7/28/2015. Correction Issues. Kevin Donovan Pinnacle Plan Design, LLC. Mark Dunbar DB&Z, Inc. ACOPA Actuarial Symposium, 8/7 8/8/2015

Transcription

1 1 Correction Issues Kevin Donovan Pinnacle Plan Design, LLC Mark Dunbar DB&Z, Inc. ACOPA Actuarial Symposium, 8/7 8/8/

2 Correction Issues Topics to cover NHCE who actually was an HCE Missing Employees who show up retroactively Ambiguity in Top-Heavy provision Drop in HCE compensation Demographics change (allowable 11(g) amendment) Unexpected HCE deferral Restructuring Cash Balances at retirement: Annuity Election Cash Balance Plans: Interest Crediting Rate Changes Cash Balance Plans: Interest Crediting Rate Rate of Return Cash Balance Plans: Late Retirement Cash Balance Plans: Pre-Approved Plans 3 NHCE Who Actually Was an HCE Demographics Name Age Compensation Ned 55 $265,000 Catelyn 55 $265,000 Hodor 40 $40,000 Rodrick 40 $40,000 Arya * 25 $30,000 Jayne 25 $30,

3 NHCE Who Actually Was an HCE Basic Profit Sharing/Cash Balance Plan Design with husband and wife owners HCEs each receive flat $150,000 CB accrual, NHCEs receive 2.75% CB accrual Profit Sharing plan limited to 6.00% of total compensation; NHCEs receive necessary allocation to pass testing Plan has been in effect for 3 years and has satisfied testing based on provided census 5 NHCE Who Actually Was an HCE In the current plan year, it is discovered that Arya, an NHCE, is actually the daughter of the owners Ned and Catelyn Consequently, the plan fails testing in the current year and historically How to correct? 6 3

4 NHCE Who Actually Was an HCE File VCP? Increase CB accruals historically for NHCEs This would entail increasing the NHCEs Cash Balance accruals from 2.75% to 11.00% per year Only provide increased accruals to two 40 years olds? Ways to correct Revise each years reporting Accrued to date Cannot increase Profit Sharing Plan allocations historically If using accrued to date method, then could increase 2015 PS allocation to help testing 7 Missing Employees Who Show Up Retroactively Individual owns 100% of his corporation Owner is the only employee Owner only plans 10% Defined Benefit Plan accrual, limited to 6% allocation in Profit Sharing Plan Owner has not made Profit Sharing allocations Plan has been in existence for 3 years 8 4

5 Missing Employees Who Show Up Retroactively It is discovered that the company has other employees besides the owner After collecting the historical census data, 7 employees are determined to be eligible to participate in the plans How to correct for current and prior years? File as VCP? 9 Missing Employees Who Show Up Retroactively Actual Demographics Name Age Compensation Actual Years of Participation Littlefinger 40 $265,000 3 EE #1 45 $50,000 3 EE #2 35 $45,000 3 EE #3 35 $45,000 2 EE #4 30 $40,000 2 EE #5 30 $40,000 1 EE #6 25 $35,000 1 EE #7 25 $35,

6 Missing Employees Who Show Up Retroactively Option #1: No VCP Filing Defined Benefit Plan Employees receive 10% accrual for all prior years Redo historical valuations, verify minimum funding has been satisfied If minimum funding has not been satisfied, then additional contributions will be necessary, excise taxes due, etc. Profit Sharing Plan No historical changes if no contributions If prior contributions, contributions need to be reallocated year by year 11 Missing Employees Who Show Up Retroactively Option #2: VCP Filing Revise historical testing for each prior year Defined Benefit Plan Argue that plan design would have been 10% accrual for owner, 0.5% for staff employees Profit Sharing plan Provide Profit Sharing allocations necessary to pass testing Is this an acceptable approach? 411(d)(6) issues? 12 6

