SPRING 2009
:: VOL 39, NO 2
THE
ASPPAJournal
ASPPA’s Quarterly Journal for Actuaries, Consultants, Administrators and Other Retirement Plan Professionals
W A S
GR
T O
F H
E AI N
T U
E N I SU SP UDEA T E
401(k) Plans under
Fire—Blaming the
Drought on the Well
In This Issue:
Document Restatement
Strategies
Correcting Late Employee
Contributions
Welfare Benefit Plans After
IRS Notice 2007-83
Taking Stock: An
Introduction to Equity-based
Compensation
by Brian H. Graff, Esq., APM
The current economic and financial markets crisis has obviously
impacted the values of 401(k) plan accounts. It has also fundamentally
affected the overall image of the 401(k) plan itself. You’ve heard the
jokes—“my 401(k) is now a 201(k).” In fact, even the minister at my
church said it during a recent sermon. But the comedic comments
underscore an increasing public anxiety about 401(k) plans. Frankly,
many working Americans (and probably a decent number of members
of Congress) are realizing for the first time that their 401(k) accounts
can go down—by a lot.
Fidelity recently announced in its analysis of 11 million
participants in more than 17,000 plans that account balances went
down on average 27 percent in 2008. In a recent survey conducted
Continued on page 4
Interest Rate Assumptions
in Defined Benefit Plans
A Primer in Cross-testing
SPRING 2009
:: 3
FROM THE EDITOR
Editor in Chief
Brian H. Graff, Esq., APM
The ASPPA Journal Committee
Kimberly A. Flett, QPA, QKA, Co-chair
Teresa T. Bloom, APM, Co-chair
James T. Comer
Catherine J. Gianotto, QPA, QKA
William C. Grossman, QPA
William G. Karbon, MSPA, CPC, QPA
Barry Kozak, MSPA
Michelle C. Miller, QKA
Mary L. Patch, QKA, QPFC
Peter K. Swisher, CPC, QPA
Nicholas J. White
David J. Witz
Editor
Chris L. Stroud, MSPA
Associate Editor
Troy L. Cornett
Production Manager
Troy L. Cornett
Technical Review Board
Michael Cohen-Greenberg
Barry Kozak, MSPA
Marjorie R. Martin, MSPA
Robert M. Richter, APM
Nicholas L. Saakvitne, APM
Advertising Sales
Dawn Bancroft
Design and Layout
Lynn A. Lema
s
s
s
ASPPA OFFICERS
President
Stephen L. Dobrow, CPC, QPA, QKA,
QPFC
President-Elect
Sheldon H. Smith, APM
Senior Vice President
Thomas J. Finnegan, MSPA, CPC, QPA
Vice President
Laura S. Moskwa, CPC, QPA
Treasurer
Robert M. Richter, APM
Secretary
Barry Max Levy, QKA
Immediate Past President
Sal L. Tripodi, APM
Ex-Officio Member of the Executive
Committee
Marcy L. Supovitz, CPC, QPA
Negative Ions Yield
Positive Attitudes
W
by Chris L. Stroud, MSPA
e’ve all heard the familiar
adage, “The fresh air will
do you good.” Just how
much good it does might
depend on where you are. If you’re at the
beach or standing in front of a waterfall, you
are likely to feel refreshed and energized—
maybe even a little euphoric. Why? It’s those
wonderful negative ions!
I love the ocean and I can recharge my
attitude by spending a little time on or near
the water. But until now, I’ve never really
understood why the therapy worked. After
reading about the lure of seaside retreats
and the positive effects of negative ions, I
decided to do a little research. Next stop…
www.google.com.
I learned that the word “ion” comes from
the Greek word meaning “traveler.” Ions
have been around for eons, but they weren’t
noticed until the 19th century. Moving water,
moving air and sunlight create negative ions,
which can stimulate everything from appetite
to plant growth to sex drive. Even though
ions are odorless, tasteless and invisible, when
we inhale these negative ions and they reach
our bloodstream and our brain, they can boost
our energy, increase our awareness, improve
respiratory illnesses, relieve stress and improve
our overall attitude. Large bodies of water,
wave action or churning waters like those in
waterfalls generate massive amounts of negative
ions. Thunderstorms can produce similar
effects. That’s why we feel so invigorated when
we breathe in the fresh air after a good rain.
Perhaps that’s what inspired the famous song
and dance “Singing in the Rain.”
And now, some statistics for the geeks
who like numbers! According to author
Tom Williams, “The negative ion count at
the base of Niagara Falls can be measured at
34,000 to 100,000 per cubic centimeter.” In
the article, Negative Ions,Vitamins of the Air,
Jim Karnstedt and Don Strachan offer this
insight: “Normally only about one atom in
100,000,000,000,000,000 is ionized making
a total of maybe 1,000-2,000 ions per cubic
centimeter....These are usually balanced pretty
evenly between positive and negative, with a
slight edge towards positive.” Fred Soyka told
New Realities, “On the seashore, where water
is always falling, you have about 2,000 negative
to 1,000 positive [ions]. That seems to be
the ratio that human beings respond to most
favorably.”
So what about those positive ions? They
are actually the bad guys—and have a negative
effect on us! Dust storms, car exhausts, cigarette
smoke and many other things attack the good
negative ions and either neutralize them or
positively charge them. Positive ions take away
our good moods and feelings of well-being.
They can make us tired, irritable, tense and
more likely to get sick.
Many in our industry have just finished the
busiest time of the year. The craziness of tax
season can leave us exhausted. Why? Perhaps
it’s because we work more hours, which
requires us to be cooped up in our offices for
extended periods of time. Most offices are
full of positive ions, contributing to our tired
and depressed feeling. The buildings tend to
seal out negative ions while the computers, air
conditioning, lighting and other things generate
way too many positive ions. Typical offices can
have a negative ion count ranging from zero to
only a few hundred per cubic centimeter. We
would likely be tired anyway this time of year,
but the work environment certainly doesn’t
help the situation. The jury is still out on things
that might help to improve the environment
(e.g., negative ion air purifiers, internal and
external waterfalls, etc.), but those might be
worth some research.
So think about this idea to renew your
positive energy. Each year after tax season, plan
a trip to the coast or take a cruise to recharge
your positive attitude. It might be exactly what
your body needs. In the meantime, here’s some
good news. We can all experience the positive
effect of negative ions every day. Our homes
offer a built-in negative ion factory—the shower!
The falling water from your own shower creates
thousands of negative ions and can serve as a
mood enhancer. So grab a towel (and maybe a
glass of wine), turn on the shower and break
out in verse. “I’m singing in the rain...what a
glorious feeling, I’m happy again!”
THE
4 :: ASPPAJournal
CONTINUED FROM PAGE 1
contents
by the National Institute on Retirement Security, only about
one-half of Americans covered by a 401(k)-type plan feel they
will have enough money to retire. Almost 60 percent believe
that 401(k) plans force workers who are not investment experts
to gamble on the stock market, which may result in insufficient
retirement savings. Let’s face it—the 401(k) plan is currently
taking a public relations beating.
Last October, even before the election, the House Education
and Labor Committee, led by Chairman George Miller (D-CA),
conducted a hearing on the impact of the financial crisis on
retirement savings. Needless to say it garnered a lot of attention.
At that hearing Peter Orzag, the new Obama Administration’s
Budget Director, testified that more than $2 trillion in
retirement savings had been wiped out.
Getting even more attention was Professor Teresa
Ghilarducci’s declaration at the hearing that the 401(k) plan
was a “failed experiment” and should be replaced with a $600
tax credit for contributions to retirement accounts maintained
by the government and providing a guaranteed 3% return. She
also stated that 401(k) plans only benefit the rich. Chairman
Miller’s television interview following the hearing, where
he said Professor Ghilarducci’s ideas were worthy of further
examination, created an uproar spawning hundreds of media
stories questioning the viability of 401(k)-type retirement plans.
Just one example was a recent article in the Los Angeles Times,
where the author argued…
“…there’s been little discussion of the way in which
this economic implosion has exposed the utter failure of
the now-ubiquitous 401(k) retirement accounts. In fact,
the entire 401(k) system looks increasingly like the sort
of bait-and-switch con relished by the Bernie Madoffs
of the world.”
6 Document Restatement
Strategies
401(k)-bashing has certainly become fashionable, but
blaming the plan design itself is unjustified. The 401(k) plan is
not a pension plan and was never intended to be one. As you
all know, it was originally viewed as a supplemental retirement
savings plan, not as the primary one. And as a savings plan it has
worked famously. In fact, the 401(k) plan is the only effective
way we have ever gotten working Americans to save.
Participation Rates by Moderate Income ($30,000–$50,000) Workers
Not Covered by a 401(k)-type Plan Versus Covered by a Plan
75.3%
80
60
40
20
0
Not Covered by an
Employer Plan – IRA Only
Covered by an
Employer Plan
Source: Employee Benefit Research Institute (2008).
As provided above, more than 75 percent of workers making
between $30,000-$50,000 contribute when covered by a
401(k)-type plan. These workers are 20 times more likely to save
as compared to those workers not covered by a plan. It is also
true that lower income workers are the primary beneficiaries of
401(k) plans.
29Interest Rate
Assumptions in Defined
Benefit Plans
13 Correcting Late
Employee Contributions
32A Primer in Cross-testing
16Welfare Benefit Plans
After IRS Notice
2007-83
36Fred Reish Honored with
the 2009 ASPPA 401(k)
Leadership Award
21Nominations Open
for ASPPA’s Board of
Directors
36Firms Recently Awarded
ASPPA Recordkeeper
Certification
22 Taking Stock: An
Introduction to Equitybased Compensation
37Did You Know?
38From the President
40 ASPPA GAC on
Capitol Hill
40 GAC Corner
42Focus on ASPPA
Members
44Welcome New Members
and Recent Designees
45 Calendar of Events
46 Fun-da-Mentals
SPRING 2009
Distribution of Estimated Private Sector Active Participants in
401(k) and Profit Sharing Plans Distributed by
Adjusted Gross Income
Percent of All Active Participants
45%
40%
35%
30%
39%
37%
25%
20%
15%
10%
10%
5%
9%
5%
0%
under $50,000
$50,000 under
$100,000
$100,000 under
$150,000
$150,000 under
$200,000
$200,000 or more
Adjusted Gross Income Level
As this chart shows, according to IRS data, 76 percent of participants
in defined contribution plans have annual household incomes of less than
$100,000. 86 percent of households have incomes of less than $150,000.
In recent months, ASPPA’s Government Affairs Committee has been
aggressively conveying these positive facts about 401(k) plans to policymakers
in Washington, and the good news is that these realities are starting to have an
impact among key decision makers. Chairman Miller, in fact, gave a recent
television interview clearly stating that he does not think we should abandon
the 401(k) plan concept. At this point, it seems fairly certain that no one is
seriously considering getting rid of 401(k) plans.
That, however, is where the certainty ends. Despite original intents to
the contrary, the reality for most working Americans is that the 401(k) has
become their sole and primary retirement plan. Consequently, in that context,
we expect over the next several months that there will be a series of hearings
examining the 401(k) plan—three were expected in the month of February
alone. In particular, they will likely be evaluating the 401(k) from the
perspective of those participants who are within five years of retirement and
whose retirement aspirations have been severely impacted by the economic
downturn.
The ASPPA Journal is produced by The ASPPA Journal
Committee and the Executive Director/CEO of ASPPA.
Statements of fact and opinion in this publication, including
editorials and letters to the editor, are the sole responsibility
of the authors and do not necessarily represent the position
of ASPPA or the editors of The ASPPA Journal.
The American Society of Pension Professionals & Actuaries
(ASPPA), a national organization made up of more than
6,500 retirement plan professionals, is dedicated to the
preservation and enhancement of the private retirement
plan system in the United States. ASPPA is the only
organization comprised exclusively of pension professionals
that actively advocates for legislative and regulatory
changes to expand and improve the private pension
system. In addition, ASPPA offers an extensive credentialing
program with a reputation for high quality training that is
thorough and specialized. ASPPA credentials are bestowed
on administrators, consultants, actuaries and other
professionals associated with the retirement plan industry.
:: 5
Through that lens, Congress will evaluate
what has worked and, in their view, what went
wrong. Because, whether you or like it or not,
the perception is that the 401(k) plan failed those
working Americans close to retirement who lost
a substantial amount of their retirement savings.
The standard responses like “the market will
rebound” or “you need to think long-term” are
wholly inadequate to those whose immediate
retirement income expectations have been dashed.
At town hall meetings throughout the country,
401(k) participants are expressing their frustration
and anger to their members of Congress who are
listening.
401(k) reform will certainly be the overriding
retirement policy theme for this Congress, and
given the current climate, there is a real danger
of an overreaction that could do real, long-term
harm to the system. ASPPA’s Government Affairs
Committee is acutely aware of this potential risk
and is already working hard to manage it. It is
going to be a very interesting year.
Brian H. Graff, Esq., APM, is the Executive Director/CEO
of ASPPA. Before joining ASPPA, he was pension and
benefits counsel to the US Congress Joint Committee on
Taxation. Brian is a nationally recognized leader in retirement
policy, frequently speaking at pension conferences throughout
the country. He has served as a delegate to the White
House/Congressional Summit on Retirement Savings, and he
serves on the employee benefits committee of the US Chamber
of Commerce and the board of the Small Business Council of
America. ([email protected])
Correction to The ASPPA Journal Winter 2009 Supplement:
The 2009 Catch-up contribution limit for SAR/SEP is $5,500.
The electronic version of this supplement on the ASPPA Web site has
been modified for this correction.
© ASPPA 2009. All rights reserved. Reprints with permission.
ASPPA is a not-for-profit professional society. The materials
contained herein are intended for instruction only and are
not a substitute for professional advice. ISSN 1544-9769.
To submit comments or suggestions, send an e-mail to
[email protected]. For information about
advertising, send an e-mail to [email protected].
THE
6 :: ASPPAJournal
Document Restatement Strategies
by Amy L. Cavanaugh, CPC, QPA, QKA
Document generation and management must be accurate, timely and profitable.
Balancing these three objectives can be difficult; however, with some forethought
it is possible to create a document protocol to manage your firm’s documentation
and leverage the document restatement process into an exercise that incorporates
plan redesign and an internal audit of the plan’s overall operation. The EGTRRA
restatement window is a great opportunity to take stock of your documents with
respect to their content, their creation and their maintenance. This article is
intended to provide you with some suggestions for managing your document
processing through the restatement and beyond.
P
lan documents and their associated
ancillary paperwork require preparation
time and follow-up. They also need to be
properly archived for future reference. Documents
are not stagnant—they require frequent amendments resulting from new laws such as the Pension
Protection Act, notices required for safe harbor
plans, automatic contribution arrangements and
qualified default investment alternatives (QDIA) as
well as the task of keeping SPDs current.
As your firm takes on new business or
conversion business, it becomes necessary to draft
or restate documents outside of the restatement
process. Also, terminating plans need to be
amended for all laws in effect as of the date of
termination. In short, document production and
management can become a full-time job that must
be incorporated into an already hectic workday.
Because of the ongoing and comprehensive
nature of document management, it is essential
that a system be created not only to create plan
documents, amendments and other required plan
documentation, but to effectively manage this
paperwork so that subsequent amendments and/or
restatements can evolve with a minimal investment
of time and resources.
It is essential to develop a game plan for your
firm’s document work. Your strategy should
consider information gathering, firm-wide defaults,
document delivery and archiving the documents.
As practitioners prepare for the EGTRRA restatement window, they should
review and refine their document strategy.
The Role of the Plan Document
A written plan document is one of the basic qualification requirements set
forth in the Internal Revenue Code. The document is a roadmap for the
overall operation and administration of a retirement plan—it is a resource of
information. It includes all of a plan’s features as well as specific instructions
for the operation and administration of the plan. It is essential that the importance of the plan document be communicated to your staff and to your clients.
S-ASPA ad
SPRING 2009
A retirement plan’s operation is defined by a
combination of what the plan sponsor intended
the plan design to be and how the administrative
software used to operate the plan addresses certain
administrative tasks. When there is a disconnect
between a plan’s operation and its written terms,
the plan becomes disqualified. Disqualifying
events can become costly. In addition to the cost
of correction, there may be fines or compliance
fees and, in the most egregious of cases, a loss of all
favorable tax treatment.
The EGTRRA restatement window is a great
opportunity to make sure that a plan’s operation
is in sync with its written terms. It is also a good
time to reevaluate the current plan designs and
redesign plans to take advantage of new rules, to
reevaluate the objectives of your clients and/or to
create efficiencies that will save time and money.
Before your firm begins restating documents, it is
important to take the time to develop a game plan.
You must determine pricing, staffing, document
delivery as well as what type of document format
to use. It is also a1great
time to re-evaluate
#2_FINAL:Layout
10/14/08
10:08 AM your
Page 1
current use of technology (e.g., client management
or document management software, electronic
delivery of documents, etc.).
:: 7
Document Sponsor or Conduit
It is essential that you determine who the “document sponsor” of your preapproved document is. This sponsor may be your firm or it may be your
document provider. The document sponsor is the party to whom the opinion
or advisory letter was issued by the IRS. This detail becomes important
because there are certain responsibilities the IRS places on the document
sponsor. Also, the document sponsor has the right to amend the plan on
behalf of all the sponsor’s clients. This choice can lead to efficiencies related
to the management of periodic amendments that are required when there has
been a change in the law.
Pricing
Document pricing depends on many different factors. Considerations include:
• what type of document format you are using;
• the terms and conditions of your service contracts; and
• the price your competition is charging.
The complexity of the document and the required supplemental
documents has been increasing. In short, more paper, less revenue. You
will want to price your documents to reflect their true value. Consider
educating your clients as to the importance of the document both in its legal
significance and the tax savings that it creates. The document is truly the
cornerstone of the retirement plans. Some firms are raising their document
prices as part of the EGTRRA restatement project. Others are restructuring
document pricing and charging an annual document fee that covers the
periodic document restatement that is required every five to six years as well
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THE
8 :: ASPPAJournal
The document
restatement
cannot happen
in a vacuum—it
requires client
contact, firmwide decisions on
default provisions
and interaction
with the TPA.
as interim amendments, summary plan descriptions
and periodic disclosures required by the IRS or
the DOL. In some cases firms may offer discounts
to new and/or recently restated clients or as an
incentive to convert from another document.
