1.
Presented By
Adam C. Pozek,
ERPA, QPA, QPFC
Partner
DWC ERISA
Consultants, LLC
A Cornucopia of
Retirement Plan Goodness
ABC of Northern Indiana
November 2, 2011

2.
Obligatory Opening Disclaimer
THE
VIEWS EXPRESSED BY THE SPEAKER ARE HIS OWN AND DO NOT NECESSARILY
REPRESENT THE VIEWS OF ANY PERSON, LIVING OR DEAD, REAL OR
FICTITIOUS, SHORT OR TALL, MALE OR FEMALE, RELIGIOUS OR
ATHEIST…WELL, YOU GET THE POINT.
NO
PEOPLE OR ANIMALS WERE HARMED IN THE MAKING OF THIS PRESENTATION.

3.
Today‟s Agenda
 Washington update
 Multiple Employer Plans (MEPs)
 Selected Q&As from the ASPPA Annual Conference
 Plan documents
 Resources from the IRS website
Slide | 3

4.
Part 1
W ASHINGTON
U PDATE

5.
Washington Update
Slide | 5

6.
Washington Update
 Super committee
◉ Little direct impact on retirement savings anticipated
◉ PBGC premiums
 Tax reform
◉ Bipartisan consensus to pursue reform
◉ Several possibilities as to the process it will follow
Slide | 6

7.
Crazy Washington Proposals
 President‟s Deficit Commission – 20/20
 CBO elimination of catch-ups
 Brookings proposal to replace reductions with credit
 State-run Multiple Employer DBs for small business
 Home(k) and the HOME Act
 New America Foundation
Slide | 7

8.
Deficit Reduction Commission – 20/20
 “Illustrative” option: marginal rates of 12/22/28%
 Consolidate retirement accounts and cap DC at
20%/$20,000 (no change for pension)
◉
Bipartisan Policy Center (BPC) proposal
 Expanded Saver‟s Credit
 Eliminated all other expenditures except:
◉ EITC and child credit
◉ Mortgage interest 12% credit, primary up to $500,000
◉ Charitable contributions 12% credit above 2% AGI
◉ ER health capped at 75th percentile, phased out by 2038
◉ Interest taxable on new issues of state and municipal bonds
Slide | 8

9.
CBO - Revenue Option 12
 Eliminate all catch-up contributions
 Reduce 401(k)- type contribution limit to $14,850
◉ Single limit for all employment-based plans, including
457(b)
 Reduce IRA limit to $4,500
 Suspend indexing for 5 years
 Raises $46 b over 10-year window
Slide | 9

10.
Hamilton Project/Brookings
 Convert current year contribution exclusion to a
uniform refundable credit
◉
◉
Contributions included in taxable income
“Revenue neutral” credit = 30% of contributions
 Proposed credit would be deposited to the IRA or
401(k) account
 Taxed at ordinary income rates upon withdrawal
 Est. 18% credit would raise $450 b over 10 years
Slide | 10

11.
State-run Multiple Employer DB Plan
 “Secure Choice Pension” proposal (NCPERS)
 Cash balance design
 Multiemployer funding rules
 Separate trust, invested in tandem with public plan
assets
 Underfunded?
◉
◉
◉
States could make up shortfalls, or
allow reduction in benefits instead of assessing withdrawal
liability, or
Set up their own guarantee fund from employer payments
Slide | 11

12.
Home(k)
 Individual election to segregate 50% of elective
deferrals into housing sub-account (employer-based
or individual)
◉
$50,000 pre-tax lifetime contribution limit
 Penalty-free withdrawal for down payment on first-
time purchase of principal residence
◉
◉
Loan can‟t exceed FHA limits
Reduced marginal tax rate on withdrawal for incomes less
than $125,000 single/$250,000 family
 Home Act (Rep. Tom Graves/Sen. Isakson)
◉ No penalty on withdrawals to pay mortgage on principal
residence
◉ Lifetime limit of lesser of $50,000 or 50% of account
Slide | 12

13.
New America Foundation
 “transform” the auto-IRA proposal with
◉ Refundable Savers Credit deposited directly to worker‟s
account
◉ Include all not covered by qualified plan
◉ Permit uniform employer contributions, with increased limit
($8,000)
◉ Automatic enrollment (at
6%), escalation, investment, rollover and annuitization
◉ Government-run “clearinghouse” for individuals‟ accounts


In addition to direct contributions, hold automatic rollovers
from employer plans;
Broker purchase of annuity contracts for default annuitization
Slide | 13

14.
Top Tax Expeditures
Tax Expenditure
2011
2012
Employer Provided Health
Exclusion
$117.3 Billion
$128.0 B
$147.4 B
$161.0 B
Home Mortgage Deduction
93.8 Billion
$ 94.1 B
$ 98.5 B
$106.8 B
Defined Contribution Plans
38.2 Billion
$ 44.1 B
$ 49.1 B
$ 48.3 B
Defined Benefit Plans
51.9 Billion
$ 62.0 B
$ 75.8 B
$ 74.6 B
Simplified Employee Pensions
(SEPs)
15.7 Billion
$ 17.0 B
$ 17.7 B
$ 18.2 B
105.8 Billion
$123.1 B
$142.6 B
$141.1 B
12.3 Billion
$ 13.2 B
$ 18.4 B
$ 21.6 B
4.0 Billion
$ 4.8 B
$ 5.4 B
$ 6.3 B
Total Employer Provided
Retirement
Traditional IRAs
Roth IRAs
2013
2014
Source: Joint Committee on Taxation January 2010 Estimates (http://www.jct.gov/publications.html?func=startdown&id=3642)
Slide | 14

