Problems and Issues With Non-Discrimination Rules - Case Studies

7/28/2019 Problems and Issues With Non-Discrimination Rules - Case Studies

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Problems and Issues withNondiscrimination Rules - Case Studies

March 18, 2003

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of your organization and Hewitt Associates LLC


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Agenda

Controlled Group Issues

Plan Aggregation Issues

Determination of HCEs

Determination of Most Valuable Accrual

Rates


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Controlled Group Issues


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Groups to Include

Who knows the group?

Are there leased

employees?

Are there affiliated

service group relations?

Are there acquisitions?


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Issue 1:

Who knows the controlled group?

Essential to involve legal counsel

HR contacts may not know

whether or not they have a parent or sub

percentage of ownership if they do

that foreign parent owns other U.S. companies

whether business relationships constitute an affiliatedservice group or leasing arrangement

Requires interpretations of corporate law

WE DO NOT PRACTICE LAW


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Issue 1:


A

B

C D

E F G

H

K J

I

USAUSA

USA USA

USAUSA

USA

USA

France

France

Canada

Acquires 80%

100%80%

40% 40%50%50%-acquired

prior year

85%0%-Leasing grp

0%-Mgt Svcs only

0%-Svcs only

Exercise: Identify controlled groups in years 0, 1, and 2, assuming acquisitions

admitted to controlled group at end of transition period


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Issue 1:


Situation: Company with foreign ownership

Family, Inc. family company owner retiring

Sells to New Dad, Inc., a large European company

so children dont take over

Family, Inc. checks and finds other US companies

owned by New Dad to include in testing Later Family, Inc. finds that New Dads Canadian

subsidiary also owns additional US entities to

include in testing, but wonders about finding others


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Issue 1:


Situation: Holding company

All Alone Company is acquired by a holding

company (Hold My Hand But Pretend Im NotHere, Inc.)

All Alone is happy it still gets to maintain its own

plans, payroll, do its own filings But, now All Alone must figure out who else Hold

My Hand owns and how to collect data from who

in order to do its testing


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Issue 2:

Are there leased employees?

Leasing arrangements

Considered leased employee if

provide services pursuant to an agreement

services performed substantially full time for at least a year

services provided under direction of recipient employer

not covered by a safe harbor retirement plan


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Issue 2:


Situation: Typical leasing arrangements

In NDT planning meeting, Who Me, Lease? Co.

states they have only 3 leased employees

jokes passing a small group in the hall that we had just

passed all their leased employees

After reviewing a leased employee checklist, WhoMe Lease calls back with 200 leased employees

since the controlled group had only 2000 NHCEs before,

the 75% ratio test changes to 68% and now requires an

average benefit percentage test


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Issue 2:


Situation: Company employees work at JV

Division J is owned by Bigger Fish Company

Bigger Fish Company spins off Division J to form a

joint venture

Division J employees become employees of the JV

Bigger Fish Company also has a few employeeswho remain Big Fish, but work at the JV

these employees are tested as employees by Bigger Fish,

but also must be included as leased employees by the JV


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Issue 2:


Situation: Company acquires employees

We Do Everything, Inc. acquires the office staff,

their portion of the retirement plan, and the wholebuilding of the We Dont Do Floors Co.

The professional staff of We Dont continues to work

in the building & control the work of the office staff We Do tests the office staff as employees

We Dont includes the office staff as leased

aggregates office plan as if its own


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Issue 3:

Are there affiliated service groups?

Affiliated Service Groups

No ownership involved, based in part on regular

provision of services or management services by aservice organization

Dont forget affiliated service groups of affiliated

service groups IRS will rule via Form 5300 filing whether an

affiliated service group relationship exists


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Issue 3:


Situation: Company acquires employees - 2

We Do Windows, Inc. acquires the office staff, their

portion of the retirement plan, and the whole buildingof the We Dont Do Windows Co.

The professional staff of We Dont continues to work

in the building & control the work of the office staff An affiliated service group relationship exists

We Do and We Dont are tested as one controlled

group


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Issue 3:


Situation: Attorneys disagree

We Do Everything, Inc. now acquires We Do

Windows, Inc.

The affiliated service group relationship is causing its

plan to fail under the new controlled group

The attorney for We Do Windows thinks it shouldpass since they feel the relationship with We Dont

Do Floors should also be an affiliated service group

The attorney for We Do Everything disagrees


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Issue 4:

What about acquisitions?

