ERISA Review/Training

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• ERISA Review/Training
• Peter Sullivan Peter Welsh
• May 8-10, 2002

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ERISA REVIEW

• Qualified Plan Types
• EGTRRA Changes
• Eligibility/Exclusions
• Discrimination Testing
• Multiple Employers

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Types of Qualified Plans

• Defined Contribution Plans
• Profit Sharing
• 401(k)
• Simple 401(k)
• Money Purchase
• Target Benefit
• Defined Benefit Plans

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What Is EGTRRA ?

• Economic Growth and Tax Relief Reconciliation Act
  of 2001
• Centerpiece of 1.35 Trillion Tax Cut
• Most provisions effective 2002

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Contribution Limits As of 12/31/01

• 10,500
• Participant limits
• Lesser of 25 of Pay or 35,000
• 15
• Profit Sharing Plans
• 25
• Money Purchase
• Combined Plans

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Increased Limits for Retirement Plans effective
1/1/02

• Maximum Contribution to DC Plan - 40,000
• 25 Limit Deleted
• Limit is now the lesser of 100 of Comp or
  40,000
• Adjustment of up to 1,000/yr. based on inflation
• Catch up contributions do not count against
  contribution limit
• Tremendous opportunity for working spouses

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Increased Limits for Retirement Plans

• Salary Deferral Limit Raised to 11,000
• Will Increase Automatically by 1,000/yr. for 4
  yr.
• After 2006 annual increases limited to 500 based
  on inflation
• Salary Deferrals part of 40,000 Overall Limit
• One or two participants who defer a large of
  income relative to their income could
  dramatically effect ADP test

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Increased Limits for Retirement Plans

• 401 (a) (17) Compensation Limit
• Current Law 170,000
• EGTRRA 200,000 in 2002 205,000 in
  2003 210,000 in 2004 215,000 in
  2005 220,000 in 2006

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Increased Limits for Retirement Plans

• Catch Up Contributions
• Available to Workers 50 and older
• Allows an extra 1,000 per year in Deferrals
• Increases 1,000/yr. until 5,000 in 2006
• Contributions not subject to ADP Test
• Contributions not subject to 40,000 Limit

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EGTRRA

• ABC Company is part of a brother sister
  controlled group with XYZ corp. ABC wants to
  offer catch-up contributions, however XYZ does
  not. Can ABC still offer Catch up contributions?

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EGTRRA

• A. NO, Universal Availability Rule

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EGTRRA

• Q. Mary ( age 52) participates in two 401(k)
  plans maintained by two unrelated employers. Mary
  contributes 6,000 in each plan. The
  contributions do not exceed either plans limits.
  Can Mary do this?

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EGTRRA

• A. Yes, Individual Catch up Contribution

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EGTRRA

• ABC company has a profit sharing plan that they
  contribute 15 to annually. They would like to
  add another 10 to bring the total to 25.
  effective 1//1/02. Can they still add a 401(K)
  option?

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EGTRRA

• A. Yes

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Defined Contribution Plan Limits Effective 1/1/02

• Deduction Limits Increased
• Effective 2002, Profit Sharing Plans may now
  deduct 25 of Compensation
• 25 limit doesnt include salary
  deferrals(individual limits still apply)
• Compensation now includes Gross Compensation,
  i.e. 401(k) Employee Deferrals
• Great opportunity to convert/merge MPP into PSP

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Increased Profit-Sharing Deduction Limit All
Businesses Can Save More

• Post EGTRRA
• 
  2001 2002
• Company Eligible Payroll 1,000,000 1,000,000
• (401(k) Employee Deferrals)
  (100,000) (N/A)
• Adjusted Eligible Payroll 900,000 1,000,000
• Deduction Limit x 15 x 25
• Employer Deductible Amount 135,000 250,000

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New Portability Is A Big WinFor Individuals,
Sponsors, and You

• Individual rollovers permitted between employer
  401(a), 403(b), governmental 457 plans, and IRAs
• Tax-exempt employer 457 plans are excluded
• Applied to distributions after 12/31/2001

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EGTRRA

• Q. ABC Company is a non-profit that maintains a
  403(B) plan. They are adding a 401(k) plan
  would like to roll the 403(b) assets into the
  401(K) plan. Can they do this?

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EGTRRA

• A. No, Participants must initiate the transfer
  after a distributable event. A company cannot
  make a Trustee to Trustee transfer.

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EGTRRA and IRS Foster Small Business Sales

• Tax Credit For Plan Start-up Costs
• 50 of the first 1,000 in administration and
  retirement education expenses for each of the
  first three years
• Employers with not more than 100 employees who
  earned in excess of 5,000 in the prior year
• At least one NHCE is covered under the plan

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EGTRRA and IRS Foster Small Business Sales

• IRS User Fee Waived
• New plans established by sponsors with 100 or
  less employees
• At least one NHCE must be covered under the plan
• IRS filing submitted after 12/31/2001 and within
  the first 5 plan years

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EGTRRA Fosters Small Business SalesSimplification
of Top Heavy Rules

• Key Employeedefinition is simplified
• Safe Harbor 401(k) Plansare now exempt from
  top-heavy testing
• Minimum Top Heavy Contribution Requirementcan
  now be satisfied with matching contributions

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Top Heavy Testing

• Key Employees own more than 60 of the total
  value of plan assets
• Generally Rollovers are not included in this
  test.
• 3 contribution
• 6 year graded vesting

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Modification to Top Heavy Rules
Pre-EGTRAA
EGTRRA - 2002

• Definition of key employee
• Officer earning over 70,000 (indexed)
• 5 owner
• 1 owner earning over 150,000
• top 10 employees with largest ownership
• minimum contribution and vesting requirements
• 5 year lookback on distributions

• Definition of key employee
• Officer earning over 130,000 (increasing by
  5,000 annually)
• 5 owner
• 1 owner earning over 150,000
• matching ctbs included in satisfying minimum ctb
  requirement
• 1 year lookback on distributions
• safe harbor plans are exempt

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EGTRRA

• Q. ABC Company maintains a 401(k) plan.
• John Owns 10 of ABC Company but terminated
  employment during 2000.
• For the 2002 plan year is John a Key Employee?

