The Pension Actuary Is Produced by the Executive Director and Pension Actuary Com- Mittee

Vol. XXIX, Number 5 September-October 1999

IN THIS ISSUE Parks Named An Interview with Patrick McDonough ...... 2 ASPA PWBA’s Investigation of 401(k) Fees...... 3 Professionalism...... 4 President Top-Heavy Plan Rules...... 5 John P. Parks, MSPA, EA, has IRS Reorganization on been named ASPA’s President for the Remedial Programs...... 6 1999-2000 term. Mr. Parks is president of MMC&P Retirement Benefit ogy, and woodworking. He has also Withholding Ain’t been active with the Philmont Scout That Hard ...... 7 Services in Pittsburgh, Pennsylvania. He has 37 years of experience in the Ranch for the past eight years. Focus on ASPA PERF..... 25 actuarial and employee benefits field. The other members of the 2000 Focus on E&E...... 26 Mr. Parks was elected to ASPA’s Executive Committee are: Calendar of Events ...... 27 Board of Directors in 1993 and served President-Elect as vice president in 1997, treasurer in PIX Digest ...... 28 George J. Taylor, MSPA 1998, and president-elect in 1999. He State College, Pennsylvania has also been active on ASPA’s Tech- Vice Presidents nology and Business Leadership Con- Joan A. Gucciardi, MSPA, CPC ference committees. Wauwatosa, Wisconsin Mr. Parks received his WASHINGTON UPDATE B.S. in mathematics at Juniata Craig P. Hoffman, APM College in Huntingdon, Penn- Jacksonville, Florida Pension Reform – sylvania. He is an enrolled ac- Scott D. Miller, FSPA, CPC Where Do We Go tuary and has been active in South Salem, New York the American Academy of Ac- Secretary From Here? tuaries, the Conference of Gwen S. O’Connell, CPC, QPA by Brian H. Graff, Esq. Consulting Actuaries, the Eugene, Oregon American College of Char- Congress left for its annual August Treasurer tered Life Underwriters, and vacation. However, as reported in ASPA Cynthia A. Groszkiewicz, MSPA the National Association for ASAP 99-21, before departing Congress Atlanta, GA Employee Ownership. passed legislation providing $792 billion Mr. Parks resides in the Immediate Past President in tax cuts, including a substantial pack- North Hills of Pittsburgh Carol R. Sears, FSPA, CPC age of pension reform provisions. To the with his wife, Iris, and Morton, Illinois surprise of nobody, the legislation passed daughter, Heidi. His hobbies Ex-Officio Member of the Executive on a substantially partisan basis. Only a include backpacking, Appa- Committee handful of Democrats voted for pas- lachia and Habitat building Sarah E. Simoneaux, CPC Continued on page 8 projects, computer technol- Mandeville, Louisiana

Actuaries, Consultants, Administrators and Other Benefits Professionals What does the Director of Practice An Interview with ... do? The Director of Practice oversees the enforcement of regulations in Circular 230, which governs all prac- Patrick McDonough tice before the IRS. In addition, my office administers the examination pro- by Sally J. Zavattari, FSPA, CPC, EA gram for Enrolled Agents, has cogni- zance over the Power of Attorney program (when one is needed, what is necessary for a legal POA, IRS publi- atrick who? Patrick McDonough is currently the cations for practitioners on POA is- PDirector of Practice and the Executive Director of the sues) and handles appeals for electronic license holders whose re- Joint Board for the Enrollment of Actuaries. He has been with newal applications have been rejected. the Office of Director of Practice of the IRS since 1981, most Also, we have been getting involved recently as Supervisory Attorney. On December 23, 1998, he in granting special permission situations for law students, where the stu- was appointed Director of Practice and Executive Director of the dents provide services to clients at low Joint Board for the Enrollment of Actuaries. He received B.S., income tax clinics under the auspices M.A., and J.D. degrees from Boston College, as well as an of a professor. This is done so that the students can represent the client before L.L.M. in taxation from the Georgetown University Law Center. the IRS, even though not otherwise He is a member of the Massachusetts Bar. He is also a colonel allowed to do so under the general Cir- in the USMC Reserves; his areas of expertise are war crimes cular 230 requirements. What does it mean to “Practice be- investigations and NATO rules of engagement. fore the IRS”? Generally, this is the Continued on page 12

