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Transcript of Welcome!
September 12, 2008
Charles Lockwood
ASC Institute, LLC
Highlands Ranch, CO
ERISA Workshop 2008ERISA Workshop 2008
ASCi
All qualified plans must be restated to comply with
current laws All pre-approved plans must be restated by April 30, 2010
Baby boomers are getting closer to retirement and looking for plan design options to help save more for retirement
Some ERs are trying to minimize fiduciary risk by eliminating investment risk on EEs
DB plans and hybrid plans (e.g., cash balance plans and new DB/k plans) will become more popular options
Importance of Plan Design Importance of Plan Design
ASCi
Each client has specific objectives in implementing and maintaining a retirement program Who is the plan for? Do HCEs want to maximize benefits? What are employee demographics? Does ER want to provide a guaranteed benefit? How much does employer want to spend?
Identify objectives and match them to plan design
Unique plan designs may fit unique needs
Plan Design – Traditional vs. UniquePlan Design – Traditional vs. Unique
ASCi
Rott ‘n Gumm Dentistry has a 401(k) plan with a 50% match on deferrals up to 6% of comp. The plan has failed the ADP test and Rott ‘n Gumm has had to make corrective distributions in each of the last 3 years
Plan Design Case StudyPlan Design Case Study
Dr. Rott, Dr. Gumm, and Dr. DeKay would like to maximize their contributions
Drs. Rott, Gumm and DeKay do not want to receive any more corrective distributions
Drs. Rott, Gumm and DeKay are happy with their current service providers
ASCi
Improving ADP ResultsImproving ADP Results Improve participation
Matching contributions = discretionary or fixed
Plan design Loans Hardships Participant-direction
Better communication Employee meetings
Avoid ADP testing altogether = safe harbor 401(k) plan
Automatic enrollment
ASCi
Basic matching contribution formula 100% of deferrals up to 3% of compensation
50% of deferrals between 3% and 5% of compensation
Enhanced matching contribution formula aggregate match which equals basic match at
each level of compensation
e.g., 100% of deferrals up to 4% of comp
Safe Harbor MatchSafe Harbor Match
ASCi
3% of compensation
Satisfies top heavy minimum requirements
May have other contributions (e.g., cross-tested formula)
Safe Harbor EmployerSafe Harbor Employer
ASCi
Required every year
30 - 90 days prior to beginning of plan year
New employees -- date of eligibility
New plan -- first day of plan year
May provide “maybe” notice with respect to 3% nonelective safe harbor contribution
Participant NoticeParticipant Notice
ASCi
EE Comp. DeferralsSafe Harbor
Match
Dr. Rott $230,000 $15,500 $9,200
Dr. Gumm $230,000 $15,500 $9,200
Dr. DeKay $230,000 $15,500 $9,200
NHCE 1 $80,000 $4,000 $3,200
NHCE 2 $65,000 $0 $0
NHCE 3 $47,000 $2,000 $1,880
NHCE 4 $42,000 $0 $0
NHCE 5 $42,000 $0 $0
NHCE 6 $39,000 $0 $0
NHCE 7 $30,000 $0 $0
NHCE 8 $25,000 $0 $0
Totals $1,060,000 $52,500 $32,680
* Safe harbor match = 100% of deferrals up to 4% of comp = must be 100% vested and cannot be subject to last day/ 1,000 HOS allocation condition
Safe Harbor 401(k) PlansSafe Harbor 401(k) Plans
ASCi
EE Comp. DeferralsSafe Harbor
Match Total
Dr. Rott $230,000 $15,500 $9,200 $24,700
Dr. Gumm $230,000 $15,500 $9,200 $24,700
Dr. DeKay $230,000 $15,500 $9,200 $24,700
NHCE 1 $80,000 $4,000 $3,200 $7,200
NHCE 2 $65,000 $0 $0 $0
NHCE 3 $47,000 $2,000 $1,880 $3,880
NHCE 4 $42,000 $0 $0 $0
NHCE 5 $42,000 $0 $0 $0
NHCE 6 $39,000 $0 $0 $0
NHCE 7 $30,000 $0 $0 $0
NHCE 8 $25,000 $0 $0 $0
Totals $1,060,000 $52,500 $32,680 $85,180
Could Rott n’ Gumm make an additional matching contribution without subjecting the plan to ADP/ACP testing?
Safe Harbor 401(k) PlansSafe Harbor 401(k) Plans
ASCi
EE Comp. DeferralsSafe Harbor
MatchDiscret.Match
Dr. Rott $230,000 $15,500 $9,200 $9,200
Dr. Gumm $230,000 $15,500 $9,200 $9,200
Dr. DeKay $230,000 $15,500 $9,200 $9,200
NHCE 1 $80,000 $4,000 $3,200
NHCE 2 $65,000 $0 $0
NHCE 3 $47,000 $2,000 $1,880
NHCE 4 $42,000 $0 $0
NHCE 5 $42,000 $0 $0
NHCE 6 $39,000 $0 $0
NHCE 7 $30,000 $0 $0
NHCE 8 $25,000 $0 $0
Totals $1,060,000 $52,500 $32,680
* Plan provides for safe harbor match with additional discretionary matching contribution on deferrals up to 6% of compensation not to exceed 4% of compensation
Safe Harbor 401(k) PlansSafe Harbor 401(k) Plans
ASCi
EE Comp. DeferralsSafe Harbor
MatchDiscret.Match
Dr. Rott $230,000 $15,500 $9,200 $9,200
Dr. Gumm $230,000 $15,500 $9,200 $9,200
Dr. DeKay $230,000 $15,500 $9,200 $9,200
NHCE 1 $80,000 $4,000 $3,200 $2,667
NHCE 2 $65,000 $0 $0 $0
NHCE 3 $47,000 $2,000 $1,880 $1,333
NHCE 4 $42,000 $0 $0 $0
NHCE 5 $42,000 $0 $0 $0
NHCE 6 $39,000 $0 $0 $0
NHCE 7 $30,000 $0 $0 $0
NHCE 8 $25,000 $0 $0 $0
Totals $1,060,000 $52,500 $32,680 $30,600
* The employer makes a 66.67% match on deferrals up to 6% of compensation ($9,200 / $13,800) not to exceed 4% of compensation
Safe Harbor 401(k) PlansSafe Harbor 401(k) Plans
ASCi
Is plan subject to ACP test?