15.
Tax Reform Myth Busters
 The myths
◉ Tax incentives for retirement savings are “lost revenue”
◉ Less than half of American workers are covered by a plan
◉ Only the wealthy benefit from retirement savings tax
incentives
◉ Retirement benefits from 401(k) plans are inadequate
◉ Cuts in tax incentives/contribution limits will only impact
the wealthy
◉ Workers will still save without access to a workplace plan
Slide | 15

16.
Myth #1: Tax Incentives = Lost Revenue
 Consider revenue effects of legislative proposals
◉ Tax cuts reduce revenue
◉ Tax expansion increases revenue
 Cash-flow accounting over a 10-year period
◉ Considers increases and decreases in revenue
◉ Does not consider impact on cash flow beyond 10 years
 For more information, see…
◉ http://www.asppa.org/MainMenu/govtaffairs/Revenue%20Estimates%20for%20Propos
als.aspx
Slide | 16

17.
Myth #1: Tax Incentives = Lost Revenue
* The new methodology estimates the tax benefit of the deferral and inside buildup, in present value terms. The Joint Committee and
Treasury estimates rely on cash-flow analysis.
Slide | 17

18.
Myth #2: Less Than Half Are Covered
Comparison of Participation/Access/Take-Up Rates for All
Workers versus Full-time Workers
90
80
73%
70
80%
64%
59%
60
50
76%
49%
All Workers
40
Full-Time Workers
30
20
10
0
Participation Rate
Access Rate
Take-Up Rate
Source: National Compensation Survey, March 2011, Bureau of Labor Statistics
Slide | 18

19.
Myth #3: Tax Benefit For The Wealthy
Estimated Private Sector Active Participants in 401(k) and Profit
Sharing Plans, Distributed by AGI
38%
36%
11%
10%
5%
Under $50k
$50k to $100k $100k to $150k $150k to $200k
$200k +
Slide | 19

20.
Myth #3: Tax Benefit For The Wealthy
Estimated Distribution of Federal Tax Expenditures for DC Plans and
Federal Income Taxes Paid, by AGI (Tax Year 2010)
Percent of Total
52%
32%
30%
18%
8%
Under $50k
13%
10%
14% 13%
$50k to $100k $100k to $150k$150k to $200k
PPTs w/Access + Retirees w/Balances
11%
$200k +
Share of Federal Income Taxes Paid (after credits)
Slide | 20

21.
Myth #4: 401(k) Benefits Are Inadequate
Snapshot of Year-End Account Balances
401(k) plan participant average account balances, * 1996-2008
and estimates for 2009 and October 1, 2010
$80
$75
$70
In Thousands
$60
$47
$50
$40
$57
$56
$37
$41
$58
$61
$65
$59
$52
$49
$43
$40
$46
$30
$20
$10
$0
Slide | 21

22.
Myth #4: 401(k) Benefits Are Inadequate
Median replacement rates for participants reaching age 65 between
2030 and 2039, by income quartile at age 65
Percent of Final 5-Year Avg Salary
120%
106.4%
100%
83.9%
86.9%
80%
60%
59.5%
51.7%
84.0%
67.2%
50.7% 54.0%
40%
20%
31.2% 23.4%
15.9%
0%
Social Security
Quartile 1
401(k) Accumulation
Quartile 2
Quartile 3
Source: Tabulations from EBRI/ICI 401(k) Accumulation Projection Model
SS + 401(k)
Quartile 4
Slide | 22

23.
Myth #5: Cuts Will Only Impact The Rich
Percentage of full-time workers currently saving stating they would
reduce savings if they lose deduction, by total household income
60%
50%
40%
30%
20%
10%
0%
$15k to $25k $25k to $35k $35k to $50k $50k to $60k $60k to $75k $75k to $100k
Source: EBRI and Mathew Greenwald & Associates, Inc. 2011 Retirement Confidence Survey
More than
$100k
Slide | 23

24.
Myth #6: Workers Will Save Without A Plan
Participation Rates by Moderate Income ($30,000 - $50,000) Workers
80.00%
70.00%
71.50%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
4.60%
No Employer Plan (IRA Only)
Source: Employee Benefits Research Institute (2010)
Employer Plan
Slide | 24

25.
Part 2
MEP- O -M ANIA

26.
This Date In History
 Birthdays
◉ 1734: Daniel Boone
◉ 1795: James K. Polk
◉ 1865: Warren G. Harding
◉ 1938: Pat Buchanan
◉ 1944: Keith Emerson
Slide | 26

27.
What Is A MEP?
 A plan in which multiple, unrelated employers
participate
 Addressed in IRC §413(c)
 Not the same as a multiemployer plan
 General types of MEPs
◉
◉
Association MEP
Former PEO plan

◉
Non-controlled-group MEP

◉
See Rev. Proc. 2002-21
Intentional or accidental
Unaffiliated (a/k/a Open) MEP
Slide | 27

28.
Plan-Level Requirements
 Plan document maintenance
 Service crediting
◉ Vesting and eligibility
 Compliance with 415 limit
 Severance from employment
 Forfeitures
 Forms 5500 (including audit) and 8955-SSA
Slide | 28

