Plan design gateway document issue; how to adjust a plan that would sa

[AndyH]

Anybody given thought to how to adjust a plan that would satisfy the 5% contribution gateway if the contribution were sufficient, but isn't in 2002.

Example, plan designed with rate groups of 20% and 5% for 2000. Plan says contributions are allocated proportionately to those percentages. Testing passes in 2000 and 2001, but in 2002 the employer can only put in an amount resulting in 10% for one group and 2.5% (or 3% if top heavy) to the second group.

This fails the 1/3 and 5% gateways, so cross testing isn't available. Should such a plan, if designed in 2000, have a "fallback" formula in such contingency? How might it be worded? How then would it be definitely determinable?

Clearly a corrective amendment increasing the contributions for NHCEs would be allowed. How else could this be planned for in advance without restricting design to the 1/3 rule?

[Guest]

until the proposed regs are 'finalized' (remember, this is the period where they are still taking comments) we probably won't know exactly what the proper procedure. Back in the days of family aggregation, some documents merely cited the reg (414(q)) rather than spelling out that family members would be aggregated. when family ag was repealed, there wasn't anything to do with the document since 414(q) now said something else.

I suppose it is a tough call at restatement time how best to word things. Possibly 'in no case will the contribution allocated to the NHCEs be less than the minimum allocation gateway that the regualtions may require'

it could very well be that nothing or very little is needed. you don't list your testing assumptions. I don't think most documents describe in detail the average benefits percentage test, but you still comply with them.

[Guest FredReilly]

Since you have a plan with a discretionary contribution, why don't you make it discretionary for each group? That would insure that there would be no document amendment issues solely because of discrimination testing. You would simply adjust the contributions among groups to fit whatever testing and gateway method works with the level of contribution for a given year.

[AndyH]

Good point.

My company has never done it that way, but it sounds like that should change.

I understand that it is ok, but I've never seen it in print. Does anyone know of anything in print that justifies that approach? I know it came up at a couple of conferences a few years ago, but I didn't hear it personally.

[Guest]

class allocations were permitted via a March 13,1998 memorandum from the IRS.

ASPA-ASAP 98-10 contains some of the more important aspects of this memorandum. (see aspa.org for info how you can subscribe to these - these are faxes that are automatically sent to you if there are changes, updates, etc pertaining to the pension field.)

[AndyH]

Thank you both for the comments. I will pursue the ASPA ASAP. I am a member, so I do have access.

Tom, is this the way you typically design these- with the groups defined, but not the percentages?

[Guest]

yes. quite often thr classes will simply be

'direct owners' and 'all others'

direct owners = owners not by attribution

avoids the problems with ownership by attribution.

you could still add another class 'owners by attribution'

an example from a corbel document would be

'for each plan year, the ER may contribute...non elective contribution. The ER will provide theAdministrator with written notification....Group A shall consist of the President, Group B shall consist of the Treasurer...

'With respect to the non elective contribution....within such group is the sae proportion that each such Participant's Copensations bears to the total compensation of all Participants in such group each year'

[Guest FredReilly]

I have designed a fairly large number of discretionary group cross-tested plans since 1993. Definition of the group seems to be the most important aspect of the design. With careful definitions you can accomplish almost any purpose a client may want. I have drafted plans with as many as sixteen groups. Two issues that don't even seem to be contemplated in the Corbel document are how to assign group membership when an employee changes category during a year and how to handle use of forfeitures among groups (doe they stay within a group or are they spread, for example). It is important to spend the time to get these right and in accordance with expectations of the client.

[AndyH]

I would be interested in more discussion of this. Is this design approach widewpread, standard, or still the exception?

I do see quite a bit of takeover new comparability plans, but I'd say less than 10% are designed in this manner. Maybe of course that's because the clients with that type of design are not dissatisfied, or maybe most of them are relatively new?

[Guest]

you have to remember, that originally it was unclear whether you could set up a plan with 'classes'. (Though you could achieve the same thing by setting up as many different plans as you needed, and just exclude people - so I think that is one reason a single plan with many classes is allowed)

anyway, most plans were set up as super integrated, because it was known these were ok. now that we are at restatement time, I would guess that most of these will go to allocations by classes.

