charles lockwood asc institute, llc littleton, co asc-net

Charles LockwoodASC Institute, LLC

Littleton, COwww.asc-net.com

ASCi

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

Plan Design in Down MarketPlan Design in Down Market

ASCi

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double taxation on loan amounts Could lose rollover option if terminate employment Will miss out on market recovery on withdrawn amounts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

Dealing with EE ConcernsDealing with EE Concerns

ASCi

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

Reduction of ER ContributionsReduction of ER Contributions

ASCi

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?

Elimination of MatchElimination of Match

ASCi

May ER eliminate/reduce discretionary match during year? Must be careful of EE relations issues

May 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

Elimination of MatchElimination of Match

ASCi

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?

SH 401(k) PlansSH 401(k) Plans

ASCi

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

Reduction of SH MatchReduction of SH Match

ASCi

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]

ExampleExample

ASCi

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]

ExampleExample

ASCi

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

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

Elimination of SH ER ContributionElimination of SH ER Contribution

ASCi

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

Elimination of SH ER Contribution Elimination of SH ER Contribution

ASCi

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

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

Hardship DistributionsHardship Distributions

ASCi

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

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 hardship event/financial need?


ASCi

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

Layoffs / TurnoverLayoffs / Turnover

ASCi

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%. The plan is tested using current year testing.

Case StudyCase Study

ASCi

Switching Testing MethodsSwitching 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

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

Timing of Plan AmendmentTiming of Plan Amendment

ASCi





XYZ declares a bonus twice a year (in June and December). Generally, bonuses are only paid to NHCEs



ASCi

Compensation DefinitionsCompensation 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) Compensation414(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 TestCompensation 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





XYZ declares a bonus twice a year (in June and December). Generally, bonuses are only paid to NHCEs.



ASCi

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?

Compensation DefinitionCompensation Definition

ASCi

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

Determining HCE StatusDetermining HCE Status

ASCi

Top-Paid Group TestTop-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

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

Determining HCE StatusDetermining HCE Status

ASCi

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

Targeted QNECsTargeted QNECs


Littleton, CO

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 $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

(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 $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

(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 $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

$1,105,000


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 $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

$1,105,000


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 $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

$1,105,000


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 $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 NondiscriminationGeneral 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 (cross-testing)

allocation Allocation rate = --------------- 414(s) comp

ASCi

Ratio test

NHC benefiting % ------------------- > 70% HCE benefiting %

Average benefits test Nondiscriminatory classification test Average benefit ratio test (ABR test)

Coverage TestsCoverage Tests

ASCi

Nondiscriminatory Classification TestNondiscriminatory Classification TestNHCE 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

(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 $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

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%

What is Magic # of NHCEs? What is Magic # of NHCEs?

ASCi

Nondiscriminatory Classification TestNondiscriminatory 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

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

What is Magic # of NHCEs?What is Magic # of NHCEs?

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 $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

(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 $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

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 $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

(1)

EE

(2)

Age

(3)

Comp.

(4)

Allocation

(5)

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

EE Age Comp. DeferSH ER

ContribER

ContribTotal

ERContrib

Alloc. % EBR

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

New Comp / SH 401(k) PlanNew Comp / SH 401(k) Plan

ASCi


ContribER

ContribTotal

ERContrib

Alloc. % EBR

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

$1,105,000


ASCi


ContribER

ContribTotal

ERContrib

Alloc. % EBR

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

$1,105,000


ASCi


ContribER

ContribTotal

ERContrib

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


ContribER

ContribTotal ERContrib

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

EE Age Comp. DeferTotal ERContrib

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

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

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


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


ASCi

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

Candidate for Cash Balance PlanCandidate for Cash Balance Plan

ASCi

EE Age

Comp. DeferTotal ERContrib

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

EE Age

Comp. DeferTotal ERContrib

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 = $276,250Total deductible contrib. = $113,853 (deferrals always deductible)Remaining deductible amount = $162,397

ASCi

EE Age Comp. DeferTotal ERContrib

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 = $276,250Total deductible contrib. = $113,853 (deferrals always deductible)Remaining deductible amount = $162,397

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


ASCi

EE Age Comp. Defer

DC Alloc

DCEBR

HypothAlloc.

CBNAR

EBR +NAR

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


* 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 $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


* 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 $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


* Drs. receive “hypothetical” allocation of $50,000

ASCi

EE Age Comp. Defer

DC Alloc

DCEBR

HypothAlloc.

CBNAR

EBR +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


* 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 $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

EE Age Comp. Defer

DC Alloc

DCEBR

HypothAlloc.

CBNAR

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

EE Age Comp. Defer

DC Alloc

DCEBR

HypothAlloc.

CBNAR

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% accrual

ASCi

EE Age Comp. Defer

DC Alloc

DCEBR

HypothAlloc.

CBNAR

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

EE Age Comp. Defer

DC Alloc

DCEBR

HypothAlloc.

CBNAR

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

EE Age Comp. Defer

DC Alloc

DCEBR

HypothAlloc.

CBNAR

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

EE Age Comp. Defer

DC Alloc

DCEBR

HypothAlloc.

CBNAR

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

EE Age Comp. Defer

DC Alloc

DCEBR

HypothAlloc.

