Transcript IRS Compliance Programs (History)

Charles Lockwood
ASC Institute, LLC
Littleton, CO
www.asc-net.com
Plan Design in Down Market

Dealing with EE concerns

Elimination of match/ER
contributions

Addition/elimination of SH
401(k) plan

Dealing with layoffs/downsizing

Modifying eligibility or
allocation conditions during the year

Correction of ADP/ACP failures
ASCi
Dealing with EE Concerns

Now is not the time to
pull out of 401(k) plan

Do not move all money
to money market

Do not borrow from
401(k) if don’t absolutely need to
 No
double taxation on loan amounts
 Could lose rollover option if terminate employment
 Will miss out on market recovery on withdrawn
amounts

More important than ever to monitor
investments and EE communications
ASCi
Reduction of ER Contributions

Watson Wyatt survey
 52%
of responding companies laid off EEs
 42% implemented pay reduction strategy
 12% suspended or reduced match with another
12% planning to reduce or suspend match in the
near future

Survey by Diversified Investment Advisors
 46%
of ERs (with more than 1,000 EEs) planning
to reduce or eliminate ER contributions / match

Hewitt Survey = 251 of Fortune 500 ERs
have suspended or reduced match
 Even
AARP is eliminating match for 2009
ASCi
Elimination of Match

May ER eliminate/reduce a fixed match?
 Depends
on whether EEs have satisfied any
allocation conditions on match
 If EEs have not satisfied allocation conditions –
can eliminate match retroactively
 If EEs have satisfied allocation conditions – must
fund match through date of amendment

Amendment must limit comp to date of amendment
 May
have significant EE relations issues if try to
eliminate match retroactively
 Will require plan amendment and SMM = no other
amendment required

What if match on a payroll basis?
ASCi
Elimination of Match

May ER eliminate/reduce discretionary
match during year?
 Must
 May
be careful of EE relations issues
have problems if already contributed match
 Should
review prior EE communications = make
sure match is designated as discretionary
 No
specific notice required to eliminate
discretionary match = may want to fund
“expected” match through date of amendment
 May
want to notify EEs once decide not to make
match to allow change in deferral elections
ASCi
SH 401(k) Plans

ER maintains a 401(k) plan. ER wishes
to amend plan to be a SH 401(k) plan,
effective 1/1/2009. Can ER add SH
feature for 2009?
 What

if plan were a PS-only plan?
Suppose instead ER would like to
eliminate SH feature for
2009. May ER amend plan
to eliminate SH matching
contribution?
ASCi
Reduction of SH Match

Must provide supplemental notice to EEs

Amendment may be effective no earlier
than 30 days after EEs are provided
supplemental notice (or 30 days after
the amendment is adopted, if later).

EEs must have a reasonable
opportunity to change deferral elections

Plan must protect match on deferrals
already made

Plan must satisfy ADP/ACP test for
entire plan year
ASCi
Example

ER Y amends plan to eliminate SH match
effective 7/1/2009. Y provides 30-day
advance notice and provides ample
opportunity for EEs to change deferrals.
The Plan provides for a SH match equal to
100% of deferrals up to 4% of comp.
 Jane
earns $50,000 for the year ($25,000 from
1/1 – 6/30) and defers 5% of comp ($1,250 from
1/1 – 6/30).
 How much is Jane entitled to as a match?


If Plan uses full year comp = $1,250 [100% of
deferrals up to 4% of full year compensation]
If Plan uses comp while a participant = $1,000
[100% of deferrals up to 4% of $25,000]
ASCi
Example

ER Y amends plan to eliminate SH match
effective 7/1/2009. Y provides 30-day
advance notice and provides ample
opportunity for EEs to change deferrals. The
Plan provides for a SH match equal to 100%
of deferrals up to 4% of comp.
 Bill
earns $200,000 by July 1 and defers $16,500
in first half of year.
 How much is Bill entitled to as a match?



$9,800 [100% of deferrals up to 4% of $245,000]
$8,000 [100% of deferrals up to 4% of $200,000]
$4,900 [100% of deferrals up to 4% of $122,500]
ASCi
SH 401(k) Plans

ER maintains a 401(k) plan. ER wishes
to amend plan to be a SH 401(k) plan,
effective 1/1/2009. Can ER add SH
feature for 2009?
 What
if plan were a PS-only plan?

Suppose instead ER would like to
eliminate SH feature for
2009. May ER amend plan
to eliminate SH matching
contribution?

What about a SH ER
contribution?
ASCi
Elimination of SH ER Contribution

Under proposed regs = in addition to
requirements for eliminating SH match,
must have substantial business hardship
 ER
is operating at an economic loss;
 There is substantial unemployment or
underemployment in the trade or business and in
the industry concerned; and
 The sales and profits of the industry concerned
are depressed or declining

Must prorate Code §401(a)(17) comp limit
when calculating amount of SH ER
contribution
ASCi
Elimination of SH ER Contribution

Need to make sure ADP/ACP tests will be
run = may result in additional costs
 Must
make sure ER is providing appropriate data
to perform ADP/ACP tests
 Since plan loses status as SH plan = plan would
also no longer be eligible for ACP test waiver

Make sure participants have "reasonable
opportunity“ to change deferral elections

ER should be aware of possible negative EE
reaction


ER may wish to establish special communications to
ensure EEs relations are not strained
Possible new statement in SH notice
ASCi
SH 401(k) Plans

May ER terminate a SH 401(k) plan
during year?
 Similar
restrictions apply as with elimination of
SH match



Must provide EEs with 30-day supplemental notice
ER must make SH contribution through date of
termination
Plan is subject to ADP/ACP tests for entire year
 ER
may avoid ADP/ACP testing if terminates due
to substantial business hardship or due to
aquisition or disposition

No advance notice required
ASCi
Hardship Distributions

Immediate and heavy financial need

Deemed to be immediate and heavy financial
need if meets safe harbor definition





Medical expenses for EE, spouse or dependents
Tuition payments (including room and board) for EE,
spouse, children or dependents
Purchase of primary residence for EE (does not
include mortgage payments)
Prevent eviction or foreclosure on EE’s primary
residence
Under final 401(k) regulations = 2 new events


Funeral expenses for parent, spouse, children or
dependents
Repair of catastrophic loss to primary residence
ASCi
Hardship Distributions

Hardship distribution must be necessary to
satisfy the financial need

Facts and circumstances test



ER may rely upon EE’s written representation that
need cannot be reasonably relieved through other
sources
Written representation cannot be relied upon if ER has
actual knowledge to contrary
Safe harbor test = no written representation
required
ASCi
Hardship Distributions

Safe harbor test



Distribution may not exceed amount of financial
need = may include taxes or penalties reasonably
anticipated to result from distribution
EE must take all available loans and distributions
from the plan
EE is prohibited from deferring or making EE
contributions to all plans maintained by ER for 6
months after hardship distribution


Does not apply to contributions made to purchase
health or welfare benefits under a cafeteria plan
Does Plan Administrator (or other
responsible party) need documentation of
ASCi
hardship event/financial need?
Layoffs / Turnover

Need to determine whether EE
has terminated employment
 May
determine eligibility for
contribution under plan

Layoffs and other terminations
may result in a partial termination
 If
partial termination occurs = plan must 100%
vest all affected EEs
 If there is a 20% or more turnover rate in the
plan due to ER-initiated action = presumption of
partial termination
 Partial termination can occur over multiple years
ASCi
Case Study

XYZ Corp maintains a 401(k) plan for its
EEs. The plan defines comp for deferral
purposes as gross comp for full plan year.
Joe, the CEO of XYZ makes $500,000 per year and
defers $15,500 into the plan for 2008. The remaining 4
HCEs make over $125,000 and defer between $10,000
and $15,500 into the plan.
 Sally, an NHCE, first becomes a participant in the plan
in July of 2008 and defers $2,000 (5% of her $40,000
annual compensation).
 XYZ declares a bonus twice a year (in June and
December). Generally, bonuses are only paid to NHCEs.
 The ADP of the HCE group for 2008 is 7.5%. The ADP of
the 10 NHCEs for 2008 is 4.3% and for 2007 is 4.9%.
ASCi
The plan is tested using current year testing.

Switching Testing Methods

Can always switch from prior year testing
to current year testing -- no abuse

Can only switch from current year testing
to prior year testing with IRS approval


Must have used current year testing for at least
five years (or for all years in existence)
There is a change in controlled group member
and - as a result - employer maintains plans
using different testing methods
ASCi
Timing of Plan Amendment
 Once
plan reflects testing method = must
be amended to change methods
 Final
401(k) regulations silent on when
plan must be amended to change methods
 Rev.
Proc. 2007-44 requires discretionary
amendments to be made no later than last
day of plan year in which amendment is
effective

This rule applies to amendments to change
testing methods
ASCi
Case Study

XYZ Corp maintains a 401(k) plan for its
EEs. The plan defines comp for deferral
purposes as gross comp for full plan year.
Joe, the CEO of XYZ makes $500,000 per year and
defers $15,500 into the plan for 2008. The remaining 4
HCEs make over $125,000 and defer between $10,000
and $15,500 into the plan.
 Sally, an NHCE, first becomes a participant in the plan
in July of 2008 and defers $2,000 (5% of her $40,000
annual compensation).
 XYZ declares a bonus twice a year (in June and
December). Generally, bonuses are only paid to NHCEs
 The ADP of the HCE group for 2008 is 7.5%. The ADP of
the 10 NHCEs for 2008 is 4.3% and for 2007 is 4.9%.
ASCi
The plan is tested using current year testing.