The Pension Actuary is produced by the executive director and Pension Actuary Com- mittee. 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 ASPA Officers position of ASPA or the editors of The Pension Actuary. President The purpose of ASPA is to educate pension actuaries, consultants, administrators, and Carol R. Sears, FSPA, CPC other benefits professionals, and to preserve and enhance the private pension system as part of the development of a cohesive and coherent national retirement income policy. President-elect John P. Parks, MSPA Editor in Chief Technical Review Board Brian H. Graff, Esq. Lawrence Deutsch, MSPA Vice Presidents Pension Actuary Committee Chair Kevin J. Donovan, APM Craig P. Hoffman, APM Stephanie D. Katz, CPC, QPA David R. Levin, APM Scott D. Miller, FSPA, CPC George J. Taylor, MSPA Pension Actuary Committee Duane L. Mayer, MSPA Donald Mackanos Donna T. Mrozinski, CPC Secretary Christine Stroud, MSPA Nicholas L. Saakvitne, Esq. Gwen S. O’Connell, CPC, QPA Daphne M. Weitzel, QPA Valeri L. Stevens, APM Treasurer George J. Taylor, MSPA Managing Editor Cynthia A. Groszkiewicz, MSPA, QPA Stephanie D. Katz, CPC, QPA Layout and Design Immediate Past President Chip Chabot and Alicia Hood Associate Editor Karen A. Jordan, CPC, QPA Jane S. Grimm Copy Editor Amy E. Emery

American Society of Pension Actuaries, 4245 North Fairfax Drive, Suite 750, Arlington, Virginia 22203 Phone: (703) 516-9300, Fax: (703) 516-9308, E-mail: [email protected], World-Wide Web: http://www.aspa.org © ASPA 1999. All rights reserved. ASPA is a non-profit professional society. The materials contained herein are intended for instruction only and are not a substitute for professional advice.

2 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 An Update on the PWBA’s Investigation of 401(k) Fees by C. Frederick Reish, APM, Esq., and Bruce L. Ashton, APM, Esq.

he inquiry by the Pension and Welfare Benefits sors, and is it readily available? Administration (PWBA) of the U.S. Department of What steps are plan sponsors tak- T ing to ensure that the fees and ex- Labor (DOL) into 401(k) fees and costs is almost two years penses charged to the individual old. During that time, the PWBA has held hearings on 401(k) accounts of the participants are rea- fees, initiated approximately 50 investigations of 401(k) sonable? 2. Are plan participants being fur- plans related to their fees, published a booklet for employees nished with sufficient information concerning 401(k) fees and costs, published a brochure for about the fees and expenses asso- employers on 401(k) fees, and worked with representatives ciated with the investment options offered under their plan to make of the insurance, mutual fund, and banking industries to informed investment decisions? develop uniform criteria for reporting and evaluating fees What additional information and costs for 401(k) plans. should be provided to or requested by participants, and is it readily At this point, it is appropriate to The History of the PWBA’s available? ask…What results have these efforts Inquiry 3. Is the information regarding ser- produced, and what remains to be On October 16, 1997, the PWBA vices, fees, and expenses that is done? announced that it was holding hearings disclosed to participants regarding In response to the first question, for the purpose of learning more about their accounts provided in a man- the PWBA’s focus on 401(k) plan the fees and costs being charged to ner understandable to most partici- fees and costs has dramatically 401(k) plans and about the reasons for, pants? Is the disclosure automatic heightened the awareness of those and consequences of, those fees. Spe- or upon request? If automatic, how expenses and their impact on invest- cifically, the PWBA Notice of Public often is the disclosure provided and ment results, among the media, plan Hearing stated that the purpose of the to whom is it provided (plan spon- sponsors, fiduciaries, advisors to hearings was to answer the following sor and/or participants)? plans, and, of course, plan partici- questions: 4. How are the services and the re- pants. That heightened awareness is 1. In selecting and monitoring service spective fees included in a bundled resulting in increased scrutiny of the providers, are employers/plan spon- fee arrangement disclosed? How fees being charged in 401(k) invest- sors being furnished with sufficient are the fees and expenses with re- ment products and, as a consequence, information to evaluate whether the spect to each of the covered ser- is increasing the level of competition fees and expenses associated with vices in a bundled arrangement de- among investment providers. Inevi- plan investments, investment op- termined? tably, that increased awareness and tions, and administrative services competition will result in lower fees are reasonable? If not, what addi- 5. What actions, if any, should the and higher benefits for 401(k) plan tional information should be pro- DOL take to improve consideration participants. vided to or requested by plan spon- Continued on page 14

