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

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

Types of Qualified Plans Defined Contribution Plans Profit Sharing 401(k) Simple 401(k) Money Purchase Target Benefit Defined Benefit Plans

What Is EGTRRA ? Economic Growth and Tax Relief Reconciliation Act of 2001 Centerpiece of $1.35 Trillion Tax Cut Most provisions effective 2002

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

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 Don’t forget to discuss Signing Bonus opportunity

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

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

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

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?

EGTRRA A. NO, Universal Availability Rule

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 plan’s limits. Can Mary do this?

EGTRRA A. Yes, Individual Catch up Contribution

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?

EGTRRA A. Yes

Defined Contribution Plan Limits Effective 1/1/02 Deduction Limits Increased Effective 2002, Profit Sharing Plans may now deduct 25% of Compensation 25% limit doesn’t 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

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

New Portability Is A Big Win For 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

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?

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

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

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

EGTRRA Fosters Small Business Sales Simplification of Top Heavy Rules Key Employee—definition is simplified Safe Harbor 401(k) Plans—are now exempt from top-heavy testing Minimum Top Heavy Contribution Requirement—can now be satisfied with matching contributions

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

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

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?

EGTRRA A. NO, one year look back rule.

401(k) Safe Harbor Says: Remove 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

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?

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

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?

EGTRRA A. Yes, exception for profit sharing plans

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?

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

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

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

Exclusions/Eligibility Age & Service 21 & 1 year of service 24 months with 100% vesting ( Profit Sharing Only) Classifications: Part time employees(can’t exclude as a class) Union Employees can be excluded Leased Employees can be excluded(limitations) must pass 410(b) coverage testing

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?

Discrimination Testing

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

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)

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 company’s plan can pass 410(b) coverage testing

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?

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

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?

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

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?

Family Attribution A. Yes, family attribution rules apply

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?

Family Attribution A. No, Family attribution rules don’t apply if there is no common interest between Mary & Bob’s companies.

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 & 3HC’s, XYZ has 18NHC & 6 HC’s. Can this be done?

410 (b) coverage Issues A. Yes, subject to 410(b) testing Each plan must cover 70% of NHC’s ABC 3/9=33% * 70% = 23% * 27=6<9=Pass XYZ 6/9=66%* 70% = 46% * 27=12<18=Pass Plan’s must be tested annually

QUESTIONS