What do you think - is it safe to keep selling cross-tested plans, in

[AndyT]

I would like to hear what others will be doing. Do you think this just another bump in the road like the 1994 TAM was? It is certainly coming at an inopportune time, with restatements coming soon.

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Andy Treece

[Guest]

I haven't read the notice yet, but will continue to draft cross-tested plans and follow developments closely. This waivering by the IRS has been going on for at least 10 years. As recently as two years ago Carol Gold indicated that rate group testing was fine. I guess only time will tell. Any other comments?

[rcline46]

We will continue to use defined groups. To stop the practice the IRS will have to totally rewrite the 401a4 and 410b regulations, and get them approved. They will also have to remove the 7.5 - 8.5 interest rate safe harbors and lots of other things. For the IRS to admit they were idiots again (ala small plan audit) seems to be far fetched. I think its a political sap to Ellen Schwartz of the NY TImes fame.

[mwyatt]

I would suggest that you all look at IRS Notice 2000-14 immediately to see the IRS's line of reasoning. It appears from first review that no "significant" rewrite of 401(a)(4) would be necessary. Rather, they would extend the Benefits Rights and Features language to the composition of HCEs and NHCEs in each Contribution class (this will blow up about every New Comp plan I've designed and I bet everyone else has concocted). They explicitly said that age-based plans would not be affected by proposal.

In reality, where someone finds a "loophole" in the law, it gets exploited to the point where the results are clearly odious to the average person (i.e, the press, IRS, congress, etc.). I tend to think that this is what happened in this instance.

Obviously this Notice just was released so nobody has had a chance to discuss what to do with existing or new CT plans, but I'd have to think that you should at least inform your clients that after spending extra admin fees, legal fees, and a $1250 IRS user fee in 2000, that their plan design is probably null and void in the immediate future. (The IRS fortunately did see that changes would be made prospectively).

In our neck of the woods (Boston), given the extremely low unemployment rate and the difficulty of attracting/retaining good employees, we've found in the last couple of years (especially with conversions of existing structures) that proposal results may be great but that the fear of insurrection of staff has stalled any plans from coming to fruition. I always thought that these plans were a good idea to implement in an economic downturn, not such a good idea when times are robust.[Edited by Dave Baker on 07-26-2000 at 04:15 PM]

[AndyH]

I agree with Mwyatt's commments. The IRS arguments make too much sense to simply go away. The line of reasoning regarding benefits, rights, & features makes a lot of sense to me and does not seem difficult to implement. If a K plan has different match formulas, for example, which must be tested as benefits, rights, & features, why wouldn't different contribution rates be similarly tested. This would make the majority of designs I've seen fail, and probably for good reason. I'd be interested in arguments against the logic in the notice, but I'm not sure what they'd be.

[This message has been edited by AndyH (edited 02-26-2000).]

[AndyT]

quote:

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Originally posted by mwyatt:

I would suggest that you all look at IR Notice 2000-14 immediately to see the IRS's line of reasoning. It appears from first review that no "significant" rewrite of 401(a)(4) would be necessary. Rather, they would extend the Benefits Rights and Features language to the composition of HCEs and NHCEs in each Contribution class (this will blow up about every New Comp plan I've designed and I bet everyone else has concocted). They explicitly said that age-based plans would not be affected by proposal.

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mwyatt,

I haven't read 2000-14 yet - only summaries. How can they logically exempt age-weighted formulas from this proposed requirement? An AW formula produces different contribution rates of varying amounts for everyone, so I don't see the IRS' logic in saying that one type of plan has to meet the BRF test for contribution rates, while another doesn't.

I guess they could change the Regs to say that an AW formula is a "non-designed based safe-harbor" like points plans are. Unless they do something like that - AND NO ONE GIVE THEM THIS IDEA!!! :^) - I think they are being inconsistent.

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Andy Treece

[Guest]

but they could modify the regs to say 'you must pass BOTH ratio % and avg ben % test.

That would be fairly consistent with other things.

most of the cross tested work I have done has been on 'new' plans. companies that would not have a plan if it weren't for the rules. so, looks like instead of getting - even a minimum contribution - most NHCEs will get zippo like before.

[mwyatt]

Andy:

IRS's logic in exempting age-based plans is that a rank and file employee can grow into the higher contribution levels by virtue of increasing age; the same rank and file employee (unless he somehow gets into the favored class) stays with the lower contribution level forever.

In brief, contributions under an Age-Based plan vary due to participant's age (and everyone gets older last time I checked), which is not necessarily related to their HCE status (although I must admit I haven't set many AB plans up where the owner is 30 and the staff are all in their 50's).

[Edited by Dave Baker on 07-26-2000 at 04:16 PM]

[Guest SDS]

Some interesting view points regarding 2000-14 but they all seem to point to the same thing. NO ONE KNOWS WHAT WILL HAPPEN! But we can maybe do something about it. I have never been one to take the time to respond to IRS regs or notices when the request ideas. But you can guarantee that we will be putting something together before the May 15th deadline mentioned in 2000-14 and I URGE YOU ALL TO DO THE SAME. To many of my "good" clients have SI plans in place and I'm not about to lay low while the IRS tries to stop that.

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[richard]

Actually, the IRS' logic that as a rank & file employee gets older, he gets a higher contribution percentage is not necessarily true in a cross-tested profit sharing plan.

The key isn't simply the employee's age; rather, it is the employee's age compared to the HCE's age.

Consider a pure age-weighted plan. Assume in 1999, the HCE is age 50, and rank & file employees are ages 25, 30 and 35. In 2000, the HCE is age 51, and rank & file employees are ages 26, 31 and 36. Assume pay increases by the same X% for each employee. Assume nobody is affected by top heavy minimums or by 401(a)(17) (or the 401(a)(17) limit increases by X%). Assume disparity isn't imputed in the cross testing calculations.

If the same dollar contribution is made in 2000 and 1999, each employee would receive the same dollar allocation in each year. If the 2000 contribution is X% higher than the 1999 contribution, each employee's allocation will be exactly X% higher in 2000 than in 1999. So, the older employee isn't "growing into" higher contributions in a pure age weighted plan.

Now consider a new comparability plan, with the same group of employees except let's add a 55-year old rank and file employee in 1999 (who will, if my actuarial calculations are correct, will be 56 years old in 2000). Under the same set of assumptions above, I expect that we could draw the same conclusion. In other words, the rank & file wouldn't be growing into a higher contribution either.

The IRS's fallacy here is thinking that the actual allocations are a percentage of pay. This would be true in an age weighted money purchase plan or a new comparability money purchase plan. But not necessarily true in a profit sharing plan.

So, while there might be some merit in what the IRS wants to accomplish (though I'll not discuss this issue here), their rationale that age weighted profit sharing plans are OK because employees can grow into higher allocations as they age, and new comparability profit sharing plans are not because the employees cannot, is wrong.

Now, does that mean that both types of plans should be allowed? Or that both types of plan should not be allowed? I don't know, but they should not be treated differently because of the "ability to grow older" into a higher contribution. In simply isn't so.

[Lorraine Dorsa]

ASPA is spearheading a campaign to generate grassroots support of cross-tested plans. See other topics on this message board re sample letters ASPA has prepared for employers and retirement plan professionals to mail/email to their senators and representatives.

ASPA is also asking for employers/professionals in key areas (Florida, Louisiana, Montana, Texas (Houston), Ohio (Cincinnati) and Maryland (Baltimore)) to mail/fax paper copies of the letters to regional coordinators who will go to Washington to personally present them to members of Congress.

I am the coordinator for Florida--email me for more information.

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