Transition rule application

Not much guidance

Generally agreed the transition rule cant be relied on

to avoid testing indefinitely if frequent M&A

some attorneys suggest testing the company and its

acquisition as separate controlled groups until the end of

the transition period

some suggest testing the company only without its

acquisition until the end of the transition period

some ignore the transition rule


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Issue 4:

What about acquisitions?

Situation: Separate testing during transition

All Together Now, Inc. acquires Not Quite Together

Yet, Inc. and instructs Not Quite Together tocontinue testing as usual until transition ends

Not Quite Together tests its multiple employer plan

plan provides cuts to HCEs After transition, All Together Now attorney gets

involved in testing and determines there is a single

employer, not multiple employers


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Groups to Exclude

Are there multiple

employer plans?

Are there jointventures?

What about the tax-

exempt exclusion?


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Issue 1:

Any multiple employer plans?

Multiple employer plans

Each employer adopting a multiple employer plan

must test separately from other adopting employers

However, failing results for one adopting employer

affect the qualified status of all in the plan


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Issue 1:


Situation: Plan has adopting employers

Wild Blue Company sponsors a profit sharing plan

and Limp a Lot, Inc. and Come Fly With Me, Inc.also choose to adopt the plan.

Come Fly uses the top 20% election for HCEs.

Limp a Lot dissolves, but Come Fly hires many ofthe Limp a Lot employees.

Come Fly includes its new employees for testing, but

ignores them for HCE determination.


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Issue 1:


Situation: Continues benefits after sale

Wild Blue Company sells its Flap Your Wings

division, but allows the employees to continue in itsplans for one year.

The new Flap Your Wings Company becomes

another adopting employer for the year. The Wild Blue Company will test including Flap Your

Wings employees/benefits up to sale

Flap Your Wings will do its own testing of the plan from

the sale date until benefits cease


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Issue 2:

What happens with JVs?

Joint Ventures

When there is not an 80% ownership relationship for

a joint venture, each group becomes a separatecontrolled group

As stated previously, there may be some employees

included in testing for both, as a leased employee inone entity


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Issue 2:

What happens with JVs?

Situation: Continues benefits after JV

You Complete Me, Inc. and Ditto, Inc. each spin off

divisions to form a joint venture.

The employees from each company remain in their

respective plans and the JV becomes an adopting

employer of both plans. Neither plan passes testing with respect to the JV


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Issue 3:

What about tax-exempt exclusions?

Tax-exempt exclusion

Only allowed for 401(k) plan testing

Requires no tax-exempt employees benefiting in

401(k)

Requires 95% coverage of non tax-exempt

employees in the 401(k) plan If requirements met, 401(k) plan testing for 410(b)

can exclude tax-exempts from the controlled group


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Issue 3:

What about tax-exempt exclusions?

Situation: For Profits have own 401(k) plans

You Keep It Company is not for profit and

acquires Well Take It, Corp., a for profit company

Smaller Well Take It has four divisions, each with

its own 401(k) plan

Even aggregated, 401(k) plans fail 410(b) no other employees left to offer 401(k) to improve results

No divisions 401(k) plan covers 95% of Well Take

It employees to exclude tax-exempts


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When to Aggregate Plans


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Issue 1:

Cant Pass NCT?

Situation: Two plans with different BRFs

Company has two plans with identical formulas

One plan is discriminatory alone, so desires to

aggregate with second plan

BRFs are different, but the second plans BRFs are

more generous, so can be aggregated with first plansBRFs to pass

Frequent requests to improve first plan benefits and

BRFs are monitored to ensure testing compliance


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Issue 1:

Cant Pass NCT?

Situation: Plans amended to be identical

We Are All Individuals, Inc. has a discriminatory

plan

The plan aggregates with a second plan

First plan requires cuts to HCEs to ensure passing

and can eliminate 401(a)(4) cuts if aggregated plan issafe harbor

First plan wont give up accruals for terminations,

and company insists on last-day for second plan


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Issue 2:

Aggregating to Avoid ABT?

Situation:


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Issue 2:

Aggregating DB and DC?