7 Missing Employees Who Show Up Retroactively IRS interpretation? After the plan is corrected, moving forward the plan would be redesigned to a more typical DB/DC combo plan with an owner and staff employees 13 Ambiguity in Top-Heavy Provision Typical PS/CB combo plan Owners receive 50% CB allocation, staff employees 2.50% allocation Staff employees receive necessary allocation in Profit Sharing plan to satisfy testing Top-Heavy has been historically satisfied in the Profit Sharing plan (5% allocation) 14 7

8 Ambiguity in Top-Heavy Provision Standard Language in DB Document to allow for Top-Heavy to be satisfied in PS Plan: for any Plan Year in which the plan is Top-Heavy each Participant who is not a Key EE and has completed 1,000 Hours of Service will accrue a benefit of 2% of the Participant s highest average compensation for the 5 consecutive years for which the Participant had the highest Compensation. the above provision will not apply to any Participant to the extent that the Participant is covered under any other plan or plans of the Employer and the minimum allocation or benefit requirement applicable to Top-Heavy Plans is met in the other plan or plans. 15 Ambiguity in Top-Heavy Provision What if the language providing for the Top- Heavy benefit to be satisfied from other plan or plans is missing from the DB document? How to correct? Is VCP required? 16 8

9 Ambiguity in Top-Heavy Provision Solution #1 Argue that the omission of the necessary Top- Heavy language from the DB document was a scribner s error (fat chance) Top-Heavy was provided under the PS sharing plan for both the PS and DB plans No benefit revisions required Corrective amendment to the DB document 17 Ambiguity in Top-Heavy Provision Solution #2 Satisfy Top-Heavy in DB plan by providing 2% accrual to Non-Key Participants for all years the DB plan was Top-Heavy This is in addition to the 5% Top-Heavy allocation provided under the Profit Sharing plan Necessary to revise prior year reporting 18 9

10 Drop in HCE Compensation Cash Balance & Profit Sharing Combo Plan in existence for 3 years Owner has historically earned over the compensation limit Owner receives 25% CB Allocation, staff receives 3.00% CB Allocation Owner receives 5% PS allocation and defers $18K for 2015 Plan Year Staff receives 7% PS allocation and defers 3% of pay 19 Drop in HCE Compensation Expected 2015 Demographics Name Age Compensation 401(k) Deferral Daenerys 35 $265,000 $18,000 Jorah 40 $35,000 $1,050 Drago 35 $60,000 $1,800 Viserys 35 $50,000 $1,500 Missandei 25 $30,000 $900 Grey Worm 25 $35,000 $1,050 Mirri 40 $40,000 $1,200 Xaro 35 $80,000 $2,

11 Drop in HCE Compensation The plan has historically passed testing using an annual pay methodology The 2015 census data is received, and the owner s compensation has dropped from $265,000 to $110,000 New accountant Sub S election, duh! The plan fails testing for the 2015 Plan Year using 2015 compensation How to correct? 21 Drop in HCE Compensation Switch testing methodology from annual pay methodology to High 3-Year Average pay methodology For 2015, use high 3 of last 4 years Owner s pay for testing purposes increases from $110,000 to $255,000 for 2015 testing year 410(b) and 401(a)(4) testing is then satisfied, plan passes testing for the year using annual testing method w/ Average Compensation 22 11

12 Drop in HCE Compensation Other options? Accrued to date testing (this would automatically require the use of Average Compensation) How long an Average Compensation period can you use? Minimum 3 years 23 Demographics Change Basic Cash Balance/ Profit Sharing Combo Plan 2 Owners (husband/wife) Professional organization (not covered by PBGC) Historically, plan has passed testing due to population demographics As a result of turnover, the NHCE population becomes older Plan fails testing 24 12

13 Demographics Change Plan Provisions & Characteristics Cash Balance Plan Owners receive flat $130,000 accrual Staff Participants receive 3.00% accrual Profit Sharing Plan Owners receive 5% total allocation; $18,000 deferral Staff Participants receive 7.00% total allocation 25 Demographics Change Current Plan Demographics Name Age Compensation Date of Hire Joffrey 45 $265,000 1/1/2013 Margaery 45 $265,000 1/1/2013 Varys 40 $40,000 1/1/2013 Loras 40 $40,000 1/1/2013 Pycelle 60 $30,000 1/1/2013 Brienne 25 $30,000 1/1/