The Players
The document restatement cannot happen in a
vacuum—it requires client contact, firm-wide
decisions on default provisions and interaction
with the TPA. It also requires a gatekeeper
to manage the gathering and processing of
information as well as document status and followup once the document is delivered and throughout
the submission process, if applicable. Before you
begin the process of actually restating documents,
you will want to determine the staff who will be
involved in the document restatements and the
allocation of responsibilities.
Which staff members you select to generate
the restatements depends on many factors
including the capabilities of your document
generation system. Some document systems
allow for collaboration. If that is the case, you can
have a lower-level staff member enter the general
information and then turn the plan over to the
administrator or consultant to address the more
complex areas. This approach is especially helpful
if there will be plan redesign incorporated into the
document restatement or if the plan is currently
drafted on a document that is different than the
one that will be used for the restatement. If a
GUST plan is drafted using a different document, a
more senior level staff member may have to “map”
the plan from the GUST document provisions to
the EGTRRA interview.
Don’t forget about the submission process. For
staffing purposes, you will need to consider the
level of knowledge required to create a document
submission. If your firm will be submitting the
plan with Form 2848, giving your firm power of
attorney to discuss this matter with the IRS, there
will need to be an attorney, CPA, actuary, Enrolled
Agent or someone with the new ERPA (Enrolled
Retirement Plan Agent) designation. Since none
of these decisions happen in a vacuum, the billing
rate of those involved in the document process
may affect your document pricing.
You will also need to address staffing with
respect to who is going to actually create the
“deliverable” (i.e., what is going to the client).
These staffing needs will be largely dictated by
what you will be delivering and the manner in
which the document package will be delivered.
You may also want to look into available
outside resources. Your document provider or an
outside pension professional may offer resources
to take on some or all of the document generation
processes.
Document Format
There are several different document formats.
Decisions about which one to use depends on
several factors including pricing, client expectation
and plan design. There are three different general
formats of plan documents:
• Prototype;
• Volume Submitter (which may or may not be in
adoption agreement format); and
• Individually Designed Plans.
The IRS created the pre-approved document
program, which applies to prototype and volume
submitter plans, in order to offer plan sponsors
reasonable assurance that their documents are
qualified with respect to the form of the document
without the time and expense of applying for
a determination letter. Interestingly, the IRS
is discouraging the practice of submitting for
determination letters on pre-approved plan
documents, although there are still many good
reasons for doing so.
In many cases, unless special circumstances
arise, it is best to draft plan documents using
a prototype or volume submitter document.
SPRING 2009
Remember, a volume submitter plan can be
modified without becoming an individually
designed plan. (At this time, it is unclear exactly
how much modification can take place before
a volume submitter plan becomes individually
designed, but regardless of how the IRS eventually
classifies a document, it is always best to start with
plan language that has already been sanctioned by
the IRS.)
Individually designed plans are, in some
instances, a necessity—especially if the plan is
a type that is not permitted to be drafted on a
pre-approved document. According to Rev. Proc.
2005-16, examples of these types of plans include
ESOPs and cash balance plans. Individually
designed plans have no reliance on an opinion
letter or advisory letter issued to a lead plan; to
obtain approval, the plan sponsor must submit the
plan to the IRS under the five-year cycle based on
the sponsoring employer’s last digit of their EIN
number on IRS Form 5300 if they want to obtain
a determination letter on the plan.
Information Gathering
The information required to create or restate a
plan document will come from many sources.
When restating a document, many document
generation firms have set up procedures to
transfer the GUST interview information into
the EGTRRA interview electronically. It is
important to remember to fold in all amendments
that have taken place that are not reflected in the
GUST “answer file.” Also, remember that firm
names, addresses, trustees and phone numbers
change. You will want to implement some sort
of peer review process to check the information
off a central database of information that you are
confident is accurate. Often when firms sit down
to coordinate this stage of the restatement process,
they realize that they may not have all applicable
client information in a single reliable source. The
restatement process may provide a good reason to
re-evaluate your firm’s information management
procedures and either reinforce the existing
policies or implement new procedures that will
assure that any time a client calls a member of your
staff with a name, address or similar change, that
this change will be forwarded to an information
“gatekeeper” who will update the database(s).
accomplish several things. First, it will make the
document data input less error prone, and second,
it will create some internal consistencies that may
serve to make it easier to service your clients
collectively. Amending your plans, to the extent
possible, to bring continuity and standardization
to your plan designs can increase firm efficiency
and identify areas where perhaps you should be
charging for additional services. One firm has
made a safe harbor plan with loans and hardships
their firm-wide standard document. Plans falling
outside of this model are evaluated, suggestions
for redesign are made to their clients and in some
instances adjustments are made to the pricing
structure.
Even though the EGTRRA provisions
were largely memorialized in the EGTRRA
amendment, each of the document providers
appears to have added many new interview
questions drilling in deeper with respect to the
EGTRRA provisions. In addition, if you are
creating your PPA and/or 415 amendments at
the same time as your restatement, you will need
responses to these answers as well.
Establishing document defaults will likely be
a collaboration of senior staff, administrators and
the document people. To the extent that any of
these established defaults will result in changes to
the existing operation of the plan, you will want to
Amending your
plans, to the extent
possible, to bring
continuity and
standardization to
your plan designs
can increase firm
efficiency and
identify areas
where perhaps you
should be charging
for additional
services.
distributions made simple
DEFAULT/
AUTOMATIC
IRAs
IRA SERVICES
MISSING
PARTICIPANT
IRAs
Defaults
Another component of document creation is
setting your document defaults. Defaults are
provisions in the document that will be the
same for most of your clients. This process will
:: 9
800.541.3938
www.penchecks.com
THE
10 :: ASPPAJournal
make sure these changes are communicated to the client and to your internal
administrators so that they can adjust the administration system parameters or
otherwise adjust their plan processing.
should be discussed with your client before it is
implemented.
Effective Date
Depending on the terms of your service contract
and your pricing structure, before you actually
create a document, you may want to send some
sort of communication to your client that
explains the document restatement and the related
pricing. Some firms invoice for documents prior
to commencing the actual document work and
require full payment or a deposit prior to the
commencement of the work. Even if you are not
pre-billing your clients for the documents, you will
want to make your clients aware of the impending
restatement and educate them as to why the
restatement is required. This communication is
also a good opportunity to remind your clients of
the value of the services that you are performing
and highlight some of the features of the new plan.
Once you have reviewed the available GUST
data, folded in interim amendments, evaluated plan
redesign, set your defaults and discussed the project
with your client, you are ready to commence
actual document production.
It is important to consider the effective date carefully. Generally the
effective date of the restatement is the first day of the plan year in which the
amendment is being made. That said, there may be special effective dates for
new provisions and provisions that are being eliminated. The effective date of
any type of plan redesign that will result in a cutback will need to be timed in
order to avoid a Code Section 411(d)(6) violation.
Plan Redesign
By engaging in some plan redesign as part of the restatement, you may be able
to make the administration and operation of the plan more straightforward
for you and your clients. Often plan design or redesign takes place at the
time a plan is established or taken over from another service provider. The
EGTRRA restatement is a wonderful time to revisit plan design. Plan
design is not static. Over time laws change and your client’s objectives and
demographics change. The best person to suggest certain plan redesigns is the
TPA who has been servicing the plan. He or she will have input based on his
or her communications with the client as well as factors such as ADP/ACP
test results, the age of the target HCE/owners and the general demographics
of their clients. Any plan redesign that is going to cost your client more
money, either in the form of contributions or administrative expense,
Client Communication
SPRING 2009
Document Delivery
The peer review process prior to document
delivery depends on your firm-wide review
protocols and your levels of confidence in staff and
document software. It is standard practice, however,
to have some form of review before document
delivery—with special attention to documents that
will be provided to the plan participants such as
summary plan descriptions.
Historically, binders have been a popular
delivery tool; however, they tend to be expensive
and are of questionable value to plan participants.
A binder does provide your client a place to
archive all plan records; however, they are fairly
time consuming to create and can be somewhat
expensive, especially if you are restating all of your
clients’ files.
More and more firms appear to be “going
green” for EGTRRA restatements rather than
creating binders with paper containing the restated
plans. If electronic “e-delivery” is used, you will
need to consider the requisite level of security
and bandwidth needed to deliver the document
effectively. Going green might actually be the best
way to help ERISA plan administrators deal with
:: 11
record retention responsibilities, and it seems timely to rethink traditions
that have been going on for some 30+ years in the pension industry.
Electronic media include:
• E-mail file attachment;
• CD-ROM;
• Scan drive (thumb key); or
• Web portal.
One important distinction is to think about sending the signature
pages, the resolution, plan policies and other documentation that must be
signed and dated in paper form. Specialists suggest that clients are more
likely to properly complete the signing process with the marked papers as
a guide.
Some firms will continue to hand-deliver document restatements.
While this practice can be time consuming and costly, it is a wonderful
opportunity to “touch” your client, both to explain the new document
and its importance and to define or redefine your relationship with your
client. Think of it as reselling. One of the benefits of this approach is
that you can discuss the document and you can have your clients sign the
document on the spot.
Electronic Signatures
Electronic delivery of documents can be taken one step further, with
electronic signatures (e-signatures). Specifically, Rev. Proc. 2005-16
(www.irs.gov/pub/irs-drop/rp-05-16.pdf) states that as long as an
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THE
12 :: ASPPAJournal
The IRS has
been clear that
they do not have
the resources
to review preapproved plans
and encourage
plan sponsors not
to submit preapproved plans;
however, there is
no prohibition to
doing so.
electronic signature reliably authenticates and
verifies the timely adoption of the plan, the IRS
will deem the document executed even though
there is no actual signature. The IRS pointed out
in a recent newsletter that if a determination letter
application is filed, information that will allow the
Service to determine that the plan or amendment
was timely adopted via electronic means should be
provided to the IRS.
For example, if the employer electronically
signed the plan through a system maintained by the
document sponsor, the employer should include
with the Form 5307 package a statement from the
document sponsor which states:
• The employer electronically signed the plan
through a system that reliably authenticates and
verifies the employer’s adoption of the plan;
• The date on which the employer electronically
signed the adoption agreement; and
• A statement from the document provider
attesting to the employer’s electronic signature
signed by the document sponsor. Remember,
you may or may not be the actual document
sponsor; your document provider may be the
party to whom the approval letter was issued.
As an alternative, the employer could submit
dated correspondence from the document
sponsor acknowledging receipt of the employer’s
electronically signed plan. Other types of
information may also be acceptable.
To Submit or Not to Submit
Practitioners are split on the topic of submitting
documents for a determination letter. Many firms
suggest that clients obtain a determination letter
and not just rely on the pre-approval opinion or
advisory letter as an added level of protection.
Others do not feel that the determination letter
is worth the time and expense of submission.
The IRS has been clear that they do not have
the resources to review pre-approved plans and
encourage plan sponsors not to submit preapproved plans; however, there is no prohibition to
doing so.
Archiving and Record Retention
ERISA and the Internal Revenue Code charge
the ERISA administrator with the task of keeping
complete plan records, including the document
and all related paperwork. Service providers need
to keep copies of the document to refer to when
operating and administering the plan as well as
interacting with clients. While historically, these
documents were archived in paper files, you may
want to consider archiving them electronically
either as a back-up or as your sole method of
archiving the document files. If you choose to
go the “e-file cabinet” route, you will want to
make sure that you scan the signature pages into
your network so that your records are complete.
Online files are easier to access if a client calls with
a question that requires you to reference the plan
document.
Plan Amendments
In recent years, there has been some sort of
amendment required annually and this trend is
expected to continue. For this reason you will
want to keep clear and complete records of your
plan documents and the key provisions so you can
quickly identify which plans will require which
amendments. Historically, the IRS has provided
model amendments to the industry; however, a
few years ago they ceased this practice citing a
lack of resources. Since then, practitioners have
relied on their document providers to create
all required amendments. Both the EGTRRA
volume submitter and the EGTRRA prototype
plans include provisions for the document sponsor
to amend on behalf of adopting employers. These
provisions make the amendment process easier
since it is not necessary to obtain the adopting
employer’s signature on the document. Adopting
amendments at the document sponsor level does
not make sense for discretionary amendments or
mandatory amendments where there are optional
provisions that would be discussed with the client
before implementing. Also, if your firm is relying
on an approval letter issued to your document
provider instead of your firm, you do not have the
right to amend the plan.
Closing Thoughts
Plan documentation is a fact of life. Notices and
amendments should be expected annually;
however, with some forethought and policies and
procedures that are written down and periodically
refined, document generation and management
can be cost-effective and can be leveraged firm
wide.
Amy L. Cavanaugh, CPC, QPA, QKA, is
currently director of marketing for American
Pensions in Mt. Pleasant, SC. Her
primary duties are to oversee marketing and
plan documents and to provide compliance
support. Amy is a frequent speaker,
educator and author on plan document and compliance topics.
([email protected])
SPRING 2009
:: 13
Correcting Late Employee Contributions
An Ounce of Prevention is Worth a Pound of Cure
by Karl E. Breice, QKA
On February 29, 2008, the Department of Labor (DOL) issued proposed
regulations regarding the timing of employee contributions (i.e., deferrals
and loan repayments). The proposed regulations provide a seven business
day safe harbor for deposit of employee contributions to the trust for small
plans (i.e., plans with fewer than 100 participants). In short, employee
contributions are deposited on time when deposited to the trust within
seven business days after the payroll period.
hird party administrators (TPAs) have
been clamoring for this kind of bright
line rule for years. Getting a bright
line rule, however, may turn into a case of “be
careful what you ask for” as this issue will now
be harder to ignore. Because the issue gives
rise to serious consequences (discussed below),
internal practices and procedures regarding
deposit timing of employee contributions should
be reviewed. Where possible, initiate transfers
from payroll to the trust on the same day as
payroll; ACH/electronic transfer represents the
best practice. Then validate that the transactions
were posted correctly within 24 to 48 hours after
initiating the transfers. Some recordkeepers will
debit the corporate account so that plan sponsors
don’t have to think about these transactions while
on vacation.
Identifying the Error
When the DOL audits a plan, they ask for all
summary pages of payroll registers showing the
total amount of employee contributions and loan
repayments withheld for each pay date. The DOL
then asks for and compares the payroll report
to all bank accounts and investment statements
showing the dates of deposit of each employee’s
contributions and loan repayments. With these
two items, the DOL (and the IRS) can identify the
error rather handily. For TPAs, the error can be
identified from the trust statements that show the
dates that employee contributions were deposited.
Once you suspect timing problems, the error can
be verified by requesting the applicable summary
payroll registers.
Consequences of the Error
Form 5500 requires reporting late employee contributions (line 4a of the
Schedule H or I). This reporting alerts the government that prohibited
transactions under ERISA §§ 406(a)(1)(D), 406(b)(1) and (2), as well as
fiduciary violations under ERISA §§ 403(c)(1), 404(a)(1)(A) and (B), have
occurred. This alert can trigger a DOL inquiry, or at a minimum, an invitation
to use the DOL’s voluntary correction program. In addition, because 5500s are
public documents, participants can use this information in legal actions against
the fiduciaries of the plan. Not reporting these violations on the annual
return can lead to criminal penalties as the Form 5500 is signed under penalty
of perjury. Moreover, the Form 5500 will continue to show late employee
contributions year after year until corrected.
THE
14 :: ASPPAJournal
Correcting the Error
Getting the
lost interest
calculation correct
is important as
the DOL can
impose penalties
under ERISA
§502(l) if they
do not agree with
your correction
methodology.
If you have corrected this type of error, you know
that it can cost a great deal to fix a small error.
Attention to timing is definitely a case where an
ounce of prevention is worth a pound of cure.
The big picture in correcting the error is
to make participants whole (i.e., calculating,
contributing and allocating lost interest) and
then addressing the excise tax. Unfortunately,
while the amounts involved are often quite
small, there is no applicable de minimis rule for
correcting lost interest. Thus, plan sponsors have
to report and correct this error. Generally, there
are two correction options: (1) self-correction;
or (2) submitting under the DOL’s Voluntary
Fiduciary Compliance Program (VFCP).
Self-correction
The tricky part here is determining lost interest
without spending a small fortune in the process.
Keeping in mind that the goal is to make
participants whole, the DOL would prefer the use
of actual rates of return experienced by participants
to determine lost interest. This practice can get
expensive, however, especially when correcting
years long since closed. To avoid this expense,
many practitioners use the DOL’s online calculator
to determine lost interest. While this practice is
widespread, the DOL has repeatedly indicated that
the online calculator to determine lost interest
alone would not be appropriate and would not
be respected upon audit. When late employee
contributions are discovered on audit, the DOL
has calculated lost interest by applying the greater of
the DOL’s online calculator or an average rate of
return realized by the plan during the year of the
error. In my experience, the DOL has looked to
the Form 5500 for the year in question and taken
the difference between the end of the year trust
value and the beginning of the year trust value,
minus contributions for the year, to calculate an
average rate of return.
Getting the lost interest calculation correct is
important as the DOL can impose penalties under
ERISA §502(l) if they do not agree with your
correction methodology. In addition, having to
rework a calculation adds to the cost of correction
and does not look good in the eyes of your client.
Keep in mind that even if corrected before
the due date of the Form 5500, late employee
contributions must still be reported on the annual
return. Also, excise tax on the lost interest must be
timely paid to the IRS using Form 5330. If the
DOL sends your client the invitation letter as a
result of reporting late employee contributions on
the Form 5500, it is a best practice to acknowledge
receipt of the invitation letter by responding with
we knew, we corrected and we reported the excise
tax. In off-the-record conversations with the
DOL, they like to see evidence of the correction
as the DOL can still open an investigation if the
correction was not adequate, especially if the
corresponding Form 5500 indicates that assets
performed well and your lost interest calculation
indicates that participants are not enjoying the
benefit of the well performing investments.
Correction under the DOL’s Voluntary Fiduciary
Compliance Program (VFCP)
The tricky part here is cost effectively completing
the detailed VFCP application. In return for
applying under VFCP to correct late employee
contributions, the DOL will issue a “no action”
letter that states in part: “EBSA will not
recommend that the Solicitor of Labor initiate
legal action against you, and EBSA will not impose
the penalties in section 502(l) or section 502(i)
of ERISA on the amount you have repaid to the
Plan.” If the application process can be streamlined,
receiving a “no action” letter can bring closure to
this issue and, with the right facts, can make the
most sense for correction.