Compensation Definitions

Code §415 = gross

Top-heavy = gross

Highly compensated employees = gross

Deductions = gross

Allocations or benefits = as defined in
plan

Testing compensation = any Code
§414(s) definition of compensation
ASCi
414(s) Compensation

Start with Code §415 compensation and
may exclude any of the following:



Elective deferrals
Fringe benefits
Amounts payable only to HCE

Other exclusions = “compensation ratio
test”

Earned income of self-employed EEs
must be modified in same fashion
 Example:
if NHCE compensation percentage is
90%, then must multiply each self-employed EE's
earned income by 90% to get 414(s) comp
ASCi
Compensation Ratio Test

Determine compensation percentage
for each employee
plan comp
 Compensation % = -------------total comp
 Both
numerator and denominator of comp ratio is
limited to $245,000 comp limit

Compare average for HCEs and NHCEs

HCE average cannot exceed NHCE
average by more than a “de minimis”
amount
ASCi
Case Study

XYZ Corp maintains a 401(k) plan for its
EEs. The plan defines comp for deferral
purposes as gross comp for full plan year.
Joe, the CEO of XYZ makes $500,000 per year and
defers $15,500 into the plan for 2008. The remaining 4
HCEs make over $125,000 and defer between $10,000
and $15,500 into the plan.
 Sally, an NHCE, first becomes a participant in the plan
in July of 2008 and defers $2,000 (5% of her $40,000
annual compensation).
 XYZ declares a bonus twice a year (in June and
December). Generally, bonuses are only paid to NHCEs.
 The ADP of the HCE group for 2008 is 7.5%. The ADP of
the 10 NHCEs for 2008 is 4.3% and for 2007 is 4.9%.
ASCi
The plan is tested using current year testing.

Compensation Definition

Net vs. gross compensation

Exclude compensation elements – such
as bonus or overtime

Compensation while a participation

Post-severance compensation

Can plan exclude elements of
compensation (such as overtime or
bonuses) under a SH 401(k) plan?
ASCi
Determining HCE Status

5% owners at any time during current
or lookback year

EE's compensation for the lookback year
exceeds HCE dollar limit
 $100,000
for 2007
 $105,000 for 2008
 $110,000 for 2009

May be able to use top-paid group test
to limit number of HCEs
ASCi
Top-Paid Group Test

EE must have compensation > dollar
amount and must be in top-paid group =
top 20% of EEs ranked by compensation

Election must be made in plan

Excluded employees
EEs who have not completed 6 months of
service
 EEs who normally work < 17½ hours per week
 EEs who normally work < 6 months per year
 EEs younger than age 21

ASCi
Determining HCE Status

May be able to use top-paid group test
to limit number of HCEs
5
HCEs and 10 NHCEs
 Top-paid group test




15 EEs * 20% = 3 EEs
Only top 3 highly paid HCES are considered HCEs
for ADP test
Remaining 2 HCEs are treated as NHCEs
Requires plan amendment before end of
year for which amendment is effective
 May
want to consider making amendment to plan
during year if think will help ADP/ACP test
ASCi
Targeted QNECs
 Targeted
QNEC = can only use QNEC in
ADP or ACP test to extent does not
exceed greater of:

5% of compensation

2x plan’s “representative
contribution rate”


The lowest QNEC rate of any
NHCE, taking into account at
least 50% of total eligible NHCEs
The lowest QNEC rate of any NHCE employed as of
the last day of the plan year
 Plan
can be designed to provide for
targeted QNECs
ASCi
Charles Lockwood
ASC Institute, LLC
Littleton, CO
New Comparability Plan

Have become very popular = based on
concept of “cross-testing”

Permits substantial disparity in
contribution for older employees

Must be tested for discrimination using
general nondiscrimination test

IRS has issued regulations requiring a
minimum 5% contribution for NHCEs in
a “cross-tested” plan
ASCi
New Comparability Plan
EE
Age
Comp
Dr. Rott
60
$245,000
Dr. Gumm
50
$245,000
Dr. DeKay
44
$245,000
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
$1,105,000
ASCi
New Comparability Plan
(1)
(2)
(3)
(4)
(5)
EE
Age
Comp.
Allocation
Alloc.
%
Dr. Rott
60
$245,000
Dr. Gumm
50
$245,000
Dr. DeKay
44
$245,000
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
(6)
Conv.
Factor1
(7)
Annuity
at Age
65
(4)*(6)
(8)
EBR
(7)/(3)
$1,105,000
ASCi
New Comparability Plan
(1)
(2)
(3)
(4)
(5)
EE
Age
Comp.
Allocation
Alloc.
%
Dr. Rott
60
$245,000
$49,000
20%
Dr. Gumm
50
$245,000
$49,000
20%
Dr. DeKay
44
$245,000
$49,000
20%
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
(6)
Conv.
Factor1
(7)
Annuity
at Age
65
(4)*(6)
(8)
EBR
(7)/(3)
$1,105,000
ASCi
Conversion Factor
 Factor
used to convert contribution to
equivalent benefit rate (EBR) at NRA
 Conversion
factor:

Project contribution to NRA at applicable interest
rate (e.g., 8.5%) = Contribution * 1.085^N
where N is years to NRA

Convert projected benefit to life annuity at age 65
based on applicable interest rate and mortality
table (e.g., 8.5% and UP 1984 table) = 7.9486
annuity factor

Example = Dr. Rott (age 45) has a conversion
factor of 0.643138 (1.085^20 / 7.9486)
ASCi
New Comparability Plan
(1)
(2)
(3)
(4)
(5)
(6)
Conv.
Factor1
EE
Age
Comp.
Allocation
Alloc.
%
Dr. Rott
60
$245,000
$49,000
20%
0.213327
Dr. Gumm
50
$245,000
$49,000
20%
0.427716
Dr. DeKay
44
$245,000
$49,000
20%
0.697805
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
(7)
Annuity
at Age
65
(4)*(6)
(8)
EBR
(7)/(3)
$1,105,000
ASCi
New Comparability Plan
(1)
(2)
(3)
(4)
(5)
(6)
Conv.
Factor1
(7)
Annuity
at Age
65
(4)*(6)
EE
Age
Comp.
Allocation
Alloc.
%
Dr. Rott
60
$245,000
$49,000
20%
0.213327
$10,453
Dr. Gumm
50
$245,000
$49,000
20%
0.427716
$20,958
Dr. DeKay
44
$245,000
$49,000
20%
0.697805
$34,193
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
(8)
EBR
(7)/(3)
$1,105,000
ASCi
New Comparability Plan
(1)
(2)
(3)
(4)
(5)
(6)
Conv.
Factor1
(7)
Annuity
at Age
65
(4)*(6)
(8)
EBR
(7)/(3)
EE
Age
Comp.
Allocation
Alloc.
%
Dr. Rott
60
$245,000
$49,000
20%
0.213327
$10,453
4.27%
Dr. Gumm
50
$245,000
$49,000
20%
0.427716
$20,958
8.55%
Dr. DeKay
44
$245,000
$49,000
20%
0.697805
$34,193
13.96%
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
$1,105,000
ASCi
New Comparability Plan
(1)
(2)
(3)
(4)
(5)
(6)
Conv.
Factor1
(7)
Annuity
at Age
65
(4)*(6)
(8)
EBR
(7)/(3)
EE
Age
Comp.
Allocation
Alloc.
%
Dr. Rott
60
$245,000
$49,000
20%
0.213327
$10,453
4.27%
Dr. Gumm
50
$245,000
$49,000
20%
0.427716
$20,958
8.55%
Dr. DeKay
44
$245,000
$49,000
20%
0.697805
$34,193
13.96%
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
$1,105,000
ASCi
General Nondiscrimination

Applies if plan fails to satisfy safe harbor
nondiscrimination test

Each HCE rate group must satisfy a
minimum coverage test under Code
§410(b)
 Rate
group includes all equal or higher allocation
or equivalent benefit rates


Rate groups may be expressed as allocation
rates or equivalent benefit rates (crosstesting)
allocation
Allocation rate = --------------414(s) comp
ASCi
Coverage Tests

Ratio test
NHC benefiting %
------------------- > 70%
HCE benefiting %

Average benefits test


Nondiscriminatory classification test
Average benefit ratio test (ABR test)
ASCi
Nondiscriminatory Classification Test
NHCE concent.
SH %
UH %
Midpoint
NHCE concent.
SH %
UH %
Midpoint
0-60
50.00
40.00
45.00
80
35.00
25.00
30.00
61
49.25
39.25
44.25
81
34.25
24.25
29.25
62
48.50
38.50
43,50
82
33.50
23.50
28.50
63
47.75
37.75
42.75
83
32.75
22.75
27.75
64
47,00
37.00
42.00
84
32.00
22.00
27.00
65
46.25
36.25
41.25
85
31.25
21.25
26.25
66
45.50
35.50
40.50
86
30.50
20,00
25.50
67
44.75
34.75
39.75
87
29.75
20.00
24.875
68
44.00
34.00
39.00
88
29.00
20.00
24.50
69
43.25
33.25
38.25
89
28.25
20.00
24.125
70
42.50
32.50
37.50
90
27.50
20.00
23.75
71
41.75
31.75
36.75
91
26.75
20.00
23.375
72
41.00
31.00
36.00
92
26.00
20.00
23.00
73
40.25
30.25
35.25
93
25.25
20.00
22.625
74
39.50
29.50
34.50
94
24.50
20.00
22.25
75
38.75
28.75
33.75
95
23.75
20.00
21.875
76
38.00
28.00
33.00
96
23.00
20.00
21.50
77
37.25
27.25
32.25
97
22.25
20.00
21.125
78
36.50
26.50
31.50
98
21.50
20.00
20.750
79
35.75
25.75
30.75
99
20.75
20.00
20.375
ASCi
New Comparability Plan
(1)
(2)
(3)
(4)
(5)
(6)
Conv.
Factor1
(7)
Annuity
at Age
65
(4)*(6)
(8)
EBR
(7)/(3)
EE
Age
Comp.
Allocation
Alloc.
%
Dr. Rott
60
$245,000
$49,000
20%
0.213327
$10,453
4.27%
Dr. Gumm
50
$245,000
$49,000
20%
0.427716
$20,958
8.55%
Dr. DeKay
44
$245,000
$49,000
20%
0.697805
$34,193
13.96%
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
$1,105,000
ASCi
What is Magic # of NHCEs?
 How
many NHCEs must benefit under
Dr. DeKay’s rate group to satisfy the
nondiscriminatory classification test?
NHCE %/HCE% > Midpoint %
 NHCE concentration percentage = 8/11 = 72.72%