14 Demographics Change Under current plan demographics, plan fails 401(a)(4) and 410(b) How to pass testing? Use Average Compensation Accrued-to-Date testing 11(g) amendment Need another young participant Otherwise, drastic benefits to current employees will need to be provided 27 Demographics Change Solution Employer has young employee hired on 1/1/2015 Employee not yet eligible for PS or CB plan Prepare an 11(g) amendment to allow immediate participation in PS plan for young employee who is not currently eligible Allow for allocation in PS plan for young employee (7.00% allocation in this case, could be much larger) Young employee will not yet enter the CB plan 28 14

15 Demographics Change Revised Plan Demographics Name Age Compensation Date of Hire Joffrey 35 $265,000 1/1/2013 Margaery 35 $265,000 1/1/2013 Varys 40 $40,000 1/1/2013 Loras 40 $40,000 1/1/2013 Pycelle 60 $30,000 1/1/2013 Brienne 25 $30,000 1/1/2013 Sansa 25 $30,000 1/1/ Demographics Change Sample 11(g) Amendment language to Profit Sharing Plan With respect to the Plan Year beginning January 1, 2015 and ending December 31, 2015, Employee Sansa shall be a Participant in the Plan and shall receive an allocation of the Company contribution that is equal to 7.00% of her base pay for 2015, under Treasury Regulation Section 1.401(a)(4)-11(g) in order to satisfy the nondiscrimination tests under Code Section 401(a)(4). Such allocation of the Company contribution only applies with respect to 2015 and shall not guarantee or otherwise give rise to allocations of the Company contribution to Sansa for any subsequent Plan Year. Must be vested! How much? 30 15

16 Demographics Change Alternative Solutions if employer does not have a young currently ineligible employee? Prepare 11(g) amendment to provide larger benefits to current staff participants 11(g) amendment can be for PS plan, CB plan, or some combination of both PS plan allocations must remain below 6.00% of total compensation What if only non-eligible employees are part-time employees? (e.g., have always been < 1,000 hours per year) Can we cherry-pick one or more PT employees, who would otherwise be non-eligible, to satisfy testing? How would this affect overall testing? 31 Unexpected HCE Deferral Basic Cash Balance/ Profit Sharing Combo Plan 2 Owners (husband/wife), 5 Staff Employees Professional organization (not covered by the PBGC) Plan in existence for 3 years Wife has had low compensation historically and has not made deferrals 32 16

17 Unexpected HCE Deferral Plan Provisions & Characteristics Cash Balance Plan Owner receives flat $150,000 accrual Wife receives 5.00% accrual Staff Participants receive 3.00% accrual Profit Sharing Plan Owners receive 5.00% total allocation Staff Participants receive 7.00% total allocation Deferrals: Owner max, wife none, staff 3.00% 33 Unexpected HCE Deferral Current Plan Demographics Name Age Compensation Deferrals Robert 55 $265,000 $18,000 Cersei 45 $35,000 $18,000 Tywin 65 $40, % Jaime 45 $40, % Tyrion 40 $30, % Stannis 45 $30, % Lancel 30 $30, % 34 17

18 Unexpected HCE Deferral Wife unexpectedly made the maximum deferral of $18,000 when the current census data was received (new accountant duh!) Wife s EBAR for average benefits test using current compensation increases from an expected 3.30% to 29.50% Plan is now failing 410(b) How to correct? 35 Unexpected HCE Deferral IRC Section 1.410(b)-5(e)(5): Average Benefit Percentage Test Three-year averaging period: An employee s benefit percentage may be determined for a testing period as the average of the employee s employee benefit percentages determined separately for the testing period and for the immediately preceding one or two testing periods (referred to in this section as an averaging period). Employee benefit percentages of a particular employee that are averaged together within an averaging period must be determined on a consistent basis for all testing periods within the averaging period. Under IRC Section 1.410(b)-5(e)(5) the EBAR used in the Average Benefit Percentage Test can be the average of the EBAR for the last two or last three years. It appears that the decision to use an average can be done on a participant by participant basis. That means that for an HCE, the average can be used if it would lower the EBAR, and, conversely, it can be used for NHCEs if it raises the EBAR