No!
May plan impose vesting schedule on additional matching contributions? Yes!
May plan impose allocation conditions on additional match? No!
Must plan provide top-heavy minimum contribution? No! SH plan is exempt from top-heavy if ONLY contributions are SH contributions
Safe Harbor 401(k) PlansSafe Harbor 401(k) Plans
ASCi
EE Comp. DeferralSH
MatchDiscret.Match
FixedMatch Total
Dr. Rott $230,000 $15,500 $9,200 $7,500 $13,800 $46,000
Dr. Gumm $230,000 $15,500 $9,200 $7,500 $13,800 $46,000
Dr. DeKay $230,000 $15,500 $9,200 $7,500 $13,800 $46,000
NHCE 1 $80,000 $4,000 $3,200 $2,174 $4,000 $13,374
NHCE 2 $65,000 $0 $0 $0 $0 $0
NHCE 3 $47,000 $2,000 $1,880 $1,087 $2,000 $6,967
NHCE 4 $42,000 $0 $0 $0 $0 $0
NHCE 5 $42,000 $0 $0 $0 $0 $0
NHCE 6 $39,000 $0 $0 $0 $0 $0
NHCE 7 $30,000 $0 $0 $0 $0 $0
NHCE 8 $25,000 $0 $0 $0 $0 $0
Totals $1,060,000 $52,500 $32,680 $25,761 $47,400 $158,341
* Plan provides for 100% fixed match on deferrals up to 6% of comp. To maximize contributions, ER makes a 54.35% discretionary match on deferrals up to 6% of comp ($7,500 / $13,800)
Safe Harbor 401(k) PlansSafe Harbor 401(k) Plans
ASCi
Scary NewsScary News Only 43% of private sector workers are
covered by a retirement plan
Only 60% of workers over age 40 who are eligible for 401(k) plans actually participate
Average A/B of EEs in plans age 60 and above is $141,000 (which will provide annuity of $12,203 for male and $11,172 for female commencing at age 65)
Only 44% of families nearing retirement have IRAs with average balance of $60,000
ASCi
Automatic EnrollmentAutomatic Enrollment Congress/IRS are encouraging 401(k) plans
to add automatic enrollment features
35
86
19
75
13
80
0
10
20
30
40
50
60
70
80
90
Females Hispanics Under $20K
Without autoenrollmentWith autoenrollment
Actual results from employees between 3 and 15 months tenure. Study by Professor Brigitte Madrian, University of Pennsylvania’s Wharton School and Dennis Shea, United Health Group
ASCi
DOL estimates that automatic enrollment rules will have following effect: Increase participation = DOL estimates 1/3 of
eligible workers do not participate in their 401(k) plans and automatic enrollment could reduce non-participation rates to less than 10%
Increase investment levels = DOL estimates automatic enrollment provisions and QDIA rules will result in between $70 billion and $134 billion in additional retirement savings by 2034
Automatic Enrollment RulesAutomatic Enrollment Rules
ASCi
Beginning in 2006 – ERs were permitted to add Roth features to 401(k) plans
Advantages of Roth Deferrals Must pay taxes currently but can take qualified distribution without
taxation (including earnings) Must leave Roth Deferrals in plan for at least 5 years and must take
distribution as qualified distribution (e.g., death, disability, age 59½)
Response has been fairly lukewarm Difficult to explain to NHCEs and administrative problems May be renewed interest in Roth contributions
What About Roth Deferrals?What About Roth Deferrals?
ASCi
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
Conversion to Roth IRAConversion to Roth IRA
ASCi
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
Conversion to Roth IRAConversion to Roth IRA
ASCi
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 5-year 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
Conversion to Roth IRAConversion to Roth IRA
ASCi
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
New Comparability PlanNew Comparability Plan
ASCi
EE Age Comp
Dr. Rott 60 $230,000
Dr. Gumm 50 $230,000
Dr. DeKay 44 $230,000
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
$1,060,000
New Comparability PlanNew Comparability Plan
ASCi
(1)
EE
(2)
Age
(3)
Comp.
(4)
Allocation
(5)
Alloc. %
(6)Conv. Factor1
(7)Annuity at Age
65(4)*(6)
(8)EBR
(7)/(3)
Dr. Rott 60 $230,000
Dr. Gumm 50 $230,000
Dr. DeKay 44 $230,000
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
$1,060,000
New Comparability PlanNew Comparability Plan
ASCi
(1)
EE
(2)
Age
(3)
Comp.
(4)
Allocation
(5)
Alloc. %
(6)Conv. Factor1
(7)Annuity at Age
65(4)*(6)
(8)EBR
(7)/(3)
Dr. Rott 60 $230,000 $46,000 20%
Dr. Gumm 50 $230,000 $46,000 20%
Dr. DeKay 44 $230,000 $46,000 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
$1,060,000
New Comparability PlanNew Comparability Plan
ASCi
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)
Conversion FactorConversion Factor
ASCi
(1)
EE
(2)
Age
(3)
Comp.
(4)
Allocation
(5)
Alloc. %
(6)Conv. Factor1
(7)Annuity at Age
65(4)*(6)
(8)EBR
(7)/(3)
Dr. Rott 60 $230,000 $46,000 20% 0.213327
Dr. Gumm 50 $230,000 $46,000 20% 0.427716
Dr. DeKay 44 $230,000 $46,000 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
$1,060,000
New Comparability PlanNew Comparability Plan
ASCi
(1)
EE
(2)
Age
(3)
Comp.
(4)
Allocation
(5)
Alloc. %
(6)Conv. Factor1
(7)Annuity at Age
65(4)*(6)
(8)EBR
(7)/(3)
Dr. Rott 60 $230,000 $46,000 20% 0.213327 $9,813
Dr. Gumm 50 $230,000 $46,000 20% 0.427716 $19,675
Dr. DeKay 44 $230,000 $46,000 20% 0.697805 $32,099
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
$1,060,000
New Comparability PlanNew Comparability Plan
ASCi
(1)
EE
(2)
Age
(3)
Comp.