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EGTRRA

• A. NO, one year look back rule.

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401(k) Safe Harbor SaysRemove Limits on
Employee Contributions

• Two Formulas
• Matching
• 100 match on deferrals up to 3 of compensation
• 50 match on deferrals between 3 and 5 of
  compensation
• Non-elective Employer Contribution
• At least 3 of compensation to all eligible NHCEs
• Can also be used to satisfy
• NCP/AN and other general non-discrimination tests
• Top-heavy minimum contribution requirements

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EGTRRA

• XYZ company has a 401(k) plan that has a calendar
  year plan year. On June 20th, they want to add a
  Safe Harbor provision.
• Can they do this?

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EGTRRA

• A. No, notice must be given prior to start of the
  plan year year the plan year must be 12 months
  long.

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EGTRRA

• Q. Assume the same facts except that XYZ only has
  a profit sharing plan.
• On June 20th can they add the safe harbor
  provision?

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EGTRRA

• A. Yes, exception for profit sharing plans

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Eligibility

• Q. Company A had all of its workers sign
  independent contractor agreements. They now want
  to set up a retirement plan for the owner. Can
  they do this?

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Eligibility

• A. No, it takes more than calling a person an
  independent contractor to exclude them from the
  retirement plan.

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Exclusions

• ABC Company wants to exclude overtime from the
  plan definition of compensation.
• How would you advise the client?

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Exclusions

• Issues
• Any excluded comp. Other than Fringe benefits are
  subject to 414(s) testing.
• 414(s)2 rule
• If Client Fails, must amend by tax filing
• May have to contribute ee contributions

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Exclusions/Eligibility

• Age Service
• 21 1 year of service
• 24 months with 100 vesting ( Profit Sharing
  Only)
• Classifications
• Part time employees(cant exclude as a class)
• Union Employees can be excluded
• Leased Employees can be excluded(limitations)
• must pass 410(b) coverage testing

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Discrimination Testing

• Q. ABC company has 30 employees, 20 of which
  earned more than 85,000 last year. How many
  employees are considered Highly Compensated
  Employees?

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Discrimination Testing

• A. 6

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Discrimination Testing

• Highly Compensated Employee(HCE)
• 5 owner of Company
• earned more than 85,000 for the preceding year
• Top Paid Group
• Top 20 of Employees earning 85,000 for the
  preceding year

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Discrimination Testing

• NHCE ADP Maximum ADP(HCE)
• 0-2 200 of Lower ADP
• 2-8 2 more
• more than 8 125 of lower ADP
• No Family Aggregation
• Family Attribution(Generally Husband/Wife)

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Multiple Employers

• Controlled Groups
• 5 or fewer owners that own more than 80 of each
  company.
• Family attribution rules apply
• Must have common benefits unless each companys
  plan can pass 410(b) coverage testing

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Multiple Employers

• Q. If a parent company has 4 wholly-owned
  subsidiaries, and together the 4 subs each own
  25 of a new sub, are the employees of the new
  sub considered to be employees of the parent
  corporation?

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Multiple Employers

• A. YES
• All employees of the six corporations are deemed
  to be employed by a single employer

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Multiple Employers

• Q. John owns 75 each of 5 car dealerships, the
  remaining 25 is owned 25 by an unrelated
  person, a different one for each corporation.
  John also owns 100 of a body shop. If the body
  shop wants to establish a plan, does it have to
  cover the car dealership employees?

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Multiple Employers

• A. No, none of the companies are considered a
  controlled group.

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Family Attribution

• Bob owns 75 of ABC Co. 25 of XYZ Co. Mary
  owns 25 of ABC 75 of XYZ Co.
• They are Husband Wife
• Is this a controlled group?

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Family Attribution

• A. Yes, family attribution rules apply

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Family Attribution

• Bob owns 100 of ABC Co. 0 of XYZ . Mary owns
  0 of ABC 100 of XYZ.
• These businesses are unrelated have no
  interaction with each other.
• Bob Mary are Husband Wife
• Is this a controlled group?

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Family Attribution

• A. No, Family attribution rules dont apply if
  there is no common interest between Mary Bobs
  companies.

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410 (b) Coverage Issues

• ABC Company XYZ are a controlled Group. They
  would like to maintain separate plans with
  separate benefits. ABC has 9 NHC 3HCs, XYZ
  has 18NHC 6 HCs.
• Can this be done?

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410 (b) coverage Issues

• A. Yes, subject to 410(b) testing
• Each plan must cover 70 of NHCs
• ABC
• 3/933 70 23 276lt9Pass
• XYZ
• 6/966 70 46 2712lt18Pass
• Plans must be tested annually

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QUESTIONS