ASCi
Nondiscriminatory Classification Test
NHCE concent.
SH %
UH %
Midpoint
NHCE concent.
SH %
UH %
Midpoint
0-60
50.00
40.00
45.00
80
35.00
25.00
30.00
61
49.25
39.25
44.25
81
34.25
24.25
29.25
62
48.50
38.50
43,50
82
33.50
23.50
28.50
63
47.75
37.75
42.75
83
32.75
22.75
27.75
64
47,00
37.00
42.00
84
32.00
22.00
27.00
65
46.25
36.25
41.25
85
31.25
21.25
26.25
66
45.50
35.50
40.50
86
30.50
20,00
25.50
67
44.75
34.75
39.75
87
29.75
20.00
24.875
68
44.00
34.00
39.00
88
29.00
20.00
24.50
69
43.25
33.25
38.25
89
28.25
20.00
24.125
70
42.50
32.50
37.50
90
27.50
20.00
23.75
71
41.75
31.75
36.75
91
26.75
20.00
23.375
72
41.00
31.00
36.00
92
26.00
20.00
23.00
73
40.25
30.25
35.25
93
25.25
20.00
22.625
74
39.50
29.50
34.50
94
24.50
20.00
22.25
75
38.75
28.75
33.75
95
23.75
20.00
21.875
76
38.00
28.00
33.00
96
23.00
20.00
21.50
77
37.25
27.25
32.25
97
22.25
20.00
21.125
78
36.50
26.50
31.50
98
21.50
20.00
20.750
79
35.75
25.75
30.75
99
20.75
20.00
20.375
ASCi
What is Magic # of NHCEs?
 How
many NHCEs must benefit under Dr.
DeKay’s rate group to satisfy the
nondiscriminatory classification test?
 NHCE
%/HCE% > Midpoint %
 NHCE concentration percentage = 8/11 = 72.72%
 Midpoint safe harbor = 36%
 NHCE%/33.3% > 36%
 NHCE % > 36% * 33.33%
 NHCE % > 12%
 1/8 = 12.5%
 Only
need to bring one NHCE into Dr.
DeKay’s rate group
ASCi
New Comparability Plan
(1)
(2)
(3)
(4)
(5)
(6)
Conv.
Factor1
(7)
Annuity
at Age
65
(4)*(6)
(8)
EBR
(7)/(3)
EE
Age
Comp.
Allocation
Alloc.
%
Dr. Rott
60
$245,000
$49,000
20%
0.213327
$10,453
4.27%
Dr. Gumm
50
$245,000
$49,000
20%
0.427716
$20,958
8.55%
Dr. DeKay
44
$245,000
$49,000
20%
0.697805
$34,193
13.96%
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
$978
3.91%
3.567210
3,489
13.96%
$1,105,000
ASCi
New Comparability Plan
(1)
(2)
(3)
(4)
(5)
(6)
Conv.
Factor1
(7)
Annuity
at Age
65
(4)*(6)
(8)
EBR
(7)/(3)
EE
Age
Comp.
Allocation
Alloc.
%
Dr. Rott
60
$245,000
$49,000
20%
0.213327
$10,453
4.27%
Dr. Gumm
50
$245,000
$49,000
20%
0.427716
$20,958
8.55%
Dr. DeKay
44
$245,000
$49,000
20%
0.697805
$34,193
13.96%
NHCE 1
41
$80,000
$3,128
3.91%
0.891298
2,788
3.49%
NHCE 2
38
$65,000
$2,542
3.91%
1.138446
2,894
4.45%
NHCE 3
35
$47,000
$1,838
3.91%
1.454124
2,673
5.67%
NHCE 4
35
$42,000
$1,642
3.91%
1.454124
2,388
5.67%
NHCE 5
28
$42,000
$1,642
3.91%
2.574007
4,227
10.06%
NHCE 6
38
$39,000
$1,525
3.91%
1.138446
1,736
4.45%
NHCE 7
27
$30,000
$1,173
3.91%
2.792797
3,276
10.92%
NHCE 8
24
$25,000
$978
3.91%
3.567210
3,489
13.96%
$1,105,000
$157,473
ASCi
Minimum Gateway Requirements
 Gateway
test = to use “cross-testing” for
discrimination testing, plan must satisfy one
of “gateway” tests:


All benefiting NHCEs must receive at least 5%
allocation (based on §415(c) compensation) OR
Lowest allocation to any NHCE must be at least
1/3 of highest allocation to any HCE (based on
any definition of §414(s) compensation)
 Example.
If highest HCE rate is 12%, lowest
NHC rate must be 4%. If highest HCE rate is
18%, lowest NHC rate must be 5%.
ASCi
New Comparability Plan
(1)
(2)
(3)
(4)
(5)
(6)
Conv.
Factor1
(7)
Annuity
at Age
65
(4)*(6)
(8)
EBR
(7)/(3)
EE
Age
Comp.
Allocation
Alloc.
%
Dr. Rott
60
$245,000
$49,000
20%
0.213327
$10,453
4.27%
Dr. Gumm
50
$245,000
$49,000
20%
0.427716
$20,958
8.55%
Dr. DeKay
44
$245,000
$49,000
20%
0.697805
$34,193
13.96%
NHCE 1
41
$80,000
$4,000
5%
0.891298
$3,565
4.46%
NHCE 2
38
$65,000
$3,250
5%
1.138446
$3,700
5.69%
NHCE 3
35
$47,000
$2,350
5%
1.454124
$3,417
7.27%
NHCE 4
35
$42,000
$2,100
5%
1.454124
$3,054
7.27%
NHCE 5
28
$42,000
$2,100
5%
2.574007
$5,405
12.87%
NHCE 6
38
$39,000
$1,950
5%
1.138446
$2,220
5.69%
NHCE 7
27
$30,000
$1,500
5%
2.792797
$4,189
13.96%
NHCE 8
24
$25,000
$1,250
5%
3.567210
$4,459
17.84%
$1,105,000
$165,500
ASCi
New Comparability Plan
(1)
(2)
(3)
(4)
(5)
EE
Age
Comp.
Allocation
Alloc. %
Dr. Rott
60
$245,000
$49,000
20%
Dr. Gumm
50
$245,000
$49,000
20%
Dr. DeKay
44
$245,000
$49,000
20%
NHCE 1
41
$80,000
$4,000
5%
NHCE 2
38
$65,000
$3,250
5%
NHCE 3
35
$47,000
$2,350
5%
NHCE 4
33
$42,000
$2,100
5%
NHCE 5
28
$42,000
$2,100
5%
NHCE 6
38
$39,000
$1,950
5%
NHCE 7
27
$30,000
$1,500
5%
NHCE 8
24
$25,000
$1,250
5%
$1,105,000
$165,500
Drs. receive 88.82% ($147,000/$165,500) of total contribution
ASCi
New Comp / SH 401(k) Plan
EE
Age
Comp.
Dr. Rott
60
$245,000
Dr. Gumm
50
$245,000
Dr. DeKay
44
$245,000
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
Defer
SH ER
Contrib
ER
Contrib
Total
ER
Contrib
Alloc.
%
EBR
$1,105,000
ASCi
New Comp / SH 401(k) Plan
EE
Age
Comp.
Defer
Dr. Rott
60
$245,000
$16,500
Dr. Gumm
50
$245,000
$16,500
Dr. DeKay
44
$245,000
$16,500
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
SH ER
Contrib
ER
Contrib
Total
ER
Contrib
Alloc.
%
EBR
$1,105,000
ASCi
New Comp / SH 401(k) Plan
EE
Age
Comp.
Defer
SH ER
Contrib
ER
Contrib
Total
ER
Contrib
Alloc.
%
Dr. Rott
60
$245,000
$16,500
$7,350
$25,150
$32,500
13.26%
Dr. Gumm
50
$245,000
$16,500
$7,350
$25,150
$32,500
13.26%
Dr. DeKay
44
$245,000
$16,500
$7,350
$25,150
$32,500
13.26%
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
EBR
$1,105,000
ASCi
New Comp / SH 401(k) Plan
EE
Age
Comp.
Defer
SH ER
Contrib
ER
Contrib
Total
ER
Contrib
Alloc.
%
EBR
Dr. Rott
60
$245,000
$16,500
$7,350
$25,150
$32,500
13.26%
2.80%
Dr. Gumm
50
$245,000
$16,500
$7,350
$25,150
$32,500
13.26%
5.61%
Dr. DeKay
44
$245,000
$16,500
$7,350
$25,150
$32,500
13.26%
9.15%
NHCE 1
41
$80,000
NHCE 2
38
$65,000
NHCE 3
35
$47,000
NHCE 4
35
$42,000
NHCE 5
28
$42,000
NHCE 6
38
$39,000
NHCE 7
27
$30,000
NHCE 8
24
$25,000
$1,105,000
ASCi
New Comp / SH 401(k) Plan
EE
Age
Comp.
Defer
SH ER
Contrib
ER
Contrib
Total ER
Contrib
Alloc.
%
EBR
Dr. Rott
60
$245,000
$16,500
$7,350
$25,150
$32,500
13.26%
2.80%
Dr. Gumm
50
$245,000
$16,500
$7,350
$25,150
$32,500
13.26%
5.61%
Dr. DeKay
44
$245,000
$16,500
$7,350
$25,150
$32,500
13.26%
9.15%
NHCE 1
41
$80,000
$1,000
$2,400
$1,136
$3,536
4.42%
3.89%
NHCE 2
38
$65,000
$0
$1,950
$923
$2,873
4.42%
4.98%
NHCE 3
35
$47,000
$0
$1,410
$667
$2,077
4.42%
6.35%
NHCE 4
35
$42,000
$0
$1,260
$596
$1,856
4.42%
6.35%
NHCE 5
28
$42,000
$0
$1,260
$596
$1,856
4.42%
11.25%
NHCE 6
38
$39,000
$0
$1,170
$554
$1,724
4.42%
4.98%
NHCE 7
27
$30,000
$0
$900
$426
$1,326
4.42%
12.20%
NHCE 8
24
$25,000
$0
$750
$355
$1,105
4.42%
15.60%
$1,105,000
$50,500
$33,150
$80,703
$113,853
ASCi
New Comp / SH 401(k) Plan
EE
Age
Comp.
Defer
Total ER
Contrib
Alloc. %
Dr. Rott
60
$245,000
$16,500
$32,500
13.26%
Dr. Gumm
50
$245,000
$16,500
$32,500
13.26%
Dr. DeKay
44
$245,000
$16,500
$32,500
13.26%
NHCE 1
41
$80,000
$1,000
$3,536
4.42%
NHCE 2
38
$65,000
$0
$2,873
4.42%
NHCE 3
35
$47,000
$0
$2,077
4.42%
NHCE 4
35
$42,000
$0
$1,856
4.42%
NHCE 5
28
$42,000
$0
$1,856
4.42%
NHCE 6
38
$39,000
$0
$1,724
4.42%
NHCE 7
27
$30,000
$0
$1,326
4.42%
NHCE 8
24
$25,000
$0
$1,105
4.42%
$1,105,000
$50,500
$113,853
Drs. receive 85.64% ($97,500/$113,853) of total contribution
plus deferrals
ASCi
Potential Issues