19 Unexpected HCE Deferral Solution Average the EBARs over the past 3 years for 410(b) purposes only Wife s EBAR for average benefits test now decreases from 29.50% to 12.00% Plan now satisfies 410(b) Depending on demographics, may need to increase PS allocation for staff participants as well Reduce owner's PS allocations to stay under 6.00%? 37 Restructuring Breaks a single plan into multiple component plans for coverage and non-discrimination testing Beneficial when whole plan does not satisfy 401(a)(4) on either a benefits or contributions basis Each component plan may be tested differently (on benefits or contributions basis) Entire plan must still satisfy certain requirements (410(b), top heavy, minimum gateway requirements) 38 19

20 Restructuring Each component plan must satisfy 410(b) Beneficial with different demographics of HCE s Husband/wife Owner/children Older Owner/Younger Owner 39 Example of Restructuring 2014 Employer Contr as % Name Pay Age Contribution EBAR of Pay HCEs: 1 HCE #1 52, , % 9.00% 2 HCE #2 30, % 3.00% Subtotals: 82, , % NHCEs: 1 NHCE #1 20, % 3.00% 2 NHCE #2 31, % 3.00% 3 NHCE #3 35, , % 3.00% 4 NHCE #4 19, % 3.00% Subtotals: 107, , % Totals: 189, ,

21 Example of Restructuring #1 Rate Group Testing fails since no NHCE s have EBAR s of at least 4.73%. Average Benefits Testing fails 70% of the HCE average percentage is 2.30% NHCE average percentage is 1.91% We can restructure the plan into two component plans to pass both 410(b) and 401(a)(4) We test HCE #1 on a benefits basis with NHCE #3 and NHCE #4 HCE #2 is tested on a contributions basis with NHCE #1 and NHCE #2 41 Example of Restructuring #1 Plan 1: Benefits Basis Plan 2: Contributions Basis 410(b) Test: 410(b) Test: 2 NHCE s/4 NHCE s 2 NHCE s/4 NHCE s Divided by Divided by 1 HCE/2 HCE s = 100% 1 HCE/2 HCE s = 100% Both component plans pass coverage of 410(b) Plan 1: Benefits Basis 401(a)(4) Test: HCE #1: 1.85% EBAR Plan 2: Contributions Basis 401(a)(4) Test: HCE #2: 3.00% Contrib NHCE #3: 2.67% NHCE #1: 3.00% NHCE #4: 2.90% NHCE #2: 3.00% 2 NHCE s/4 NHCE s 2 NHCE s/4 NHCE s Divided by Divided by 1 HCE/2 HCE s = 100% 1 HCE/2 HCE s = 100% Both component plans pass non-discrimination of 401(a)(4) 42 21