(4)
Allocation
(5)
Alloc. %
(6)Conv. Factor1
(7)Annuity at Age
65(4)*(6)
(8)EBR
(7)/(3)
Dr. Rott 60 $230,000 $46,000 20% 0.213327 $9,813 4.27%
Dr. Gumm 50 $230,000 $46,000 20% 0.427716 $19,675 8.55%
Dr. DeKay 44 $230,000 $46,000 20% 0.697805 $32,099 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
$1,060,000
New Comparability PlanNew Comparability Plan
ASCi
(1)
EE
(2)
Age
(3)
Comp.
(4)
Allocation
(5)
Alloc. %
(6)Conv. Factor1
(7)Annuity at Age
65(4)*(6)
(8)EBR
(7)/(3)
Dr. Rott 60 $230,000 $46,000 20% 0.213327 $9,813 4.27%
Dr. Gumm 50 $230,000 $46,000 20% 0.427716 $19,675 8.55%
Dr. DeKay 44 $230,000 $46,000 20% 0.697805 $32,099 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
$1,060,000
New Comparability PlanNew Comparability Plan
ASCi
(1)
EE
(2)
Age
(3)
Comp.
(4)
Allocation
(5)
Alloc. %
(6)Conv. Factor1
(7)Annuity at Age
65(4)*(6)
(8)EBR
(7)/(3)
Dr. Rott 60 $230,000 $46,000 20% 0.213327 $9,813 4.27%
Dr. Gumm 50 $230,000 $46,000 20% 0.427716 $19,675 8.55%
Dr. DeKay 44 $230,000 $46,000 20% 0.697805 $32,099 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%
$1,060,000
New Comparability PlanNew Comparability Plan
ASCi
(1)
EE
(2)
Age
(3)
Comp.
(4)
Allocation
(5)
Alloc. %
(6)Conv. Factor1
(7)Annuity at Age
65(4)*(6)
(8)EBR
(7)/(3)
Dr. Rott 60 $230,000 $46,000 20% 0.213327 $9,813 4.27%
Dr. Gumm 50 $230,000 $46,000 20% 0.427716 $19,675 8.55%
Dr. DeKay 44 $230,000 $46,000 20% 0.697805 $32,099 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%
$1,060,000 $148,473
New Comparability PlanNew Comparability Plan
ASCi
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%.
Minimum Gateway RequirementsMinimum Gateway Requirements
ASCi
(1)
EE
(2)
Age
(3)
Comp.
(4)
Allocation
(5)
Alloc. %
(6)Conv. Factor1
(7)Annuity at Age
65(4)*(6)
(8)EBR
(7)/(3)
Dr. Rott 60 $230,000 $46,000 20% 0.213327 $9,813 4.27%
Dr. Gumm 50 $230,000 $46,000 20% 0.427716 $19,675 8.55%
Dr. DeKay 44 $230,000 $46,000 20% 0.697805 $32,099 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%
$1,060,000 $156,500
New Comparability PlanNew Comparability Plan
ASCi
(1)
EE
(2)
Age
(3)
Comp.
(4)
Allocation
(5)
Alloc. %
Dr. Rott 60 $230,000 $46,000 20%
Dr. Gumm 50 $230,000 $46,000 20%
Dr. DeKay 44 $230,000 $46,000 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%
$1,060,000 $156,500Drs. receive 88.185 % ($138,000/$156,500) of total contribution
New Comparability PlanNew Comparability Plan
ASCi
EE Age Comp. DeferSH ER
ContribER
ContribTotal
ERContrib
Alloc. % EBR
Dr. Rott 60 $230,000
Dr. Gumm 50 $230,000
Dr. DeKay 44 $230,000
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
$1,060,000
New Comp / SH 401(k) PlanNew Comp / SH 401(k) Plan
ASCi
EE Age Comp. DeferSH ER
ContribER
ContribTotal
ERContrib
Alloc. % EBR
Dr. Rott 60 $230,000 $15,500
Dr. Gumm 50 $230,000 $15,500
Dr. DeKay 44 $230,000 $15,500
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
$1,060,000
New Comp / SH 401(k) PlanNew Comp / SH 401(k) Plan
ASCi
EE Age Comp. DeferSH ER
ContribER
ContribTotal
ERContrib
Alloc. % EBR
Dr. Rott 60 $230,000 $15,500 $6,900 $23,600 $30,500 13.26%
Dr. Gumm 50 $230,000 $15,500 $6,900 $23,600 $30,500 13.26%
Dr. DeKay 44 $230,000 $15,500 $6,900 $23,600 $30,500 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
$1,060,000
New Comp / SH 401(k) PlanNew Comp / SH 401(k) Plan
ASCi
EE Age Comp. DeferSH ER
ContribER
ContribTotal
ERContrib
Alloc. % EBR
Dr. Rott 60 $230,000 $15,500 $6,900 $23,600 $30,500 13.26% 2.80%
Dr. Gumm 50 $230,000 $15,500 $6,900 $23,600 $30,500 13.26% 5.61%
Dr. DeKay 44 $230,000 $15,500 $6,900 $23,600 $30,500 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
$1,060,000
New Comp / SH 401(k) PlanNew Comp / SH 401(k) Plan
ASCi
EE Age Comp. DeferSH ER
ContribER
ContribTotal ERContrib
Alloc. % EBR
Dr. Rott 60 $230,000 $15,500 $6,900 $23,600 $30,500 13.26% 2.80%
Dr. Gumm 50 $230,000 $15,500 $6,900 $23,600 $30,500 13.26% 5.61%
Dr. DeKay 44 $230,000 $15,500 $6,900 $23,600 $30,500 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%
$1,060,000 $47,500 $31,800 $76,053 $107,853
New Comp / SH 401(k) PlanNew Comp / SH 401(k) Plan
ASCi
EE Age Comp. DeferTotal ERContrib
Alloc. %
Dr. Rott 60 $230,000 $15,500 $30,500 13.26%
Dr. Gumm 50 $230,000 $15,500 $30,500 13.26%
Dr. DeKay 44 $230,000 $15,500 $30,500 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%
$1,060,000 $47,500 $107,853
Drs. receive 84.84% ($91,500/$107,853) of total contribution plus deferrals
New Comp / SH 401(k) PlanNew Comp / SH 401(k) Plan
ASCi
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
Potential IssuesPotential Issues
ASCi
Can provide substantially greater benefit to
older employees (generally over 40 years old)
Especially useful for sole proprietors (or employers with very few EEs)
Benefit is guaranteed at retirement = employer bears investment risk
Entire normal cost is deductible = no limit unless combine with defined contribution plan
Why Do DB Plans Make Sense?Why Do DB Plans Make Sense?