Plan document issues = more limited
under prototype plans

Turnover / hiring practices

Excluding family members

Failure of average benefits test =
automatic enrollment

Not enough time to accumulate
sufficient retirement savings
ASCi
Cash Balance Plans

Defined benefit plan that looks and acts
like a defined contribution plan

DB characteristics
 Contribution
is based on actuarial funding
concepts = employer bears risk of gain or loss
 DB
415 limits apply = permits greater
contributions than DC plan
 Subject
 Must
to PBGC coverage
file a Schedule B with Form 5500
 Subject
to QJSA rules
ASCi
Cash Balance Plans

DC characteristics
 Benefit
balance
expressed as a hypothetical account
 Benefit
and interest credited to the account each
year = must be defined in plan document


Plan looks like DC plan because benefit is
determined like a “contribution” to a DC plan
Plan is a DB-plan because benefit is determined
based on value at NRA using an assumed interest
credit
ASCi
Cash Balance Plans

Advantages
 Participants
receive a DC-type statement showing
value of hypothetical account

Participants do not have the ability to direct
investment of their “account”
 Distribution

option generally will be a lump sum
Need clarification from Congress/IRS on whipsaw
issue which forces plan to use lower that desired
interest credits
 Allows
HCEs
a more equitable sharing of costs among
ASCi
Candidate for Cash Balance Plan

Business has stable income to meet
continuing funding obligation

Targeted group (e.g., owner) is age 50
or older with compensation > $245,000

Owners want to maximize contribution
at a level above what is available in DC
plan

ER has existing new comparability plan
with “room” under the maximum
deduction limit
ASCi
New Comp / SH 401(k) Plan
EE
Age
Comp.
Defer
Total ER
Contrib
Alloc.
%
EBR
Dr. Rott
60
$245,000
$16,500
$32,500
13.26%
2.80%
Dr. Gumm
50
$245,000
$16,500
$32,500
13.26%
5.61%
Dr. DeKay
44
$245,000
$16,500
$32,500
13.26%
9.15%
NHCE 1
41
$80,000
$4,800
$3,536
4.42%
3.89%
NHCE 2
38
$65,000
$4,000
$2,873
4.42%
4.98%
NHCE 3
35
$47,000
$0
$2,077
4.42%
6.35%
NHCE 4
35
$42,000
$2,000
$1,856
4.42%
6.35%
NHCE 5
28
$42,000
$0
$1,856
4.42%
11.25%
NHCE 6
38
$39,000
$0
$1,724
4.42%
4.98%
NHCE 7
27
$30,000
$1,000
$1,326
4.42%
12.20%
NHCE 8
24
$25,000
$2,500
$1,105
4.42%
15.60%
$1,105,000
$63,800
$113,853
ASCi
New Comp / SH 401(k) Plan
EE
Age
Comp.
Defer
Total ER
Contrib
Alloc.
%
EBR
Dr. Rott
60
$245,000
$16,500
$32,500
13.26%
2.80%
Dr. Gumm
50
$245,000
$16,500
$32,500
13.26%
5.61%
Dr. DeKay
44
$245,000
$16,500
$32,500
13.26%
9.15%
NHCE 1
41
$80,000
$4,800
$3,536
4.42%
3.89%
NHCE 2
38
$65,000
$4,000
$2,873
4.42%
4.98%
NHCE 3
35
$47,000
$0
$2,077
4.42%
6.35%
NHCE 4
35
$42,000
$2,000
$1,856
4.42%
6.35%
NHCE 5
28
$42,000
$0
$1,856
4.42%
11.25%
NHCE 6
38
$39,000
$0
$1,724
4.42%
4.98%
NHCE 7
27
$30,000
$1,000
$1,326
4.42%
12.20%
NHCE 8
24
$25,000
$2,500
$1,105
4.42%
15.60%
$1,105,000
$63,800
$113,853
Deductible limit = 25% * $1,105,000 = $276,250
Total deductible contrib. = $113,853 (deferrals always deductible)
Remaining deductible amount = $162,397
ASCi
New Comp / SH 401(k) Plan
EE
Age
Comp.
Defer
Total ER
Contrib
Alloc.
%
EBR
Additional
Benefit
Dr. Rott
60
$245,000
$16,500
$32,500
13.26%
2.80%
$50,000
Dr. Gumm
50
$245,000
$16,500
$32,500
13.26%
5.61%
$50,000
Dr. DeKay
44
$245,000
$16,500
$32,500
13.26%
9.15%
$50,000
NHCE 1
41
$80,000
$4,800
$3,536
4.42%
3.89%
NHCE 2
38
$65,000
$4,000
$2,873
4.42%
4.98%
NHCE 3
35
$47,000
$0
$2,077
4.42%
6.35%
NHCE 4
35
$42,000
$2,000
$1,856
4.42%
6.35%
NHCE 5
28
$42,000
$0
$1,856
4.42%
11.25%
NHCE 6
38
$39,000
$0
$1,724
4.42%
4.98%
NHCE 7
27
$30,000
$1,000
$1,326
4.42%
12.20%
NHCE 8
24
$25,000
$2,500
$1,105
4.42%
15.60%
$1,105,000
$63,800
$113,853
Deductible limit = 25% * $1,105,000 = $276,250
Total deductible contrib. = $113,853 (deferrals always deductible)
Remaining deductible amount = $162,397
ASCi
Combined DC/Cash Balance Plan

Cash balance plan is DB plan
 Subject

Combined plans must satisfy minimum
gateway requirement
 7.5%

to DB 415 limit and funding rules
gateway applies to DC/DB plans
Cash balance plan must satisfy Code
§401(a)(26)
 Must
provide at least 40% of employees with at
least 0.5% NAR

Combined plans are subject to 25%
deduction limit
ASCi
Gateway for DB/DC Plans
To satisfy the minimum gateway for DB/DC
combination plans, each NHCE must have an
aggregate normal allocation rate (ANAR) that
meets following requirements:
Highest HCE ANAR
ANAR for NHCEs
Less than 15%
At least 1/3 of the HCE rate
15% to 25%
5%
25% - 30%
6%
30-35%
7%
Above 35%
7½%
ASCi
Combined DC/Cash Balance Plan

Cash balance plan is DB plan
 Subject

Combined plans must satisfy minimum
gateway requirement
 7.5%

to DB 415 limit and funding rules
gateway applies to DC/DB plans
Cash balance plan must satisfy Code
§401(a)(26)
 Must
provide at least 40% of employees with at
least 0.5% NAR

