Documents for New Comparability Plans

[Lynn Campbell]

What plan documents are you using for these Plans? I have looked at 2 and am not completely satisfied with either one. One requires extra language inserted, and the Model Plan requires percentages for each rate group. Thanks for any input.

[Dave Baker]

What Model Plan?

[Guest Ray Williams]

We use Individually Designed documents written for each particular plan design

[richard]

I've only seen volume submitter documents that require extra language.

Does anyone know whether the IRS will consider the extra language to be material (and thus require a higher user fee) or to be immaterial (and the lower user fee).

[Guest Ray Williams]

The IRS has required the higher fee ( now $1000) on every paln we have submitted.

[Guest lminsky]

To answer the original question, I believe that PPD(or should I say Corbel?) has a cross-tested/age weighted adoption agreement that you can purchase if you are a prototype sponsor. Of course, any plan that seeks to use the general test to pass discrimination testing hurdles will be "individually designed" from the IRS perspective (and they will require the accompanying higher user fee to get a determination letter). Thus, why not go ahead and draft (or modify) a plan to fit the client's individual needs instead of paying PPD or some other similar document provider?

[Ervin Barham]

I have used PPD with good results. I would say in response to Iminsky's comment that the firm I worked for did not "buy" the extra PPD adoption agreement, but took one of the regular adoption agreements and modified it, depending on the type of plan, since they were individually designed plans. I couldn't see paying extra for that adoption agreement. PPD was very good to work with.

[Dave Baker]

The nice thing about cross-tested plan documents is that drafting has become much simpler due to the IRS' clarification in a field memorandum issued in March. It looks like a profit-sharing plan document works nicely, with just a little tweaking in the allocation provisions.

The field memorandum is online at http://www.benefitslink.com/reish/articles/fieldmemo.html.

Looks like we get to define two or more classes, then the employer gets absolute discretion how much to fund for each class each year, as long as that amount is specified in writing to the trustee for a particular year.

[imchipbrown]

I haven't done any of these yet (don't quite understand the rules), but had this thought. I'd like to have some holes shot through it.

Why not adopt two non-standardized prototypes and exclude group 1 from plan 1 and group 2 from plan two. Then fund each plan separately, backing into the amount of contribution required to pass the general test?

I would think you could do away with the need for individual designs and use off-the-shelf documents with $125 fees.

[Guest lminsky]

If you want a determination letter that says that the plan(s) is/are non-discriminatory under the general test I think it will still cost you the full freight (maybe double to get 2 letters?).

I am no expert though! Anyone else out there have a different view?

[Larry M]

1. With respect to the filing fee, I understand the class profit sharing plans (e.g., 3% for all, extra 2% to those in classes 2 and 3 and extra 15% to those in class 3) are now to be submitted as volume practitioner plans subject to only the $125 fee.

2. with respect to having two documents: in order to save an initial fee which may be higher, you will incur the expense of maintaining two plans instead of one. Doesn't seem appropriate.

[Lynn Campbell]

Re message from Larry M. Have you submitted a Plan this way/has the IRS responded? I assume you use Form 5307 with some sort of explanation? Any details you can provide will be very helpful. Thanks.

[Larry M]

"Let me make myself perfectly clear."

When we submit for an initial determination, we do not request approval for the 401(a)(4) test. Rather we submit the plan document and get approval "subject to its passing the 401(a)(4) tests each year".

The IRS fee is $125.

Then we perform the tests annually and maintain the results in a file in case of subsequent audit.

If we were to file the initial request with a request for a determination of THAT year's 401(a)(4) test qualifying, we would pay $1,000; get an approval for THAT year; and then what would you do for subsequent years?

Refile each year? Not me. Not if it is going to cost the client and me both time and money, including another $1,000 IRS fee.

[Guest lminsky]

In response to LarryM- although you can now use a profit sharing prototype (see Dave Baker's comments above re: IRS Field Directive issued March 13, 1998) I do not think that you will get what you are looking for by filing Form 5307. You may get a determination letter but it will not contain an opinion regarding the general test (ie. the cross-tested portion of the plan).

Again, other comments and opinions would be appriciated!

[Guest lminsky]

Interesting! I have been doing things a bit differently but would like to hear what others think of this approach. I must admit that I have wondered what effect the IRS' belssing based on the initial plan year allocations would have if they challenge a future year's allocation.

In terms of the document itself, I think that I do this a bit differently than you as well. I do not put in a formula (ie. 3% to group A and X% to group b)- instead I simply specify/define the different groups and provide that each year "the trustee will be given written notification from the Employer as to the amount of the contribution to be allocated to each group."

[Ervin Barham]

Much ado about nothing?

1. When you submit a plan to the IRS, in their words, they only "bless" (I use that term very loosely) the methodology that you are using to test, not the results. Resubmitting each year would be a waste of everyone's time and money. If the IRS were to audit, you would have to "reprove" that your method works anyway as this becomes an operations issue.

2. I would much prefer to have a full letter, knowing that at least you have some protection than trying to save a $1,000 bucks or so, when usually the owner saves far more than that in a cross-tested plan.

3. With regards to having 2 plans with exclusions, for small employer plans, the administrative costs will usually exceed the savings on the front end. Thus, it makes much more sense for small employers to use the class method to exclude.

[Guest KarenW]

Interesting discussion of whether to pay the lower fee or higher fee for your d.l.. What do you gain by getting the more expensive D.L. if you just modify the allocation formula of a prototype document? I don't see any advantage to paying the higher fee.

[Guest Bill Mulkern]

Is the plan document for a comparability plan required to state the formula "proving" that the plan does not discriminate?

[Guest richard o goehring]

Generally a cross tested document does not require a formula proving satisfaction of nondiscrimination. With that being said, in practice I have found that the required language depends entirely on the agent reviewing the submission. I have had agents who answer the same phone in an IRS office require very different language in terms of sophistication for the otherwise same cross tested plan.

Richard Goehring

[richard]

Here is another reason not to have separate plans; one covering Group A employees (let's say the owners) and the second covering Group B employees (as if this horse hasn't already been beaten to death):

To be safe, the client would have to have substantially the same investments in both plans.

Otherwise, if the plan for Group A employees has better investment results than the plan for Group B employees, wouldn't this be discriminatory?

As an extreme example, the Group A plan is invested in a stock market index fund that earns (over the long term), say 8% per year, and the Group B plan is invested in a money market fund that earns say 4% per year. (Remember that the owners who are covered by Plan A is also making the investment decisions for both plans.)

I'm not sure exactly what section of the Code the IRS would object to (or for that matter what specific section of ERISA the Dept of Labor would object to), but it could be messy.