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Problems and Issues with Nondiscrimination Rules-Case StudiesMarch 18,2003To protect the confidential and proprietary information included in this material,it may not be disclosed or provided to any third parties without the approval of your organization and Hewitt Associates LLC1AgendaControlled Group IssuesPlan Aggregation IssuesDetermination of HCEsDetermination of Most Valuable Accrual Rates2Controlled Group Issues 3Groups to IncludeWho knows the group?Are there leased employees?Are there affiliated service group relations?Are there acquisitions?4Issue 1:Who knows the controlled group?Essential to involve legal counselHR contacts may not knowwhether or not they have a parent or subpercentage of ownership if they dothat foreign parent owns other U.S.companieswhether business relationships constitute an affiliated service group or leasing arrangementRequires interpretations of corporate lawWE DO NOT PRACTICE LAW5Issue 1:Who knows the controlled group?ABCDEFGHKJIUSAUSAUSAUSAUSAUSAUSAUSAFranceFranceCanadaAcquires 80%100%80%40%40%50%50%-acquired prior year85%0%-Leasing grp0%-Mgt Svcs only0%-Svcs onlyExercise:Identify controlled groups in years 0,1,and 2,assuming acquisitions admitted to controlled group at end of transition period6Issue 1:Who knows the controlled group?Situation:Company with foreign ownershipFamily,Inc.family company owner retiringSells to New Dad,Inc.,a large European company so children dont take overFamily,Inc.checks and finds other US companies owned by New Dad to include in testingLater Family,Inc.finds that New Dads Canadian subsidiary also owns additional US entities to include in testing,but wonders about finding others7Issue 1:Who knows the controlled group?Situation:Holding companyAll Alone Company is acquired by a holding company(Hold My Hand But Pretend Im Not Here,Inc.)All Alone is happy it still gets to maintain its own plans,payroll,do its own filingsBut,now All Alone must figure out who else Hold My Hand owns and how to collect data from who in order to do its testing8Issue 2:Are there leased employees?Leasing arrangementsConsidered leased employee ifprovide services pursuant to an agreementservices performed substantially full time for at least a yearservices provided under direction of recipient employernot covered by a safe harbor retirement plan9Issue 2:Are there leased employees?Situation:Typical leasing arrangementsIn NDT planning meeting,Who Me,Lease?Co.states they have only 3 leased employeesjokes passing a small group in the hall that we had just passed all their leased employeesAfter reviewing a leased employee checklist,Who Me Lease calls back with 200 leased employeessince the controlled group had only 2000 NHCEs before,the 75%ratio test changes to 68%and now requires an average benefit percentage test 10Issue 2:Are there leased employees?Situation:Company employees work at JVDivision J is owned by Bigger Fish CompanyBigger Fish Company spins off Division J to form a joint ventureDivision J employees become employees of the JVBigger Fish Company also has a few employees who remain Big Fish,but work at the JVthese employees are tested as employees by Bigger Fish,but also must be included as leased employees by the JV 11Issue 2:Are there leased employees?Situation:Company acquires employeesWe Do Everything,Inc.acquires the office staff,their portion of the retirement plan,and the whole building 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 staffWe Do tests the office staff as employeesWe Dont includes the office staff as leasedaggregates office plan as if its own 12Issue 3:Are there affiliated service groups?Affiliated Service GroupsNo ownership involved,based in part on regular provision of services or management services by a service organizationDont forget affiliated service groups of affiliated service groupsIRS will rule via Form 5300 filing whether an affiliated service group relationship exists13Issue 3:Are there affiliated service groups?Situation:Company acquires employees-2We Do Windows,Inc.acquires the office staff,their portion of the retirement plan,and the whole building of the We Dont Do Windows Co.The professional staff of We Dont continues to work in the building&control the work of the office staffAn affiliated service group relationship existsWe Do and We Dont are tested as one controlled group14Issue 3:Are there affiliated service groups?Situation:Attorneys disagreeWe Do Everything,Inc.now acquires We Do Windows,Inc.The affiliated service group relationship is causing its plan to fail under the new controlled groupThe attorney for We Do Windows thinks it should pass since they feel the relationship with We Dont Do Floors should also be an affiliated service groupThe attorney for We Do Everything disagrees15Issue 4:What about acquisitions?Transition rule applicationNot much guidanceGenerally agreed the transition rule cant be relied on to avoid testing indefinitely if frequent M&Asome attorneys suggest testing the company and its acquisition as separate controlled groups until the end of the transition periodsome suggest testing the company only without its acquisition until the end of the transition period some ignore the transition rule16Issue 4:What about acquisitions?Situation:Separate testing during transitionAll Together Now,Inc.acquires Not Quite Together Yet,Inc.and instructs Not Quite Together to continue testing as usual until transition endsNot Quite Together tests its multiple employer planplan provides cuts to HCEsAfter transition,All Together Now attorney gets involved in testing and determines there is a single employer,not multiple employers17Groups to ExcludeAre there multiple employer plans?Are there joint ventures?What about the tax-exempt exclusion?18Issue 1:Any multiple employer plans?Multiple employer plans Each employer adopting a multiple employer plan must test separately from other adopting employersHowever,failing results for one adopting employer affect the qualified status of all in the plan19Issue 1:Any multiple employer plans?