Combined plans are subject to 25%
deduction limit
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
NHCE 1
41
$80,000
$4,800
$6,000
NHCE 2
38
$65,000
$4,000
$4,875
NHCE 3
35
$47,000
$0
$3,525
NHCE 4
35
$42,000
$2,000
$3,150
NHCE 5
28
$42,000
$0
$3,150
NHCE 6
38
$39,000
$0
$2,925
NHCE 7
27
$30,000
$1,000
$2,250
NHCE 8
24
$25,000
$2,500
$1,875
$1,105,000
$63,800
$125,250
Hypoth
Alloc.
CB
NAR
* Plan satisfies minimum gateway = NHCEs receive 7.5%
allocation in DC plan
EBR +
NAR
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
NHCE 1
41
$80,000
$4,800
$6,000
6.69%
NHCE 2
38
$65,000
$4,000
$4,875
8.54%
NHCE 3
35
$47,000
$0
$3,525
10.91%
NHCE 4
35
$42,000
$2,000
$3,150
10.91%
NHCE 5
28
$42,000
$0
$3,150
19.31%
NHCE 6
38
$39,000
$0
$2,925
8.54%
NHCE 7
27
$30,000
$1,000
$2,250
20.95%
NHCE 8
24
$25,000
$2,500
$1,875
26.75%
$1,105,000
$63,800
$125,250
Hypoth
Alloc.
CB
NAR
EBR +
NAR
* Convert DC allocation to EBRs using applicable interest rate
(8.5%) and applicable mortality table (UP-1984)
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Hypoth
Alloc.
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
$40,000
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
$40,000
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
$40,000
NHCE 1
41
$80,000
$4,800
$6,000
6.69%
NHCE 2
38
$65,000
$4,000
$4,875
8.54%
NHCE 3
35
$47,000
$0
$3,525
10.91%
NHCE 4
35
$42,000
$2,000
$3,150
10.91%
NHCE 5
28
$42,000
$0
$3,150
19.31%
NHCE 6
38
$39,000
$0
$2,925
8.54%
NHCE 7
27
$30,000
$1,000
$2,250
20.95%
NHCE 8
24
$25,000
$2,500
$1,875
26.75%
$1,105,000
$63,800
$125,250
CB
NAR
EBR +
NAR
* Drs. receive “hypothetical” allocation of $50,000
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Hypoth
Alloc.
CB
NAR
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
$40,000
2.21%
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
$40,000
3.60%
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
$40,000
4.83%
NHCE 1
41
$80,000
$4,800
$6,000
6.69%
NHCE 2
38
$65,000
$4,000
$4,875
8.54%
NHCE 3
35
$47,000
$0
$3,525
10.91%
NHCE 4
35
$42,000
$2,000
$3,150
10.91%
NHCE 5
28
$42,000
$0
$3,150
19.31%
NHCE 6
38
$39,000
$0
$2,925
8.54%
NHCE 7
27
$30,000
$1,000
$2,250
20.95%
NHCE 8
24
$25,000
$2,500
$1,875
26.75%
$1,105,000
$63,800
$125,250
EBR +
NAR
* Hypothetical allocation is converted to Normal Accrual Rate
(NAR) using plan’s assumptions = 5% interest rate and ’94
GAR mortality table
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Hypoth
Alloc.
CB
NAR
EBR +
NAR
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
$40,000
2.21%
5.01%
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
$40,000
3.60%
9.21%
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
$40,000
4.83%
13.98%
NHCE 1
41
$80,000
$4,800
$6,000
6.69%
NHCE 2
38
$65,000
$4,000
$4,875
8.54%
NHCE 3
35
$47,000
$0
$3,525
10.91%
NHCE 4
35
$42,000
$2,000
$3,150
10.91%
NHCE 5
28
$42,000
$0
$3,150
19.31%
NHCE 6
38
$39,000
$0
$2,925
8.54%
NHCE 7
27
$30,000
$1,000
$2,250
20.95%
NHCE 8
24
$25,000
$2,500
$1,875
26.75%
$1,105,000
$63,800
$125,250
* DC EBR and CB NAR are added together to get benefit rate
subject to rate group test
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Hypoth
Alloc.
CB
NAR
EBR +
NAR
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
$40,000
2.21%
5.01%
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
$40,000
3.60%
9.21%
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
$40,000
4.83%
13.98%
NHCE 1
41
$80,000
$4,800
$6,000
6.69%
$0
NHCE 2
38
$65,000
$4,000
$4,875
8.54%
$0
NHCE 3
35
$47,000
$0
$3,525
10.91%
$0
NHCE 4
35
$42,000
$2,000
$3,150
10.91%
$0
NHCE 5
28
$42,000
$0
$3,150
19.31%
$0
NHCE 6
38
$39,000
$0
$2,925
8.54%
$0
NHCE 7
27
$30,000
$1,000
$2,250
20.95%
$0
NHCE 8
24
$25,000
$2,500
$1,875
26.75%
$0
$1,105,000
$63,800
$125,250
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Hypoth
Alloc.
CB
NAR
EBR +
NAR
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
$40,000
2.21%
5.01%
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
$40,000
3.60%
9.21%
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
$40,000
4.83%
13.98%
NHCE 1
41
$80,000
$4,800
$6,000
6.69%
$0
NHCE 2
38
$65,000
$4,000
$4,875
8.54%
$0
NHCE 3
35
$47,000
$0
$3,525
10.91%
$0
NHCE 4
35
$42,000
$2,000
$3,150
10.91%
$0
NHCE 5
28
$42,000
$0
$3,150
19.31%
$0
NHCE 6
38
$39,000
$0
$2,925
8.54%
$0
NHCE 7
27
$30,000
$1,000
$2,250
20.95%
$0
NHCE 8
24
$25,000
$2,500
$1,875
26.75%
$0
$1,105,000
$63,800
$125,250
Plan fails 401(a)(26) = must have at least 40% of employees
receiving “meaningful benefit” which IRS has defined as .5%
ASCi
accrual
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Hypoth
Alloc.
CB
NAR
EBR +
NAR
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
$40,000
2.21%
5.01%
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
$40,000
3.60%
9.21%
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
$40,000
4.83%
13.98%
NHCE 1
41
$80,000
$4,800
$6,000
6.69%
$300
NHCE 2
38
$65,000
$4,000
$4,875
8.54%
$300
NHCE 3
35
$47,000
$0
$3,525
10.91%
$300
NHCE 4
35
$42,000
$2,000
$3,150
10.91%
$300
NHCE 5
28
$42,000
$0
$3,150
19.31%
$300
NHCE 6
38
$39,000
$0
$2,925
8.54%
$300
NHCE 7
27
$30,000
$1,000
$2,250
20.95%
$300
NHCE 8
24
$25,000
$2,500
$1,875
26.75%
$300
$1,105,000
$63,800
$125,250
$122,400
*NHCEs receive hypothetical allocation of $300
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Hypoth
Alloc.
CB
NAR
EBR +
NAR
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
$40,000
2.21%
5.01%
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
$40,000
3.60%
9.21%
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
$40,000
4.83%
13.98%
NHCE 1
41
$80,000
$4,800
$6,000
6.69%
$300
0.10%
NHCE 2
38
$65,000
$4,000
$4,875
8.54%
$300
0.28%
NHCE 3
35
$47,000
$0
$3,525
10.91%
$300
0.15%
NHCE 4
35
$42,000
$2,000
$3,150
10.91%
$300
0.15%
NHCE 5
28
$42,000
$0
$3,150
19.31%
$300
0.22%
NHCE 6
38
$39,000
$0
$2,925
8.54%
$300
0.28%
NHCE 7
27
$30,000
$1,000
$2,250
20.95%
$300
0.54%
NHCE 8
24
$25,000
$2,500
$1,875
26.75%
$300
0.75%
$1,105,000
$63,800
$125,250
$122,400
*Cash balance plan satisfies Code §401(a)(26) = 5/11 (45%)
of EEs receive meaningful benefits
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Hypoth
Alloc.
CB
NAR
EBR +
NAR
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
$40,000
2.21%
5.01%
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
$40,000
3.60%
9.21%
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
$40,000
4.83%
13.98%
NHCE 1
41
$80,000
$4,800
$6,000
6.69%
$300
0.10%
6.79%
NHCE 2
38
$65,000
$4,000
$4,875
8.54%
$300
0.28%
8.86%
NHCE 3
35
$47,000
$0
$3,525
10.91%
$300
0.15%
11.06%
NHCE 4
35
$42,000
$2,000
$3,150
10.91%
$300
0.15%
11.06%
NHCE 5
28
$42,000
$0
$3,150
19.31%
$300
0.22%
19.53%
NHCE 6
38
$39,000
$0
$2,925
8.54%
$300
0.28%
8.82%
NHCE 7
27
$30,000
$1,000
$2,250
20.95%
$300
0.54%
21.49%
NHCE 8
24
$25,000
$2,500
$1,875
26.75%
$300
0.75%
27.50%
$1,105,000
$63,800
$125,250
$122,400
* Plan satisfies nondiscrimination on basis of combined DC
EBRs and CB NARs
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Hypoth
Alloc.
CB
NAR
EBR +
NAR
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
$40,000
2.21%
5.01%
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
$40,000
3.60%
9.21%
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
$40,000
4.83%
13.98%
NHCE 1
41
$80,000
$4,800
$6,000
6.69%
$300
0.10%
6.79%
NHCE 2
38
$65,000
$4,000
$4,875
8.54%
$300
0.28%
8.86%
NHCE 3
35
$47,000
$0
$3,525
10.91%
$300
0.15%
11.06%
NHCE 4
35
$42,000
$2,000
$3,150
10.91%
$300
0.15%
11.06%
NHCE 5
28
$42,000
$0
$3,150
19.31%
$300
0.22%
19.53%
NHCE 6
38
$39,000
$0
$2,925
8.54%
$300
0.28%
8.82%
NHCE 7
27
$30,000
$1,000
$2,250
20.95%
$300
0.54%
21.49%
NHCE 8
24
$25,000
$2,500
$1,875
26.75%
$300
0.75%
27.50%
$1,105,000
$63,800
$125,250
$122,400
* Meets deduction limit = $1,105,000 * 25% = $276,250;
Total employer contribution = $247,650; Deferrals are
always deductible!
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
DC
EBR
Hypoth
Alloc.
CB
NAR
EBR +
NAR
Dr. Rott
60
$245,000
$16,500
$32,500
2.80%
$40,000
2.21%
5.01%
Dr. Gumm
50
$245,000
$16,500
$32,500
5.61%
$40,000
3.60%
9.21%
Dr. Kay
44
$245,000
$16,500
$32,500
9.15%
$40,000
4.83%
13.98%
NHCE 1
41
$80,000
$4,800
$6,000
6.69%
$300
0.10%
6.79%
NHCE 2
38
$65,000
$4,000
$4,875
8.54%
$300
0.28%
8.86%
NHCE 3
35
$47,000
$0
$3,525
10.91%
$300
0.15%
11.06%
NHCE 4
35
$42,000
$2,000
$3,150
10.91%
$300
0.15%
11.06%
NHCE 5
28
$42,000
$0
$3,150
19.31%
$300
0.22%
19.53%
NHCE 6
38
$39,000
$0
$2,925
8.54%
$300
0.28%
8.82%
NHCE 7
27
$30,000
$1,000
$2,250
20.95%
$300
0.54%
21.49%
NHCE 8
24
$25,000
$2,500
$1,875
26.75%
$300
0.75%
27.50%
$1,105,000
$63,800
$125,250
$122,400
* Beginning in 2007 – deductible amount increases to $342,550;
$1,105,000 * 25% = $276,250 + $66,300 (6% of comp)
ASCi
Combined DC/Cash Balance Plan
EE
Age
Comp.
Defer
DC
Alloc
Hypoth
Alloc.
Dr. Rott
60
$245,000
$16,500
$32,500
$40,000
Dr. Gumm
50
$245,000
$16,500
$32,500
$40,000
Dr. Kay
44
$245,000
$16,500
$32,500
$40,000
NHCE 1
41
$80,000
$4,800
$6,000
$300
NHCE 2
38
$65,000
$4,000
$4,875
$300
NHCE 3
35
$47,000
$0
$3,525
$300
NHCE 4
35
$42,000
$2,000
$3,150
$300
NHCE 5
28
$42,000
$0
$3,150
$300
NHCE 6
38
$39,000
$0
$2,925
$300
NHCE 7
27
$30,000
$1,000
$2,250
$300
NHCE 8
24
$25,000
$2,500
$1,875
$300
$1,105,000
$63,800
$125,250
$122,400
* Drs. receive 87.52% of ER contribution + deferrals
ASCi
Pension Protection Act

No age discrimination if benefit is equal
to or greater than that of any similarly
situated, younger participant

May provide interest credits not greater
than a market rate of return

Can provide lump sum distribution equal
to hypothetical account balance
 Eliminates

“whipsaw” problem
Must provide 100% vesting after 3 YOS
ASCi
Charles Lockwood
ASC Institute, LLC
Littleton, CO
Nonqualified Deferred Comp
 On
October 22, 2004 = President signed
American Jobs Creation Act of 2004 (JOBS
Act)
 Added
Code §409A which changes tax rules
affecting nonqualified deferred compensation
arrangements
 Requires practitioners to review (and amend)
existing nonqualified deferred compensation
arrangements
 IRS
also issued proposed regs and various
Notices addressing nonqualified deferred
compensation arrangements
ASCi
Nonqualified Deferred Comp
 Arrangement
under which an ER promises
to pay comp in the future for past, present
or future services
 Usually,
ERs use nonqualified deferred
compensation plans to compensate
executives and key EEs in excess of
statutory limits and to allow deferral of tax
until tax bracket will be lower
 Not
subject to vesting, coverage,
nondiscrimination or funding rules applicable to
qualified retirement plans
ASCi
Nonqualified Deferred Comp