Plus take out some of the extra language that I have seen - defining the assumptions that will be used in testing. Now there is a real oxymoron - defining an assumption

[Guest FredReilly]

I forget when the original field directive came out, I think it was in 1994 or 1995. In my area in Southern California plan designs tend to be pretty agressive and most of us, including several attorneys, were of the opinion that the cited authority was extremely weak since it was a discussion of pension plan concerns, not profit sharing plans with discretionary contributions and multiple benefit structures. All of the determination letter submissions that I had at the time were given favorable letters despite the field directive. I know that a number of the firms in the area changed to super integrated style formulae. That caused quite a few problems since there were often several years of discretinary group contributions already in existence. The only plans in which I actually did a formula were small with employees geting top heavy minimums and all residual contributions to owners (usually the max).

The field directive has already ben retracted for three years, so there has been no reason to do a formula based plan since 1997, other than inertia.

I am a little concerned that the gateway reg., although it seems a much more serious attempt to curtail cross-tested plans than the field directive, is somewhat similar in that it may be the product of certain individuals at the IRS and that it may end up very different in final form. I do not want to base any current designs on the reg. for that reason, and am only providing disclosure to my clients that there is regulatory activity that will have effect in 2002, or maybe later.

[AndyH]

Although I've been in this business a long time, I've only been involved in cross tested plans for a little more than a year (though quite heavily now). I have a DB background, so the math part is simple to me. It's the documentation/submission aspect that I'm missing. I essentially inherited a lot of these plans with "hard wired" formulas, that need to be amended frequently. We're always struggling with how close to cut the passing margins.

Our basic volume submitter documents were written before the 3/98 memo, and due to the GUST delays, haven't been redone until now.

Since we don't use Corbel for volume plans, we were unaware of their document options in this regard until now.

Having re-reviewed all of the documentation which you and Tom have cited, it looks like we need to change course quickly, but we still have some reservations.

For example, (1) regarding the required letter from the employer to the Trustee, when is that due? Not by plan year end I hope, but this seems unclear.

(2) Has anyone had any feedback from the reviewers on these (document) designs, or are they simply submitted without any cross testing reference, and if so has there been any trouble with the a(4) submission demonstration?. Admittedly I haven't actually gotten to looking at the submission requirements yet personally. I would assume there have been many approvals, but probably without GUST approval. I wonder what might happen during that stage.

In speaking with our legal people, apparently we've had a lot of inconsistent feedback from the reviewers regarding the testing requirements and language.

(3) How would the SPD be worded? Just prorata within classes?

This just seems a little troubling from the definitely determinable angle, but I agree it would solve a lot of problems.

With regard to the gateway issues, we're putting a lot of these plans in now, and it would certainly be preferable to me to design them more long term than just for 1 or 2 years.

I think the gateway regs make too much sense to not survive.

Thanks again for the comments.

[Guest FredReilly]

(1) That letter seems a little rediculous. I would say that in most of my small plans they are the same person. Where there are independent trustees, they either don't know what it is, or are uninterested, since they receive detailed instructions where individual accounts exist anyway. Only the IRS cares, so we do a letter to be signed and put in the file (in the case of future IRS audit), dated contemporaneously with deposit of the contribution.

(2) I have received determination letters on all of my pre-1995 plans. Most were done without a request for a 401(a)(4) ruling, principally for reasons of the size of the fee. We also don't feel there is a whole lot of reliance since that portion of the ruling is only good for the year disclosed in regards to the method. That being said, I have several submissions with the complete demos and have never had any difficulty with IRS reviewers. Some of these letters have been as recent as three months ago. The recent ones are all relating to 5310 submissions and have included GUST amendments.

(3) I have always used that approach. The current Corbel Autodoc offering does the same. I think that each class can be given a separate SPD just describing how their class is provided allocations, if the different classes are a sensitive issue.