29.
Employer-Level Requirements
 Nondiscrimination testing
◉ Coverage
◉ ADP/ACP
◉ Top heavy
 Deductibility of contributions
Slide | 29

30.
One Bad Apple
 Qualification failures jeopardize the entire plan, not
just the adopting employer
 EPCRS
◉
◉
Permits VCP fee to be based on adopting employer
participant count, but
“the plan administrator (rather than any contributing or
adopting employer) must request consideration of the plan
under VCP.”
 Questions
◉ Who writes the check?
◉ How do you deal with the bad apples?
Slide | 30

31.
Fiduciary Implications
 Some marketing implies complete delegation of
fiduciary responsibilities
 Decision to join MEP = selecting service provider(s)
 Due diligence in selection and monitoring still
necessary
Slide | 31

32.
Pros and Cons
 Advertised advantages
◉ Group buying power
◉ Reduction in fiduciary responsibility
◉ Shared audit cost
◉ Less administrative burden
 Potential disadvantages
◉ One bad apple
◉ Limited cost savings


◉
◉
Audit for small employers
Document maintenance
Limited plan design options
Limited investment menu flexibility
Slide | 32

33.
The Open MEP “Controversy”
 Are they single plans under ERISA?
◉ Primarily an issue of reporting and disclosure
◉ May carry fiduciary implications
◉ Potential SEC concerns
Slide | 33

34.
Important Definitions
 ERISA §3(2) defines employee pension benefit plan
in relevant part as…
◉
“any plan, fund, or program which was heretofore or is
hereafter established or maintained by an employer or by an
employee organization, or by both”
 ERISA §3(1) defines employee welfare benefit plan
with the same wording regarding establishment and
maintenance.
 ERISA §3(3) defines an employee benefit plan as an
employee pension benefit plan or an employee
welfare benefit plan.
Slide | 34

35.
Employer or Employee Organization
 ERISA §3(4) defines employer organization as…
◉ “any labor union or any organization of any kind, or any
agency or employee representation
committee, association, group, or plan, in which employees
participate and which exists for the purpose, in whole or in
part, of dealing with employers concerning an employee
benefit plan, or other matters incidental to employment
relationships; or any employees' beneficiary association
organized for the purpose in whole or in part, of establishing
such a plan.”
Slide | 35

36.
YWCA: DOL Advisory Opinion 81-44A
 Membership in YWCA limited to chapters, all of
which were employers
 Retirement plan
◉
◉
Participation required as a condition of membership
PEs selected board of trustees
 Plan considered to be a single plan under ERISA
Slide | 36

37.
ADA: DOL Advisory Opinion 83-15A
 Membership in American Dental Association open
to individuals
 IRA-type arrangement
 Plan not a single plan under ERISA
◉
“It is the Department's position that where membership in a
group or association is open to anyone engaged in a
particular trade or profession regardless of employer
status, and where control of such a group or association is
not vested solely in employer members, such group or
association is not a bona fide group or association of
employers within the meaning of section 3(5) of the Act.”
Slide | 37

38.
United Way: DOL Advisory Opinion 83-21A
 No control of affiliates by national org
 Coordinated operations and fund raising
 Retirement plan
 Collection of separate plans rather than a single plan
◉ Greater “organizational nexus” required
Slide | 38

39.
Interest on Capital Hill
 Automatic IRA Act of 2011 (S. 1557)
◉ Introduced by Senators Bingaman (D-NM) and Kerry (DMA)
◉ Directs IRS and DOL to review the “one bad apple”
rule, reduce disincentives to “pooling” and a model MEP
plan
 Small Businesses Add Value for Employees Act of
2011 ( the SAVE Act)
◉
◉
Introduced by Congressmen Ron Kind (D-WI) and Dave
Reichert (R-WA)
Includes several provisions to facilitate the sponsorship of
QACA MEPs as well as clarifying the commonality
requirement for any DC MEP
Slide | 39

40.
Interest on Capital Hill
 Additional bills expected to be introduced
 ASPPA has been asked informally for input
 Concern repeal of “one bad apple” would create
compliance disincentive
 Concern that some promotional material overstates
degree of fiduciary mitigation
Slide | 40

41.
DC MEP Proposal
 DC MEPs not subject to “commonality”
requirement
 “Small Plan” audit rules apply if
◉
◉
MEP has less than 1,000 participants, and
No single PE has more than 100 participants
 MEP Provider and PE‟s identified on 5500
 IRS given express authority to audit the MEP
Provider
Slide | 41

42.
DC MEP Proposal (cont‟d)
 Selection/monitoring of MEP provider and named
fiduciary is fiduciary function
 Repeal of “one bad apple” rule, unless
◉
◉
MEP provider fails to reasonably oversee
compliance, and
Disqualification NOT caused by actions of a PE that
were beyond control of the MEP provider
 MEP provider jointly liable with PEs for back
taxes
Slide | 42

43.
MEP Resources
 ASPPA ASAP, authored by Derrin Watson
◉ www.asppa.org/document-vault/pdfs/asaps/open/1122.aspx
 Open MEPs: An ERISA Enigma by Derrin Watson
◉ Journal of Pension Benefits, Edition 19.2 (to be published in
December 2011)
◉ See also
http://benefitslink.com/modperl/qa.cgi?db=qa_who_is_em
ployer&id=300
 “Trouble Ahead For Open MEPs” in CFO
Magazine, authored by Jeff Mamorsky
◉
http://www.cfo.com/article.cfm/14595671/c_2984379/?f=a
Slide | 43
rchives