ASCi
Age Maximum Accrual
37 $35,073
38 $37,178
39 $39,409
40 $41,773
41 $44,279
42 $46,936
43 $49,752
44 $52,738
45 $55,902
46 $59,256
47 $62,811
48 $66,580
49 $70,575
50 $74,809
Age Maximum Accrual
51 $79298
52 $84,056
53 $89,099
54 $94,445
55 $100,112
56 $106,118
57 $112,485
58 $119,235
59 $126,389
60 $133,972
61 $142,010
62 $150,531
63 $159,563
64 $169,136
Maximum benefit accrual for first year of plan assuming normal retirement age of 65, 6% interest assumption and ’94 GAR mortality table
Benefit Accruals Under a DB PlanBenefit Accruals Under a DB Plan
ASCi
Code §415 limits how much an EE may receive under a
qualified plan
DC plan limit = lesser of $45,000 or 100% of compensation
DB plan limit = based on maximum annual benefit that can be provided at retirement
Under EGTRRA = DB limit is the lesser of 100% of 3 year high average compensation or $185,000
Code 415 LimitsCode 415 Limits
ASCi
EE Age Comp. Accrual
Dr. Rott 60 $230,000 $133,972
Dr. Gumm 50 $230,000 $72,472
Dr. DeKay 40 $230,000 $41,728
NHCE 1 50 $80,000 $28,498
NHCE 2 48 $65,000 $20,608
NHCE 3 40 $47,000 $9,349
NHCE 4 39 $42,000 $7,881
NHCE 5 35 $42,000 $6,042
NHCE 6 35 $39,000 $5,791
NHCE 7 27 $30,000 $2,863
NHCE 8 24 $25,000 $2,003
$1,060,000 $331,207
Plan formula = 8.09% x YOP (up to 5) -- age 65 NRA, 6% interest, 94 GAR mortality table
Sample Defined Benefit PlanSample Defined Benefit Plan
ASCi
Cover enough EEs in both plans to pass
coverage and Code §401(a)(26) Can be maintained separately without combined testing
No cross-participation allows plan to avoid 25% combined deduction limit DB plan can always deduct “normal cost” and DC plan
can deduct up to 25% of total comp If have cross-participation = no deduction in DC plan to
DB/DC contribution exceeds 25% of compensation New rules allow plan to deduct up to 6% of
compensation in DC plan
DB Carve-OutDB Carve-Out
ASCi
EE Age Comp. DC Contribution DB Accrual
Dr. Rott 60 $230,000 $0 $133,972
Dr. Gumm 50 $230,000 $0 $72,472
Dr. DeKay 40 $230,000 $46,000 $0
NHCE 1 50 $80,000 $4,891 $0
NHCE 2 48 $65,000 $3,974 $0
NHCE 3 40 $47,000 $0 $9,349
NHCE 4 39 $42,000 $0 $7,881
NHCE 5 35 $42,000 $0 $6,042
NHCE 6 35 $39,000 $0 $5,791
NHCE 7 27 $30,000 $1,834 $0
NHCE 8 24 $25,000 $1,529 $0
$1,060,000 $57,228 $235,507• Both plans satisfy coverage / nondiscrimination• DB plan satisfies 401(a)(26)• No deduction problem = no cross participation
DB/DC CombinationDB/DC Combination
ASCi
Different contributions for EEs based on age Hard to communicate to employees = younger
employees don’t appreciate life annuity at age 65
Plans can become underfunded or overfunded Can limit possibility by using appropriate investment vehicle
Must have enrolled actuary to determine funding and to sign Schedule B of Form 5500
Problems with DB PlansProblems with DB Plans
ASCi
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 to PBGC coverage
Must file a Schedule B with Form 5500
Subject to QJSA rules
Cash Balance PlansCash Balance Plans
ASCi
DC characteristics
Benefit expressed as a hypothetical account balance
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
Cash Balance PlansCash Balance Plans
ASCi
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 a more equitable sharing of costs among HCEs
Cash Balance PlansCash Balance Plans
ASCi
Business has stable income to meet continuing
funding obligation
Targeted group (e.g., owner) is age 50 or older with compensation > $230,000
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
Candidate for Cash Balance PlanCandidate for Cash Balance Plan
ASCi
EE Age
Comp. DeferTotal ERContrib
Alloc. %EBR
Dr. Rott 60 $230,000 $15,500 $30,500 13.26% 2.80%
Dr. Gumm 50 $230,000 $15,500 $30,500 13.26% 5.61%
Dr. DeKay 44 $230,000 $15,500 $30,500 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%
$1,060,000 $60,800 $107,853
New Comp / SH 401(k) PlanNew Comp / SH 401(k) Plan
ASCi
EE Age
Comp. DeferTotal ERContrib
Alloc. % EBR
Dr. Rott 60 $230,000 $15,500 $30,500 13.26% 2.80%
Dr. Gumm 50 $230,000 $15,500 $30,500 13.26% 5.61%
Dr. DeKay 44 $230,000 $15,500 $30,500 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%
$1,060,000 $60,800 $107,853
New Comp / SH 401(k) PlanNew Comp / SH 401(k) Plan
Deductible limit = 25% * $1,060,000 = $265,000Total deductible contrib. = $107,853 (deferrals always deductible)Remaining deductible amount = $157,147
ASCi
EE Age Comp. DeferTotal ERContrib
Alloc. %EBR
Additional
Benefit
Dr. Rott 60 $230,000 $15,500 $30,500 13.26% 2.80% $40,000
Dr. Gumm 50 $230,000 $15,500 $30,500 13.26% 5.61% $40,000
Dr. DeKay 44 $230,000 $15,500 $30,500 13.26% 9.15% $40,000
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%
$1,060,000 $60,800 $107,853
New Comp / SH 401(k) PlanNew Comp / SH 401(k) Plan
Deductible limit = 25% * $1,060,000 = $265,000Total deductible contrib. = $107,853 (deferrals always deductible)Remaining deductible amount = $157,147
ASCi
Cash balance plan is DB plan
Subject to DB 415 limit and funding rules
Combined plans must satisfy minimum gateway requirement 7.5% 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
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
ASCi
Gateway for DB/DC PlansGateway for DB/DC Plans
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%