In addition to a “no action” letter, under
VFCP you can use the online calculator to
quickly determine lost interest. This calculator
SPRING 2009
economically and effectively removes all the guess
work out of calculating lost interest. Using VFCP
generally also gives you three options for dealing
with the excise tax: 1) fill out IRS Form 5330
and file with the IRS to pay the excise tax on
the prohibited transaction (usually a very small
amount); 2) if the excise tax totals $100 or less, no
VFCP application has been made within the last
three years and the employee contributions were
no more than 180 days late, you can pay the excise
tax to the trust and allocate it to participants just as
you allocated lost interest; or 3) if you give notice
to participants that late employee contributions
have occurred, you do not have to pay the excise
tax. The last option may be attractive when
correcting years long since ended because of the
pyramiding effect of calculating the excise tax
taken by the IRS on Form 5330.
A final advantage to using VFCP to correct
late employee contributions relates to abating the
penalty for late filing of the excise tax. Generally,
Form 5330 is due by the seventh month after
the end of the tax year of the employer. When
the correction of late employee contributions
takes place after the due date for the Form 5330,
penalties and interest can be assessed. Applying the
penalty, however, arguably undermines the policy
of VFCP. VFCP was designed by the government
to encourage plan sponsors to review prior year’s
administration, voluntarily make participants
whole, proactively correct policies and procedures
and seek amnesty under VFCP. Thus, abating the
penalty for late filing makes sense from a tax policy
perspective.
:: 15
Conclusion
The consequences for failing to make timely
remittances of employee contributions are serious,
including prohibited transactions, excise taxes,
exposure to participant lawsuits and liability for lost
earnings on these contributions. The first step in
addressing this issue involves reviewing current
practices and procedures for getting employee
contributions into the plan as soon as possible but
in no event later than seven business days after the
end of the payroll period. Correcting the
prohibited transaction promptly and completely
ensures that your exposure to sanctions and
participant lawsuits are minimized.
Karl E. Breice, QKA, JD, is an ERISA
compliance manager at Primark Benefits
located in Burlingame, CA. Primark
Benefits is a full service third party
administration firm. With more than
20 years of experience, Karl conducts
compliance reviews, oversees corrections under EPCRS,
VFCP and DFVCP as well as manages IRS/DOL
audits. Karl has been a member of ASPPA since 2004.
([email protected])
VFCP was
designed by the
government to
encourage plan
sponsors to review
prior year’s
administration,
voluntarily make
participants whole,
proactively correct
policies and
procedures and seek
amnesty under
VFCP.
Allocating Lost Interest
Regardless of the approach used to correct the
error, the lost interest has to be allocated. This
allocation can get expensive, especially in the case
of participants who no longer have an account
balance in the plan but who did during the period
being corrected. A pro-rata allocation of the lost
interest based on account balances remaining
in the plan at the time of correction has been
respected by the DOL in applications I have filed.
Other Considerations
A review of the plan document regarding the
timing of employee contributions may reveal that
the plan document has incorporated the timing
rules regarding employee contributions. If that
language has not been followed, you may have an
operational error on your hands as well.
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THE
16 :: ASPPAJournal
Welfare Benefit Plans After IRS
Notice 2007-83
by Jeffrey I. Bleiweis
The combination of the tumbling stock market and declining home
values has created a storm that threatens the retirement security of
many Americans. Add to that the skyrocketing cost of medical care and
the uncertainty surrounding Medicare, and you have a perfect storm of
bad news that has caused Americans to look at retirement with fear and
trepidation, instead of with hope and excitement. W
hile you may not be able
to do anything about the
declining stock market or
the housing crisis, there is a way that you, as a
benefits, tax, insurance or accounting advisor,
can help relieve your clients’ retirement fears by
ensuring that they will have enough money to
pay for medical care after retirement. It is called a
“welfare benefit plan,” and it allows an employer to
pre-fund post-retirement medical reimbursement
benefits on a tax-deductible basis. The employer
simply makes annual contributions to a trust on a
level basis over the working life of an employee to
fund a reserve that will reimburse the employee for
qualified medical costs incurred by the employee
after retirement. In addition, by funding the plan
with insurance and annuity products, the employer
can guarantee that the funds will be available at
retirement without having to worry that benefits
will be eroded by poor market performance.
Background
Ironically, at a time when the insurance industry
is best suited to address the fears of an aging
population about paying for medical care, advisors
have shied away from promoting fully-insured
welfare benefit plans. In fact, there has been a
drumbeat of doom in the insurance industry
decrying the demise of welfare benefit plans
funded with life insurance. The primary reason for
the distress is a series of guidance published by the
Internal Revenue Service (the “IRS”) in October
2007—Notice 2007-83, Notice 2007-84 and Rev.
Rul. 2007-65 (collectively the “IRS Guidance”).
The purpose of this article is to dispel the myth that life insurance can no
longer be used to fund a welfare benefit plan. While the IRS Guidance has
had the chilling effect that the IRS intended, it did not change the substantive
law regarding welfare benefit plans. A welfare benefit plan is still the best and,
perhaps, the only vehicle through which an employer can provide legitimate
welfare benefits to its employees on a tax-deductible basis. In addition, life
insurance is still a viable funding mechanism for such benefits.
Trust Arrangements and Listed Transactions
In my opinion, the most important of the IRS Guidance is Notice 2007-83,
which designates certain “trust arrangements” as “listed transactions” under
Section 6011 of the Code. While it appears that Notice 2007-83 has scared
advisors from recommending legitimate welfare benefit transactions, it is
important to recognize that the Notice is not directed to all welfare benefit
plans, but only to those plans that the IRS finds abusive. In the news release
SPRING 2009
accompanying the IRS Guidance, the IRS says:
• There are many legitimate welfare benefit funds
that provide benefits, such as health insurance
and life insurance, to employees and retirees.
• The guidance targets specific abuses involving a
limited group of arrangements that claim to be
welfare benefit funds.
Thus, we are left with two questions. The
first is which “trust arrangements” are abusive
and, as a result, considered “listed transactions”
by the IRS? The second is what does it mean
that an arrangement has been designated a listed
transaction?
In Notice 2007-83, the IRS says that it
“intends to challenge the claimed tax benefits for
the above-described transactions.” (emphasis added)
Taking the IRS at its word, this guidance should
mean that the IRS will not challenge transactions
not described in the Notice.
The transactions described in the Notice are
welfare benefit plans, funded with cash-value life
insurance contracts that provide current benefits to
active employees only.
The plan and trust documents indicate
that the plan provides benefits such as
current death benefit protection, selfinsured disability benefits, and/or selfinsured severance benefits to covered
employees (including those employees
who are also owners of the business),
and that the benefits are payable while the
employee is actively employed by the employer.
The employer’s contributions are often
based on premiums charged for cash
value life insurance policies. For example,
contributions may be based on premiums
that would be charged for whole life
policies. As a result, the arrangements often
require large employer contributions relative to
the actual cost of the benefits currently provided
under the plan. (emphasis added)
Furthermore, contributions in excess of the
cost of the plan’s current benefits accumulate in
the policy’s cash value for the purpose of making
cash distributions to the owner of the business at a
later date.
It is anticipated that after a number of
years the plan will be terminated and the
cash value life insurance policies, cash, or
other property held by the trust will be
distributed to the employees who are plan
participants at the time of the termination.
While a small amount may be distributed
to employees who are not owners of
the business, the timing of the plan
:: 17
termination and the methods used to allocate the remaining assets are
structured so that the business owners and other key employees will
receive, directly or indirectly, all or a substantial portion of the assets
held by the trust.
Plans that provide post-retirement benefits, such as life insurance or
medical reimbursement benefits, are not described in the Notice. It should
follow, then, that such plans are not listed transactions, and, in Notice 2007-84,
the IRS affirms that post-retirement life insurance and medical reimbursement
benefits are legitimate benefits that can be funded on a tax-deductible basis.
Sections 419 and 419A of the Internal Revenue Code set forth rules
under which employers are permitted to make currently deductible
contributions to welfare benefit funds in order to provide their retirees with
medical and life insurance benefits. Section 419A(c)(2) allows additional
limited reserves for post-retirement medical and post-retirement life
insurance benefits. The reserves must be funded over the working lives of
the covered employees and must be actuarially determined on a level basis
using assumptions that are reasonable in the aggregate for the post-retirement
benefits to be provided to the covered employees.
Unlike a plan that provides post-retirement benefits, a plan that provides
current benefits to active employees only is not entitled to maintain a reserve.
However, a cash-value insurance policy, by definition, has a reserve. The
policy’s reserve is its accumulation account, which holds assets in excess of the
cost of the plan’s current benefits.
We now have the answer to the first question asked in this article.
Arrangements that permit larger contributions than the cost of the plan’s
benefits are abusive. Welfare benefit plans that provide current benefits to
active employees only, but are funded with cash-value insurance permit such
excess contributions. As a result, we would expect such trust arrangements to
be designated as listed transactions for purposes of Section 1.6011-4(b)(2) of
the Treasury regulations.
THE
18 :: ASPPAJournal
Unfortunately, while Notice 2007-83 defines the problem in narrow
terms, the Notice has been interpreted by some as painting in very broad
strokes. The Notice designates any transaction that has each of four elements
a “listed transaction.” The element that has caused the most consternation in
the insurance industry is the following:
The employer has taken a deduction for contributions for benefits
under the plan (other than post-retirement medical benefits or
post-retirement life insurance benefits) that is greater than the
sum of the following amounts:
a. For uninsured benefits, such as self-insured disability or selfinsured severance, the amount is equal to the fund’s qualified
cost for the taxable year. The fund’s qualified cost is the sum of
claims actually incurred and paid during the year, plus a reserve
for claims incurred, but not paid, during the year, plus claims paid
during the year, but incurred during a previous year, as long as no
deduction was taken for such claims, plus administrative expenses
in connection therewith.
b. For insured benefits, such as life insurance, the amount is equal to
insurance premiums paid during the taxable year, plus insurance
premiums paid in prior taxable years that are properly allocable
to the current year, plus administrative expenses in connection
therewith, as long as the insurance policy does not accumulate
value either within or outside the policy.
c. For taxable years ending after November 5, 2007, the sum of the
foregoing amounts equals zero. For taxable years ending prior to
November 5, 2007, this amount equals the greater of the amount
reported on an employee’s W-2 or 1099 or the cost of insurance
element of the policy purchased.
In Notice 2007-83, the IRS targets plans that permit “large contributions
relative to the cost of the plan’s benefits.” However, there are benefit
professionals who believe that the Notice goes well beyond this point. They
have written that the Notice designates any plan funded with cash-value life
insurance as a listed transaction. They do not believe that it matters that the
plan also provides post-retirement benefits or that the plan does not permit
contributions in excess of the cost of the plan’s benefits. For them, if the
employer takes a deduction for the cost of the plan’s current benefits, the plan
is a listed transaction.
In my opinion, this interpretation of the Notice is overly broad, but for
purposes of this article I will assume that it is correct. Of course, even under
this broad interpretation of the Notice, plans funded with something other
than cash-value insurance, such as a combination of term insurance and an
annuity, should not be listed transactions. In addition, as long as the employer
does not take a deduction for the cost of current benefits, a plan funded with
cash-value insurance should not be a listed transaction. But, the question
for this article is what does it mean that a plan is a listed transaction? It does
not mean that the employer will not be allowed a deduction for the cost
of the plan’s pre-retirement death benefit. Whether a particular taxpayer is
entitled to a deduction for a particular transaction depends upon the facts
and circumstances of the taxpayer and the facts and circumstances of the
transaction. Deductions are uniquely fact-specific. A taxpayer may be
entitled to a deduction, even though the transaction generating the
s
s
deduction has been designated a listed transaction
by the IRS.
Congress gave the IRS the right to designate
listed transactions in Section 6011 of the Code.
However, Section 6011 is not substantive law. It
is a notice provision. It simply requires a taxpayer
participating in a listed transaction to disclose its
participation in the transaction to the IRS, so the
IRS can decide whether to seek more information
about the transaction. The IRS said as much in
the preamble to the Treasury regulations under
Section 6011:
The Treasury Department and the IRS
are concerned about the proliferation of
corporate tax shelters. These temporary
regulations are intended to provide the
Service with early notification of large
corporate transactions with characteristics
that may be indicative of such tax shelter
activity.
Disclosure and Deductibility
Whether a taxpayer is entitled to a deduction for
a particular transaction depends not upon the
disclosure provisions of Section 6011, but upon the
substantive law governing that transaction. The
substantive law of welfare benefit plans is found in
Sections 419, 419A and 162 of the Code. What
does that law say?
An employer can deduct contributions to
a welfare benefit fund if they are ordinary and
necessary business expenses.1 Amounts paid by the
employer for welfare benefits are deductible under
Section 162(a) of the Code.2 Death and medical
reimbursement benefits are welfare benefits, and
insurance premiums are ordinary and necessary
business expenses.3
The employer’s deduction is limited to the
fund’s qualified cost for the plan year.4 The
qualified cost is the sum of the qualified direct cost
and an addition to a qualified asset account, as long
as the amount in the qualified asset account does
not exceed the fund’s account limit for the year.5
The qualified direct cost is the amount actually
paid by the employer for benefits during the year.6
For pre-retirement death benefits, the qualified
direct cost is the term cost of insurance.7
A fund’s qualified asset account includes assets
set aside to pay life insurance and medical benefits.8
It includes money for claims incurred during
the taxable year, but not paid until the following
year.9 It can also include a reserve funded over
s
1 IRC Sections 419(a) and 162(a)
2 Treas. Reg. Section 1.162-10(a)
3 Moser, Schneider, Booth and Neonatology
4 IRC Section 419(b)
5 IRC Section 419(c)(1)
6 IRC Section 419(c)(3)
7 Neonatology
8 IRC Section 419A(a)
9 IRC Section 419A(c)(1)
SPRING 2009
the working lives of the employer’s employees on
a level basis to provide post-retirement death and
medical reimbursement benefits.10 In addition,
the employer may deduct administrative expenses
associated with the benefits.
To illustrate the foregoing, assume that an
employer desires to provide pre-retirement death
and post-retirement medical reimbursement
benefits to its employees. For ease of illustration,
assume that the employer has one employee
who is age 55 at plan adoption and that normal
retirement age is 65. Further, assume that the
pre-retirement death benefit is $2,000,000 and the
post-retirement medical reimbursement benefit
is $500,000. If we assume that the cost of term
insurance at age 55 is $2.00 per $1,000, then,
under Section 419(c)(3) of the Code, the qualified
direct cost of the plan’s pre-retirement death
benefit is $4,000, and this amount is deductible by
the employer, irrespective of the type of insurance
policy purchased by the plan. In addition, if
we ignore interest, the level funding of the
s
s
post-retirement medical reimbursement benefit is
$50,000 per year, and, under Section 419A(c)(2) of
the Code, this amount can be paid into the plan’s
reserve and is tax-deductible, irrespective whether
the reserve is maintained in an annuity, the cashvalue of a permanent insurance policy or some
other investment. The employer can also deduct
administrative expenses in connection with
the benefits, which include insurance company
expenses associated with the policy.
An employer funding its plan with cash-value
insurance may be required to attach a disclosure
statement to its tax return if it deducts the cost of
the plan’s pre-retirement death benefit, which, in
the example above, is $4,000. However, Notice
2007-83, which some think imposes the disclosure
obligation, cannot override the provisions of
the Code that govern contributions to a welfare
benefit fund and provide a deduction for those
contributions. The IRS acknowledges as much in
the following excerpt from Notice 2007-84 when
it says:
:: 19
In Notice 2007-83,
the IRS targets
plans that permit
“large contributions
relative to the
cost of the plan’s
benefits.”
s
10 IRC Section 419A(c)(2)
The ERISA Outline Book
Valuable reference tool
for any practitioner
By Sal L. Tripodi, J.D., LL.M.
Recommended resource
for ERPA Exam candidates
2009 Edition
This six-volume resource will tell you what you need
to know, including:
PPA technical corrections and other provisions of the Worker,
Retiree, and Employer Recovery Act of 2008
Provisions in the Heroes Earnings Assistance and Relief
All PPA 2006 guidance issued in 2008, including minimum
funding guidance
Revised EPCRS procedures
Guidance on rollovers to Roth IRAs
Guidance on qualified optional survivor annuities (QOSAs)
And much more!
Order your copy of The ERISA Outline Book, 2009 Edition
today at http://store.asppa.org
Knowledge • Advocacy • Credibility • Leadership
Advanced Actuarial Conference
JUNE 8-9, 2009
EMBASSY SUITES BOSTON LOGAN AIRPORT
BOSTON, MA
ASPPA® College of Pension Actuaries
REGISTER ONLINE:
www.asppa.org/actuarial
Knowledge • Advocacy • Credibility • Leadership
ACOPA Actuarial Symposium
AUGUST 14-15, 2009
ASPPA® College of Pension Actuaries
EMBASSY SUITES CHICAGO
DOWNTOWN LAKEFRONT
CHICAGO, IL
REGISTER ONLINE:
www.asppa.org/aas
SPRING 2009
Sections 419 and 419A of the Internal Revenue Code set forth rules
under which employers are permitted to make currently deductible
contributions to welfare benefit funds in order to provide their
retirees with medical and life insurance benefits. Businesses often
maintain welfare benefit funds that comport with the intent of
sections 419 and 419A and do in fact provide meaningful medical and
life insurance benefits to retirees on a nondiscriminatory basis, and
make substantial contributions to those welfare benefit funds that are
fully deductible.
As a benefits, tax, insurance or accounting advisor, a welfare benefit plan is
the best way to protect your clients’ retirement security by setting aside funds
to pay for quality medical care after retirement. As long as a plan provides
legitimate welfare benefits on a non-discriminatory basis, it can be funded
with life insurance contracts on a tax-deductible basis. The amount of the
Nominations
Open for
ASPPA’s Board
of Directors
Nomination Deadline:
September 1, 2009
If you would like to nominate a
credentialed ASPPA member to serve a
term on ASPPA’s Board of Directors, visit
www.asppa.org/forms/boardnomform.
htm, complete the nomination form and
submit it to the Chair of the Nominating
Committee, Immediate Past President,
Sal L. Tripodi, APM, and the Board of
Directors Liaison, Troy L. Cornett.
