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

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

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

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

5. 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

6. 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

7. 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

8. Increased Limits for Retirement Plans
401 (a) (17) Compensation Limit
Current Law: $170,000
EGTRRA: $200,000 in $205,000 in $210,000 in $215,000 in $220,000 in 2006

9. 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

10. 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?

11. EGTRRA
A. NO, Universal Availability Rule

12. 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?

13. EGTRRA
A. Yes, Individual Catch up Contribution

14. 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?

15. EGTRRA
A. Yes

16. 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

17. Increased Profit-Sharing Deduction Limit All Businesses Can Save More
Post EGTRRA
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

18. 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

19. 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?

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

21. 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

22. 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

23. 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

24. 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

25. Modification to Top Heavy Rules
Pre-EGTRAA
EGTRRA
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

26. 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?

27. EGTRRA
A. NO, one year look back rule.

28. 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

29. 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?

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

31. 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?

32. EGTRRA
A. Yes, exception for profit sharing plans

33. 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?

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

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

36. 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

37. 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

38. 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?

39. Discrimination Testing

40. 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

41. 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)

42. 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

43. 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?

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

45. 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?

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

47. 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?

48. Family Attribution
A. Yes, family attribution rules apply

49. 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?

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

51. 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?

52. 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

53. QUESTIONS