To satisfy the minimum gateway for DB/DC combination plans, each NHCE must have an aggregate normal allocation rate (ANAR) that meets following requirements:
ASCi
Cash balance plan is DB plan
Subject to DB 415 limit and funding rules
Combined plans must satisfy minimum gateway requirement 7.5% 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
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80%
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61%
Dr. Kay 44 $230,000 $15,500 $30,500 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
$1,060,000 $60,800 $119,250
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
* Plan satisfies minimum gateway = NHCEs receive 7.5% allocation in DC plan
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80%
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61%
Dr. Kay 44 $230,000 $15,500 $30,500 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%
$1,060,000 $60,800 $119,250
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
* Convert DC allocation to EBRs using applicable interest rate (8.5%) and applicable mortality table (UP-1984)
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80% $40,000
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61% $40,000
Dr. Kay 44 $230,000 $15,500 $30,500 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%
$1,060,000 $60,800 $119,250
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
* Drs. receive “hypothetical” allocation of $40,000
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80% $40,000 2.21%
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61% $40,000 3.60%
Dr. Kay 44 $230,000 $15,500 $30,500 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%
$1,060,000 $60,800 $119,250
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
* Hypothetical allocation is converted to Normal Accrual Rate (NAR) using plan’s assumptions = 5% interest rate and ’94 GAR mortality table
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80% $40,000 2.21% 5.01%
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61% $40,000 3.60% 9.21%
Dr. Kay 44 $230,000 $15,500 $30,500 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%
$1,060,000 $60,800 $119,250
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
* DC EBR and CB NAR are added together to get benefit rate subject to rate group test
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80% $40,000 2.21% 5.01%
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61% $40,000 3.60% 9.21%
Dr. Kay 44 $230,000 $15,500 $30,500 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
$1,060,000 $60,800 $119,250
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80% $40,000 2.21% 5.01%
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61% $40,000 3.60% 9.21%
Dr. Kay 44 $230,000 $15,500 $30,500 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
$1,060,000 $60,800 $119,250
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
Plan fails 401(a)(26) = must have at least 40% of employees receiving “meaningful benefit” which IRS has defined as .5% accrual
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80% $40,000 2.21% 5.01%
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61% $40,000 3.60% 9.21%
Dr. Kay 44 $230,000 $15,500 $30,500 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
$1,060,000 $60,800 $119,250 $122,400
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
*NHCEs receive hypothetical allocation of $300
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80% $40,000 2.21% 5.01%
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61% $40,000 3.60% 9.21%
Dr. Kay 44 $230,000 $15,500 $30,500 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%
$1,060,000 $60,800 $119,250 $122,400
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
*Cash balance plan satisfies Code §401(a)(26) = 5/11 (45%) of EEs receive meaningful benefits
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80% $40,000 2.21% 5.01%
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61% $40,000 3.60% 9.21%
Dr. Kay 44 $230,000 $15,500 $30,500 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%
$1,060,000 $60,800 $119,250 $122,400
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
* Plan satisfies nondiscrimination on basis of combined DC EBRs and CB NARs
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80% $40,000 2.21% 5.01%
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61% $40,000 3.60% 9.21%
Dr. Kay 44 $230,000 $15,500 $30,500 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%
$1,060,000 $60,800 $119,250 $122,400
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
* Meets deduction limit = $1,060,000 * 25% = $265,000; Total employer contribution = $241,650; Deferrals are always deductible!
ASCi
EE Age Comp. Defer
DC Alloc
DCEBR
HypothAlloc.
CBNAR
EBR +NAR
Dr. Rott 60 $230,000 $15,500 $30,500 2.80% $40,000 2.21% 5.01%
Dr. Gumm 50 $230,000 $15,500 $30,500 5.61% $40,000 3.60% 9.21%
Dr. Kay 44 $230,000 $15,500 $30,500 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%
$1,060,000 $60,800 $119,250 $122,400
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
* Beginning in 2007 – deductible amount increases to $328,600; $1,060,000 * 25% = $265,000 + $63,600 (6% of comp)
ASCi
EE Age Comp. Defer
DC Alloc
HypothAlloc.