ASPPA will send a confirmation when
a nomination has been received. If
confirmation is not received, please
e-mail the Board of Directors Liaison at
[email protected].
:: 21
deduction is determined under Sections 419 and
419A of the Code, and nothing in Notice 2007-83
says otherwise.
Jeffrey I. Bleiweis has been vice president
and general counsel of CJA and Associates,
Inc. since 1993. In that capacity, he advises
senior management on legal and tax issues
related to the design and administration of
insurance products and employee benefit
plans. Jeffrey frequently speaks before professional groups on
the use of insurance products in qualified and non-qualified
employee benefit plans. He advises a nationwide network
of independent insurance agents on tax and ERISA issues
and has written extensively in the course of that work.
([email protected])
For ASPPA to continue to be the effective organization that it is, active participation by all of its
credentialed members is essential. One of the ways that you can take action is to understand
and participate in the Board of Directors nomination process. It is important that the ASPPA
Board of Directors be made up of a broad mix of individuals so that the needs and concerns
of all constituencies and stakeholders are effectively represented.
If you know a forward-thinking ASPPA credentialed member (FSPA, MSPA, CPC, QPA, QKA,
QPFC, TGPC or APM) with admirable leadership skills, please check to see if he or she would
be interested in having his or her name submitted for nomination to the Board of Directors. If
he or she is interested, now is the time to begin the nomination process.
The Nominating Committee’s Review Process
Many criteria are considered in choosing potential members of the Board of Directors, including
the current makeup of the Board and the number of open slots. There are always more nominations than open seats on the Board of Directors, so not everyone nominated will be elected;
however, you will know that you have done your part by participating in the process.
The goal of the selection process is to select new Board members such that the Board of
Directors in total includes individuals with diverse backgrounds and characteristics that
effectively represent the entire organization. It is not simply a choice of who is the “best”
candidate, but more often it is a function of what issues the Board is currently dealing with
and what individual qualities and experience are needed at the time. When evaluating a
nominee, the Nominating Committee considers a number of characteristics, including:
• Ability to meet ASPPA’s core values of strategic thinking, responsiveness, courage and
dedication;
• Willingness to serve in a leadership capacity;
• Activities within ASPPA, including demonstrating leadership in more than one area;
• Ability to represent the organization as a whole;
• Professional credentials;
• Time available for volunteer activities;
• Geographic location; and
• Current employer and type of firm.
Nominations must be received by ASPPA no later than 60 days prior to the Annual Business
Meeting (which is held each year in conjunction with the ASPPA Annual Conference) in order
to be considered for the upcoming year. In order for a nominee to be considered for the 2010
ASPPA Board of Directors, nominations must be received by September 1, 2009.
The Selection Process
The Nominating Committee’s work begins in the spring and continues into the summer. They
review the current Board, noting whose terms are expiring, how many open slots there will be
and what characteristics are currently needed. The Nominating Committee keeps nomination
forms on file from previous years for candidates who did not become Board members. (The
committee, however, appreciates updated information on any candidate who is still interested
in serving on the Board. Updated information on previously nominated candidates can be emailed to the Board of Directors Liaison, Troy L. Cornett, at [email protected].) The Committee begins reviewing candidates as nominations are submitted or updated information on
prior nominees is provided. Prior to the ASPPA Annual Conference, the Nominating Committee submits a slate of prospective Board members to the Board. This slate is then presented
to the ASPPA membership for a vote at the Annual Business Meeting that takes place during
the ASPPA Annual Conference.
THE
22 :: ASPPAJournal
Taking Stock: An Introduction to
Equity-based Compensation
by Kimberly J. Boggs and Michael Lovernick
G
This article provides a basic introduction to the different types of equitybased compensation that may be provided by employers. It is important to
keep in mind that many types of equity-based compensation reach beyond
the executive suite to a much broader group of employees. Compensating
employees with equity is intended to create a sense of common ownership
between employees and shareholders and directly align individual
employee performance with specific company goals.
ranting equity in the company
may reinforce a mutual
commitment to achieving
the long-term goals of the employer. While the
fundamental concept may seem simple, different
equity compensation structures may be required
for different types of employees. For example,
different motivators and performance criteria often
are appropriate for senior executives and critical
leadership versus technical or sales talent.
A key to designing a successful equity-based
compensation program is understanding the
underlying goal of the company. For example,
is the company most concerned with improving
short-term operational results or long-term
strategic value creation? Is the proposed equity
compensation meant to attract new talent, retain
existing employees or motivate employees to
“get on board” in meeting a specific target?
Once the specific goals of the program have
been determined, employers may choose from a
variety of equity-based compensation alternatives
discussed next.
A thorough discussion of design considerations
is outside the scope of this article, but it is an
important first step in determining which form of
equity compensation will fit a company’s needs.
This article is intended to be an introduction
to different types of equity-based compensation
and highlights some of their key features and tax
treatment. A complex set of legal, accounting
and tax issues, including specific income tax
withholding rules, are involved with equity-based
compensation, and thoughtful planning is critical. This article will touch on
key aspects of the legal and tax framework but will not address accounting
or income tax withholding rules. Companies should seek expert legal and
accounting advice before designing and implementing an equity-based
compensation program.
Types of Equity-based Compensation
ESOPs and ESPPs
ESOPs
An employee stock ownership plan (ESOP) is a qualified retirement plan
invested primarily in qualifying employer securities (generally, employer
stock).1 In addition to being a vehicle to provide equity compensation to
SPRING 2009
employees in the form of retirement savings,
ESOPs may also be a valuable financing tool
for companies. ESOPs are often utilized by
owner-operated businesses that desire to transfer
ownership of the company to employees and may
be referred to as an “employee-owned” company.
ESOPs often involve a loan from a lender to
purchase the qualifying employer securities held by
the plan—this common type of ESOP is referred
to as a leveraged ESOP.
An ESOP operates similarly to other types of
defined contribution plans. Individual accounts
of plan participants are credited with an amount
of stock determined under either a discretionary
or predetermined formula. The total value of the
participant’s individual account is directly tied to
the value of company stock.
As with other types of qualified retirement
plans, an ESOP must meet specific requirements
in order to preserve its tax advantage. The ESOP
must satisfy the legal requirements applicable
to all qualified retirement plans,2 including
nondiscrimination and minimum coverage rules.
Since the nondiscrimination and minimum
coverage rules apply, ESOPs may not be structured
as management-only incentive plans. In addition
to meeting the qualification requirements, an
ESOP must be designed to invest primarily in
employer securities. Participants must be allowed
to exercise voting rights if the class of security
provides voting rights. In addition to other
distribution requirements, a participant who is
entitled to receive a distribution from the ESOP
is entitled to receive the benefit in the form
of employer securities. Because an ESOP is a
qualified plan, distribution events are limited.3
ESPPs
An employee stock purchase plan (ESPP) is a
tax-favored arrangement that gives employees
the opportunity to purchase company stock at
a discounted price. Although not a qualified
retirement plan, an ESPP receives favorable tax
treatment under the same legal framework that
applies to statutory stock options (discussed below)
as long as certain requirements are satisfied.4 If
these requirements are met, the employee will not
be required to recognize taxable income when
the employee purchases stock under the plan
(i.e., exercise) and when the stock is later sold,
it will be taxed as a capital gain. However, the
statutory stock option holding period applies. If
the employee sells the stock before the end of
the holding period, then ordinary income will be
recognized.
Under an ESPP, employees typically purchase
stock through after-tax payroll deductions. On the
:: 23
purchase date, the company uses the accumulated deductions to purchase
company stock for the individual, generally at a discount. The discount
that may be offered to employees is the primary distinguishing feature of
an ESPP. Depending on the specific plan design, the discounted price
can be as much as 15% off the fair market value of the stock.5 From the
employer’s perspective, the favorable tax treatment is one-sided. While
the employee reaps a tax advantage, the employer cannot deduct a
compensation expense as the result of the grant or the exercise of stock
under an ESPP. A deduction is only available to the employer if the
employee does not meet the holding period requirements and recognizes
ordinary income.
Compensatory Stock Options
Options Generally
An “option” is a right granted to an individual to purchase company
stock at a predetermined price or “exercise price.”6 The right to exercise
the option (i.e., purchase shares of stock) typically accrues or vests over
a period of time and typically is subject to forfeiture if the employee
leaves prior to the vesting date. Incremental vesting creates an incentive
for the employee to remain with the company to reap the full value
of the opportunity. The individual is under no obligation to purchase
the stock. The basic components of an option are: (1) the offer to sell
at the option price; (2) the maximum number of shares available to be
purchased; and (3) the period of time the offer remains open.7 Option
holders are not yet stockholders and, therefore, are not entitled to vote or
otherwise exercise any other stockholder rights associated with ownership
of stock. An important advantage of compensatory nondiscounted
stock options (including incentive stock options, nonqualified stock
options and performance-based stock options) is that they qualify for the
performance-based pay exception from the Section 162(m) $1 million
limit on deductible compensation.8
THE
24 :: ASPPAJournal
There are two basic types of compensatory stock options—statutory
(commonly referred to as incentive stock options) and nonstatutory or
nonqualified stock options.
Incentive Stock Options
Incentive stock options (ISOs) are tax-favored statutory stock options granted
by a company to an employee to purchase stock of the corporation.9 A
stock option must satisfy specific criteria to qualify as a tax-favored ISO.10
Among the fundamental criteria are the requirements that ISOs be granted to
employees only and the exercise price be equal to or greater than the stock’s
fair market value on the grant date.11
ISOs may have less flexibility but they also have two important advantages
over nonstatutory stock options. First, neither the grant nor the exercise
of the ISO triggers recognition of income or gain.12 Second, if the stock
purchased as the result of an ISO exercise is held until at least two years after
the date of grant and one year after the date of exercise, gain on the sale of
the stock will be capital gain not ordinary income.13 If stock purchased as
the result of exercise of an ISO is sold prior to the expiration of that holding
period, then ordinary income must be recognized if there is a gain.
The favorable tax treatment for the employee is offset by the loss of a
tax benefit to the employer: an employer cannot deduct any compensation
expense as the result of the grant or the exercise of an ISO.14 If, however, the
employee does not meet the holding period requirements, the employer may
deduct the compensation that the employee recognizes upon the exercise of
the option.15
Nonstatutory Stock Options
The most common type of options issued to employees are nonstatutory stock
options (NSOs), which are sometimes referred to as nonqualified stock options.
An NSO is an option that does not satisfy the above requirements for ISOs.
In contrast to ISOs, NSOs may be granted to any
service provider, including non-employees, such
as outside directors, independent contractors, etc.
The exercise price of the NSO may also be less
than the stock’s fair market value on the grant date,
but the granting of a so-called “discounted” NSO
may have significant accounting and other tax
ramifications.16 NSOs are governed by Section 83
of the Internal Revenue Code which covers the
taxation of all property transferred in connection
with the performance of services. Under Section
83(a), the grant of an NSO is not a taxable event
except in very narrow circumstances discussed
below. Typically, the taxation event for an NSO
occurs when the option holder exercises the
NSO, at which time the option holder recognizes
compensation or ordinary income (and, if the
option holder is an employee, wages subject to
withholding and employment taxes) equal to the
fair market value of the stock transferred less the
“strike” price paid on exercise of the option. Only
in very narrow circumstances—where the option
is fully vested and has a “readily ascertainable
fair market value” on the date of grant—will the
option be taxable upon grant.17
When unrestricted stock is transferred
upon the exercise of an NSO and the employee
recognizes compensation income equal to the
difference between the fair market value of the
stock on exercise and the exercise price, the
employer is permitted to claim a corresponding
business expense deduction under Section 162.
Employers may deduct the amount only in the
event the employee includes the amount in gross
income.18
Performance-based Stock Options
Performance-based stock option plans may be
broad-based or specific to one or a small group
of executives. A performance-based stock option
plan generally provides that the option holder
will not vest and be eligible to exercise the NSO
unless and until specified performance criteria
are met. Examples of performance criteria might
be the option price exceeding a predetermined
incremental increase in value above the grant
price or the company outperforming its financial
projections. Typically, performance-based options
operate by setting an exercise price that is above
the current market value for the company’s
options. Consequently, it is only of value to the
option holder if the market value increases above
that threshold.
The rate of vesting of the performancebased options varies depending on the design of
SPRING 2009
the program. Some common vesting schedules
provide for graduated vesting upon the attainment
of certain benchmarks in option price over grant
price.
Restricted Stock
Restricted stock refers to a transfer of company
stock that is subject to restrictions. Although the
employee is treated as the owner of the stock when
it is transferred, taxation is generally delayed until
the rights in the stock are no longer subject to a
“substantial risk of forfeiture” (i.e., the rights are
vested) or the stock is fully transferable. There is an
exception to this tax treatment if a Section 83(b)
election is made.19 A Section 83(b) election results
in income recognition equal to the stock’s fair
market value on the date of grant, notwithstanding
the potential that the stock may not vest and
that the employee may forfeit the stock. Section
83(b) elections are irrevocable and must be made
within 30 days of receiving a grant of restricted
stock.20 If a Section 83(b) election is made, the
tax event is accelerated for both the employee
and the employer. The employee includes the
current fair market value of the stock in income
upon grant and the employer deducts the value
of the stock includable in the employee’s income.
The benefit of a Section 83(b) election is that the
compensatory element of the transaction is closed
and any future appreciation in the stock may be
eligible for capital gains tax treatment when the
stock is later sold.
If a Section 83(b) election is not made, the
employee’s tax holding period begins at the time
of vesting, and the employee’s tax basis is equal
to the amount paid for the stock (if any) plus
the amount included as ordinary compensation
income. Upon a later sale of the shares, assuming
the employee holds the shares as a capital asset, the
employee would recognize capital gain income or
loss; whether such capital gain would be a shortor long-term gain would depend on the time
between the beginning of the holding period at
vesting and the date of the subsequent sale.
An employer deduction is allowed under
Section 162 when the employee includes the
amount in income. Employers may deduct
amounts in the employer’s taxable year in which
the employee’s taxable year ends.21
Phantom Rights
The equity-based compensation options discussed
above involve actual shares of stock and may not be
the first choice for all employers. Implementation
costs, the burden of regulatory requirements, such
as securities laws registration, valuation challenges
or corporate structure may incent employers to
adopt plans that provide cash awards rather than
share ownership. Additionally, the company’s
owners may simply prefer to share in the
economic value of equity but not the actual equity.
For these employers, phantom equity-based
compensation alternatives may be more attractive.
Phantom Stock
Phantom stock is an employer’s promise to pay
a bonus to the employee equal to the value of
its stock on a future date. The amount of the
payment is determined by measuring the value of
company stock on a specified grant date and the
increase in value over a specified period of time.
Several key features of phantom stock, which
distinguish it from stock appreciation rights, are
that the employee generally receives the stock
value even if the stock price does not increase
from the date of grant and phantom stock value
may reflect dividends and stock splits.
In addition, in contrast to SARs, phantom
stock typically does not permit the employee to
cash out the value during the period. Rather,
the phantom stock value is generally paid at a
predetermined future date and subject to claims
of the employer’s creditors to avoid earlier income
inclusion under the constructive receipt and
economic benefit doctrines.
:: 25
A performancebased stock
option plan
generally provides
that the option
holder will
not vest and
be eligible to
exercise the
NSO unless and
until specified
performance
criteria are met.
THE
26 :: ASPPAJournal
Summary of Tax Treatment*
Type of Equity-based
Compensation
When is it Taxable to the Employee?
When is the Deduction Taken by the Employer?
ESOP
• No tax on earnings
• No tax at time of contribution
• Tax upon distribution
• In a leveraged ESOP, loan repayments (principal and interest) are deductible when paid
• Otherwise, contributions to the ESOP are deductible when
made
ESPP
• No tax at grant of option
• No tax at exercise of option*
• No deduction unless the employee fails to satisfy the
holding period
* Holding period applies. Employee may not sell the
share within two years from grant and one year from
date of exercise or income must be recognized similar
to NSOs.
Incentive Stock Options
• No tax at grant of option
• No tax at exercise of option*
• No deduction unless the employee fails to satisfy the
holding period
* Holding period applies. Employee may not sell the
share within two years from grant and one year from
date of exercise or income must be recognized similar
to NSOs.
NQ Stock Options
• Except in rare cases, taxation upon exercise and
the receipt of stock that is no longer subject to a
substantial risk of forfeiture
• Generally deductible during the same year employee
recognizes income
Performance-based Stock
Options
• Taxation upon exercise and the receipt of stock that
is no longer subject to a substantial risk of forfeiture
• Generally deductible during the same year employee
recognizes income
Restricted Stock
• Taxed when no longer subject to a substantial risk of
forfeiture
• Section 83(b) election available
• Generally deductible during the same year employee
recognizes income
Phantom Stock
• Taxed in the year value of shares is paid
• Generally deductible during the same year employee
recognizes income (but may be deductible in the tax year
prior to vesting if paid out within 2-1/2 months of the
close of the year)
Stock Appreciation Rights
• Taxed in the year right is exercised and cash or stock
received
• Generally deductible during the same year employee
recognizes income (but may be deductible in the tax year
prior to vesting if paid out within 2-1/2 months of the
close of the year)
Restricted Stock Units
• Taxed when cash or stock is transferred to employee
• Generally deductible during the same year employee
recognizes income (but may be deductible in the tax year
prior to vesting if paid out within 2-1/2 months of the
close of the year)
* This chart summarizes general rules relating to the income tax treatment of certain categories of equity-based compensation and is not intended to be an exhaustive list. Exceptions and timing
differences may exist based on plan design.
Stock Appreciation Rights
A stock appreciation right (SAR) is similar to an option because SARs
typically provide for the right to receive the cash equivalent of the
appreciation in the value of a predetermined number of shares over a set
period of time. Employers have more flexibility in SAR plan design than in
phantom stock plan design. Some plans permit the employee to cash out the
appreciated value at any time while other plans require a set period of time to
elapse. On the date of grant, the SAR has no spread or ascertainable value.22
Like phantom stock, the rights are typically paid out in cash but may be settled
in stock (or a combination of cash and stock).