44.
MEP Resources
 TAG whitepaper, authored by Bob Toth
◉
http://www.tagresources.com/pdfs/OpenMEP%20White%20Paper.pdf
 401(k) Safe whitepaper, authored by Fred Reish/Bruce
Ashton
◉
http://www.401ksafe.com/pdf/401kSAFE_Open_Multiple_Emplo
yer_Plans.pdf
 LinkedIn discussion threads in ASPPA group
◉
◉
MEPs Come To The ASPPA Annual Conference
Consulting an Association on the Benefit of a MEP
 DOL investigation of one MEP promoter
◉
http://www.canadianbusiness.com/article/50434--workers-askidaho-fiduciary-where-is-their-money
Slide | 44

45.
Part 3
S ELECTED Q&A S F ROM
T HE ASPPA A NNUAL C ONFERENCE

46.
Sorry You Missed The Conference
Slide | 46

47.
Uncashed Checks
 Facts
◉ Terminated participant elects to receive a distribution of
more than $5,000.
◉ Plan sends check for 80% of gross distribution and remits
remaining 20% as tax withholding.
◉ A Form 1099-R is issued timely.
◉ It is later determined the check was never cashed.
 Question
◉ What can/should the plan do?
Slide | 47

48.
Uncashed Checks
 Question
◉ What can/should the plan do?
 Proposed answer
◉ Check was clearly delivered to participant, triggering taxable
event.
◉ Failure to cash the check does not change taxation.
◉ Plan should re-issue check, but no need for further
withholding or a second 1099-R.
 IRS response
◉ The IRS agreed with the proposed answer.
Slide | 48

49.
Corrective Amendments
 Facts
◉ Employer seeks VCP approval to correct the definition of
compensation via retroactive plan amendment.

Operationally using total comp, but mistakenly changed to
exclude bonuses during last restatement.
 Question
◉ Is it ok to use the intended definition of comp while awaiting
IRS approval?
Slide | 49

50.
Corrective Amendments
 Question
◉ Is it ok to use the intended definition of comp while awaiting
IRS approval?
 Proposed answer
◉ None
 IRS comment
◉ The plan could be at risk for operations inconsistent with the
plan document.
◉ While VCP is pending, sponsor should amend the definition
of comp to match operations on a prospective basis so as not
to perpetuate the operational failure in the event VCP is not
approved.
Slide | 50

51.
Determination Letters and VCP
 Facts
◉ Employer submits a determination letter application.
◉ Cover letter notes a prior failure to timely adopt an interim
amendment.
◉ The IRS issues the determination letter.
 Question
◉ Is there any need to file a separate VCP application or does
the DL cover the non-amender failure described in the cover
letter?
Slide | 51

52.
Determination Letters and VCP
 Question
◉ Is there any need to file a separate VCP application or does
the DL cover the non-amender failure described in the cover
letter?
 Proposed answer
◉ None
 IRS response
◉ If the cover letter is specific enough, the disclosure preserves
the right to come in under VCP.
◉ Open-ended disclosures do not preserve VCP.
Slide | 52

53.
Deposit Error
 Facts
◉ Due to TPA error, profit sharing contributions were
deposited into the DB plan.
◉ Attorney discovered problem dating back to 2002.
◉ Appears error also occurred prior to 2002 when client had
no TPA.
◉ There are no reliable records prior to 2002.
 Questions
◉ Is it sufficient to only correct back to 2002?
◉ What is the recommended correction method?
Slide | 53

54.
Deposit Error
 Questions
◉ Is it sufficient to only correct back to 2002?
◉ What is the recommended correction method?
 Proposed answer
◉ None
 IRS response
◉ The primary goal is to place participants in the position they
would have been had the error not occurred.
◉ Absence of records prior to 2002 does not excuse correction
for earlier years.
◉ Reasonable estimates may potentially be used.
Slide | 54

55.
Taxation of Improper Distributions
 Facts
◉ Employer discovered employees who were transferred
within the same controlled group received ineligible
distributions from 2002 through 2010.
◉ Employer does not want to issue corrected Forms 1099-R for
2002 through 2007.
 Question
◉ Can the employer use VCP to get approval to issue Forms
1099-R for the current year with respect to the improper
distributions made in 2002 – 2007?
Slide | 55

56.
Taxation of Improper Distributions
 Question
◉ Can the employer use VCP to get approval to issue Forms
1099-R for the current year with respect to the improper
distributions made in 2002 – 2007?
 Proposed answer
◉ None
 IRS response
◉ In general, the IRS will not approve a change in the year of
tax reporting except in the limited case of reporting certain
deemed distributed participant loans, as set forth in EPCRS.
Slide | 56

57.
Timing of Deemed Distribution
 Facts
◉ A plan uses the maximum cure period for defaulted
participant loans.

◉
◉
End of the quarter following the quarter in which the loan
payment was missed
First missed payment is in August 2011, giving the
participant until December 31, 2011, to cure the loan default.
If payment is not made, the loan is a deemed distribution
and a Form 1099-R must be issued.
 Question
◉ Is the taxable event on the last day of the cure period
(December 31st) and taxable for 2011 or the next day
(January 1st) and taxable in 2012?
Slide | 57