22 Example of Restructuring #2 (1) Equivalent (2) (1)+(2) Equivalent Employer Total Salary Percent 3% Safe Harbor Accrual Contr Deferral Total Accrual of Normal and Add'l as a as a as a Contr as a Total Date of Date of Retire 2014 Profit Sharing Percent Percent Salary Percent (Discret Percent Employer Name Birth Hire Date Pay Age Contribution of Pay of Pay Deferral of Pay plus 401(k) of Pay Contr HCEs: 1 Owner 03/16/ /01/ /01/ , , % 13.27% 17, % 52, % 67.36% 2 Wife of Owner 09/25/ /27/ /01/ , , % 5.00% 17, % 26, % 18.10% 3 Child #1 11/10/ /10/ /01/ , % 3.00% % % 1.52% 4 Child #2 07/09/ /10/ /01/ , % 3.00% % % 1.52% Subtotals: 497, , % 35, % 80, % 88.50% NHCEs: 1 NHCE #1 06/03/ /18/ /01/ , % 5.00% % % 1.22% 2 NHCE #2 09/03/ /03/ /01/ , , % 5.00% % 1, % 2.46% 3 NHCE #3 04/16/ /03/ /01/ , % 5.00% % % 1.69% 4 NHCE #4 12/16/ /21/ /01/ , % 5.00% % % 1.65% 5 NHCE #5 02/11/ /01/ /01/ , , % 5.00% % 1, % 2.05% 6 NHCE #6 06/25/ /06/ /01/2005 4, % 5.00% % % 0.48% 7 NHCE #7 10/04/ /18/ /01/ , , % 5.00% % 1, % 1.95% Subtotals: 117, , % % 5, % 11.50% Totals: 615, , , , % x 25% Discretionary Limit = 153, Example of Restructuring #2 NEW COMPARABILITY TESTING RESULTS WITHOUT IMPUTED DISPARITY: IRC 410(b) Average Benefits Percentage Test: (PASSES) (Considers Deferrals and Employer Contributions) IRC 401(a)(4) Rate Group Test: (FAILS) (Considers only Employer Contributions) Average Accrual Percentage for HCEs: 7.94% x 70% = 5.56% Average Accrual Percentage for NHCEs: 3.12% Restructuring: 410(b) Testing wife and kids on contributions basis Plan A Plan B NHCE Concentration Percentage: (2/7) 0.29% 71.43% (5/7) (1/4) 0.25% 75.00% (3/4) Number of NHCEs = % 95.24% Number of Employees = 11 Safe Harbor % = 47.75% Unsafe Harbor % = 37.75% Percentage = 63.64% Midpoint % = 42.75% BENEFITS BASIS Equivalent Number Number Rate Accrual of of Group 401(a)(4) Rate Group Rate HCEs NHCEs Ratio % Restructuring Rate Groups: EBAR HCE NHCEs Ratio % All % 0.00% % Owner % (Fails) 3.21% % Wife of Owner % 5.00% % Child # % (Fails) 3.00% % Child # % (Fails) 3.00% % 44 22

23 Cash Balances at Retirement: Annuity Election 2 Owners in the plan $150,000 annual cash balance allocation Plan in existence for 5 years, 5% interest crediting rate Plan Actuarial Equivalence: 5%, Lump Sum mortality One owner retires at 65, Cash Balance account = $828, Cash Balances at Retirement: Annuity Election Owner elects a Life Annuity Actuarial Equivalence 65 = Monthly Life Annuity: $5, Assume 3% interest and Lump Sum Mortality for annuity purchase Annuity purchase factor = Value of Life Annuity = $996,174 20% greater than value of cash balance account What to do? 46 23

24 Interest crediting rate - change Can interest rate be changed? Why would you want to? May be having testing issues with current (otherwise compliant) rate Current rate non-compliant 47 Interest crediting rate - change Relief for Interest Crediting changes Interest crediting is a right to which participant is entitled once the pay credit has accrued i.e., once the pay credit for a year has been earned, the right to interest on it for all years through distribution is accrued Cannot cut future interest credits, even before they re credited Except in narrow relief provided in 2014 regs 48 24

25 Interest crediting rate - change Can change from one compliant rate to another Wear-away approach on old balance i.e. payout greater of balance at date of change, plus interest at old rate, or such balance, plus pay credits, plus interest at new rate But not for those not active (or no longer benefiting) at amendment date. Otherwise would be receiving greater of two compliant rates 49 Interest crediting rate - change Consider plan using 30-year Treasury rate Recall IRS requires.5% accrual to be receiving meaningful benefit for IRC 401(a)(26) 30-year rate for December 2014 is 2.83% Consider employee age 37, NRA 62 Compensation = $50,000; pay credit 2% of comp. APR 2015 applicable table = (13.05 annual) 50 25