Dr. Rott 60 $230,000 $15,500 $30,500 $40,000
Dr. Gumm 50 $230,000 $15,500 $30,500 $40,000
Dr. Kay 44 $230,000 $15,500 $30,500 $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
$1,060,000 $60,800 $119,250 $122,400
Combined DC/Cash Balance PlanCombined DC/Cash Balance Plan
* Drs. receive 87.52% of ER contribution + deferrals
ASCi
Pension Protection ActPension 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
If plan is disqualified, substantial tax
consequences may apply for “open” years
Tax consequences include: Taxation to participants Taxation of trust Loss of deduction Loss of rollover opportunity for participants
Special rule applies if plan fails coverage or nondiscrimination
Consequences of DisqualificationConsequences of Disqualification
ASCi
Employee Plans Correction Resolution
Program (EPCRS) = Rev. Proc. 2006-27
Now have 3 programs: SCP (Self-Correction Program) = no submission to IRS VCP (Voluntary Correction Program) = submission to
IRS before being caught Audit CAP (Audit Closing Agreement Program) = caught
by IRS Generally too late for EPCRS
IRS has issued list of top mistakes www.irs.gov/pub/irs-tege/401k_mistakes.pdf
IRS Voluntary Correction ProgramIRS Voluntary Correction Program
ASCi
Failure to timely amend plan Failure to use correct compensation Failure to properly include/exclude EEs Late deposit of 401(k) deferrals Failure to satisfy hardship rules Improper calculation of match Failure to correct ADP/ACP failures Failure to include all EEs in ADP/ACP test Failure to provide top-heavy minimum Code §415 and §402(g) violations
Most Common Qualification Failures Most Common Qualification Failures
ASCi
4 types of disqualifying defects Plan document failures (e.g., failure to make good faith
or interim amendments) Must use VCP to correct failure
Operational failures = failure to follow the terms of the plan May use SCP or VCP to correct failure
Demographic failure (e.g., coverage/ nondiscrimination) Must use VCP to correct failure
Employer eligibility failure Must use VCP to correct failure
EPCRS ProgramEPCRS Program
ASCi
Established practices and procedures
Operational problem
General correction principles used
Change administrative procedures
Significant failure – two years Special rule for mergers/acquisitions
Insignificant failure – no limit
Maintain adequate records
No fee
SCPSCP
ASCi
Plan sponsor submits VCP paperwork
Plan sponsor identifies failures
Plan sponsor proposes correction
Plan sponsor pays user fee
IRS issues a compliance statement
Plan sponsor corrects within 150 days of compliance statement
Plan not examined
VCPVCP
ASCi
VCP FeesVCP Fees
Number of participants VCP fee
20 or fewer $750
21-50 $1,000
51-100 $2,500
101-500 $5,000
501-1,000 $8,000
1,001-5,000 $15,000
5,001-10,000 $20,000
Over 10,000 $25,000
ASCi
Plan sponsor is under examination
Plan sponsor enters closing agreement
Plan sponsor makes correction
Plan sponsor pays sanction Negotiated % of maximum payment amount (MPA)
for open years Tax on trust Income tax due to loss of employer deductions Income tax due to inclusion of income for participants
Audit CAPAudit CAP
ASCi
Failure to timely amend plan Failure to use correct compensation Failure to properly include/exclude EEs Late deposit of 401(k) deferrals Failure to satisfy hardship rules Improper calculation of match Failure to correct ADP/ACP failures Failure to include all EEs in ADP/ACP test Failure to provide top-heavy minimum Code §415 and §402(g) violations
Most Common Qualification Failures Most Common Qualification Failures
ASCi
Plan Sponsor X for Plan ABC, a calendar year 401(k) plan with 40 participants, discovers it has missed the deadline for adopting good-faith EGTRRA amendments. X has a favorable GUST determination letter.
Reasonable correction Amend plan for all laws Confirm operation was consistent with
amendment
NonamendersNonamenders
ASCi
SCP – not available
VCP – available Normally $1,000 fee
If “good faith amendments” or interim amendments only, fee is $375
Audit CAP – Amend plan, pay negotiated % of MPA
NonamendersNonamenders
ASCi
Compensation DefinitionsCompensation Definitions
Code §415 = gross
Top-heavy = gross
Highly compensated employees = gross
Deductions = gross
Allocations or benefits = Plan Compensation (as defined in AA §5-2)
Testing compensation = any Code §414(s) definition of compensation
ASCi
Post-severance compensation = may
include payments made after severance of employment if: Compensation is regular compensation or payment
for unused sick, vacation or other leave
Payment is made by the later of 2½ months after severance from employment or the last day of the limitation year in which the severance occurs, and
The amounts would have been paid and included in 415 compensation if EE had not terminated employment
Post-Severance CompensationPost-Severance Compensation
ASCi
Severance pay is not included as 415
compensation May not defer on severance payments
Plan may exclude post-severance compensation Plan would be subject to 414(s) testing
Raises issues regarding application of ADP/ACP test
Post-Severance Compensation Post-Severance Compensation
ASCi
415 amendment = required (interim) As interim amendment = RAP expires as of due
date for filing tax return for tax year beginning after 7/1/07
Amendment date for calendar year ER = 9/15/09 (if file for corporate extension)
Concern is possible cut-back if apply compensation definition retroactively to 1/1/08 Amend plan before anyone accrues benefit for 2008
Plan AmendmentPlan Amendment
ASCi
Failure to timely amend plan
Failure to use correct compensation
Failure to properly include/exclude EEs
Late deposit of 401(k) deferrals
Failure to satisfy hardship rules
Improper calculation of match
Failure to correct ADP/ACP failures
Failure to include all EEs in ADP/ACP test
Failure to provide top-heavy minimum
Code §415 and §402(g) violations
Most Common Qualification Failures Most Common Qualification Failures
ASCi
401(k) plan with 8 participants
Employee Y (a former participant) was rehired on March 1, 2008
Employee Y was not permitted to make deferrals until January 1, 2009
Employee Y was an NHCE with compensation of $75,000
The NHCE ADP for 2008 was 8% and the HCE ADP was 10%
Exclusion of Eligible EmployeeExclusion of Eligible Employee
ASCi
Reasonable correction Make QNEC to compensate for missed deferral
opportunity QNEC = 50% of employee’s missed deferral Missed deferral = ADP of employee’s group for plan year
of exclusion by employee’s compensation for that year Make up any matching contributions based on actual
amount of missed deferral (not 50%) 8% x $75,000 x 50% x 10/12 = $2,500 plus earnings
What if ER fails to follow EE’s election? Rev. Proc. 2008-50 = 50% of amount elected
Exclusion of Eligible EmployeeExclusion of Eligible Employee
ASCi
Failure to timely amend plan
Failure to use correct compensation
Failure to properly include/exclude EEs
Late deposit of 401(k) deferrals
Failure to satisfy hardship rules
Improper calculation of match
Failure to correct ADP/ACP failures
Failure to include all EEs in ADP/ACP test
