sufficiently complicated concept. Cross-testing came about solely because it sold plans and made money for pension planners with the rulemakers cashing in also upon their return to the private sector. Government 101.

3) An interest rate between 7.5% and 8.5% was deemed reasonable by IRS when they were trying to disallow DB contribution of Vinson & Elkins plans within a small plan audit program that argued 5% was unreasonable and it stuck for target and age-weighted plans.

4) I get that this is a cross-tested board and most of you make big money off this legal scam but wasn't there a time when you entered the profession to ensure secure retirements for the greatest number and it wasn't all about your fees? Just wondering.

[FAPInJax]

What flaw????

Assume that you can buy a monthly annuity that costs $100 for each dollar of monthly pension.

This means that A who receives $100 will receive $1 per month.

B only receives $10 (maintaining your 10:1 ratio). Now, B is going to the bank with the $10 because the plan terminated and invests the money at 8%. The value of the $10 in 30 years is amazingly $100.63 which means B will receive the exact same monthly benefit at retirement as A despite an allocation substantially less.

[pmacduff]

(4) - Well - we certainly don't "make big money off this scam"! We also try to do what is best for our clients AND their employees. As I previously mentioned - we work with the smaller employers who would not have a plan AT ALL were it not for the benefits of cross-testing.

So your "securing benefits for the greatest number" statement applies to our clients because those smaller employers with anywhere from 3 or 4 up to 50 to 200 employees/participants do provide for a large number of covered employees - in our market anyway.

[Tom Poje]

there is a false assumption that the widget will also cost more in the future.

that same widget Big Screen TV which cost $2000 a few years ago now costs $500 and does even more than what it did before. take a look at a computer and what you get for the price. there are lots of other examples, so not everything goes up in price, nor does the quality stay the same.

[drakecohen]

(4) - Well - we certainly don't "make big money off this scam"! We also try to do what is best for our clients AND their employees. As I previously mentioned - we work with the smaller employers who would not have a plan AT ALL were it not for the benefits of cross-testing.

So your "securing benefits for the greatest number" statement applies to our clients because those smaller employers with anywhere from 3 or 4 up to 50 to 200 employees/participants do provide for a large number of covered employees - in our market anyway.

Which goes back to the relative advantage argument. Without cross-testing that doctor would take the $60,000 in salary and pay $21,000 in taxes which presumably would bolster Social Security or put up jungle gyms in some Iraqi neighborhood, whatever the government decides to do with it. It could conceivably benefit the rank-and-file employee more than that 3% TH minimum.

If the argument is that the rank-and-file would not have a plan at all without cross-testing then it comes down to what minimum level of benefits should be provided. Wouldn't a 1% of pay minimum create more plans? How about a hearty hand clasp for the non-keys? That would certainly be an easy sell to a doctor but would it provide any significant retirement security for the receptionist. The non-key could be better off with that $21,000 being spent by the government.

Having said that and having seen government in operation I am all for giving government as little money as possible since I see it as corrupted and dysfunctional. But, being from New Jersey, I might be looking at an extreme case.

[drakecohen]

there is a false assumption that the widget will also cost more in the future.

that same widget Big Screen TV which cost $2000 a few years ago now costs $500 and does even more than what it did before. take a look at a computer and what you get for the price. there are lots of other examples, so not everything goes up in price, nor does the quality stay the same.

That's presuming deflation which certainly occurs on the micro level for some products. However I'm presuming that the same forces that return 8% annually over 30 years would impact the overall cost of goods over that period. Otherwise where would the rise in the value of the investment come from aside from productivity gains. If this widget cost $2,000 in 2011 but would cost $500 in 2041 then how would one's investment in the widget factory rise tenfold?

[GMK]

sales volume (demand vs. price) and economies of scale

[drakecohen]

What flaw????

Assume that you can buy a monthly annuity that costs $100 for each dollar of monthly pension.

This means that A who receives $100 will receive $1 per month.

B only receives $10 (maintaining your 10:1 ratio). Now, B is going to the bank with the $10 because the plan terminated and invests the money at 8%. The value of the $10 in 30 years is amazingly $100.63 which means B will receive the exact same monthly benefit at retirement as A despite an allocation substantially less.

Exactly my point but whereas A gets that $1 in 2011 and can buy a widget with it, B will get their $1 dollar in 2041 when a widget will cost 10 times as much, assuming the normal operation of inflation.