Situation: DB/DC plan cant pass gateways

PS plan for Over There division employees and

defined benefit plan for Over Here division

Over There PS provides 6% to rank and file, 3% to

executives (rank and file includes some HCEs)

Over Here is a discriminatory group providingdefined benefit plan with 1% of pay formula

Highest HCE allocation is a DB participant with 38%

Average NHCE rate for DB is 2.5%


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Issue 2:



DB/DC plan fails Minimum Allocation Gateway

1/3 of 38% > 2.5%

2.5% < 7.5%

DB/DC plan fails Primarily DB Gateway

DB group couldnt pass NCT, so wont have 50% NHCEs DB/DC plan fails Broadly Available Separate Plans

if DB group could pass the NCT, there would be no reason

to aggregate


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Issue 2:



Consider implications under proposed cash balance

regulations if DB plan converted to a cash balanceplan with 6%/3% allocations as in PS, but

provided DB/CB choice to all in DB plan

provided greater of formula to all in DB plan

provided CB with frozen DB minimum to all in DB plan


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Issue 3:

Aggregating vs. Merger?

Situation: Merger of target plan and MPP

Safe harbor target plan participation was frozen

several years ago

All employees hired since then participate in a safe

harbor money purchase plan

To save money, trusts were combined, plans merged Target and MPP tested by restructuring

until cross-testing regulations

now is supposed to pass Gateways without restructure


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Issue 4:

Different plan years in ABT?

Situation: One employee, two plan years

Not really an aggregation issue

Employee benefits in a calendar year 401(k) plan and

in a 4/1 plan year MPP plan

Employee is HCE for 2003 testing of the 401(k) plan

No testing done for the MPP since no HCEs benefit would have been NHCE for plan year ending 3/31/2003

Average benefit test required for 401(k) plan


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Determining HCEs


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Issue 1:

Acquiring HCEs?

Situation: New member of controlled group

BuyCo acquires NewCo assets on November 1, 2002

NewCo employees immediately join BuyCos DB

plan

As part of transaction, certain senior NewCo execs

will lose their jobs in early 2003 Can the BuyCo DB plan provide the execs with

annual normal retirement pensions equal $16,000?


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Issue 2:

Collecting the right pay?

Situation: Average benefits test with different

plan years

Plan A is being tested for its 12/31/2002 plan year

Plan B (10/31 pye) is also in the testing group

HCEs for the ABT are either Plan A (12/31/2002) or

Plan B (10/31/2002) HCEs Does Plan A keep track of fiscal 10/31 employee

compensation? Or Plan B 12/31?

3


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Issue 3:

When are snapshots not enough?

Situation: Required to cross-test a definedcontribution plan

Minimum allocation gateway requires each NHCE toreceive an allocation at least 1/3 of the largest HCEallocation

The highest allocation rate is likely to belong to an

HCE with partial year of pay Snapshot testing identifies HCEs on the snapshot

date, so could miss HCEs who leave mid-year


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Determining Most ValuableAccrual Rates

I 1


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Issue 1:

Dont forget to close windows

Situation: Plan offers an early retirement

window

Window benefits are reflected in most valuableaccrual rates in first year it is open

In MVAR iteration, include window benefits at first

age, but exclude them at ages after window closes

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Issue 2:

What is average annual comp?

Situation: Short-service employees

The regulations state that the averaging period must

consist of three or more years, but need not be longerthan the employees period of employment

They have less than a full averaging period of

compensation

Can the rest of the averaging period be filled with

zero compensation?

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Issue 3:

Improving the rate grouping

Situation: Not all rate groups pass 410(b)

Most often, rate group ranges are determined

mechanically, starting at 0% Frequently, better results are had by adjusting the

starting point

The HCE rates within a range cannot be significantlyhigher than the nHCE rates


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Odds and Ends

I 1


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Issue 1:

Union membership

Situation: Union and non-union members

covered by same plan

Employer believes entire plan is collectivelybargained

Identity of union members not always clear

Actuary has entire census, but no union indicator norplan year compensation

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Issue 2:

Non-resident aliens

Situation: US and British employees covered

by same plan

Brits are totally excludable if they have no US sourceincome

Can provide separate discriminatory benefit structure

for the Brits Must comply with applicable UK tax and benefits

rules, if applicable

Documents

Problems and Issues With Non-Discrimination Rules - Case Studies