58.
Timing of Deemed Distribution
 Question
◉ Is the taxable event on the last day of the cure period
(December 31st) and taxable for 2011 or the next day
(January 1st) and taxable in 2012?
 Proposed answer
◉ The taxable event occurs on the last day of the cure period.
Thus, a 1099-R must be issued for 2011.
 IRS response
◉ The IRS agreed with the proposed answer.
Slide | 58

59.
Excess Deferrals and RMDs
 Facts
◉ For the 2011 calendar/plan year, a participant (no catch-up
contributions permitted) defers $19,500.
◉ Excess deferral is distributed by April 15, 2012.
 Questions
◉ When computing the RMD for 2012, does the participant‟s
12/31/2011 account balance include the excess deferral?
◉ If yes, does the distribution of the excess deferral count
toward satisfaction of the 2012 RMD?
Slide | 59

60.
Excess Deferrals and RMDs
 Questions
◉
◉
When computing the RMD for 2012, does the participant‟s
12/31/2011 account balance include the excess deferral?
If yes, does the distribution of the excess deferral count toward
satisfaction of the 2012 RMD?
 Proposed answer
◉
◉
Yes, the excess deferral is part of the account for determining the
RMD.
No, the refund would not count toward the RMD.


See Treas. Reg. §1.401(a)(9)-5, Q&A-9.
Consistent with treatment of ADP/ACP refunds.
 IRS response
◉
The IRS agreed with the proposed answer.
Slide | 60

61.
Early Participation Rule For ADP Test
 Facts
◉ Company A is an LLC established in 2010.
◉ The members and some employees were all previously
employed by Company B but left to start A.
◉ A and B are not part of a controlled group or affiliated
service group.
◉ A establishes the A 401(k) Plan




◉
General effective date of 1/1/2010 and deferrals added 9/1/2010
Eligibility of age 21 and 3 months of service
Does not recognize service with B
Does waive age/service for those employed on 9/1/2010
For 2010, plan has 26 eligible participants (4 HCEs/22
NHCEs), all of whom have less than 1 year of service.
Slide | 61

62.
Early Participation Rule For ADP Test
 Questions
◉ What would the ADP test results be for the 2010 plan year if
the early participation rule of IRC §401(k)(3)(F) is elected?
◉ If the plan is amended for the 2011 plan year to use the prior
year testing method, what are the testing results for that
plan year if the plan still uses the early participation rule?
◉ Does the answer to the previous questions change if, instead
of waiving eligibility, the plan‟s terms recognize service with
B; thereby giving each A employee more than 1 YOS for
eligibility but less than 1 year of actual service?
◉ Do any of the previous answers change if B has a minority
ownership interest in A?
Slide | 62

63.
Early Participation Rule For ADP Test
 Question #1
◉ What would the ADP test results be for the 2010 plan year if
the early participation rule of IRC §401(k)(3)(F) is elected?
Slide | 63

64.
Early Participation Rule For ADP Test
 Question #1
◉ What would the ADP test results be for the 2010 plan year if
the early participation rule of IRC §401(k)(3)(F) is elected?
 Proposed answer #1
◉ Only HCEs would be included in 2010 test and all NHCEs
disregarded, so the test would automatically pass.
Slide | 64

65.
Early Participation Rule For ADP Test
 Question #2
◉ If the plan is amended for the 2011 plan year to use the prior
year testing method, what are the testing results for that
plan year if the plan still uses the early participation rule?
Slide | 65

66.
Early Participation Rule For ADP Test
 Question #2
◉ If the plan is amended for the 2011 plan year to use the prior
year testing method, what are the testing results for that
plan year if the plan still uses the early participation rule?
 Proposed answer #2
◉ Since there were no NCHEs in the 2010 testing group, the
2011 test would automatically pass?
Slide | 66

67.
Early Participation Rule For ADP Test
 Question #3
◉ Does the answer to the previous questions change if, instead
of waiving eligibility, the plan‟s terms recognize service with
B; thereby giving each A employee more than 1 YOS for
eligibility but less than 1 year of actual service?
Slide | 67

68.
Early Participation Rule For ADP Test
 Question #3
◉ Does the answer to the previous questions change if, instead
of waiving eligibility, the plan‟s terms recognize service with
B; thereby giving each A employee more than 1 YOS for
eligibility but less than 1 year of actual service?
 Proposed answer #3
◉ Optional recognition of service with B to accelerate entry
into the plan does not require recognition when identifying
otherwise excludable employees. The otherwise excludable
employee is based on statutory service requirements, so
optional grants of service are disregarded.
Slide | 68

69.
Early Participation Rule For ADP Test
 Question #4
◉ Do any of the previous answers change if B has a minority
ownership interest in A?
Slide | 69

70.
Early Participation Rule For ADP Test
 Question #4
◉ Do any of the previous answers change if B has a minority
ownership interest in A?
 Proposed answer #4
◉ This should not change the prior answers as long as there is
no statutory obligation to credit service.
Slide | 70

71.
Early Participation Rule For ADP Test
 IRS response
◉ The IRS agreed with the proposed answer.
◉ The IRS agreed with the proposed answer.
◉ The IRS disagreed on the basis that the plan cannot have it
both ways – recognize service for eligibility but disregard for
otherwise excludable classification.
◉ The IRS agreed with the proposed answer.
Slide | 71