Payments received to cash in stock appreciation rights are includible in
gross income in the year the employee exercises the rights.23 Exercising the
right to receive employer stock instead of cash also results in income to the
employee. A payment in cash is deductible once the employer actually pays
for the exercise of the SAR. If the employer distributes stock for the SAR, the
value of the stock is deductible once that stock is distributed.
Restricted Stock Units
Restricted stock units (RSUs) are similar to
restricted stock, but the compensatory grant under
an RSU is merely valued in terms of company
stock and does not provide for an actual transfer of
company stock at the time of the grant. It may be
useful to think of an RSU as a promise to transfer
stock (or make an equivalent cash payment) in the
future. Depending on the specific terms of the
award, RSUs may be settled in either cash or actual
shares after the vesting requirements are satisfied.
Upon transfer, the value of the stock (or equivalent
cash) is included in the employee’s income and
taxable as wages. Note that the vesting date and
the transfer date may not be the same (i.e., some
RSUs may “vest” the employee in a right to a
future transfer.)
SPRING 2009
One important difference between RSUs
and restricted stock is the option to include in
income the fair market value of the stock prior to
vesting. A Section 83(b) election is not available
upon the grant of an RSU because there is no
actual transfer of stock on the grant. An award of
restricted stock units is not a current transfer of
property; therefore, there is no income event until
there is an actual transfer of cash or fully vested
stock.
In Conclusion—On the Horizon
As with all forms of compensation, rules and
regulations change over time. The following are a
few of the regulatory changes impacting equitybased compensation in the near future.
Section 409A
Section 409A governing deferral of compensation
was added to the Internal Revenue Code effective
January 1, 2005. Final regulations were issued
in 2007 and after several extensions, the final
deadline for compliance is December 31, 2008.24
Under the final regulations, the following types
:: 27
of equity-based compensation are subject to Section 409A: nonstatutory
stock options or stock appreciation rights that have an exercise price below
fair market value on the date of grant or that include a deferral feature;
restricted stock units that are not paid upon vesting (or within 2 1/2 months
of the close of the tax year of vesting); and options to acquire (or stock
appreciation rights based on) stock that does not constitute service recipient
stock as defined by Section 409A. The terms “fair market value” and “service
recipient stock” are complex definitions specific to Section 409A25 and must
be considered when determining whether equity-based compensation will
be treated as a deferral of income. These types of equity-based compensation
must be reviewed and, if necessary, revised to comply with the Section 409A
requirements. The good news is that there are some specific exceptions
employers may take advantage of if applicable.
Failure to comply with Section 409A at any time during a taxable
year may cause the amounts deferred under the plan for that year (and all
preceding taxable years) to be included in the participant’s gross income in the
taxable year in which the failure occurred to the extent vested. Additionally,
these amounts are subject to a 20% addition to tax plus interest at an increased
rate on any resulting tax underpayments.
IFRS
On August 27, 2008, the US Securities and Exchange Commission
announced the proposal of a roadmap for mandatory adoption of
International Financial Reporting Standards (IFRS) in place of US
Generally Accepted Accounting Principles (GAAP) in 2014, 2015 or 2016
ASPPA Spring
Examination Window
May 14 - June 26, 2009
Register Now!
For additional information and to register visit www.asppa.org/springexams09.
Final registration deadline is May 13, 2009.
Knowledge • Advocacy • Credibility • Leadership
THE
28 :: ASPPAJournal
To date, more
than 100
countries require,
permit or base
their standards
on IFRS.
(depending on the size of the company) with an
early adoption option available in 2009 for some
large companies who meet specific criteria. To
date, more than 100 countries require, permit
or base their standards on IFRS. Implementing
a single set of high quality, globally accepted
accounting standards would benefit global capital
markets and investors by simplifying comparisons
among global investment opportunities (regardless
of where a company is located) and would also
benefit companies by eliminating duplicative
and costly reporting requirements. From a US
standpoint, the conversion to IFRS will have
a profound impact on equity-based executive
compensation, in addition to other changes. For
example, employee stock purchase plans that do
not currently have to record an expense under the
United States GAAP rules will have to now record
a compensation expense under IFRS.
Proposed Regulations under Section 6039
In July of 2008, the IRS issued proposed
regulations relating to the return and information
statement requirements under Section 6039.26 The
proposed regulations reflect the changes to Section
6039 made by the Tax Relief and Health Care
Act of 2006. The proposed regulations provide
guidance to assist corporations with the return
and information statement requirements related
s
s
to ISOs and ESPPs. The new regulations establish
four sets of requirements concerning:
• returns filed with the IRS related to ISOs;
• returns filed with the IRS related to ESPPs;
• statements to participants related to ISOs; and
• statements to participants related to ESPPs. The effective date for the new requirements is
January 31 following the year of the stock transfer.
IRS Notice 2008-8 waived the new requirements
for 2007 and 2008 extending the compliance
deadline to 2009.
Note: The views expressed herein are those of the
authors and do not necessarily reflect the views of
Ernst & Young LLP.
Kimberly J. Boggs is a manager in the
performance & reward practice of Ernst &
Young’s Chicago office. Kimberly has more
than seven years of experience consulting
on tax and ERISA matters related to
employee benefit plans and arrangements,
including advising clients on the technical requirements of
deferred compensation and equity-based incentive compensation.
([email protected])
Michael Lovernick is a former staff consultant in the
performance & reward practice of Ernst & Young’s Chicago
office.([email protected]).
s
1 See §§401(a), 4975(e) and 501(a) of the Internal Revenue Code of 1986, as amended (Code), and §407(d)(6) of the Employees Retirement Income Security Act of 1974, as amended
(ERISA).
2 An ESOP must meet the qualification requirements of §401(a) of the Code as a defined contribution plan in order to secure the favorable tax treatment afforded to a qualified retirement
plan, including deductibility of employer contributions, tax-free growth of trust and earnings, and delay of income taxation of participants until qualified distribution.
3 Typical distribution events are separation from service, death, disability or attainment of the plan’s normal retirement age. Additional distribution limitations apply to ESOPs that do not
apply to other types of qualified retirement plans.
4 Generally, §423 requires the ESPP to be offered to employees with the same rights and privileges, be established pursuant to shareholder approval and comply with option price and option
period restrictions. Code §423(b) and Treas. Regs. §1.423-2.
5 Code §§423(b)(6)(A) and (B).
6 Treas. Regs. §1.421-1(a).
7 Treas. Regs. §1.421-1(a)(1).
8 Code §162(m)(4)(C).
9 Code §422(b).
10 Code §422 generally.
11 Treas. Regs. §§1.422-1 and 1.422-2(a).
12 Upon exercise, there may be alternative minimum tax implications to the employee depending on the excess spread between exercise price and fair market value. Code §56(b)(3).
13 Code §422(a)(1).
14 Code §421(a)(2).
15 Code §421(b).
16 In addition to receiving negative accounting treatment, a discounted option is treated as deferred compensation subject to the restrictions under §409A, which means that the option
generally must have a fixed exercise date.
17 Treas. Regs. §1.83-7.
18 Treas. Regs. §1.83-6(a)(1).
19 Under §83(b) of the Code, an election may be made to recognize income upon the transfer of restricted property (not yet vested) paid in connection with the performance of services.
20 Code §83(b).
21 Code §83(h).
22 The value of the rights should be limited to the spread between the date of grant and the date of exercise to avoid constructive receipt. Private Letter Rulings 8925024, 8831031, 8513047,
8333079, 8316044, 8252053 and 8117078.
23 Rev. Ruls. 82-121 and 80-300.
24 Notice 2007-86; Treas. Regs §1.409A-6.
25 Note that the definition of fair market value for purposes of §409A is more restrictive than the definition of fair market value under §422 of the Code relating to ISOs.
26 Prop. Regs. §1.6039-1.
SPRING 2009
:: 29
Interest Rate Assumptions in
Defined Benefit Plans
by Richard F. McCleary
Among the many assumptions used in defined benefit plan funding and other
computations, pension professionals and actuaries tend to wrestle routinely
with interest rate assumptions. Interest rate assumptions shape the funding
and operation of defined benefit plans. As retirement plan professionals, we
need to understand how they work and how they are applied so we can explain
their implications.
he Pension Protection Act of 2006 (PPA)
reformed funding and other rules for
defined benefit pension plans. These
rules are generally effective in years beginning
in 2008. Before PPA, actuaries were provided
with more, albeit controlled, freedom in selecting
interest rate assumptions for funding defined
benefit pension plans. In addition to clamping
down on interest rates, PPA required plan sponsors
to approve certain characteristics of interest rate
assumptions as they relate to plan funding, lump
sum calculations and payments to the Pension
Benefit Guaranty Corporation (PBGC).
Plan Funding
The Funding Target is the liability or obligation
of a pension plan. It is determined using three
Segment Rates, or interest rates, that apply to
benefits paid during three time periods:
• Segment 1: Payments expected to be due within
five years;
• Segment 2: Payments expected to be due within
five to 20 years; and
• Segment 3: Payments expected to be due after
20 years.
The three Segment Rates are based on an
underlying Corporate Bond Yield Curve, which
is developed from a 24-month average of yields
on investment grade corporate bonds of varying
maturities in the top three quality levels. Each
Segment Rate is the single rate of interest
determined by the Treasury for any given month
on the basis of the applicable Corporate Bond
Yield Curve for that month, taking into account
only that portion of the yield curve applicable to
that particular segment.
As for the Treasury, it publishes interest rate information after the end of
each month. Also, any elections made with regard to the yield curve cannot
be changed without Treasury approval.
Transition is available for the Segment Rates at the election of the plan
sponsor. Transition rules allow the pre-PPA four-year weighted average
corporate bond rate approach to be blended with the new three-segment rate
approach. Depending on plan demographics this approach could possibly
lower funding requirements until Segment Rates are fully phased in. New
plans established after 2007 cannot use the Segment Rate phase-in. Unless
the pension plan is very mature and has an older population, employing the
transition rules usually generates a higher Funding Target.
There is a second aspect to the “three segment” approach that a plan
sponsor may elect. A plan can use the yield curve for the month that includes
the valuation date, or for any of the four months that precede the valuation
date. One advantage of choosing an earlier date is that funding projections
THE
30 :: ASPPAJournal
In most cases
the PPA change
in lump sum
interest rates
from the 30-year
Treasury to the
Segment Rates
decreased lump
sum benefits
payable to many
participants.
and other calculations do not have to wait for the
Treasury to issue rates.
Alternatively, a plan sponsor can elect to
use the full yield curve without the 24-month
averaging, as opposed to the “three segment”
approach. The option to use the full yield
curve without averaging could help minimize
contribution volatility for those plan sponsors
who have made an effort to more closely match
the duration of plan assets to the underlying plan
liabilities.
Interest rates are not only used in the
calculation of the Funding Target. The actuary uses
interest rates in determining the Target Normal
Cost and amortizing any plan shortfall over a
seven-year period. The Target Normal Cost is best
defined as the one-year cost of accruing benefits
under the plan. The shortfall is the difference
between the Funding Target and plan assets.
PPA also required an “effective interest rate”
to be developed. The effective interest rate is
formulaically calculated as the single interest rate
that would yield the Funding Target under the
interest rate method selected. The effective interest
rate is reported on IRS Form 5500 – Schedule SB.
Pension plan assets are also affected by interest
rates. Assets typically include plan contributions
deposited after the end of the plan year on behalf
of the prior plan year. These are counted as
contributions receivable in the current plan year
asset value. Contributions are discounted back to
the valuation date based on the prior plan year’s
effective interest rate.
Lump Sum Benefits
Similar to funding, lump sum benefits are
determined using a yield curve consisting of
three interest rates that apply to benefit payments
during three time periods: fewer than five years,
between five and 20 years, and more than 20 years.
However, the rates are not as smoothed as they
are for funding. For lump sum calculations the
underlying curve reflects a one-month average of
corporate bond yields for the month preceding
the distribution. The change in interest rate is
phased in over five years beginning in 2008 at
20% per year. Under the phase-in, the rates used
to determine present values will be a blend of the
30-year Treasury rate and the rates from the yield
curve.
SPRING 2009
Interest rates are selected depending on the
“stability period” timing specified in the plan
document. Unlike funding interest rates, there
are no opportunities for a plan sponsor to elect
another set of interest rates to calculate lump sums.
In most cases the PPA change in lump sum
interest rates from the 30-year Treasury to the
Segment Rates decreased lump sum benefits
payable to many participants. The five-year phasein is intended to mitigate the change. The new
interest rates will be phased in gradually starting
with lump sums paid in 2008 and implemented
fully for lump sums paid in 2012.
The impact of the PPA lump sum interest
rate on participant distributions is based on
several factors: (a) the age of the participant;
(b) the “shape” of the yield curve; (c) the yield
spread between corporate and 30-year Treasury
bonds; and (d) whether lump sums are based on
immediate or deferred benefits. Older participants,
a flat yield curve, a large spread between bond rates
and deferred lump sums generally produce smaller
reductions in lump sum amounts.
IRS Maximum Benefits
Section 415 of the Internal Revenue Code
imposes maximum benefit limitations on pension
plan benefits. The interest rate used to normalize
lump sums back to straight life annuities is the
greater of 5.5% or the rate specified by the plan.
In some cases the rate specified by the plan is based
on the 30-year Treasury bond rate.
These provisions pose challenges for some plan
sponsors, especially those of smaller plans. IRS
funding rules may allow a plan sponsor to fund the
plan at a faster rate than is allowed to be paid out.
Or, favorable asset returns may place the plan in an
excess funding position.
As an example, if the Funding Target must be
determined using an effective interest rate that is
lower than 5.5%, and the largest lump sum benefit
must be calculated using 5.5%, then the assets in
the plan could exceed the allowable distributions.
Cash Balance and Other Hybrid Plans
Cash balance plans state a rate of interest credit on hypothetical account
balances for participants. In order to pass anti-age discrimination rules,
interest credit rates must not exceed a market rate of return to be
defined in Treasury regulations. Also, interest credits may not decrease
the account balance below the aggregate amount of contribution
credits. This restriction eliminates prospectively the litigation risk for
hybrid plans relating to “whipsaw” issues. Another nice feature of using
an acceptable interest rate is that the hypothetical account balance
may be paid out to a participant, making the plan much simpler to
administer.
Conclusion
As the interest rate environment and IRS plan funding philosophy
change, we need to be ready to adapt. It is very important that plan
sponsors, actuaries and other pension professionals realize and
understand the implications of interest rate assumptions. This
foundation allows us to effectively communicate the impact on funding
results to financial professionals and to explain benefits to plan
participants.
Richard F. McCleary, EA, MAAA, FCA, is currently the director
of actuarial services with Summit Retirement Plan Services, Inc.
in Akron, OH. Rich has 21 years of experience assisting defined
benefit plan sponsors and business professionals with design and
funding of retirement programs. During his actuarial career he has
worked with all sizes of companies in every major facet of the industry.
([email protected])
TGPC
Tax-Exempt & Governmental Plan Consultant
The credential designed specifically for professionals who
specialize in the tax-exempt and governmental plan
marketplace, which includes 403(b)s and 457 plans.
Be a part of it all!
PBGC Premiums
PBGC requires that plan sponsors pay premiums
based on the funding shortfalls in defined benefit
plans. In determining a plan’s unfunded vested
liability for PBGC variable-rate premium purposes,
the three-segment interest rate structure published
each month by PBGC is used to develop the
vested portion of the plan liability. Alternatively, a
plan sponsor may elect to use the vested portion of
the plan’s Funding Target instead of determining
the liability using PBGC interest rates. An election
to use the Alternative Funding Target approach
may not be revoked for five years.
:: 31
For additional information go to www.asppa.org/tgpc.
Knowledge • Advocacy • Credibility • Leadership
THE
32 :: ASPPAJournal
A Primer in Cross-testing
by Thomas E. Poje, CPC, QPA, QKA
Cross-testing is a method that can be used to meet nondiscrimination rules.
This article introduces basic concepts used in cross-testing and illustrates
why cross-testing works. The formula for an E-BAR will be determined and
used to explain some of the assumptions used in testing.
L
et’s start with an example:
Harley Worthett (age 60)
deposited $10,000 in a five-year
CD guaranteed to pay 5%. Suppose his assistant,
Shirley U. Jest (age 25), invested only $2,000 in a
GIC that will earn the same 5% for the next 40
years. What will be the end result of their financial
endeavors? We’ll keep it simple and assume interest
is paid only at the end of the year.
We’ll begin with Harley. To determine his
balance next year, simply multiply the amount
deposited by the interest rate:
$10,000 * 1.05 = $10,500.
In another year his balance will be:
$10,500 * 1.05 = $11,025.
The results after five years are illustrated in the
table below.
Year
Beginning
Balance
Interest
Ending
Balance
1
$10,000
1.05
$10,500
2
$10,500
1.05
$11,025
3
$11,025
1.05
$11,576
4
$11,576
1.05
$12,155
5
$12,155
1.05
$12,763
Notice that the ending balance after any given
year is simply the original beginning balance
multiplied by 1.05 for each year. Thus, the balance
at year five could have been determined by the
following formula:
$10,000 * (1.05)5 = $12,763
or in a more general form:
Original Amount * (1 + i)x = future value,
where i = interest rate (i.e., .05) and X = the number of
years to be considered.
Using this formula, one can easily determine
what Shirley’s ending balance will be:
$2,000 * (1.05)40 = $14,080
How about that! Shirley had 1/5 the
investment but came out ahead of Harley. This
illustration works because Shirley would have her
money invested for a lot longer period of time than Harley. Hopefully, it also
illustrates the basic concept of why cross-testing works. Simply substitute
“NHCE” for Shirley, and “HCE” for Harley, provide the NHCE with 1/5
the contribution of the HCE and demonstrate the NHCE actually “does
better” at retirement than the HCE! Cross-testing works if, under the
nondiscrimination rules, you have enough NHCEs who do as well as or
better than the HCEs.
Testing for Nondiscrimination
There are two basic ways to test a defined contribution plan for
nondiscrimination—on an allocation basis [Treas. Reg. §1.401(a)(4)-2] or on
the basis of equivalent benefits [Treas. Reg. §1.401(a)(4)-8(b)]. Testing on an
allocation basis is the easiest because it is simply an individual’s contribution
divided by his or her compensation. However, it’s not much use (unless one
is restructuring) if the goal is to provide some or all of the HCEs with a
larger percentage of pay than the NHCEs. Therefore, this article will focus
its attention on some of the aspects of testing allocations on an equivalent
benefits basis.