Failure to provide top-heavy minimum
Code §415 and §402(g) violations
Most Common Qualification Failures Most Common Qualification Failures
ASCi
Top-10 DOL ViolationsTop-10 DOL Violations Failure to timely deposit deferrals Failure to make required contributions Improper valuation of plan assets Improper distributions Orphaned plans Adverse actions against EEs trying to
enforce plan rights Failure to put assets in plan's name Prohibited transactions Failure to have established procedures Improper allocation of expenses
ASCi
Timely Deposit of DeferralsTimely Deposit of Deferrals 401(k) deferrals become plan assets on
earlier of: 15th business day of month following date withheld
from paycheck As soon as can be reasonably segregated from
employer’s general assets DOL position = 3 - 5 business days
Failure to deposit deferrals trust Prohibited transaction Fiduciary breach
Form 5500 requires verification of timeliness of deposits
ASCi
DOL Proposed RegulationsDOL Proposed Regulations Creates safe harbor for timely deposit of
401(k) deferrals Deemed timely if deposited within 7 business
days following date amounts are withheld from paycheck
Only available if plan has fewer than 100 participants at beginning of plan year
For larger plans – timing of deferrals may be sooner than 7 days = DOL may add SH for larger plans in final regulations
SH rule also applies to deposit of loan repayments
ASCi
DOL Proposed RegulationsDOL Proposed Regulations Compliance with safe harbor rule is not
mandatory = will allow ERs to ensure satisfying plan asset rules
Small ER that remits later than 7-day limit may wish to review its systems and plan remittance procedures
Gives providers another reason to encourage ERs to remit deferrals on a timely basis
Effective when final regs are issued = DOL will apply rule until finalized
ASCi
Plan trustees are responsible for monitoring and collecting delinquent plan contributions and generally may not contract around that duty
FAB applies obligation on trustees to collect delinquent contributions Plan or service contracts should identify responsible
parties
Steps necessary to collect delinquent contributions = facts of each case Value of assets involved, the likelihood of successful
recovery, and expenses
FAB 2008-01
ASCi
Expected that new guidance will begin new round of DOL audits focusing on trustee misconduct Concern that DOL will begin/continue targeting
service providers (including TPAs) to determine whether ERs are making timely contributions
Already starting to see some specific DOL action against trustees
FAB 2008-01
ASCi
Repay deferrals
Calculate and pay lost earnings
Will have to calculate lost earnings on each late payment
Can use DOL calculator to determine amount of lost earnings Great improvement over prior rules = generally, had
to use actual rate of return that would have been earned by each EE under plan or highest rate of return
Correction StepsCorrection Steps
ASCi
DOL CalculatorDOL CalculatorCorrection Period Interest Rate
4/1/2000 - 3/31/2001 9%
4/1/2001 - 6/30/2001 8%
7/1/2001 - 12/31/2001 7%
1/1/2002 - 12/31/2002 6%
1/1/2003 - 9/30/2003 5%
10/1/2003 - 3/31/2004 4%
4/1/2004 - 6/30/2004 5%
7/1/2004 - 9/30/2004 4%
10/1/2004 - 3/31/2005 5%
4/1/2005 - 9/30/2005 6%
10/1/2005 - 6/30/2006 7%
7/1/2006 - 12/31/2007 8%
1/1/2008 - 3/31/2008 7%
Can use calculator rates = regardless of interest actually earned by plan
Based on IRS underpayment penalty rate under Code §6621
Currently 6%
Interest rate is never negative
dol.gov/ebsa/ calculator/main.html
ASCi
Form 5500 specifically asks if are a late depositor
Must answer under penalties of perjury
Recent court case = imposed $153,000 in penalties and fines and a one-year term of federal probation for false 5500 Hid fact that ER was using funds for own purpose Had repaid the amounts back to the plan “Lied” about existence of prohibited transaction
Second criminal case in last few months for false filing of Form 5500
How Should ER Answer 5500?How Should ER Answer 5500?
ASCi
Failure to timely amend plan
Failure to use correct compensation
Failure to properly include/exclude EEs
Late deposit of 401(k) deferrals
Failure to satisfy hardship rules
Improper calculation of match
Failure to correct ADP/ACP failures
Failure to include all EEs in ADP/ACP test
Failure to provide top-heavy minimum
Code §415 and §402(g) violations
Most Common Qualification Failures Most Common Qualification Failures
ASCi
Plan does not allow for hardship distribution Retroactive amendment to permit hardship Repayment to the plan
Plan must exhaust all available distributions (including loans) prior to taking hardship distribution
Hardship DistributionsHardship Distributions
ASCi
Plan provides for 100% match on deferrals up to
6% of compensation
ER matches each payroll period
Jane earns $50,000 and defers 10% through July 1 when she stops deferring
Jane has deferred $2,500 (10% x $25,000) and received a match of $1,500 (6% x $25,000)
Is Jane entitled to an additional “true-up” contribution?
Improper Matching ContributionImproper Matching Contribution
ASCi
Failure to timely amend plan
Failure to use correct compensation
Failure to properly include/exclude EEs
Late deposit of 401(k) deferrals
Failure to satisfy hardship rules
Improper calculation of match
Failure to correct ADP/ACP failures
Failure to include all EEs in ADP/ACP test
Failure to provide top-heavy minimum
Code §415 and §402(g) violations
Most Common Qualification Failures Most Common Qualification Failures
ASCi
DOL penalties can be as high as $1,100 per day per late form Generally run in the range of $50 to $300 per day = common
to see penalties in 5 – 6 figures
IRS penalties are $25 per day up to $15,000 per late form
Reasonable correction Correction is not available through EPCRS May use DOL’s Delinquent Filer Voluntary Correction Program If Form 5500-EZ, file with IRS and include reasonable cause
statement requesting
Failure to File Form 5500Failure to File Form 5500
ASCi
Penalty is reduced to $10/day For small filer = maximum penalty is $750 For large filer = maximum penalty is $2,000
For multiple years Small plans = $1,500 Large plans = $4,000
IRS will also waive its late filing penalties if file under DFVC
DFVC not available if have received a late filing notice from DOL (not IRS)
DFVC ProgramDFVC Program
ASCi
IRS issued final regs on July 23, 2007
Very surprising – expected final regs by 7/1 Not effective until 2009 taxable years Not too many changes from proposed regs
403(b) plans are available for: Public schools Tax-exempt ERs under 501(c)(3) and Churches
Must be funded by: Annuity contracts issued by insurance co. Custodial accounts invested in mutual fund Retirement income accounts
403(b) Regulations403(b) Regulations
ASCi
ERs now responsible for administration of
plan document Individual participants no longer the target market ERs will generally be more involved in selection of
investments ER must monitor contribution limits, in-service
withdrawals and loan limits ER must enter into information sharing agreements