72.
Allocations Based On Job Classification
 Facts
◉ Plan has two allocation groups

◉
◉
8% contribution to Day Shift and 5% to Night Shift
Plan requires 1,000 hours to share in allocation but no LDR
Bob works 1,200 hours on day shift and then moves to night
shift where he works 800 hours for the rest of the year
 Questions
◉ How should Bob‟s allocation be determined?
◉ If formula applies for each hour, is there a 411(d)(6)
violation due to transfer to night shift?
◉ If he is entitled to both 8% and 5% rates, what is the impact
on the general nondiscrimination test?
Slide | 72

73.
Allocations Based On Job Classification
 Question #1
◉ How should Bob‟s allocation be determined?
Slide | 73

74.
Allocations Based On Job Classification
 Question #1
◉ How should Bob‟s allocation be determined?
 Proposed answer #1
◉ Primarily a document drafting issue. Does the document
provide for hour-by-hour allocation or base it on shift at a
set time during the year, e.g. first day or last day?
Slide | 74

75.
Allocations Based On Job Classification
 Question #2
◉ If formula applies for each hour, is there a 411(d)(6)
violation due to transfer to night shift?
Slide | 75

76.
Allocations Based On Job Classification
 Question #2
◉ If formula applies for each hour, is there a 411(d)(6)
violation due to transfer to night shift?
 Proposed answer #2
◉ No 411(d)(6) issue since this is an employment change and
not a plan amendment.
Slide | 76

77.
Allocations Based On Job Classification
 Question #3
◉ If he is entitled to both 8% and 5% rates, what is the impact
on the general nondiscrimination test?
Slide | 77

78.
Allocations Based On Job Classification
 Question #3
◉ If he is entitled to both 8% and 5% rates, what is the impact
on the general nondiscrimination test?
 Proposed answer #3
◉ Total allocation is combined to determine EBR for testing.
Slide | 78

79.
Allocations Based On Job Classification
 IRS response
◉ The IRS agreed with the proposed answers.
Slide | 79

80.
Mid-Year Amendment To Safe Harbor Plan
 Facts
◉ Plan is safe harbor 401(k) using nonelective contribution
◉ Sponsor wants to amend to a more liberal eligibility
requirement but doesn‟t want to wait until the start of the
next year
 Questions
◉ Is this change permitted mid year since it does not impact
existing deferral elections?
◉ Does the answer change it the plan used the safe harbor
match instead?
Slide | 80

81.
Mid-Year Amendment To Safe Harbor Plan
 Questions
◉ Is this change permitted mid year since it does not impact
existing deferral elections?
◉ Does the answer change it the plan used the safe harbor
match instead?
 Proposed answer
◉ None
 IRS response
◉ The official IRS position is that the only exceptions for
changes during the year are those in Announcement 200759.
◉ Acknowledged this is unworkable and needs to be clarified.
Slide | 81

82.
Allocation Of Forfeitures
 Facts/variations
◉ Forfeitures occurring in one plan year become allocable to
other participants in the immediately following year.
◉ Forfeitures are used only to pay plan expenses. If current
forfeitures exceed expenses, unused forfeitures are rolled
forward and applied to future years‟ expenses.
◉ Upon cash-out, non-vested portion transferred to forfeiture
account but is not allocated until the end of the year.

Prior to allocation, plan terminates and forfeitures are
reallocated.
 Questions
◉ Which of these scenarios is/are permitted?
◉ Why or why not?
Slide | 82

83.
Allocation Of Forfeitures
 Questions
◉ Which of these scenarios is/are permitted?
◉ Why or why not?
 Proposed answer
◉ Permitted as long as it is consistent with plan terms.
◉ Not permitted. If forfeitures exceed expenses, plan must
provide excess amounts are reallocated or reduce employer
contributions.
◉ The forfeiture is valid even if reallocation does not occur
until later.
 IRS response
◉ The IRS agreed with the proposed answer.
Slide | 83

84.
Rehires And Distributions
 Facts
◉ Plan has no in-service distribution provision.
◉ Participant has bona fide severance from
employment, triggering distributable event.
◉ Participant is then rehired.
 Questions
◉ Does the rehire extinguish the participant‟s right to elect a
distribution?
◉ Does it matter whether the participant is rehired as full or
part time?
Slide | 84

85.
Rehires And Distributions
 Questions
◉ Does the rehire extinguish the participant‟s right to elect a
distribution?
◉ Does it matter whether the participant is rehired as full or
part time?
 Proposed answer
◉ The participant no longer has a right to a distribution until a
subsequent employment termination.
◉ The full/part time status has no bearing on the answer.
 IRS response
◉ The IRS agreed with the proposed answer.
Slide | 85

86.
Part 4
P LAN D OCUMENTS

87.
This Date In History
 Miscellaneous
◉ 1889: North and South Dakota were admitted to the Union
◉ 1947: Howard Hughes flew the Spruce Goose for just over
one minute
◉ 1948: Harry S. Truman won re-election despite newspaper
headlines to the contrary
◉ 1976: Jimmy Carter was the first southerner elected
President since the Civil Way
◉ 1985: Miami Vice became the second TV soundtrack to hit
the top of the album charts – first was Peter Gunn in 1959
Slide | 87