There are three basic parts of the regulations pertaining to testing defined
contribution plans on the basis of equivalent benefits (or cross-testing):
SPRING 2009
:: 33
• Treas. Reg. §1.401(a)(4)-8(b)(1)—This section
deals with the gateway minimum rules which
went into effect for plan years beginning
January 1, 2002. For purposes of this article, it is
assumed the plan has met these requirements.
• Treas. Reg. §1.401(a)(4)-8(b)(2)—This section
deals with the determination of equivalent
accrual rates, which is the emphasis of this article.
• Treas. Reg. §1.401(a)(4)-8(b)(3)—This section
deals with target benefit plans. It is quite possible
these plans are nearly extinct—if not, they are
certainly on the endangered species list. As such,
these animals will not be discussed in this article.
Step 3: Determining the Equivalent Accrual Rate
Simply take the benefit determined in Step 2 and divide by the
individual’s 414(s) compensation. This result is commonly referred
to as the E-BAR (Equivalent Benefit Accrual Rate). By the way, the
regulations never use the term E-BAR!
Taking the formula from the initial example:
Step 1: Calculating the Future Value of a
Contribution
In the initial example, Harley deposited $10,000
and Shirley deposited $2,000, and the formula
original amount * (1 + i)x = future value, where
x represents years to age 65, was developed to
indicate how much each would have at age
65. This step is actually the first step of what
Treas. Reg. §1.401(a)(4)-8(b)(2)(ii)(B) refers to
as normalization. The dictionary definition of
normalize is “to change; make different; cause
a transformation.” Thus, one is changing or
converting the contribution into a benefit. Again,
in Step 1, the process is simply calculating what the
future value of a contribution will be. One could
refer to this amount as the lump sum at retirement.
Working through another example, consider 60 year-old Barbara
Seville, an HCE making $230,000. A contribution of $46,000 (20% of
pay) is made for her. What is her E-BAR?
(The APR in this example is 115.39, which is based on the 1983 IAF
table at 8.5% interest.)
The E-BAR for Barbara is:
Step 2: Converting the Future Value to a Benefit
This step is even easier than the first. Simply
divide the future value by an Annuity Purchase
Rate (APR) from one of the permissible Mortality
Tables [Treas. Reg. §1.401(a)(4)-12 Definitions—
Standard Mortality Tables]. One could refer to this
result as the benefit at retirement. Since the
annuity factor represents a monthly annuity, this
result would produce a monthly benefit. Since both
the contribution and compensation are annual
figures, it is necessary to multiply the result by 12
to produce an annual benefit.
Question: The regulations list a number of different mortality tables that one can use in
testing. Which is the most useful to use
for nondiscrimination testing purposes?
Answer: As a general rule, it doesn’t matter.
Generally all participants in the testing
group have the same retirement age,
and therefore all will have the same
APR factor. Thus, in Step 2, you are
merely dividing by a constant. (That
being said, if the plan imputes permitted
disparity, a larger value for the APR
may make just enough of a difference
to help a plan pass testing.)
original amount * (1.0i)x = future value
and working through the steps results in the following:
Step 1:
Step 2:
Step 3:
contribution * (1 + i)x = lump sum
12 * lump sum / APR = annual benefit
benefit / compensation = E-BAR
Combining these into one produces the following formula:
12 * contribution * (1 + i)x / APR / compensation = E-BAR
12 * 46,000 * (1.085)5 / 115.39 / 230,000 = 3.128%
Barbara knows just enough about the rules to know that before even
considering cross-testing she must provide a minimum allocation of 5% to
any of her employees. She only has one employee, Sharon Sharalike, and
therefore provides her with a 5% contribution. Sharon is 43 years old and
makes $20,000 a year, so her contribution is $1,000. (Sharon is 22 years
from retirement age of 65.) Barbara asks if this contribution is sufficient
to pass nondiscrimination testing. Simply plug the numbers into the
formula and determine the E-BAR for Sharon:
12 * 1,000 * (1.085)22 / 115.39 / 20,000 = 3.129%
What luck! Sharon has an E-BAR slightly greater than Barbara, and
so this situation would pass nondiscrimination testing. Wow! Barbara
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Knowledge • Advocacy • Credibility • Leadership
THE
34 :: ASPPAJournal
A plan can
pass the
nondiscrimination
requirements
using either the
ratio percentage
test or the average
benefits test. In
addition, there
are other possible
options, such
as imputing
permitted
disparity,
restructuring
or “accrued to
date” testing of
contributions.
received a 20% contribution which was four times
the 5% contribution provided Sharon, and yet the
plan was still able to pass testing. By the way, it
is not how much someone receives in terms of
dollars, but rather what percentage of pay he or
she receives that determines if a plan passes or fails
cross-testing. Sharon’s compensation could have
been $33,275.21 and as long as she received 5% of
pay ($1,663.76) the results would have been the
same.
Okay, maybe this outcome was not really luck.
The numbers were pretty contrived to obtain
these results. Note that Barbara was 60 years old
and Sharon was 43 years old. There is a 17-year
difference between their ages. The interest rate
assumption was 8.5%, and that age difference
produces the following factor: (1.085)17 =
4.00226. Thus, it is really no surprise that Barbara
could receive a contribution that is four times
that of Sharon. Since the minimum allocation
gateway is 5%, an owner making maximum
compensation will be able to receive 20% of pay
(4.00226 * 5%)—enough to reach the 415 limit
provided there are enough employees with a
17-year age difference.
The regulations require the use of a preretirement interest rate between 7.5% and 8.5%.
What would happen if a lower interest rate was
used? Assuming the same mortality table and
interest of 1983 IAF and 8.5%?
Barbara:
12 * 46,000 * (1.075)5 / 115.39 / 230,000 = 2.986%
Sharon:
12 * 1,000 * (1.075)22 / 115.39 / 20,000 = 2.553%
Sharon’s E-BAR is now less than Barbara’s
E-BAR, and this example would fail cross-testing.
It is easy to see why a pre-retirement interest rate
of 8.5% is typically used in testing—it normally
produces better results. (If there is more than one
HCE in the testing group, it is possible that a lower
interest will produce better results, but I leave that
to a more in-depth discussion of cross-testing.)
Let’s go back and look at Barbara again.
Suppose she had a calendar year plan that runs
from January 1, 2008 – December 31, 2008. She
was born May 1, 1948, so her attained age is 60,
and in all the examples it was assumed she had five
years to retirement. Barbara is actually closer to
age 61 at the end of the plan year, so in testing, one
could have assumed only four years to retirement.
Using attained age:
12 * 46,000 * (1.085)5 / 115.39 / 230,000 = 3.128%
Using age nearest:
12 * 46,000 * (1.085)4 / 115.39 / 230,000 = 2.883%
Using “age nearest” will produce a smaller
E-BAR for anyone born in the first half of the
plan year. There is no rule regarding when you
can use attained age or age nearest, as long as you
are consistent with all employees. Therefore, if
the HCE (or most of the HCEs, if there are more
than one) are born in the first half of the plan year,
exercising this option might be enough to enable a
plan to pass nondiscrimination testing.
Conclusion
This brief article developed the formula for
calculating an E-BAR, which is really the first
step in cross-testing. Of course, few will actually
hand-calculate those values, depending instead on
the accuracy of computer software to generate
those numbers. However, based on the formulas
shown, it is hoped that one can understand why
cross-testing works in the first place. In addition,
it was proven that to maximize the owner and still
provide the gateway minimum would require a
difference of at least 17 years between the HCE
and some of the NHCEs. This point implies that
one should be able to look at some census data,
and based just on ages (without even running any
numbers), have a rough idea if a plan is a good
candidate for cross-testing. Things get a little
more complicated if there is more than one HCE,
but at least it is a place to start. Finally, the article
indicated why an interest rate of 8.5% is typically
used instead of 7.5%, and why the age assumption
(nearest vs. attained) may be helpful in testing.
Now that the formula for the E-BAR has
been determined, the next step is putting this
design to work under the cross-testing rules. A
plan can pass the nondiscrimination requirements
using either the ratio percentage test or the average
benefits test. In addition, there are other possible
options, such as imputing permitted disparity,
restructuring or “accrued to date” testing of
contributions. For now, we will consider those
subjects to be “advanced topics” and fodder for
future articles.
Thomas E. Poje, CPC, QPA, QKA,
works for Dorsa Consulting, Inc. in
Jacksonville, FL. He is a contributing editor
for the Coverage and Nondiscrimination
Answer Book. Tom is one of the
moderating members for BenefitsLink.com
and has spoken at ASPPA conferences and ABC meetings. He
serves on ASPPA’s IRS Q&A Committee. At last count,Tom
has penned 12 pension parody songs of such artists as Elvis,
The Beatles and Louis Armstrong.
SPRING 2009
:: 35
Actuarial Science is not Rocket Science.
IT’S MORE COMPLICATED.
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rocket scientists, they are in the business of making risky
endeavors more predictable.
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THE
36 :: ASPPAJournal
Fred Reish Honored with the
2009 ASPPA 401(k) Leadership Award
C. Frederick Reish, APM, is the recipient of the 2009
ASPPA 401(k) Leadership Award. Fred is a partner at
the Reish Luftman Reicher & Cohen law firm in Los
Angeles, CA. ASPPA honored Fred at The ASPPA
401(k) SUMMIT, which was held in San Diego, CA
from March 22-24. In fact, Fred was a founding
Co-chair of the SUMMIT and was a speaker and
moderator at sessions this year.
The ASPPA 401(k) Leadership Award
acknowledges a specific accomplishment or
contribution by an individual or group of
professionals working with the 401(k) industry each
year. Sponsored by Morningstar, Inc., a leading
provider of independent investment research, this
award recognizes leadership, innovation and significant
influence in the retirement industry. Each year,
ASPPA selects an honoree for having a direct and
positive influence on the ability of Americans to
build successful retirement futures, especially through
employer plans during the past year.
Among dozens nominated for the award, three
Michael Wilson (left) of Morningstar joins Brian H. Graff, Esq., APM (right),
distinguished finalists were invited to attend the
ASPPA Executive Director/Chief Executive Officer, in congratulating Fred Reish, SUMMIT and share their industry experiences. They
APM, recipient of the 2009 ASPPA 401(k) Leadership Award, at
were Stephen Wilt of Akron, OH; Brian Ward of
The ASPPA 401(k) SUMMIT in San Diego.
Brentwood, TN; and Trisha Brambley of Newtown,
PA (who was unable to attend the conference).
Michael Wilson of Morningstar joined ASPPA
Executive Director/Chief Executive Officer Brian H. Graff, Esq., APM, in making the presentation to
Fred. Michael told SUMMIT attendees that the field of nominees was an impressive list of people who
worked hard and who continue to be on the cutting edge of providing retirement options and advantages
as Americans look forward toward financial security.
Firms Recently Awarded ASPPA Recordkeeper
Certification
ABG of Houston
ABG of Michigan
Moran & Associates, Inc./G. Russell Knobel & Associates, Inc.
SPRING 2009
“The choice of the award nominating
committee is no surprise to us in the industry.
The individual recipient of the award this year
is a well-known expert in the field of employee
benefits, retirement plans, legislation, litigation and
a personal realm of influence. Just the mention
of his familiar name ensures that people will take
notice,” Michael said.
In its account of the award ceremony,
401kWire reported: “ASPPA honored another top
ERISA legal eagle, Fred Reish, with its second
annual 401(k) Leadership Award (sponsored by
Morningstar). Fred, a staple on the conference
speaking circuit, lightened the mood while still
nudging advisors to never be satisfied ‘until we
have 100 percent participation.’” The report
continued: “’I want to speak about you, mainly
because I know that’s your favorite subject,’ Reish
quipped. ‘Almost all of you are fiduciaries...Your
real client’s the employee, and your real focus is on
the adequacy of benefits in retirement.’”
Among his many distinctions, PLANSPONSOR
magazine selected Fred as one of the “15 Legends”
in the development of retirement plans, and he
received the magazine’s 2006 Lifetime Achievement
Award. He is the recipient of the IRS Director’s
:: 37
Two award finalists, Brian Ward and Stephen Wilt, join Patrick J. Rieck, QPA,
QKA, QPFC (left), Co-chair of The ASPPA 401(k) SUMMIT
Committee, to discuss their work in the employer-sponsored
retirement plan industry at the recent event held in San Diego this year.
Award and the IRS Commissioner’s Award for his contributions to employee
benefits education. Known in his legal profession as one of “The Best Lawyers
in America,” he also is the recipient of the Harry T. Eidson Founders Award
for his significant contribution to ASPPA. A reliable opinion leader and always
eager to help, Fred speaks before federal agencies and Congress on a regular
basis. His enthusiasm for the industry is inspirational and contagious.
Did You Know?
ASPPA provides online indexes for all the technical articles published in The ASPPA Journal from 1997 to the present. The indexes
are sorted by author’s last name, title or date of publication and can be found at www.asppa.org/taj.
New for 2009
The most recent issue of The ASPPA Journal continues to be available in pdf format to ASPPA members only on the ASPPA Web
site. Previous issues are now available in pdf format to members and non-members alike who visit www.asppa.org/taj.
Beginning in 2009, electronic excerpts (in pdf format) of each individual technical article in the most recent issue of The ASPPA
Journal are now available to ASPPA members only on the ASPPA Web site. Once the subsequent issue has been released, these
articles will be moved to the public Web site. Feel free to download these articles and distribute them or, once they appear on
the public Web site, you may link to them from your own Web site.
Looking for CE Opportunities?
The ASPPA Journal Continuing Education Quizzes are available online 24 hours a
day, seven days a week. To purchase and take a quiz, visit www.asppa.org/tajce
and select the Quick Link “Register for a CE Quiz.” There is one quiz for each issue
of The ASPPA Journal, and three ASPPA CE credits are earned each issue for a
passing score.
THE
38 :: ASPPAJournal
FROM THE PRESIDENT
The Little Engine That Could
by Stephen L. Dobrow, CPC, QPA, QKA, QPFC
O
ne of my favorite childhood
stories is “The Little Engine
That Could.” In that story, a small
but determined locomotive, through fortitude and
force of will, optimism and hard work, unexpectedly
manages to overcome obstacles and pull a heavy
train over the crest of a summit. “I think I can, I
think I can” was his mantra as he did his hard work; “I thought I could” was his cry of joy as he coasted
down the other side of the summit.
While the storybook begins in a bustling train
yard, nowhere does the story give credit to the
enormous tasks of imagining, designing, building,
running, maintaining and staffing the train yard, the
tracks, the signals and the rest of the infrastructure,
much less exploring the needs of the people who
are over the hill at the end of the track. Somewhere,
somehow, people sat down and created a structure
that allowed success to occur, dreamt of delivering the
goods to the people that needed them and created a
plan that would allow it to be successful.
Five years ago, ASPPA underwent great change.
After much soul searching, we changed the name
from ASPA to ASPPA. We broke new ground as
we updated a strategic plan that was many years
in development. We set up some structures, such
as the Management Council (MC; consists of
ASPPA President, President-Elect and Executive
Director/CEO) and the ASPPA Management Team
(AMT; consists of the Co-chairs of major
ASPPA committees). We also changed
the Board of Directors into a body
that operates more at a strategic
level (instead of being “down
in the weeds”); we now
discuss issues and
strategies needed
to keep the “train”
headed in the right
direction and leave the
details to committees
and staff.
As our nation stands
today in the midst of economic
recovery and stimulus, TARPs and rescues and
shovel-ready projects, it is time to ask ourselves as
an organization: where do we stand? Are we on
the right track(s)? Do we understand the needs
of the people at the end? Is the infrastructure
working? Are the right things in place that will
allow our hard working engines to deliver the
goods? Are we able to react nimbly to an everchanging environment? Can we embrace change?
Of course, it is always a work in progress,
but let’s examine where we stand. The AMT
is a partnership made up of volunteers and staff
professionals. Each major committee has a staff
co-chair and a volunteer co-chair, all of whom sit
on the AMT. The AMT is charged with carrying
out projects that will educate all retirement
plan professionals and preserve and enhance the
employer-based retirement system; it is the body
where departmental cross-communication and
teamwork is highlighted. Much as the railroad ties
provide a basic foundation for a delivery system,
our AMT serves as the strong foundation of all
ongoing projects at ASPPA.
The most recent committee added to the
AMT is our new Technology Committee, which
is charged with investigating and testing new
methods of providing distance learning and
communication. Recent and ongoing AMT
projects include restructuring and optimizing our
ABC structure, a task force to investigate the needs
of business owners, development of a revised Web
site from the ground up and integrating ACOPA.
Our Membership department has a vibrant group
of volunteers addressing volunteerism, membership
benefits and member recruitment.
It is felt that the AMT is working well, and
ASPPA overall is chugging along very effectively.
ASPPA continues to grow its membership
and increase the education that is delivered, is
financially sound and is helping to shape the
country’s retirement legislative agenda and
retirement policy. ASPPA recently expanded
its definition of retirement professionals to
embrace people involved in the tax-exempt and
SPRING 2009
governmental plan marketplace by offering an
educational and credentialing education program
called the Tax-Exempt & Governmental Plan
Consultant (TGPC). Despite the economy, we
continue to have excellent conference attendance
and the best conference programs in the industry.
Other projects include expanding our
government affairs operation with the goal
of becoming the preeminent advocate for the
private retirement system. We are meeting
challenges in battles where state governments have
proposed offering 401(k) and DB plans to small
businesses. In Washington, DC, we continue to
provide testimony on issues such as fee disclosure,
investment advice, automatic enrollment and
DB funding relief. We have restructured the
Government Affairs staff and added new personnel
at all levels to better power the engine of change.
One notable addition to our remarkable team
is our new General Counsel and Director of
Regulatory Affairs, ASPPA Past President Craig
P. Hoffman, APM, now an ASPPA full-time
employee.
There have been some stunning advancements
in our Education and Examination area, including
the successful launch of ERPA through ASPPA’s
partnership with NIPA via AIRE. ASPPA has also
restructured the CPC program, introduced the new
TGPC credential, created new online courses and
new publications—staying true to our mission to
be the premier educational and credential-issuing
organization for all retirement plan professionals.
It seems that ASPPA is like the bustling train yard
that is teeming over with projects that are on-track.