Nonqualified deferred compensation plan
allows EE to defer compensation outside of
qualified plan structure

May be elective or nonelective
 Elective
formula -- similar to 401(k) plan
 Nonelective formula -- similar to defined
contribution or defined benefit plan
 If elective, election must be made before the tax
year starts

Exception for first year of new plan = election can
be made up to 30 days after plan is first established
or up to 30 days after EE first becomes eligible
ASCi
Taxation of Deferred Comp
 New
rules regarding taxation of
nonqualified deferred compensation issued
under Code §409A
 Imposes
additional requirements that must be
satisfied or all amounts under nonqualified
deferred comp arrangement become taxable
without regard to constructive receipt
 Code §409A will restrict flexibility to change time
and form of distributions and place limits on
timing of deferral elections
 Code §409A will also require nonqualified “plans”
to be in writing
 Amendments required by 12/31/2006
ASCi
Taxation of Deferred Comp
 ER’s
deduction and EE’s recognition of
income are matched
 ER
is entitled to deduction and EE recognizes
amounts in income when benefits are paid
 EE may be subject to employment tax at earlier
date = when benefits are earned (accrued) or
vested (if later)
 Different
from qualified plans
 ER
is entitled to deduction when contributions are
made to plan but EE does not recognize amounts
in income until distributions are made from the
plan
ASCi
Taxation of Deferred Comp
 Constructive
receipt doctrine
 Deferred
compensation becomes taxable if
participant has “control” over receipt of comp =
i.e., no substantial restrictions on receipt (such as
passage of time)
 Any election to defer comp must be entered into
before comp is earned and must be irrevocable
 Economic
benefit doctrine
 EE
may be taxed immediately if ER secures its
promise to pay in the future = amounts will be
taxable benefit if funded and not subject to
substantial risk of forfeiture
 Rabbi trust is an “unfunded” benefit
ASCi
Taxation of Deferred Comp
 To
avoid taxation, plan must be unfunded
for tax and ERISA purposes
 Rabbi
trust may be used without causing the plan
to be "funded”
 To
avoid ERISA funding requirements =
plan must be a top hat plan or an excess
benefit plan
 Top
hat plan = maintained primarily for select
group of management or highly compensated EEs
 Excess benefit plan = maintained solely for
purpose of providing benefits in excess of Code
§415 limits under qualified plan
ASCi
Top Hat Plan
 Top
hat plan definition (Title I
of ERISA)
 Select
group of management or
highly compensated employees
 Looks at participant’s influence
over plan design
 Forces plan to be discriminatory
 If
top hat plan definition isn’t satisfied,
ERISA generally requires the plan to be
funded, which will trigger taxation unless
there is a substantial risk of forfeiture
ASCi
Rabbi Trust
 Trust
established by ER to hold
assets of nonqualified deferred
compensation plan
 Generally
irrevocable except
that assets are subject to claims
of ER’s creditors
 Amounts
held under a rabbi trust are not
considered as “funded” for taxation
purposes
 Rev.
Proc. 92-64 contains model rabbi trust
provisions
ASCi
Payment of Benefits
 Time
and method for payment
must be stated for each event
entitles the participant to
receipt of benefits
that
 Benefit
may be paid only under
the following circumstances:
 Separation
from service
 Disability
 Death
A
specified time described under the plan
 Change in ownership
 Unforeseeable emergency
ASCi
Payment of Benefits
 Plan
may provide for payment in case of
unforeseeable emergency
Severe financial hardship resulting from an illness
or accident of the EE, beneficiary, or spouse or
dependent
 Loss of the EE’s or beneficiary’s property due to
casualty
 Other similar extraordinary
and
unforeseeable circumstances
arising from events beyond
the control of the EE

ASCi
Taxation of Deferred Comp
 Generally,
EE is not taxed on deferred
compensation until distribution
(“constructive receipt”)
 However,
such amounts are subject to FICA
when there is no substantial risk of
forfeiture
 Must
be conditioned on future performance of
services
 Merely having to wait until future date to receive
deferred comp is not enough
 Ability to periodically extend, or roll, the risk of
forfeiture is considered by IRS to be “sufficiently
suspect” as to whether substantial risk
ASCi
Tandem 401(k) Plans
 Tandem
401(k) plans allow
EEs to “defer” into 401(k)
plan through nonqualified
plan thereby avoiding
possibility of refunds
 Example
EE earns $400,000 and before beginning of CY
elects to defer $40,000 to nonqualified plan with
maximum deferral to 401(k) plan
 On 2/20/09, it is determined that maximum
amount allowable under ADP test is $9,200
 By 3/15/09, $9,200 transferred into 401(k) plan
and $30,800 stays in rabbi trust


Can also allow transfer of match to 401(k) plan
ASCi
Tandem 401(k) Plans
 Proposed
regs under Code §409A allow for
tandem 401(k) plans
Deferral elections must be made at the same time
= if don’t defer into 401(k), is payable in cash
 Elections must be made before CY begins
(accommodates rules for nonqualified plan)
 Deferral initially made to nonqualified plan
 Maximum permitted deferral determined after year
end, following application of ADP, ACP and 402(g)
= must run ADP/ACP tests before March 15
 Maximum qualified deferral must be transferred
from rabbi trust to qualified plan by March 15 of
following year

ASCi
Advantages of Tandem Plan

Qualified plan limits do not apply to
amount deferred under nonqualified plan

No deferrals ever have to be refunded from
401(k) for violation of ADP test

No match ever have to be distributed from
401(k) for violation of ACP test

EE can receive match on full comp (without
regard to 401(a)(17) comp limit) under
nonqualified plan
ASCi
Disadvantages of Nonqualified Plan

Benefits not secured from creditors of
employer

Employer must postpone its deduction until
employee recognizes income
 EE
recognizes amounts as wages for income tax
purposes (but not FICA) when distributions are
made
 Employer receives deduction when distributions
are made

Title I of ERISA -- cannot cover NHCEs
ASCi
457 Plan

Nonqualified plan maintained by government
or tax-exempt ER

Code §457 imposes limits on amounts that
can be deferred into nonqualified plan by
government / tax-exempt ERs
 Recognizes
that such ERs are not affected by
deduction rules

If satisfies requirements of Code §457(b) =
eligible 457 plan
 Compensation
deferred under eligible 457 plan is
not taxable until distributed

If does not satisfy 457(b) = ineligible 457(f)
ASCi
plan
Annual Deferral Limit
 Applies


Includes both elective and nonelective
contributions
Does not include rollover contributions
 Lesser


to all deferred compensation
of:
The applicable dollar limit
100% of includible compensation
 Applicable


dollar amount
2008 - $15,500
2009 - $16,500
ASCi
Annual Deferral Limit
 Includible
compensation – Code §415(c)(3)
compensation

Gross compensation = not reduced by elective
deferrals, cafeteria plan contributions, or qualified
transportation fringe benefits
 No
coordination with 403(b) or 401(k)
deferral limits



Changed under EGTRRA
No longer reduce 457 limit by deferrals under
401(k) or 403(b) plan
Can double up deferrals to 457 plan and 403(b) or
401(k) plan
ASCi
Age 50 Catch-Up Limit

Available only to governmental Ers


2008 - $5,000
2009 - $5,500

Employee must be age 50 by end of
calendar year

Same catch-up rules as apply to 401(k)
plans
ASCi
Special Catch-Up Limit

Different from age 50 catch-up = EE gets
greater of two catch-up limits


Limit is the lesser of:



the annual deferral limit or
the underutilized limit from prior years
Underutilized limit


Available to participants who are within three
taxable years ending before NRA
The basic limit in effect for each prior year less
the amount of annual deferrals for each year
NRA must be stated in plan = age 65 or
later
ASCi
Reporting 457 Plan Deferrals

Deferrals under 457 plan not subject to
taxation or withholding

Reported on Form W-2

Reported in Box 12 with Code G (same box report
401(k) deferrals)

Elective and nonelective deferrals, unless subject
to a substantial risk of forfeiture

If deferrals are subject to substantial risk of
forfeiture (e.g., vesting schedule) not reported
until no longer subject to substantial risk of
forfeiture
ASCi
Participant Must Perform Services

Individual must perform services for
employer to participate in 457 plan

Code §457 does not require services as an
EE = can allow participation by
independent contractors

457 rules applied the same for independent
contractors as for EEs

Independent contractors cannot participate in a
qualified plan sponsored by the employer
ASCi
Timing of Deferral Agreement

If plan allows for elective deferrals =
deferral election must be entered into
before the first day of the month in
which the compensation is paid or made
available

Nonelective contributions deemed to
satisfy requirement = no formal
agreement required
ASCi
Distribution Restrictions

Distributions events

Severance from employment

Attainment of age 70 1/2

Unforeseeable emergency

Certain small accounts

Termination of plan

QDRO
ASCi
Distribution Restrictions

Unforeseeable emergency = severe
financial hardship defined in the plan




Illness or accident
Loss of property due to casualty
Other extraordinary circumstances beyond the
participant’s control
Regulations list additional events




Foreclosure or eviction from primary residence
Medical expenses
Funeral expenses
Unforeseeable emergency cannot be relieved
through other resources
ASCi
Distribution Restrictions

Loans





Governmental 457 only = because of funding
rules
Reasonable rate of interest
Rules of 72(p) apply
Distribution restrictions apply to offset
Minimum distribution rules apply

Apply rules under Code §401(a)(9)
ASCi
Funding Restrictions

Tax-exempt organization

Must be “unfunded”

Potential conflict with Title I of ERISA



Top-hat plan
Excess benefit plan
If funded, taxed when no longer subject to a
substantial risk of forfeiture
ASCi
Funding Restrictions

Governmental entity

Must hold assets in trust for exclusive benefit of
participants







Trust must not be subject to claims of ER’s creditors
Trust is tax exempt
Written trust agreement
Custodial account / annuity contracts
Deferral transmission - not longer than is
reasonable for the proper administration of the
participant accounts
Consequences of failure to comply - ineligible plan
No Form 5500 or 990 reporting
ASCi
Plan Documents