26 Interest crediting rate - change Pay credit = $50,000 *.02 = $1,000 To NRA = $1,000 * ( ^ 25) = $2, Benefit = $2, / / 50,000 =.31% Not meaningful What if change interest crediting rate to 5% fixed? To NRA = $1,000 * (1.05 ^ 25) = $3, Benefit = $3, / / 50,000 =.51% Meaningful 51 Interest crediting rate - change Re change from 30-year rate to fixed rate Would need to keep track of pre-amendment balance and continue to credit interest at 30-year rate At ASD such balance would be compared to actual balance at such date Of course if 30-year rates stay where they are will be non-issue 52 26

27 Interest rates - ROR Why use ROR for interest crediting? In general, goal is to invest assets to mirror crediting rate And shift investment risk to employees Losses do not create a funding shortfall Goal is to simply deposit pay credits 53 Interest rates - ROR Why use ROR for interest crediting? In general, goal is to invest assets to mirror crediting rate But issues can arise with (a)(4) 401(a)(26) 54 27

28 Interest rates - ROR CB Plan s early retirement reduction: Benefit at aa = a NRA / (1 + int) ^ (NRA - aa) / a aa (where int = current interest crediting rate) Suppose NRA = 62, aa = 55, ROR = 15% $ limit (age 55) = $17,500 * / 1.15 (7) / = $5, LS Limit (age 55) = $5, * = $976,576 If crediting rate 5%, 415 LS Limit ~ $1.85 million 55 Interest rates - ROR Consider 55-year old law partner At age 50 began pay credits of $125k annually Averaged 5% ROR; at age 55 balance = $690K But last year ROR 15% LS limited to 5/10 * $976,576 = $488,288 $200K less than balance! Can be mitigated by capping crediting rate at 5% 56 28

29 Interest rates - ROR Normal accrual rate generally = inc. in AB / Comp. Assume same data as previous slide pay credit $100K; Comp. $250K At 5% NAR = $100K * 1.05 ^ 7 / / 250K = 4.31% At 15% NAR = $100K * 1.15 ^ 7 / / 250K = 8.15% Leverage obtained by testing PS at 8.5% lost! Again mitigated by capping crediting rate at 5% 57 Interest rates - ROR Recall math from earlier slide re change in crediting rate Pay credit to NRA = $1,000 * ( ^ 25) = $2, Benefit = $2, / / 50,000 =.31% Not meaningful What if interest crediting rate 5% fixed? Pay credit to NRA = $1,000 * (1.05 ^ 25) = $3, Benefit = $3, / / 50,000 =.51% Meaningful Lower rate can cause a26 failure mitigate with 5% fixed for NHCs 58 29

30 Late Retirement With respect to a participant with an annuity starting date after NRA, a cash balance plan must either provide an actuarial increase after NRA, or satisfy the requirements for suspension of benefits under 411(a)(3)(B). Accordingly, a cash balance plan that does not properly suspend benefits violates the requirements of 411(a) if the balance of the hypothetical account is not increased sufficiently for post NRA distributions Reg (a)(13)-1(b)(2)(i) 59 Late Retirement Consider a plan crediting interest based on the ROR of plan assets Absent a minimum rate such a plan could violate the rules for post NRA increases in years with low or negative returns But a minimum rate would violate the market rate requirement (absent relief) 60 30

31 Late Retirement Reg (b)(5)-1(e)(4) provides such relief A statutory hybrid plan is not treated as providing an effective interest crediting rate that is in excess of a market rate merely because the plan provides that the participant s benefit, as of each annuity starting date after normal retirement age, is equal to the greater of-- (i) The benefit based on the accumulated benefit determined using an interest crediting rate... not in excess of a market rate ; and (ii) The benefit that satisfies the requirements of section 411(a)(2). 61 Late Retirement Of course this is not an issue if significant pay credits are still being received i.e. post retirement actuarial increase is only required if adjusted NRA accrual would result in a benefit greater than that received under the terms of the plan including continued accruals 62 31