The only limitation toward overwhelming success
seems to be finding enough volunteers to hop on the
train and staff the projects. So, like a stationmaster,
I’m looking for a small engine with great heart whose
mantra is “I think I can.” Any volunteers? ALL
ABOARD!
Stephen L. Dobrow, CPC, QPA, QKA, QPFC, is president
of Primark Benefits, a pension consulting firm in Burlingame,
CA, and ASPPA President. Stephen worked in the ASPPA
Conferences Committee for many years and oversaw the dramatic
expansion undertaken in this area. He also served at various times
as chair of committees such as Membership, ASPPA PAC and
Finance and Budget, and he has held positions including Treasurer,
member of the Board of Directors and member of the ASPPA
Executive Committee. Stephen holds a degree in Management from
Golden Gate University in San Francisco. He formerly served as
a chapter officer for NIPA and is active in the Western Pension &
Benefits Conference. ([email protected])
Knowledge • Advocacy • Credibility • Leadership
2009
NORTHEAST AREA
BENEFITS CONFERENCE
JULY 16, 2009 | OMNI PARKER HOUSE | BOSTON, MA
JULY 17, 2009 | MILLENNIUM BROADWAY | NEW YORK, NY
REGISTER ONLINE!
www.asppa.org/nebc
TE/GE, Employee Plans
:: 39
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by David M. Lipkin, MSPA
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ASPPA GAC on Capitol Hill
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ASPPA’s Government Affairs Committee (GAC) went to the Hill on
our members’ behalf for our annual legislative visit during the
first week of February. Although Congress was pre-occupied with
working out the stimulus plan, key staff from the labor and tax
committees made time for us.
A
s we reported to you a year ago,
we have continued to work on
our “ERISA 3” project (since
re-named “Proposals for Enhancing Retirement
Security for Working Americans,” which I’ll
abbreviate as PERSWA for the rest of this article).
This collection of “forward-thinking” proposals
spans four general categories:
• expanded coverage;
• simplification;
• “longevity” issues (retirees outliving their
retirement funds); and
• disclosure.
Our goal was to complete PERSWA so that we could present
recommendations to key Congressional staffers during this trip. ASPPA’s GAC
includes many subcommittees [DB, 401(k), plan document, DOL, etc.]. One
of these subcommittees, the Legislative Relations Committee chaired by
Karen Smith, MSPA, is charged with the PERSWA proposal. Karen Smith
and the LRC should be congratulated for completing this effort!
After several conference calls and meetings, we met in Washington, DC on
February 1, 2009 for our final preparations. For our proposals to be seriously
considered by legislators, we needed to assemble more than a “member
wish list”—we also needed to carefully consider public policy needs. After
a wonderful Super Bowl party (graciously hosted by Brian H. Graff, Esq.,
APM—Go Steelers!), we set off for the Hill on Monday morning.
The days set for the GAC Hill meetings were extremely busy ones for
Congress and its staff. The stimulus bill was absorbing everyone’s time, and it
GAC Corner
ASPPA Government Affairs Committee
Comment Letters and Testimony since October 2008
January 27, 2009
A group letter signed by Nevada plan sponsors and retirement plan
administrators was presented to Nevada lawmakers requesting
the immediate withdrawal of a Nevada proposed regulation that
would require retirement plan administrators providing retirement
services in the state of Nevada to be licensed as trust companies.
www.asppa.org/resources/NevadaGroupLetter012709FIN.pdf
January 7, 2009
ASPPA submitted comments to the IRS on the Proposed Regulation
regarding the Notice to Participants of Consequences of Failing to
Defer Receipt of Qualified Retirement Plan Distributions.
www.asppa.org/pdf_files/010709.Proposed.Notice.to.Defer.
Distribution.ASPPA.FIN.pdf
January 26, 2009
ASPPA submitted comments to the IRS on §201 of the Worker,
Retiree and Employer Recovery Act of 2008, which suspends
Required Minimum Distributions (RMDs) in 2009.
December 17, 2008
ASPPA Executive Director/Chief Executive Officer, Brian H. Graff,
Esq., APM, wrote to the editor of The Wall Street Journal regarding
the extensive Money Matters article “How to Fix 401(k)s,” which
was published in the Sunday, December 14, edition.
www.asppa.org/pdf_files/012609.RMD.comment.letter.Unsol.FIN.pdf
www.asppa.org/pdf_files/LTE_Graff_to_WSJ_121708.pdf
January 16, 2009
ASPPA recommended changes to the IRS’ Employee Plans
Compliance Unit (EPCU) Compliance Check Program for preapproved retirement plan documents.
November 23, 2008
ASPPA submitted comments to Treasury requesting clarification on
several of the pension provisions of the Heroes Earnings Assistance
and Relief Tax Act of 2008 (the “HEART Act”).
www.asppa.org/pdf_files/011609.EPCU.Pre-Approved.Plan.Outreach.
Comments.ASPPA.pdf
www.asppa.org/pdf_files/112408.ASPPA.HEART.ACT.comments.FIN.
pdf
For all GAC filed comments, visit www.asppa.org/government/gov_comment.htm.
SPRING 2009
is a credit to ASPPA’s reputation that key staff for
the House and Senate Committees who consider
pension legislation took time to meet with GAC
representatives. Feedback from these staffers was
incisive and engaging. Many proposals were well
received. (However, we found we need to do a
better job of conveying the challenges of interim
amendments.)
Each meeting began with a plea for further
DB plan funding relief. It appears that obtaining
funding relief will take some work, especially in
light of the difficulty Congress had in passing
technical corrections and limited relief in
December 2008. A proposal to pay only interest
on the 2008 actuarial loss for two years, and then
amortizing it over the next seven years, seemed
more acceptable than widening the corridor on
asset valuation. We will vigorously continue this
effort. Staffers requested further data from us and
we are collecting case studies.
Next, we discussed major PERSWA proposals.
Some of the specific proposals we discussed
included:
• An alternate 401(k) safe harbor, where the
employer increases the non-elective contribution
from 3% to 4%, in exchange for not having to
adopt the safe harbor (or issue the notice) before
the beginning of the year.
This option would address the current (very
difficult) problem where a plan sponsor must
commit before the year begins, and even with
the current severe downturn, can not effectively
“uncommit.” This proposal was well received
during our visits. (What’s not to like?!)
• A proposal to eliminate the need for interim
amendments.
Interim amendments are the “almost-annual”
amendments that are needed to keep the plan
document in compliance. We believe that this
effort of constantly adopting model amendments
is inefficient, creating unnecessary cost. The
IRS/Treasury disagree, believing that the process
improves actual compliance. Unable to achieve
a regulatory solution, we are seeking legislation
to address the problem. This proposal met
with resistance from some Hill staff who were
concerned about the long gap between submission
due dates. It was clear from the meetings that this
proposal must be more fully fleshed out to both
address staff concerns and provide a more clear
picture of the extent of the problem.
• Allow hardship distributions to include
investment income.
• Exempt small account balances from the required
minimum distribution rules.
• Allow the purchase of “longevity insurance”
with pre-tax dollars.
:: 41
“Longevity insurance” is an annuity product that commences income
if you live to age 85. It is designed to prevent retirees from outliving
their money. The consensus on this issue seemed to be support for
the concept but concern that these annuity products need more time
to develop, and participants need tools to help them choose the best
annuity.
• Allow a plan to set its NRA at age 55 (as opposed to the current “grey
area” from 55 to 62).
• Improve fee disclosure to allow “apples to apples” comparison between
fees for bundled versus unbundled services.
We also discussed improvements to make DB(k) plans more flexible,
as well as enabling alternate plan designs such as a flexible profit-sharing
type employer contribution combined with the defined benefit structure
including:
• the employer bearing investment risk;
• joint and survivor protection; and
• the ability to use DB limits.
While our proposals were generally received favorably, we also needed
to listen to and respond to legislators’ concerns. (“With the huge amount
of tax subsidy that we give retirement plans, how can we tolerate a system
that provides no coverage to half its workers?”) ASPPA’s GAC is prepared
to respond to the challenge, and the Hill visits were a good start. This
summary is a very brief overview of our effort. We’ll have our annual
meeting with regulators in June (IRS, DOL, PBGC).
These lobbying efforts are performed by ASPPA members for ASPPA
members. That means YOU! While GAC already has more than 60
volunteers, we need your assistance in one of these ways:
• Volunteer for GAC. Visit www.asppa.org/volunteer and complete
the Volunteer Position Application.
• No time to volunteer? ASPPA’s PAC is the engine that makes
these efforts go. Contribute to the ASPPA PAC today. (Note: this
contribution must be a member contribution, not an employer
contribution.)
• No time? No money? Then share your ideas with us! What regulations
and pension laws do you feel strongly about? What do you think of the
ideas we discussed this week? Send us relevant case studies to help our
causes.
Special thanks to Robert M. Richter, APM, and Judy A. Miller, MSPA
(member and staff GAC Co-chairs, respectively), Teresa T. Bloom (ASPPA
GAC Chief), Sal L. Tripodi, APM (Senior GAC Advisor), Stephen L.
Dobrow, CPC, QPA, QKA, QPFC, and Sheldon H. Smith, APM (ASPPA
President and President-Elect, respectively), for their significant
contributions to these efforts. We firmly believe that GAC is providing
value for ASPPA members, and we hope that you agree.
David M. Lipkin, MSPA, is the president of Metro Benefits, Inc., in
Pittsburgh, PA, which he founded in 1986. David speaks on a variety
of topics, including the professional responsibilities of the actuary. He has
published numerous articles. He has been selected by the Department of
Labor to serve as an independent fiduciary for several orphan/abandoned
plans. David currently serves as Co-chair of ASPPA’s Government
Affairs Committee. He previously served as Chair of GAC’s Defined Benefit Subcommittee.
David currently serves on the ASPPA Board of Directors. David is a Member, Society of
Pension Actuaries (MSPA), a Fellow of the Society of Actuaries (FSA) and an Enrolled
Actuary (EA). ([email protected])
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42 :: ASPPAJournal
and form a professional network. He now
serves on a number of ASPPA committees.
Lawrence D. Silver,
QKA—A member of
ASPPA since February
2006, Larry had an interest
in the financial services
industry since high school
and college when he held
positions in the mutual fund
industry. He did everything from fund accounting
to equity trading and transfer agent operations.
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With more than 11 years of experience in
the retirement industry, Larry is an assistant
director in the ERISA Compliance Group at
The Hartford in Boston. His group specializes
in non-discrimination testing and government
filings for defined contribution pension
plans. Larry currently is treasurer, liaison and
immediate past president of the ABC of New
England. He serves as the Co-chair of the
ASPPA Technology Committee, member of the
ASPPA Management Team,Vice Chair of the
ABC Liaisons and member of the ASPPA Web
site Committee. Larry, his wife and young son
reside in the Boston area.
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Growing a Chosen Profession
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Larry became a member of ASPPA and obtained
his QKA credential when another manager
spoke very highly of the organization, brought
The ERISA Outline Book into the office and
demonstrated the value of ASPPA membership to
clients. That same college roommate who helped
Larry get started in the industry became interested
in work at another TPA firm. He suggested Larry
join a business colleague building the ASPPA
Benefits Council of New England, filling
crucial volunteer positions. Working
at the ABC has provided Larry
with several opportunities
to volunteer
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The first job for Larry after college was with MFS
Investment Management in trading operations,
but Larry wanted to try something different. His
college roommate convinced management in the
pension and retirement plan group to hire Larry
and he was promoted to an ERISA compliance
position after only six months with the firm.
Building a Career with ASPPA
G
Experiencing the volunteer path at ASPPA
has introduced Larry to a wide variety of
professionals, but the stand out experience for
him was meeting former ASPPA president
Sal L. Tripodi, APM. Larry’s fellow employees,
while using The ERISA Outline Book, nearly
started a cult following and often broke into
a chant of “What would Sal say?” when they
knew that the “ERISA bible” would provide
fertile ground for the research they pursued.
Larry credits the inspiration from Sal Tripodi,
among other volunteers and ASPPA staff, as
instrumental in his high level of participation
in the work of ASPPA committees, the ABC
of New England and events during the year.
Larry values the contacts he has made to
discuss various positions on complex plan issues
and is certain such access has enabled him to
better serve his clients and grow his expertise,
simultaneously. “The camaraderie I have with
the ASPPA staff and my fellow volunteers leads
me to thoroughly enjoy my experiences,” Larry
says.
IO
A Fresh Career in the Pension and
Retirement Industry
S
Volunteering through ASPPA
SPRING 2009
Yannis P. Koumantaros, QKA – A
member of ASPPA since November
2005,Yannis has worked with his
family in the pension industry business
since before he was a teenager. His
father, Pano, started Spectrum Pension
Consultants, Inc. in 1978 and his
mother joined the company three years
later. Yannis and his brother, Petros, helped in the business
on weekends, opening mail, sorting documents, stapling,
highlighting and distributing work requests to the appropriate
staff members. While he and his brother were in high school
and college, they continued to work in the business in higher
levels of work product, and Yannis joined the firm full time after
graduating from the University of Washington in Seattle, WA,
earning a business degree in finance and marketing.
Yannis’ father was a longtime ASPPA member and he
encouraged Yannis to participate in its activities in order to
network with business people throughout the United States.
Though somewhat intimidated by the number of attendees at
the first ASPPA conferences he attended, he quickly realized
the value of participation. “I’ll never forget meeting Steve
Rosen, the president-elect at the time, at the ASPPA Annual
Conference. Our firm and his were in the same study group
and I soon understood why my late father spoke so highly of
Steve,” Yannis said. “He was the ‘Tiger Woods of ASPPA’ to me,
and on my return home, I told my father all about meeting him.
From that time on, I knew I had to get involved, participate,
give and receive from the organization, long term,” he added.
:: 43
Yannis is never shy to speak out about an issue or roll up
his sleeves and dive right into a subject of importance to the
industry or to ASPPA. He promotes his profession, his issues
and his business, all with enthusiasm and drive, through public
relations efforts and attendance at multiple conferences—even in
tough economic times. He relishes challenges, does his research
and forms timely strategies for accomplishing his goals from a
career and business standpoint. Recently,Yannis was asked only
days before the hearing to testify before the Washington State
Senate Ways and Means Committee in opposition to legislation
that would allow the state to offer qualified retirement plans
to private employers. He immediately agreed to testify and
did an outstanding job representing the interests of ASPPA’s
Washington state members before the committee in opposing
the legislation.
Yannis said his experience is that the ASPPA community is
very tight, highly influential, available and willing to help one
another in the pension and retirement industry. For this and
other reasons,Yannis serves as Vice Chair on the ASPPA Political
Action Committee (PAC). His philosophy of government is
best explained by his unwillingness to be “legislated out of
business.” His enthusiasm also boosts his role with the ASPPA
Membership Committee role and co-chairing the Next
Generation Subcommittee. “Participating in an organization
committed to its sustainability just gets me extremely excited,
and I cannot wait to help our organization reach a membership
numbering 10,000, all of whom will contribute to ASPPA PAC,
of course,” Yannis said recently. The ASPPA community always
finds his enthusiasm a welcome contagion.
Have you made your 2009
PAC contribution?
It’s not to late to be a part of
ASPPA PAC.
Join today at www.asppa.org/pac.