88.
Prototype vs. Volume Submitter
 VS offers greater design flexibility
◉ Non-safe harbor hardship provisions
◉ Minor modifications permitted without complete loss of
reliance
 Cross-tested plans
◉ Fewer differences
◉ No more prototype limitation on number of allocation rates
◉ http://www.relius.net/News/TechnicalUpdates.aspx?ID=58
6
 See recent guidance
◉ IRS Rev. Proc. 2011-49
◉ New LRMs updated October 2011
Slide | 88

89.
Mandatory Restatements
 Pre-approved documents
◉ 6-year restatement cycle



◉
Mass submitter drafts and submits to IRS during first 2 years
IRS reviews and approves during next 2 years
Employers adopt during the last 2 years
DB plan cycle generally begins 2 years after DC cycle
Slide | 89

90.
Mandatory Restatements
 EGTRRA cycle for DC plans
◉ Based on 2004 cumulative list of changes
◉ Submitted to IRS for review by January 31, 2006
◉ IRS issued opinion/advisory letters on March 31, 2008
◉ Employers had until April 30, 2010 to adopt
◉ See IRS Rev. Proc. 2007-44, Section 16.03
 PPA cycle for DC plans
◉ Based on 2010 cumulative list of changes
◉ To be submitted to IRS for review by January 31, 2012
◉ IRS to issue opinion/advisory letters in early 2014
◉ Employers will be required to adopt by early to mid 2016
◉ See IRS Rev. Prov. 2011-49, Section 29
Slide | 90

91.
Mandatory Restatements for IDPs
 Deadline based on last digit of EIN of plan sponsor
◉ Cycle A with EIN ending in 1 or 6: January 31, 2007/2012
◉ Cycle B with EIN ending in 2 or 7: January 31, 2008/2013

◉
Cycle C with EIN ending in 3 or 8: January 31, 2009/2014

◉
Governmental plans in this cycle regardless of EIN
Cycle D with EIN ending in 4 or 9: January 31, 2010/2015

◉
Multiple Employer Plans in this cycle regardless of EIN
Multiemployer plans in this cycle regardless of EIN
Cycle E with EIN ending in 5 or 0: January 31, 2011/2016
Slide | 91

92.
Words Mean Things
“When I use a word,” Humpty Dumpty said in rather a
scornful tone, “it means just what I choose it to mean –
neither more nor less.”
“The question is,” said Alice, “whether you can make words
mean so many different things.”
Humpty Dumpty began again. “They‟ve a
temper, some of them – particularly
verbs, they‟re the proudest – adjectives
you can do anything with, but not
verbs – however, I can mange the
whole lot of them!”
Source: Through The Looking Glass, Lewis Carroll
Slide | 92

93.
The Plan Document Requirement
 Plan must be a definite written program
◉ Treas. Reg. §1.401-1(a)(2)
 Walsh v. Bank of America Corporate Severance
Program (U.S. District Court for the Southern
District of MA)
◉
“…in more recent cases, the First Circuit has held that courts
should not look beyond the express terms of an ERISAregulated plan unless the disputed term is ambiguous,” and
that „[i]n ERISA cases…the central issue must always be
what the plan promised…and whether the plan delivered.”
Slide | 93

94.
The Plan Document Requirement
 Kennedy v. Plan Administrator for DuPont Savings
& Investment Plan (U.S. Supreme Court, January
2009)
◉
◉
“ERISA provides no exception to the plan administrator‟s
duty to act in accordance with plan documents.”
“ERISA forecloses any justification for enquiries into
expressions of intent, in favor of the virtues of adhering to an
uncomplicated rule. Less certain rules could force plan
administrators to examine numerous external
documents…and draw them into litigation like this.”
Slide | 94

95.
Procedure Is Important
 Richard G. Tatum v. R.J. Reynolds Tobacco
Company (US District Court for the Middle District
of NC, July 2011)
◉
◉
◉
Employee Benefits Committee had authority to amend “by
written instrument”
“All resolutions or other actions taken by the EBC shall be by
vote of a majority of the members of the Committee present
at any meeting, or without a meeting by an instrument
signed by a majority of the members of the Committee.”
Amendment invalidated


No vote
Signed by only the secretary of the EBC
Slide | 95

96.
What‟s The Deference?
 Federal judicial standards of review
◉ De novo
◉ Deferential
 De novo standard applies…
◉ “unless the benefit plan gives the administrator or fiduciary
discretionary authority to determine eligibility for benefits
or to construe the terms of the plan.”
 Firestone language = deferential review unless
decision is “arbitrary, capricious or an abuse of
power”
Source: Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 103 L. Ed. 2d 80, 109 S. Ct. 948 (1989)
Slide | 96

97.
Mistake or Ambiguity
 The case
◉ Conversion of traditional DB plan to cash balance plan
◉ “the [opening account balance] is (A) the Participant‟s
applicable transition factor…times (B) the lump-sum
cashout value…, multiplied by the applicable transition
factor…”
◉ Double application increased benefits by $2.5 billion
◉ Second application disregarded as ambiguity
 The decision
◉ Plan provision was unambiguous on its face
◉ Committee abused its discretion
◉ Interpretation and modification are two different things
Source: Young vs. Verizon’s Bell Atlantic Cash Balance Plan, 575 F. Supp. 2d 892 (N.D. Ill. 2008)
Slide | 97