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 of the Limp a Lot employees.Come Fly includes its new employees for testing,but ignores them for HCE determination.20Issue 1:Any multiple employer plans?Situation:Continues benefits after sale Wild Blue Company sells its Flap Your Wings division,but allows the employees to continue in its plans 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 saleFlap Your Wings will do its own testing of the plan from the sale date until benefits cease21Issue 2:What happens with JVs?Joint Ventures When there is not an 80%ownership relationship for a joint venture,each group becomes a separate controlled group As stated previously,there may be some employees included in testing for both,as a leased employee in one entity22Issue 2:What happens with JVs?Situation:Continues benefits after JVYou 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 JV23Issue 3:What about tax-exempt exclusions?Tax-exempt exclusionOnly allowed for 401(k)plan testingRequires no tax-exempt employees benefiting in 401(k)Requires 95%coverage of non tax-exempt employees in the 401(k)planIf requirements met,401(k)plan testing for 410(b)can exclude tax-exempts from the controlled group24Issue 3:What about tax-exempt exclusions?Situation:For Profits have own 401(k)plansYou Keep It Company is“not for profit and acquires Well Take It,Corp.,a“for profit companySmaller Well Take It has four divisions,each with its own 401(k)planEven aggregated,401(k)plans fail 410(b)no other employees left to offer 401(k)to improve resultsNo divisions 401(k)plan covers 95%of Well Take It employees to exclude tax-exempts25When to Aggregate Plans 26Issue 1:Cant Pass NCT?Situation:Two plans with different BRFs Company has two plans with identical formulasOne plan is discriminatory alone,so desires to aggregate with second planBRFs are different,but the second plans BRFs are more generous,so can be aggregated with first plans BRFs to passFrequent requests to improve first plan benefits and BRFs are monitored to ensure testing compliance27Issue 1:Cant Pass NCT?Situation:Plans amended to be identical We Are All Individuals,Inc.has a discriminatory planThe plan aggregates with a second planFirst plan requires cuts to HCEs to ensure passing and can eliminate 401(a)(4)cuts if aggregated plan is safe harborFirst plan wont give up accruals for terminations,and company insists on last-day for second plan28Issue 2:Aggregating to Avoid ABT?Situation:29Issue 2:Aggregating DB and DC?Situation:DB/DC plan cant pass gatewaysPS plan for Over There division employees and defined benefit plan for Over Here divisionOver There PS provides 6%to rank and file,3%to executives(rank and file includes some HCEs)Over Here is a discriminatory group providing defined benefit plan with 1%of pay formulaHighest HCE allocation is a DB participant with 38%Average NHCE rate for DB is 2.5%30Issue 2:Aggregating DB and DC?Situation:DB/DC plan cant pass gatewaysDB/DC plan fails Minimum Allocation Gateway1/3 of 38%2.5%2.5%7.5%DB/DC plan fails Primarily DB GatewayDB group couldnt pass NCT,so wont have 50%NHCEsDB/DC plan fails Broadly Available Separate Plansif DB group could pass the NCT,there would be no reason to aggregate 31Issue 2:Aggregating DB and DC?Situation:DB/DC plan cant pass gatewaysConsider implications under proposed cash balance regulations if DB plan converted to a cash balance plan with 6%/3%allocations as in PS,butprovided DB/CB choice to all in DB planprovided“greater of formula to all in DB planprovided CB with frozen DB minimum to all in DB plan32Issue 3:Aggregating vs.Merger?Situation:Merger of target plan and MPPSafe harbor target plan participation was frozen several years agoAll employees hired since then participate in a safe harbor money purchase planTo save money,trusts were combined,plans mergedTarget and MPP tested by restructuringuntil cross-testing regulationsnow is supposed to pass Gateways without restructure 33Issue 4:Different plan years in ABT?Situation:One employee,two plan yearsNot really an aggregation issueEmployee benefits in a calendar year 401(k)plan and in a 4/1 plan year MPP planEmployee is HCE for 2003 testing of the 401(k)planNo testing done for the MPP since no HCEs benefit would have been NHCE for plan year ending 3/31/2003Average benefit test required for 401(k)plan 34Determining HCEs 35Issue 1:Acquiring HCEs?Situation:New member of controlled group BuyCo acquires NewCo assets on November 1,2002NewCo employees immediately join BuyCos DB planAs part of transaction,certain senior NewCo execs will lose their jobs in early 2003Can the BuyCo DB plan provide the execs with annual normal retirement pensions equal$16,000?36Issue 2:Collecting the right pay?Situation:Average benefits test with different plan yearsPlan A is being tested for its 12/31/2002 plan yearPlan B(10/31 pye)is also in the testing groupHCEs for the ABT are either Plan A(12/31/2002)or Plan B(10/31/2002)HCEsDoes Plan A keep track of fiscal 10/31 employee compensation?Or Plan B 12/31?37Issue 3:When are snapshots not enough?Situation:Required to cross-test a defined contribution planMinimum allocation gateway requires each NHCE to receive an allocation at least 1/3 of the largest HCE allocationThe highest allocation rate is likely to belong to an HCE with partial year of paySnapshot testing identifies HCEs on the snapshot date,so could miss HCEs who leave mid-year38Determining Most Valuable Accrual Rates 39Issue 1:Dont forget to close windowsSituation:Plan offers an early retirement window Window benefits are reflected in most valuable accrual rates in first year it is openIn MVAR iteration,include window benefits at first age,but exclude them at ages after window closes40Issue 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 longer than the employees period of employmentThey have less than a full averaging period of compensationCan the rest of the averaging period be filled with zero compensation?41Issue 3:Improving the rate groupingSituation: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 pointThe HCE rates within a range cannot be significantly higher than the nHCE rates42Odds and Ends 43Issue 1:Union membershipSituation:Union and non-union members covered by same planEmployer believes entire plan is collectively bargainedIdentity of union members not always clearActuary has entire census,but no union indicator nor plan year compensation44Issue 2:Non-resident aliensSituation:US and British employees covered by same planBrits are totally excludable if they have no US source incomeCan provide separate discriminatory benefit structure for the BritsMust comply with applicable UK tax and benefits rules,if applicable45
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