®
THE
44 :: ASPPAJournal
Welcome New Members and Recent Designees
s FSPA
Gregory W. Elnyczky, FSPA,
MSPA, CPC, QPA, QKA
s MSPA
Justin Lee Bonestroo, MSPA,
CPC, QPA, QKA
Gary J. Caine, MSPA
Patricia J. Conger, MSPA
Sara K. DeFilippo, MSPA
William Gundberg, Jr., MSPA
Shih-Hwan Hsu, MSPA
Carol E. Kocher, MSPA
Raymond Lane, MSPA
Neil Neubarth, MSPA
s
CPC
Michelle D. Adkins, CPC,
QPA, QKA
Bianca A. Ballachino, CPC,
QPA, QKA
Jennifer L.M. Bluhm, CPC,
QPA, QKA
Justin Lee Bonestroo, MSPA,
CPC, QPA, QKA
Randall J. Broscious, CPC,
QPA, QKA
Jefferson S. Brown, CPC,
QPA, QKA
Shannon L. Childress, CPC,
QPA, QKA
Melissa F. Childs, CPC, QPA,
QKA
Laurie L. Clark, CPC, QPA, QKA
Kim R. Collier, CPC, QPA, QKA
Rhonda K. Collins, CPC, QPA,
QKA
Gerianne DeRosa, CPC, QPA,
QKA
William G. Enck, CPC
Joshua W. Fetzer, CPC, QPA,
QKA
Richard C. Flower, CPC, QPA
Kelly D. Gardner, CPC, QPA,
QKA
Kathleen Gnash, CPC, QPA,
QKA
David M. Gray, CPC, QPA, QKA
Christine M. Hall, CPC, QPA,
QKA
David R. Huizel, CPC, QPA,
QKA
Robert G. Koch, CPC, QKA
Kelly A. Kurtz, CPC, QPA, QKA,
QPFC
W. Andrew Larson, CPC
Rachelle A. Livran, CPC, QPA,
QKA
Cari A. Massey-Sears, CPC,
QPA
Marian C. McAndie, CPC, QPA,
QPFC
Edward Meadows, CPC, QPA,
QKA
Kevin D. Miller, CPC, QPA, QKA
David Mulkern, CPC, QPA, QKA
Dawn L. Murray, CPC, QPA
Timothy E. Norman, CPC,
QPA, QKA
Nick S. Novoselich, CPC,
QPA, QKA
Jung Park, CPC, QPA, QKA
Richard S. Phillips, CPC, QPA,
QKA
Nicholas E. Porcaro, CPC,
QPA, QKA
Lori Reay, CPC, QPA, QKA
Matthew C. Reynolds, CPC,
QPA
Bryan L. Satterfield, CPC,
QPA, QKA
Leonard J. Savoleo, CPC
Melany L. Shuler, CPC, QPA,
QKA
Stephanie R. Sorenson, CPC,
QPA, QKA
Georgette R. Stearns, CPC,
QPA, QKA
David Streissguth, CPC, QPA,
QKA
William J. Sutton, CPC, QPA
Michael A. Thomas, CPC,
QPA, QKA
Ronald H. Ulrich, CPC, QPA,
QKA
Amy P. Wicker, CPC, QPA, QKA
Jack J. Wilson, CPC, QPA
Addison L. Wolfe, CPC, QPA,
QKA
s QPA
Kelly Alexander, QPA, QKA
Jonathan J. Bachman, QPA,
QKA
Benjamin F. Barnett, QPA, QKA
Karen Beckham, QPA, QKA
Rose A. Bethel-Chacko, QPA,
QKA
Alan R. Blaskowski, QPA, QKA
Christina Bochy, QPA, QKA
Kevin Boercker, QPA
Kyle D. Bonds, QPA, QKA
Erin M. Books, QPA, QKA
Ryan Boone, QPA, QKA
Rochelle E. Borger, QPA, QKA
J. Wayne Braun, QPA, QKA
Grant Brown, QPA, QKA
Allen L. Cairns, QPA
John Calder, QPA, QKA
Laura A. Carnes, QPA, QKA
Samantha Chau, QPA, QKA
Mary E. Compeau, QPA, QKA
Stephen Coombs, QPA, QKA
Barbara R. Crittenden, QPA,
QKA
Ron Dagenhardt, QPA, QKA
Shannon M. Dolan, QPA, QKA
Angela H. Downard, QPA, QKA
Frederick L. Engels, III, QPA,
QKA
Manny G. Erlich, QPA
Richard C. Flower, CPC, QPA
Theodore Fox, QPA, QKA
Jayne L. Gaffney, QPA
Tara Ganshorn, QPA, QKA
Kizzy Gaul, QPA, QKA
Catherine J. Gianotto, QPA,
QKA
Robert Griffith, QPA, QKA
Kathleen M. Griffo, QPA, QKA,
QPFC
Jay E. Guanella, QPA, QKA
Carrie L. Haack, QPA, QKA
Alex W. Habriga, QPA, QKA
Donald A. Hanke, QPA, QKA
Sharon W. Hartman, QPA
Kimberly A. Heidemann, QPA,
QKA
Robert Hertwig, QPA, QKA
Carrie M. Horn, QPA, QKA
Rhonda C. Jinks, QPA
Caroline J. Khachaturian,
QPA, QKA
Eileen M. Latham, QPA, QKA
Michael P. Liscio, QPA, QKA
Jeffrey P. Mahon, QPA
Angela M. Marks, QPA, QKA
Dawn Marlar, QPA, QKA
Donna Lynn Martin, QPA, QKA
Christopher A. Mautz, QPA,
QKA
Brian McCabe, QPA, QKA
Michael T. McCallum, QPA,
QKA
Amy McGuire, QPA, QKA
Bonnie L. Miller, QPA, QKA
Kathleen B. Moran, QPA, QKA
John Morse, QPA, QKA
Dawn L. Murray, CPC, QPA
Gerald P. Noel, QPA, QKA
Nick S. Novoselich, CPC,
QPA, QKA
Kimberly L. Oros, QPA, QKA
Stacey L. Pace, QPA, QKA
Brian Page, QPA, QKA
Tyler A. Pedersen, QPA, QKA
Christine L. Pitzer, QPA, QKA
Krisy M. Ploeger, QPA, QKA
Heather L. Proch-Saleski,
QPA, QKA
Marilyn I. Ramjohn, QPA, QKA
Kathryn M. Risch, QPA, QKA
Leslie A. Robinson, QPA, QKA
Sarah Marie Rodgers, QPA,
QKA
Scott S. Roenigk, QPA, QKA
Priscilla H. Roman, QPA, QKA
Tracey L. Rostron, QPA, QKA
Lisa Schoening, QPA, QKA
Megan Schulze, QPA, QKA
Tim Shanklin, QPA, QKA
Jaime Smalley, QPA, QKA
Annita M. Smythe, QPA, QKA
Michael J. Sperry, QPA, QKA
Susan M. Stevens, QPA, QKA
Veronica A. Stokes, QPA, QKA
Rebecca Sullenberger, QPA,
QKA
Robert J. Thorn, QPA
Eugene Y. Trakhtenberg, QPA,
QKA
Gary L. Veverka, QPA, QKA
Carol Walbert, QPA, QKA
Candice A. Ward, QPA, QKA
Jimmy R. Weatherford, QPA
Julie B. Yanez, QPA, QKA
Margaret A. Younis, QPA, QKA
Denise M. Zubal, QPA, QKA
Rebecca Zubovic, QPA, QKA
s QKA
Brittany Abear, QKA
Jimmy Allen, Jr., QKA
Tara S. Anderson, QKA
Jessica L. Angell, QKA
Julie Aspros, QKA
Ian R. Bass, QKA
Candice Baumann, QKA
Rose A. Bethel-Chacko, QPA,
QKA
Bryan Birch, QKA
Marissa Blank, QKA
Christina Bochy, QPA, QKA
Edward Paul Bock, II, QKA
Kristi M. Bowman, QKA
Lisa Boylan, QKA
Amy Brooks, QKA
Amy M. Brown, QKA
Elizabeth Browne, QKA
John NN Bruce, QKA
Melania I. Budiman, QPA, QKA
Melissa Bunk, QKA
Michael J. Burlaka, QKA
Mark Cain, QKA
Doug Cannon, QKA
Nathan O. Carlson, QKA
Alice Chambley, QKA
Gennaro M. Cicalese, Jr., QKA
Leona Clayton-Ivy, QKA
Barbara M. Clough, QKA
Kirk D. Cors, QKA
Mollie M. Corson, QKA
Cynthia J. Cross, QKA
Wendy L. Curto, QKA
Pamela Dahab, QKA
Kimberly Damore, QKA
Angie Darby, QKA
Sunny DeFelice, QKA
Kevin Dement, QKA
Leanne Dengler, QKA
Cynthia G. Detwiler, QKA
Amy Dickerhoof, QKA
Angela H. Downard, QPA, QKA
John W. Driver, III, QKA
Kyle Dunigan, QKA
Karen M. Dunn, QKA
Keith L. Dunn, QKA
Andrea Durrant, QKA
Shelly Duval, QKA
Fain Dye, QKA
Kristen W. Eckert, QKA
Grant Ellis, QKA
Matilda Ellis, QKA
Denise Falbo, QKA
Mark Fishbein, QKA
Michael Follaco, QKA
Mary S. Galloway, QKA
Wanda Garmon-Price, QKA
Merced Garza, III, QKA
Kizzy Gaul, QPA, QKA
Beth Gibson, QKA
Amanda B. Gilbert, QKA
Christopher J. Gilbert, QKA
Barbara J. Goguen, QKA
Julie E. Goodwin, QKA
Matthew Green, QKA
Shannon Greenstreet, QKA
Linda L. Harlow, QKA
Cassandra Harper, QKA
Jonathan B. Haslauer, QKA
Enola Heeter, QKA
Danny Hernandez, QKA
Robert Hertwig, QPA, QKA
Rita Hoerth, QKA
Wendy R. Holliday, QKA
Bobbi J. Holt, QKA
Christopher Ashton Hunter,
QKA
Kelly Hurd, QKA
Melissa S. Iverson, QKA
Amar J. Jairam, QKA
Erica Johnson, QKA
Jessie Johnston, QKA
Thomas A. Jordan, QKA
Robert S. Kaplan, QKA
Josh A. Kegley, QKA
Betty J. Kellas, QKA
Kathryn Kennedy, QKA
Kevin Kim, QKA
Robin Kinslow, QKA
Peter Kirkfield, QKA, QPFC
Beth L. Kitchens, QKA
Courtney N. Koch, QKA
Allen Kohnen, QKA
Erin Kotula, QKA
Nedra H. Laffoon, QPA, QKA
Stephen E. LaFleur, QKA
Aaron Leitzy, QKA
Ken Lewey, QKA
Jessica Light, QKA
Kathleen A. Love, QKA
Shanne M. Lovely, QKA
Myron Lurie, QKA
Lorena Mabe, QKA
Robert Mapes, QKA
David C. Marconi, QKA
Deanna L. Matthies, QKA
Jennifer Miesen, QKA
David A. Miilu, QKA
Ellen Moll, QKA
Kristin Morales, QKA
Kathleen B. Moran, QPA, QKA
Lisa Morris, QKA
Juhlia M. Nelson, QKA
Brett Niderost, QKA
Ellen M. Nipp, QKA
Marie Nistico, QKA
Ann M. Nordin, QKA
Nick S. Novoselich, CPC,
QPA, QKA
Matthew C. Olson, QKA
Shaune Oppelt, QKA
Kimberly L. Oros, QPA, QKA
Jesse Osborne, QKA
Jeffrey Page, QKA
Todd J. Perala, QKA
Barbara Pitaluga, QKA
Katrina Rankin, QKA
Jeffrey Reddig, QKA
David Reed, QKA
Steve Renner, QKA
Suzanne Richardson, QKA
Kathryn M. Risch, QPA, QKA
Priscilla H. Roman, QPA, QKA
Susan M. Rosenberger, QKA
James P. Rosselle, QKA
Joann Ruebusch, QKA
John G. Salvador, QKA
Jeremy J. Schira, QKA
Pamela M. Schmidt, QKA
Megan Schulze, QPA, QKA
Andrew H. Shank, QKA
Kenneth Short, QKA
Michelle D. Siewell, QKA
Arlana Smith, QKA
Patricia K. Smith, QKA
William Stack, QKA
Tiffany M. Stanley, QKA
Michelle Stephenson, QKA
Lily M. Taino, QKA
Tera L. Tarbet, QKA
Colleen M. Taylor, QKA
Ryan Techmer, QKA
Timothy M. Thomas, QKA
Stacy Thompson, QKA
Amie Tokuda, QKA
Faith Toole, QKA
Melinda Trachsel, QKA, QPFC
Lisa M. Tymann, QKA
Jaime Victoria, QKA
Amy R. Vincent, QKA
Stephanie Watts, QKA
Dana Weisberg, QKA
Marcy L. Weiss, QKA
Kathleen M. Wells, QKA
Jennifer A. Wendt, QKA
David Evan Wichman, QKA
Cheryl A. Wilder, QKA
Darla Wilson, QKA
Melissa A. Wilson, QKA
Robert C. Wolf, QKA
Stacey A. Worrell, QKA
Nicole Yell, QKA
Susan Zolman, QKA
s QPFC
James P. Anderson, QKA,
QPFC
Dana Corbett, QPFC
Mark W. Couillard, QKA, QPFC
Joshua Dautovic, QPFC
Daniel Dean, QPFC
Patrick Garrett, QPFC
Brian J. Giles, QKA, QPFC
Ronald A. Hayunga, QKA,
QPFC
John McSorley, QPFC
Kevin O’Connell, QPFC
Caroline Perry, QPFC
Raymond J. Rodriguez, QPFC
Eric Sobczak, QPFC
Keith Stecker, QPFC
Heather Surdick, QPA, QKA,
QPFC
Melinda Trachsel, QKA, QPFC
Andrew Trasowech, QPFC
Lori L. Wenzl, CPC, QPA, QKA,
QPFC
s TGPC
Paul S. Indianer, TGPC
Charles F. Rolph, III, CPC,
TGPC
s COPA
Jewel Bradford Barlow, Jr., COPA
Helen G. Block, COPA
Craig Jay Blumenfeld, COPA
Eric P. Brust, MSPA, COPA
John M. Bury, COPA
Stephen M. Coleman, COPA
Janet S. Eisenberg, COPA
Karen Fogle, COPA
Kenneth J. Herbold, COPA
Bart Karlson, COPA
Richard Kutikoff, COPA
Douglas Steven Lane, COPA
Katy Lee, COPA
Richard McCleary, COPA
Farhad K. Minwalla, COPA
Henry Nearing, COPA
Scott Otermat, COPA
Bill Richardson, COPA
Carl Shalit, COPA
Robert Warmus, COPA
Earlene L. Young, COPA
s APM
John E. Anderson, APM
Kelly Brooks, APM
Robert C. Burleigh, Jr., APM
John M. Murro, APM
Rachelle Oberg, APM
Gisele Sutherland, APM
s AFFILIATE
Kristina Barton
Carolyn Bedard
Kevin L. Burch
Phillip J. Capell
Alan D. Chingren
Marshall Esler
Karen Foster
Allan Friedland
Thomas J. Geraghty, Jr.
William Hayward
Laura Jewell
Richard L. Kirby
Robert M. Kissler
John LeHockey
Dustin Locklear
Curtis M. Luckman
Dana Malone
Courtney Mann
Derek D. Mantel
Diane Marotta
Lisa Margaret Martin
Elizabeth C. Mihalka
Michael J. O’Brien
Barbara Preslock
Marc M. Roberts
Jason Sauer
Mark A. Sawalski
Mark J. Schiferl
Arthur H. Sido
Kimberley Smith
Marc Smith
Timothy J. Smith
Kaycee R. Spears
Ximena Spicer
Loren Stark
Blair Stientjes
Christopher M. Stout
Michele Suriano
Jessica D. Tierney
Melvin A. Willliams
Calvin DD Wilson
James O. Wood
Trevor S. Yee
Kelly C. Young
Robbi J. Young
Fan Zhang
SPRING 2009
:: 45
Calendar of Events
ASPPA
Date
Description
CE Credits
Apr 17
Early registration deadline for spring examinations
Apr 17 – 20
EA-2B Review Courses • Chicago, IL
Apr 20 – 21
Great Lakes Benefits Conference • Chicago, IL
15
Apr 29 – 30
Mid-Atlantic Benefits Conference • Washington, DC
11
Apr 30 – May 1
DOL Speaks: The 2009 Employee Benefits Conference • Washington, DC
11
May 13
Final registration deadline for spring examinations
May 14 – Jun 26 Spring 2009 examination window (DB, DC-1, DC-2, DC-3, PFC-1 and PFC-2)
Jun 7 – 9
Advanced Actuarial Conference • Boston, MA
TBD
Jun 12
Postponement deadline for spring DB, DC-1, DC-2, DC-3, PFC-1 and PFC-2 examinations
Jun 18 – 20
Women Business Leaders Forum • Nashville, TN
15
Jun 28 – Jul 1
Western Benefits Conference • Denver, CO
20
Jul 16
Northeast Benefits Conference • Boston, MA
8
Jul 17
Northeast Benefits Conference • New York, NY
8
Aug 14 – 15
ACOPA Actuarial Symposium • Chicago, IL
Sep 28
Early registration deadline for fall examinations
TBD
Oct 2 – 5
EA-2A Review Courses • Chicago, IL
Oct 30
Final registration deadline for fall examinations
Nov 1
ASPPA Annual Conference Intensive Review Sessions • National Harbor, MD
Nov 1 – 4
ASPPA Annual Conference • National Harbor, MD
Nov 16 – 17
The ASPPA Cincinnati Pension Conference • Cincinnati, OH
24
TBD
** Please note that when a deadline date falls on a weekend, the official date shall be the first business day following the weekend.
** Please note that listed CE credit information for conferences is subject to change.
AIRE & ERPA
Apr 25 – 26
Live ERPA Review Courses (prior to NIPA Annual
Forum and Expo) • Las Vegas, NV
Apr 30
ERPA—SEE Winter Examination Window
Candidate Grade Notification
Jul 6
ERPA—SEE Registration Deadline for
Summer 2009 Examination
Jul 7 – Aug 31
ERPA—SEE Summer Examination Window
Aug 14
ERPA—SEE Summer Examination
Postponement Deadline
Oct 31
Live ERPA Review Courses (prior to ASPPA
Annual Conference) • National Harbor, MD
ABC Meetings
April TBD
May 14
June TBD
ABC of Cleveland
Washington Update
Brian H. Graff, Esq., APM
ABC of New England
Fee Disclosure & Investment
Advice
Bruce L. Ashton, APM, and
Stephanie L. Napier, APM
ABC of New England
Advanced Actuarial Conference
Speakers from Various Government
& Private Practice
May 20
ABC of New York
Cash Balance Plans
Kevin J. Donavan, MSPA
April TBD
ABC of Greater Cincinnati
Annual Membership
Appreciation Luncheon
April 10
ABC of Atlanta
Fee Disclosures for Investment
Advisors and TPAs
Bruce L. Ashton, APM
April 23
ABC of Northern Indiana
Topic TBD
Dave J. Kolhoff and
Robert J. Toth
May 6
A Partnership of ASPPA & NIPA
ABC of the Delaware Valley
Social (free to members)
ABC of Atlanta
ERISAApalooza 2009!
Sal L. Tripodi, APM
June TBD
June TBD
June 12
ABC of Chicago
Topic TBD
Richard A. Hochman, APM
ABC of the Delaware Valley
Form 5500 Update – 1/2-day
Seminar with PEBA
Janice M. Wegesin, CPC, QPA
June TBD
June 16
ABC of Greater Cincinnati
Testing and Reporting
Regulations Update
John P. Stebbins, QKA, and
Mike F. Kraemer
ABC of Northern Indiana
Topic TBD
All-day Seminar with Ilene H.
Ferenczy, CPC
June 17
ABC of New England
Latest News on 403(b) Plans
Richard A. Hochman, APM
For a current listing of ABC meetings, visit www.asppa.org/abc.
THE
46 :: ASPPAJournal
Fun-da-Mentals
Sudoku Fun
Every digit from 1 to 9 must appear:
· In each of the columns,
· in each of the rows,
· and in each of the nine mini-boxes
2
 
8
9
5
7
8
6
9
2
8
9
6
1
1
3
5
1
4
5
6
6
7
2
5
4
1
Level = Medium
Answers will be posted on ASPPA’s Web site in the
Members Only section. Log in. Click on The ASPPA
Journal. Scroll down to “Answers to Fun-da-Mentals.”
Word Scramble
Unscramble these four puzzles—one letter to each space—to
reveal four pension-related words.
SIDE TV
—— —— —— ——
POD DATE
—— —— —— ——
SSN CUE
——
—— —— ——
FLIP FAINT
——
—— —— —— —— ——
——
BONUS: Arrange the boxed letters to form the Mystery Answer as
suggested by the cartoon.
Mystery Answer: An “ __ __ __ __”
__ __ __ __ __
Answers will be posted on ASPPA’s Web site in the Members Only
section. Log in. Click on The ASPPA Journal. Scroll down to
“Answers to Fun-da-Mentals.”
What the actuary’s son was doing in order
to avoid handing over his bad report card.