Written plan in compliance in form and
operation

Timing of EGTRRA amendments



Plan amendments to reflect EGTRRA and
regulations no later than December 31, 2005
IRS has issued model amendment for
governmental plans
Obtaining IRS approval


No prototype 457 plan approval
PLR option
ASCi
Taxation of Distributions

Governmental 457(b) plan



Taxed in year actually received = “made available”
rule repealed by EGTRRA
Right to accelerate payments irrelevant
Tax-exempt organization 457 plan
Taxed in year the amounts are first made
available = even if not distributed
 Unforeseeable emergency and small amounts actual distribution needed to trigger taxation
 EE may defer commencement of benefit until
future date if entered into before amounts are
available = one additional deferral election
permitted
ASCi

Taxation of Distributions

Premature distribution penalty


Generally, not applicable to 457(b) plans
Rollovers from other retirement plan subject to
the penalty are subject to penalty - requires
separate accounting

QDRO distributions - same tax rules as
for qualified plans

Reporting and withholding


Tax-exempt - Use Form W-2, except for death
distributions
Governmental - Use Form 1099-R, mandatory
withholding rules apply if not rolled over
ASCi
Rollover Options

Governmental 457(b) plans only



Traditional IRA, qualified plan, 403(b) plan,
governmental 457(b) plan
Direct or 60-day rollover
Acceptance of rollover






Separate accounting
Not included in deferral limits
Direct rollover must be available
402(f) notice required
Surviving spouse rollover
Hardship distributions not available for rollover
ASCi
Ineligible 457(f) Plans

Any nonqualified deferred compensation
plan maintained by an eligible employer
that does not meet requirements of Code
§457(b)

Taxed when deferred amounts are not
subject to a substantial risk of forfeiture


Must be conditioned on the future performance of
substantial services
Tax-exempt 457(f) plans have to be top-hat
plans to avoid funding problems
ASCi
Example

Joe Bob participates in governmental 457(f)
plan. Joe Bob receives a contribution of
$20,000 under the plan. Joe may not
receive the contribution until the later of
age 65 or termination of employment.
Assuming Joe Bob does not terminate,
when is he taxed on the contribution?
ASCi
Example

Joe Bob participates in governmental 457(f)
plan. Joe Bob receives a contribution of
$20,000 under the plan. Joe may not
receive the contribution until the later of
age 65 or termination of employment.
Assuming Joe Bob does not terminate,
when is he taxed on the contribution?
No substantial risk of forfeiture = immediately
ASCi
Example

Joe Bob participates in governmental 457(f)
plan. Joe Bob receives a contribution of
$20,000 under the plan. Joe may not
receive the contribution until the later of
age 65 or termination of employment.
Assuming Joe Bob does not terminate,
when is he taxed on the contribution?
No substantial risk of forfeiture = immediately

Would answer change if Joe Bob made
elective deferrals to plan?
ASCi
Example

Joe Bob participates in governmental 457(f)
plan. Joe Bob receives a contribution of
$20,000 under the plan. Joe may not
receive the contribution until the later of
age 65 or termination of employment.
Assuming Joe Bob does not terminate,
when is he taxed on the contribution?
No substantial risk of forfeiture = immediately

Would answer change if Joe Bob made
elective deferrals to plan?
No = taxable immediately
ASCi
Example

Suppose in the prior example, the plan
requires Joe Bob to work until age 65 to
vest in the benefits under the plan. When is
Joe Bob taxed on the deferred
compensation benefit?
ASCi
Example

Suppose in the prior example, the plan
requires Joe Bob to work until age 65 to
vest in the benefits under the plan. When
is Joe Bob taxed on the deferred
compensation benefit?
Age 65
ASCi
Charles Lockwood
ASC Institute, LLC
Littleton, CO
www.asc-net.com
Major Changes Forthcoming
 New
 Fee
administration looking to make changes
disclosure still a major issue
 Congress/administration
considering options
to overhaul 401(k) system
 Guaranteed





retirement accounts (proposal)
Mandatory participation for all EEs not covered by an
ER-sponsored DB plan
$600 refundable tax credit from U.S. government
EEs required to invest 5% into a guaranteed account
administered by SSA
Invested in government bonds paying 3% a year
Funds could not be accessed before retirement, death
or disability
ASCi
Automatic IRAs

Automatic Workplace Pensions (IRAs)
 Mandatory
for all ERs with at least 10 EEs who have
been in business for at least 2 years and do not
offer retirement plan
 Would provide for automatic deposit of 3% of
compensation into IRA for all EEs who do not make
alternative election

EE can change contribution level (up to IRA limit) or
opt out
 ERs
would be allowed a temporary tax credit in
amount of $25 per enrolled EE up to $250/year
 EEs would receive a standard notice and election
form along with national Web site providing basic
ASCi
educational material
Plan Documents

Five-year staggered cycle for individually
designed plans (e.g., ESOPs, cash balance
plans
Cycle Last Digit
of EIN
A
1 or 6
B
2 or 7
C
3 or 8
D
4 or 9
E
5 or 0
Submission
Next Submission
Period
Period
2/1/06 – 1/31/07 2/1/11 – 1/31/12
2/1/07 – 1/31/08 2/1/12 – 1/31/13
2/1/08 – 1/31/09 2/1/13 – 1/31/14
2/1/09 – 1/31/10 2/1/14 – 1/31/15
2/1/10 – 1/31/11 2/1/15 – 1/31/16
ASCi
Cycle D Cumulative List

Notice 2008-108

Cycle D submission must include PPA
provisions, even if PPA RAP has not expired
 If
Cycle D plan’s 2009 plan year ends after
January 31, 2010 = plan sponsor may elect to
defer submission until Cycle E
 Will be treated as timely filing but will have to
update for Cycle E Cumulative List

HEART Act
 Plans
submitted in cycle D may, but are not
required to be, amended to reflect HEART Act
 IRS will not consider the HEART Act in issuing
determination letters for Cycle D plans
ASCi
Pre-Approved Plans

All pre-approved plans must be amended by
April 30, 2010 to comply with EGTRRA

Approved Prototype/VS plans should have
incorporated prior interim amendments






EGTRRA good faith amendments
401(a)(9) amendments
Automatic enrollment amendments
Roth amendments
Final 401(k)/401(m) amendments
Must retain all prior interim amendments
(and discretionary amendments) made
since last determination letter
ASCi
Interim Amendments

Additional interim amendments required
Interim Amendment
Code §415 regulations
Due Date for Amendment
Due date for filing tax return for
tax year beginning after 7/1/07
or, for more than one ER, last day
of 10th month following plan year
Normal Retirement Age
End of first plan year beginning
on or after June 30, 2008
402(g) gap period income
End of 2009 plan year
PFEA amendment for DB plans
End of 2009 plan year
PPA amendments
End of 2009 plan year
HEART Act amendments
End of 2010 plan year
Midwest Disaster Relief
End of 2010 plan year
WRERA amendments
End of 2011 plan year
ASCi
Terminating Plans

Terminating plans must be
amended for all current laws
through date of termination

Must terminating plan be
restated onto EGTRRA plan
prior to termination?

Should plan be submitted for DL (Form
5310)?
 May
want to get reliance on all amendments
made since prior IRS letter
 If not going to submit for DL – may want to
restate
ASCi
403(b) Prototype Program

403(b) plans must have written document
by December 31, 2009 which complies
with final regulations

IRS is planning to establish a prototype
program for 403(b) plans
 IRS
released draft sample language on the IRS
website (www.irs.gov) for use in drafting a
403(b) prototype plan
 Will provide for mass submitter program similar
to M&P program
 Prototypes will be permitted to provide for both
annuity contracts and custodial accounts as
funding vehicles
ASCi
403(b) Prototype Program

403(b) prototypes will be permitted to
offer participant loans
 Plan
will have to identify party responsible (e.g.,
the ER) for coordinating vendors to ensure
compliance with loan requirements

403(b) prototype would not be allowed to
have vesting schedules
 This
requirement is likely to change based on
comments

Plan would have to contain language
overriding the terms of any annuity
contract or custodial account
ASCi
403(b) Prototype Program

Prototype sponsor will have right to amend
plan on behalf of adopting ERs

Plan must identify who is responsible for
administrative functions, including
requirements that apply to vendors (e.g.,
loan limits, hardship withdrawals)

IRS intends to adopt 6-year restatement
cycle consistent with RAP for M&P plans


IRS plans to release new Form 8929 and 8929-A for
submissions of prototype and mass submitter 403(b)
documents
403(b) plans must file Form 5500
beginning with 2009 plan year
ASCi
Required Minimum Distributions

Worker, Retiree, and Employer Recovery
Act of 2008 (“WRERA”)
 Allows
EEs to temporarily waive the requirement
to take out a Required Minimum Distribution for
the 2009 calendar year

Designed to allow participants to delay distribution
until can restore some of lost value to account
 Applies
to qualified DC plans, governmental 457
plans, 403(b) plans, and IRAs
 Changes
the way rollover rules will apply to
distributions in 2009
 Plans
do not have to be amended until the last
day of the 2011 plan year
ASCi
Required Minimum Distributions

Required Beginning Date:

Non-5% owners = April 1 following later of:



attainment of age 70 ½, or
termination of employment
5% owners = April 1 following age 70½

Subsequent RMDs must
be made by December 31

RMD determined based
account balance at end of
prior year

RMD is not eligible for rollover
on
ASCi
Required Minimum Distributions

Ed is a 5% owner and turns age 70½ in
2008 and is required to take his first RMD
on April 1, 2009.
 Must
Ed take a distribution by April 1, 2009?

What A/B is used to determine April 1 RMD?

May Ed rollover April 1 RMD?
 Must
 May
Ed take his December 31, 2009 RMD?
Ed take his December 31, 2009 RMD?