32 Late Retirement Consider balance at NRA (65) of $500,000 Interest credit based on ROR plan assets APRs based on (e) table and 5% Age 65 = age 66 = Assume reasonable rate for post retirement increase is 5% - note there is no guidance here 63 Late Retirement Accrued benefit at 65 = $3, $500,000 / = $3, Age 66 AB would need to be $3, $3, * * 1.05 / = $3, Balance would need to be at least $525,000 $3, * = $525,000 If ROR under 5% and no (or low) pay credit would need to adjust interest credit upward 64 32

33 Late Retirement Note that this is algebraically the same as insuring interest credit is enough for reasonable adjustment So what is reasonable? Certainly not a negative rate based on ROR or RIC 30-year Treasury? Currently ~ 3% 3-year Treasury + 50 bps? Currently ~ 1.5% Again, zero guidance 65 Pre-Approved Plans In Announcement IRS extended submission deadline for PPA restatement of pre-approved DBPs to February 2, 2015 IRS intent was to expand pre-approved program to plans with certain cash balance features. Announcement further extended submission deadline to June 30, 2015 Rev proc further extended to October 30,

34 Pre-Approved Plans Announcement provided that current sponsors of cash balance plans could complete Form 8905 (Certification of Intent to Adopt a Pre-approved Plan) before end of applicable individually designed on-cycle deadline (1/31/16 for Cycle E) negating need to restate until deadline for pre-approved documents. 67 Pre-Approved Plans Again, IRS intent was to expand pre-approved program to plans with certain cash balance features. Begs question as to what features will & will not be allowed in pre-approved plans And what happens if 8905 signed but upon restatement plan does not meet specs required for pre-approval and therefore adopts an IDP? Look at Rev Proc

35 Pre-Approved Plans Temporary Eligibility for Six-Year Cycle An employer who adopts an individually designed plan is entitled to remain in the six-year remedial amendment cycle only for the current remedial amendment cycle. This temporary eligibility for the six-year cycle applies if: (1) the employer is an intended adopter (as described in section 17.04) and after timely executing the Form 8905, the employer decides to adopt an individually designed plan whose underlying plan document is not based on a pre-approved plan 69 Pre-Approved Plans An employer is an intended adopter if: (1) the employer currently maintains a qualified individually designed plan and (2) such employer and a sponsor or practitioner who maintains an existing pre-approved plan execute Form 8905 before the end of the employer s five-year remedial amendment cycle 70 35

36 Pre-Approved Plans Confirmed in IRS Employee Plan News Issue March 19, 2014 Question 1 confirms above conclusion 71 Pre-Approved Plans Rev Proc also provides what cash balance features will be allowed (or rather won t be allowed) in pre-approved plans Section references below are to applicable sections in RP (two references in each slide refer to M&P and VS sections of RP) 72 36

37 Pre-Approved Plans 5.16(1) / 14.08(1) A cash balance plan that was the subject of a conversion amendment must comply with the provisions of 411(b)(5)(B)(iii) and must comply with 1.411(b)(5)-1(c). i.e., A +B approach must be used Also, opinion or advisory letters won t be issued for plans using opening account balance as described in 1.411(b)(5)-1(c)(3). i.e., set and check approach to conversion not allowed (2) / 14.08(2) Pre-Approved Plans Plans that contain structure of pay credits that increase with age, service, or otherwise must be definitely determinable, operationally nondiscriminatory, and at all times in compliance with the 133 1/3 percent rule of 411(b)(1)(B) 74 37

38 Pre-Approved Plans 6.03(7) / 14.08(2) Letters not issued for: Plans with non-cash balance formulas E.g., PEP plans Plans with interest credits based on participant choice Plans with interest credits based on return on plan assets or return on mutual funds 75 Pre-Approved Plans 6.03(7) / 14.08(2) Letters not issued for (cont.): Conversions other than pure A + B Plans not using 133 1/3 method to pass 411(b) Plans funded with insurance under 412(e)(3) Certain offset arrangements 76 38