with providers = will result in significant consolidation of providers
ERs will be required to file full Form 5500
Changing WorldChanging World
ASCi
Plan document requirement
Applies to all 403(b) plans = even those exempt from ERISA (e.g., government plans)
Plan document must be in place by first day of 2009 taxable year
Must satisfy requirements of 403(b) regs in form and operation
Must allocate responsibilities among ER and third party providers Must identify responsible party for complying with
requirements that require aggregation of contracts such as loans and hardships
Cannot impose responsibility on EEs
403(b) Plan Document403(b) Plan Document
ASCi
Plan document requirement May incorporate other documents by reference,
such as annuity contract or custodial account Must not be any conflict of interest
IRS will issue model language for public school plans
May lead to IRS determination letter or pre-approved 403(b) program
May have to file full Form 5500
403(b) Plan Document403(b) Plan Document
ASCi
Field Assistance Bulletin 2007-02 = SH allowing 403(b) plan funded only with EE contributions to avoid Title I of ERISA Participation of EEs must be completely voluntary All rights are enforceable solely by EE Involvement of ER is limited to certain optional
specified activities ER receives no direct or indirect compensation
(other than reasonable reimbursement to cover expenses)
Non-ERISA 403(b) PlansNon-ERISA 403(b) Plans
ASCi
Allowable activities include:
requesting information concerning proposed providers and compiling such information to facilitate review and analysis by EEs
entering into salary reduction agreements and collecting/remitting amounts to providers
limiting funding media or products available to EE to a number and selection designed to afford EEs reasonable choice
Other acts may subject ER to ERISA Handling plan transfers, processing distributions, making
hardship or QDRO determinations, or administering loans
Non-ERISA 403(b) PlansNon-ERISA 403(b) Plans
ASCi
Why does it matter = increased fiduciary
liability 403(b) plans will be subject to full Form 5500 filings =
including audit for large plans Subject to DOL fiduciary/prohibited transaction rules
including new fee disclosure requirements ER will have obligation to monitor investments and
providers = subject to prudence rule ERs will have to oversee financial institutions to make sure
plan is being administered properly ER will have to provide financial institutions with adequate
information to administer loans, hardship and other distributions
ERISA 403(b) PlansERISA 403(b) Plans
ASCi
Restriction on 90-24 transfers Rev. Rul. 90-24 permitted EEs to transfer from one
contract to another contract as long as similar distribution restrictions
Final regulations allow transfers if similar distribution restrictions and ER enters into agreement with provider to share employment information (e.g., term date), hardship and loan information
Effective for exchanges occurring after September 24, 2007 = prior transfers are grandfathered (as long as no later transfer)
403(b) Regulations403(b) Regulations
ASCi
Rev. Proc. 2007-71 = model language Post-2004 orphan contracts (both pre- and post-
9/24/07) will not fail §403(b) if: ER makes reasonable, good faith effort to contact issuer
and notify them of contact information for person in charge of administering the ER’s plan or
Issuer makes reasonable, good faith effort to contact ER before making any distribution or loan to participant
For former EEs, issuer must make reasonable effort before making loan to determine if loan limits are met (e.g., other outstanding loans)
Post 9/24/07 transfers can be re-exchanged prior to July 1, 2009
403(b) Regulations403(b) Regulations
ASCi
Special rules regarding 415 excesses If 415 excess, excess amount treated as
nonqualified = remaining portion retains qualified status
Any 415 excess must be held in separate account for year of excess and following year
Clarifies that 403(b) plans are subject to QDRO rules
Life insurance prohibited
403(b) Regulations403(b) Regulations
ASCi
Tax-exempt ERs subject to same discrimination rules as qualified plans Eliminates “good-faith” standard under Notice 89-23 Church and governmental plans generally exempt
from nondiscrimination rules Are subject to compensation limit under 401(a)(17) and
universal availability
Catch-up contributions permitted under 403(b) plan Only applies after EE makes special $3,000 catch-up
for “qualified EEs” of “qualified organizations”
403(b) Regulations403(b) Regulations
ASCi
Universal availability
Replaces ADP test Eliminates ability to exclude certain EEs permitted
under Notice 89-23 EEs covered by collective bargaining agreement; EEs who make one-time election to participate in
governmental plan instead of 403(b) program; certain visiting professors; and EEs of religious order who have taken a vow of
poverty Can continue to exclude until 2010 TY
403(b) Regulations403(b) Regulations
ASCi
Ability to terminate 403(b) plans and convert to 401(k) plans
Can distribute from terminating 403(b) only if no contributions made to another 403(b) plan during 12-month period following final distribution of plan assets
Terminations can occur between July 27, 2007 and effective date of regulations
Can 403(b) plans terminate if there are orphan accounts for which ER has no information?
403(b) Regulations403(b) Regulations
ASCi
Is switching from 403(b) to 401(k) a good idea?
If plan is a non-ERISA plan = switching would require Form 5500 reporting, SPD/SMMs, additional testing
Universal availability avoids need for ADP test = ER may be able to utilize SH plan design
403(b) plans may permit greater catch-up contributions ER may be able to offer more investments and services
at lower cost in a 401(k) plan EEs will have ability to take a distribution from the plan
upon termination
403(b) Regulations403(b) Regulations
ASCi
In 2007 = estimated that 403(b) plans accounted for $735 billion in assets (roughly 17% of total DC plan market)
403(b) plans will need solutions to: Implement 403(b) plan document prior to 1/1/09 Address fiduciary concerns Ease potential administrative burdens
In a recent survey of 403(b) sponsors = 90% cited assistance with new regulatory compliance as a key need
403(b) Opportunities403(b) Opportunities
ASCi
Plan design and plan administration opportunities 403(b) plans subject to same nondiscrimination rules
as 401(k) plans ERs will need assistance in ensuring 403(b) plan is in
compliance with regulations = no longer can shift responsibility to EEs
Potential fiduciary liability will increase need for employee education
Participants with orphan accounts may need help consolidating their accounts
403(b) Opportunities403(b) Opportunities
ASCi
ERs will need help reviewing prospectuses, fees, investment performance and surrender charges Excessive fees in 403(b) plans recognized as
significant problem
Focus changes from participant-managed investments to employer-managed investments
IRS expected to substantially increase 403(b) audit activity
403(b) Opportunities403(b) Opportunities