CBNAR

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

EE Age Comp. Defer

DC Alloc

HypothAlloc.

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 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


Littleton, CO

ASCi

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

Nonqualified Deferred Comp Nonqualified Deferred Comp

ASCi

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 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

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

Taxation of Deferred Comp Taxation of Deferred Comp

ASCi

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

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

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 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

Top Hat PlanTop Hat Plan

ASCi

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

Rabbi TrustRabbi Trust

ASCi

Time and method for payment

must be stated for each event that entitles the participant to receipt of benefits

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

Payment of BenefitsPayment of Benefits

ASCi

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

Payment of BenefitsPayment of Benefits

ASCi

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 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

Tandem 401(k) PlansTandem 401(k) Plans

ASCi

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

Tandem 401(k) PlansTandem 401(k) Plans

ASCi

Advantages of Tandem PlanAdvantages 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 PlanDisadvantages 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 Plan457 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) plan

ASCi

Applies to all deferred compensation Includes both elective and nonelective

contributions Does not include rollover contributions

Lesser of: The applicable dollar limit 100% of includible compensation

Applicable dollar amount 2008 - $15,500 2009 - $16,500

Annual Deferral LimitAnnual Deferral Limit

ASCi

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

Annual Deferral Limit

ASCi

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

Age 50 Catch-Up Limit

ASCi

Different from age 50 catch-up = EE gets greater of two catch-up limits Available to participants who are within three

taxable years ending before NRA

Limit is the lesser of: the annual deferral limit or the underutilized limit from prior years

Underutilized limit 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

Special Catch-Up Limit

ASCi

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

Reporting 457 Plan Deferrals

ASCi

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

Participant Must Perform Services

ASCi

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

Timing of Deferral Agreement

ASCi

Distributions events Severance from employment

Attainment of age 70 1/2

Unforeseeable emergency

Certain small accounts

Termination of plan

QDRO

Distribution Restrictions

ASCi

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

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

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

Funding Restrictions

ASCi

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

Funding Restrictions

ASCi

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

Plan Documents

ASCi

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

Taxation of Distributions

ASCi

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

Taxation of Distributions

ASCi

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

Rollover Options

ASCi

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

Ineligible 457(f) Plans

ASCi

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?

Example

ASCi


No substantial risk of forfeiture = immediately

Example

ASCi



Would answer change if Joe Bob made elective deferrals to plan?

Example

ASCi



Would answer change if Joe Bob made elective deferrals to plan?

No = taxable immediately

Example

ASCi

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?

Example

ASCi

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

Example


Littleton, COwww.asc-net.com

ASCi

New administration looking to make changesFee 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

Major Changes ForthcomingMajor Changes Forthcoming

ASCi

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 educational material

Automatic IRAsAutomatic IRAs

ASCi

Five-year staggered cycle for individually

designed plans (e.g., ESOPs, cash balance plans

Plan Documents Plan Documents

Cycle Last Digit of EIN

Submission Period

Next Submission Period

A 1 or 6 2/1/06 – 1/31/07 2/1/11 – 1/31/12

B 2 or 7 2/1/07 – 1/31/08 2/1/12 – 1/31/13

C 3 or 8 2/1/08 – 1/31/09 2/1/13 – 1/31/14

D 4 or 9 2/1/09 – 1/31/10 2/1/14 – 1/31/15

E 5 or 0 2/1/10 – 1/31/11 2/1/15 – 1/31/16

ASCi

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

Cycle D Cumulative ListCycle D Cumulative List

ASCi

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

Pre-Approved PlansPre-Approved Plans

ASCi

Additional interim amendments required

Interim AmendmentsInterim Amendments

Interim Amendment Due Date for Amendment

Code §415 regulationsDue 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 PlansTerminating 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) 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

403(b) Prototype Program

ASCi

403(b) Prototype Program403(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 Program403(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

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

Required Minimum Distributions Required Minimum Distributions

ASCi

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 on account balance at end of prior year

RMD is not eligible for rollover

Required Minimum DistributionsRequired Minimum Distributions

ASCi

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 Ed take his December 31, 2009 RMD?

May Ed take his December 31, 2009 RMD? Depends on plan document

If so, will RMD be eligible for rollover?


ASCi

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

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

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

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 37% elect to increase the rate

Final Automatic Enrollment RegsFinal Automatic Enrollment Regs

ASCi

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?

Final Automatic Enrollment RegsFinal Automatic Enrollment Regs

ASCi

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

Rules Applicable to EACAs Rules Applicable to EACAs

ASCi

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

Rules Applicable to QACAs Rules Applicable to QACAs

ASCi

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

Rules Applicable to QACAsRules Applicable to QACAs

ASCi

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

EPCRSEPCRS

ASCi

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

Failure to Implement EACAFailure to Implement EACA

ASCi

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

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

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

Failure to Provide SH NoticesFailure to Provide SH Notices

ASCi

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

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)

Correction can be made under SCP


ASCi

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?


ASCi

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

Kennedy v. Du PontKennedy v. Du Pont

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


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


ASCi

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

Eligible Combined Plan – DB(k)Eligible Combined Plan – DB(k)

ASCi

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

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


ASCi

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.

ROBSROBS

ASCi

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

ROBSROBS