98.
Mistake or Ambiguity
 Subsequent class action suit
◉ Verizon sought reformation based on mutual mistake of fact
◉ Argued participants understood single application of
transition factor
 The decision
◉ “The phrase calling for a second multiplication was a
drafting error. No evidence exists to suggest that any plan
participant relied on the error. In fact, the course of dealing
between defendants and the plan participants shows that
benefits were consistently calculated by multiplying the
transition factor once. To enforce the erroneous plan
provision now would result in an enormous windfall to the
class participants.”
Source: Young vs. Verizon’s Bell Atlantic Cash Balance Plan, 575 F. Supp. 2d 892 (N.D. Ill. 2008)
Slide | 98

99.
The Court Has The Power
 The case
◉ Plan restatement in 1996 changed benefit formula from Step
to Integrated
◉ Benefits continued to be calculated using Step formula
◉ Scrivener‟s error identified in 2002 and IRS approval sought
to correct via retroactive amendment
◉ IRS approved in late 2003
◉ Participants sued for benefits under Integrated formula
 The decision
◉ Plan terms were clear and unambiguous
◉ Court has exclusive power to correct scrivener‟s error
◉ Correction requires mutual mistake
Source: Cross v. Bragg, 2009 WL 2196887 (4th Cir. July 24, 2009)
Slide | 99

100.
One More For Good Measure
 The case
◉
◉
◉
◉
Frye suffered two work-related injuries and received compensation
for permanent partial disabilities
DB plan had offset for certain disability payments.
Frye sued when pension benefits were offset
District court found in Frye‟s favor and Thompson appealed
 The decision
◉
…the fiduciary…is not free, by virtue of its discretion, “to disregard
unambiguous language in the plan.” On the other hand, the
fiduciary‟s “use of interpretive tools to disambiguate ambiguous
language is . . . entitled to deferential consideration...” In using
such tools, the fiduciary may not, of course, rewrite or modify the
plan. “Interpretation and modification are different; the power to
do the first does not imply the power to do the second.”
Source: Frye v. Thompson Steel Company, No. 10-1900 (7th Cir. September 2, 2011)
Slide | 100

101.
Words Mean Things
Slide | 101

102.
Part 5
IRS W EBSITE

103.
This Date In History
 Music
◉ 1957: Jailhouse Rock - Elvis Pressley
◉ 1965: Get Off of My Cloud - The Rolling Stones
◉ 1973: Midnight Train To Georgia - Gladys Knight & The
Pips
◉ 1981: Private Eyes - Hall & Oates
◉ 1989: Sowing The Seeds Of Love - Tears for Fears
Slide | 103

104.
Checklists
 One-page pdf checklists by plan type
◉ SIMPLE IRA
◉ SEP
◉ SARSEP
◉ 401(k)
◉ 403(b)
 Designed for plan sponsor use
 Links to Fix-It Guides
Source: http://www.irs.gov/retirement/article/0,,id=117534,00.htmlQ
Slide | 104

105.
Checklists
Source: http://www.irs.gov/retirement/article/0,,id=117534,00.htmlQ
Slide | 105

106.
Fix-It Guides
 Provide plain-English descriptions of
◉ Basic plan rules
◉ Common errors
◉ Correction methodology
 Available for the following plan types
◉ SIMPLE IRA
◉ SEP
◉ SARSEP
◉ 401(k)
 Designed for plan sponsor use
Source: http://www.irs.gov/retirement/sponsor/article/0,,id=181908,00.html
Slide | 106

107.
Fix-It Guides
Source: http://www.irs.gov/retirement/sponsor/article/0,,id=181908,00.html
Slide | 107

108.
401(k) Compliance Questionnaire
Source: http://www.irs.gov/pub/irs-tege/epcu_401k_questionnaire.pdf
Slide | 108

109.
EP Exam Guidelines
Source: http://www.irs.gov/retirement/article/0,,id=96954,00.html
Slide | 109

110.
Questions
Page
| 110
Adam C. Pozek, ERPA, QPA, QPFC
Partner
DWC ERISA Consultants, LLC
651.204.2600 ext. 107
www.linkedin.com/in/adampozek
Adam.Pozek@DWCConsultants.com
Twitter.com/PozekOnPension
www.DWCConsultants.com
www.PozekOnPension.com
DWCAdamPozek
AdamCPozek

111.
Caveats & Disclaimers
THE
CONTENT OF THIS PRESENTATION IS GENERAL IN NATURE AND IS FOR
INFORMATIONAL PURPOSES ONLY.
IT
IS NOT INTENDED TO BE NOR SHOULD IT BE
USED AS A SUBSTITUTE FOR SPECIFIC TAX, LEGAL AND/OR FINANCIAL ADVICE
THAT CONSIDERS ALL RELEVANT FACTS AND CIRCUMSTANCES.
TO ENSURE COMPLIANCE WITH THE REQUIREMENTS IMPOSED ON US BY IRS
CIRCULAR 230, WE INFORM YOU THAT ANY TAX ADVICE CONTAINED IN THIS
COMMUNICATION (INCLUDING ANY ATTACHMENTS) IS NOT INTENDED AND CANNOT
BE USED FOR THE PURPOSE OF: (I) AVOIDING TAX-RELATED PENALTIES UNDER
THE INTERNAL REVENUE CODE, OR (II) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY TAX-RELATED MATTER(S) ADDRESSED
HEREIN.

112.
The End