Depends on plan document

If so, will RMD be eligible for rollover?
ASCi
Required Minimum Distributions

What are ERs supposed to do?
 Make
distributions in accordance with previous
elections, notwithstanding the RMD waiver
 Suspend all RMDs for 2009
 Let the participant choose whether to take a
distribution of the 2009 RMD amount



If ER allows for distribution of RMD amount – what
are notice requirements?
What about monthly installment payments that may
already have been made in 2009?
If allow for distribution – can EEs rollover RMD
amount to IRA (or Roth IRA)
ASCi
Required Minimum Distributions

RMD rules do not apply for 2009 distribution
so those amounts are eligible for rollover =
but not treated as ERD for purposes of:
 direct
rollover rules
 20% withholding requirement
 402(f) notice

Suppose Ed had begun taking RMDs in 2007
as a series of installment payments
 Must
Ed take a distribution in 2009?
 If
Ed takes his RMD -- can Ed rollover the
distribution to an IRA?
ASCi
Required Minimum Distributions

John Jr., a beneficiary of John, Sr., is
entitled to death benefits under the Plan.
John Sr. died in 2004. John Jr. has not
taken any RMDs from the Plan.
 By
when must John take a distribution from the
Plan?
 May John rollover the distribution to an inherited
IRA?
 When must John take a distribution from the
inherited IRA?
ASCi
Final Automatic Enrollment Regs

Fidelity survey
 Over
half (52%) of automatically enrolled
participants were between ages 20 and 34
 Only 13% of automatically enrolled participants
were between ages of 50 and 64
 Majority (56%) of automatically enrolled
participants made less than $40,000 while only
10% had salaries between $80,000 and $150,000
 Average participation in automatic enrollment plans
is roughly 90% while average participation in plans
that do not use auto enrollment is about 60%
 For plans with automatic deferral rate 3% = 57%
of EE kept that contribution rate and an additional
ASCi
37% elect to increase the rate
Final Automatic Enrollment Regs

Effective date of final regulations
 EACA
provisions effective 2010 plan year = plan
may operate in good faith compliance for plan
years beginning in 2008
 QACA provisions effective 2008 plan year


No significant changes from proposed regulations
When do plans have to be amended to
comply with final regulations?
 PPA
amendments required by end of 2009 plan
year
 Do EACA/QACA provisions have to be adopted by
end of 2009 plan year?
ASCi
Rules Applicable to EACAs

Final regs allow EACAs to exclude EEs hired
after a specific date



However, must cover all eligible EEs under EACA
to get 6 month ADP/ACP correction window
Only need to give notice to EEs covered under
EACA
Permissive withdrawal election terminates
participant’s deferrals under the plan,
unless makes an affirmative election to
defer
 Plan
may not condition permissive withdrawal
election on ceasing deferrals after the withdrawal
ASCi
Rules Applicable to QACAs

Provides relief for rehired EEs under QACA


Can restart automatic increase if no automatic
deferrals for an entire plan year
Modifies QACA notice requirement for EEs
who are immediately eligible


If not practical to provide notice before EE
becomes eligible = notice will be treated timely if
provided as soon as practicable after that date
EE must be eligible to defer from compensation
beginning on date of eligibility

ER must provide the notice prior to pay date for the
payroll period in which EE becomes eligible
ASCi
Rules Applicable to QACAs

Final regs do not change requirement that
EE must make election not to defer

Commentators wanted to exclude anyone who had
not elected to defer

Effective for 2010 Plan Years = QACAs must
use SH definition of compensation for SH
contributions

Final regs confirm cannot establish
QACA/EACA during year under existing
401(k) plan
ASCi
EPCRS

Rev. Proc. 2008-50 = latest
EPCRS guidance

Now have only 3 programs:
SCP (Self-Correction Program)
 VCP (Voluntary Correction
Program)
 Audit CAP (Closing Agreement
Program)


SCP does not require a
submission to the IRS
ASCi
Failure to Implement EACA

IRS has issued informal guidance regarding
the correction if fail to implement
automatic contribution

IRS provides insight into facts IRS auditors
will be looking for on audit

For EEs that are not deferring = auditors will be
looking for plan records containing affirmative
elections to defer zero

If no election = indicates plan failed to implement
the automatic enrollment provisions
ASCi
Failure to Implement EACA

Engine Co. sponsors 401(k) plan with 3%
automatic contribution. For 2009, the ADP
for NHCEs was 4%. Albert and Bobbi both
became eligible on 1/1/2009 but were not
automatically enrolled in the plan (neither
made deferral elections). Both EEs earned
$30,000 in 2009.
 Example
1: The ER did not provide Albert with any
enrollment materials
 Example
2: The ER gave Bobbi the Plan’s
enrollment materials
ASCi
Failure to Implement EACA

Fixing the Mistake:
 Example
1: Plan effectively precluded Albert from
making deferrals. ER must make QNEC to make up
missed deferral.

Albert’s missed deferral is $1,200 (4% (ADP for
NHCEs) times $30,000). The corrective contribution
required for Albert is $600 (50% x missed deferral).
 Example
2: Since Bobbi received enrollment
materials = use automatic deferral percentage to
determine correction.

Bobbi’s missed deferral is $900 (3% (automatic
deferral percentage) times $30,000). The corrective
contribution required for Bobbi is $450 (50% x
missed deferral).
ASCi
Failure to Provide SH Notices

IRS has issued informal guidance regarding
the correction of SH plan that failed to
provide SH notice

IRS provides insight into facts IRS auditors
will be looking for on audit
 The

deferral decisions among eligible EEs
If many EEs are not making deferrals or deferring
at low rates, they may not have received notice of
right to defer
 The
plan’s procedures for issuing notices
 The plan’s records showing the ER followed
procedures relating to distribution of notices
ASCi
Failure to Provide SH Notices

ER fails to make SH notice for 2009 by
November 30. Discovers violation on
December 15. What should ER do?

ER discovers violation in March 2010. Plan
provides for basic SH match. What should
ER do?
 Example
1: Violet became eligible to participate in
the plan on January 1, 2009. She did not receive
notice and was not informed of her right to make
deferrals. Violet earned $20,000 during 2009
 Example
2: Indigo has been a participant in the
plan and was informed by HR department her
that match would remain same for 2009
ASCi
Failure to Provide SH Notices

Fixing mistake
 Example
1: ER did not inform Violet of ability to
make deferrals. To correct failure, ER must make a
corrective contribution for Violet to replace her
missed deferral opportunity and the missed match




Missed deferral is deemed equal to greater of 3% of
comp or maximum deferral percentage for which ER
provides a match of at least 100% of deferrals
Violet’s missed deferral is 3% of $20,000, or $600.
Violet’s missed deferral opportunity is 50% of her
missed deferral of $600, or $300. ER must make
QNEC of $300 (adjusted for earnings).
ER also must make matching contribution of $600
(adjusted for earnings)
ASCi
Correction can be made under SCP
Failure to Provide SH Notices

Fixing mistake
 Example
2: Failure to provide notice to Indigo did
not prevent her from making deferrals. No
correction is required. Plan should reform
procedures to ensure timely notices made in future

DOL also may impose civil penalties (up to
$1,000 per day) for failure to provide
automatic contribution notice

Can ER use Example 2 for EEs who don’t
defer?

What if plan provides for SH ER contribution?
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Kennedy v. Du Pont

Supreme Court held that former spouse's
waiver of ex-husband's retirement benefit
did not override terms of the plan that
required a beneficiary designation
Waiver was pursuant to divorce decree that did not
qualify as QDRO
 Participant failed to revoke designation of former
spouse as beneficiary under plan prior to death


Reaffirms that plan administrator may rely
on beneficiary designations in their files
unless there is an overriding QDRO

May add plan provision to automatically revoke
beneficiary designation of ex-spouse on divorce
ASCi
Conversion to Roth IRA

Under PPA – beginning in 2008, EEs can roll
from 401(k) plan to Roth IRA

Must pay income tax at time of rollover
AGI restrictions still apply (i.e., must have AGI
below $100,000)
 Post-2008 rollover may be accomplished by direct
rollover or 60-day rollover
 Plan Administrator of distributing plan is not
responsible for ensuring that EE is eligible to
make a rollover to a Roth IRA
 No mandatory 20% withholding and early
withdrawal penalty tax does not apply

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Conversion to Roth IRA

PPA allows conversion beginning in 2010
for all taxpayers

AGI limits no longer apply =
HCEs can convert existing
IRAs to Roth IRAs

Income taxes due on
conversion can be spread
over 2 years (e.g., 2011
and 2012)

Conversions in subsequent
years are included in income
during tax year in which conversion is completed
ASCi
Conversion to Roth IRA

May want to begin taking action to
maximize Roth conversion opportunity (and
reduced taxation) in 2010




If possible = open up Roth IRA now to begin 5year clock
If available = make contributions to traditional
IRA to prepare for conversion
If cannot make deductible contributions = make
after-tax contributions to traditional IRA and
convert in 2010
Rollover from qualified plan to traditional IRA and
then convert = amend plan to allow for in-service
distribution
ASCi
Eligible Combined Plan – DB(k)

PPA provides for new type of “eligible
DC/DB combined plan” for 2010 plan year
 Maintained
by small employer (less than 500 EEs)
at time plan established
 Assets are held in a single trust
 DB and DC plans treated as separate plans for
funding, nondiscrimination and distribution rules

Plans are treated as single plan for Form
5500 filing purposes

The IRS issued Notice 2009-71 requesting
comments on DB(k) guidance
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Eligible Combined Plan – DB(k)

DB plan must provide each participant with
a benefit of:
 one
percent of final average comp times YOS
 20 percent of final average comp

Final average comp is determined based on
five consecutive years with highest comp

Any contributions to DB plan must be vested
after 3 YOS

DC plan must utilize a 401(k) feature
 4%
of pay automatic contribution
 Match of 50% of deferrals up to 4% of comp
ASCi
Eligible Combined Plan – DB(k)

DC plan is deemed to satisfy ADP test

Matching contributions must satisfy ACP test
unless satisfy SH ACP rules

ER contributions under DC plan and benefits
under DB plan subject to nondiscrimination
rules as under present law

Both plans are deemed to satisfy top heavy
requirements

All contributions, benefits, and other rights
and features must be provided uniformly to
all participants
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ROBS

Rollovers of Business Startups

Individual establishes a shell corporation

Individual executes a rollover from a prior
qualified plan or personal IRA into newly created
qualified plan

Sole participant in plan then directs investment of
account balance into purchase of employer stock

After business is established, the plan may be
amended to prohibit further investments in
employer stock. This amendment may be
unnecessary, because all stock is fully allocated.
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ROBS

A major promoter was first identified as
sponsor of pre-approved prototype

IRS has stated that because ROBS
generally do not enable NHCEs to acquire
ER stock, some of these plans violate
nondiscrimination rules

IRS is also concerned with valuation issues
since stock is valued at current value of
assets

May want to have legal counsel involved
ASCi