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 3 long and intensive program of preparation to practice.” Everyone in leadership agrees with the conclusion that actuaries are professionals. Certainly we all complete a rigorous course of study and examination before becoming qualified. The real question is, do we all act professionally? Put another way, do we all accept and Professionalism – fulfill the responsibilities of a professional? Among these are the responsibility to act in the best It’s Up to Us! interests of the profession’s publics and the responsibility to uphold the by William J. Falk, FSA, FCA, MAAA, EA image and reputation of the profession. rofessionalism has become one of the most frequent The actuarial profession in the United States and Canada has em- Ptopics for recent discussions among actuarial leaders. bodied these responsibilities in the It has been the topic of several of the president and guest Code of Professional Conduct (U.S.) and Rules of Professional president editorials in The Actuarial Update. Recent events Conduct (Canada). These docu- have served to heighten the leadership’s concerns about ments set forth the principles that professionalism. But concerns about the professionalism of all actuaries must uphold in order to meet our responsibilities. actuaries can only be addressed effectively if the entire With our professionalism un- profession is involved, and everyone takes professionalism to der suspicion, at least in the U.S., heart in their day-to-day activities. the Code of Professional Conduct has become an even more impor- The recent unfavorable public- Even the belief that actuaries tant part of our professional self- ity about actuaries’ roles in assist- are professionals is under attack. regulation. The Joint Committee on ing companies with changing their The American Academy of Actu- the Code of Professional Conduct defined benefit pension plans to aries recently submitted an amicus is working to create an improved cash balance formulas has led to curiae brief in a Michigan lawsuit Code for the future. As the CCA’s concern by some that actuaries are filed by a client against an actuarial representative on this Committee, not fulfilling their professional re- consulting firm. The Academy’s I have been involved in several dis- sponsibilities to the public. Yes, we brief addressed the question of cussions that led to the exposure can argue very convincingly among whether actuaries are profession- draft sent to all members in May. ourselves that employee communi- als subject to the Michigan profes- The task force’s primary goal is a cations are not the actuary’s re- sional malpractice statutes rather Code that is clearer and more eas- sponsibility. And we can argue that ily applied to the situations in than the general negligence stat- statements, even laughter, taken out which actuaries find themselves. utes, as the plaintiffs claim. The of context from a session at a pro- The basic intent and content of the Academy’s answer was a definite fessional meeting are not a true re- current Code are being preserved. yes, supported by several court de- flection of the actuaries’ position Through June 26, as I am draft- cisions. In one of the decisions regarding employee communica- ing this article, we received only tions. But, the fact remains that cited, the Supreme Court judged twenty-nine comments on the ex- some members of the general pub- actuaries to be “a recognized pro- posure draft from a population of lic and many lawmakers have taken fessional discipline.” According to about 16,000 actuaries in the U.S. this issue as cause to question the the Supreme Court of Nebraska, a profession is identified with “the professional behavior of actuaries. Continued on page 20

4 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 Top-Heavy Plan Rules: A Review and How They Will Change in 2000 by Steven Oberndorf, Esq. and Richard Hochman, APM

he concept of a top-heavy plan did not exist until SBJPA Brings Changes to TERISA was amended by the Tax Equity and Fiscal the Top-Heavy Rules Responsibility Act of 1982 (TEFRA). To address perceived The rules for top-heavy plans es- abuses in small retirement plans, TEFRA introduced the sentially remained unchanged from TEFRA’s enactment until the passage concept of the top-heavy plan by adding §416 of the Internal of the Small Business Job Protection Revenue Code (Code). The obligation to provide minimum Act of 1996 (SBJPA). Two changes contributions or benefits was further explained by guidance, involving top-heavy plans were made by SBJPA. The first, effective for the provided in the form of questions and answers, that was 1998 plan year, modified the defini- issued by the Internal Revenue Service (IRS) as Treasury tion of compensation found in Code Reg. §1.416-1 in December 1984. §415, which is used in determining top-heavy contributions or benefits. Comment: Concerned with documents would ever go into The definition was changed to include budget deficits and the effect of effect in most plans with more amounts deferred by a participant on a the tax subsidy provided to than 100 participants. The repre-tax basis into a §401(k), §125 caf- qualified retirement plans, Con- quirements of Code §416 con- eteria, or flexible benefits plan. Includ- gress mandated that a qualified tinue to have considerable ing these pre-tax dollars generally will retirement plan provide at least impact on plan designs that fa- result in an increase in the minimum minimal benefits for all partici- vor owners and other key em- contribution or benefit provided, since pants. This was especially true ployees and whose effects are it increases the amount of compensa- of qualified plans where own- magnified in the small plan situ- tion on which the top-heavy contribu- ers and officers were receiving ation. For example, the mini- tion or benefit is based. In 401(k) most of a plan’s contributions mum contribution requirement plans, this means non-key employees or benefits. Thus, the need for must be observed by top-heavy who make pre-tax contributions are not the top-heavy requirements was profit-sharing plans using age- penalized for the deferral. The second considered extremely important weighted and new comparabil- change, effective for the 2000 plan in the context of smaller retire- ity plan designs, and 401(k) year, repealed the Code §415(e) ben- ment plans maintained by pro- plans with participant deferrals. efit limitation that applies to individu- fessional corporations. Because This assures that eligible non- als covered under both a defined of plan demographics and other key employees in these defined contribution and a defined benefit plan nondiscrimination rules, it is ex- contribution plans receive allo- maintained by the same employer. tremely unlikely that top-heavy cations that are at least 3% of This latter change generally should requirements mandated to be in compensation. result in a decrease in the percentage all qualified retirement plan Continued on page 16

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 5 FOCUS ON GAC Impact of IRS Reorganization on Remedial Programs by C. Frederick Reish, APM, Esq., and Bruce Ashton, APM, Esq.

ince the beginning of the IRS’ restructuring process, grams would be administered by the officials of the Employee Plans Division have sought branch which handles plan examina- S tions, and, thus, all of the programs input from practitioners on the most effective way for the would be better coordinated with employee plans function to be organized. Recently, Fred Reish greater uniformity. participated in a session arranged by Joyce Kahn, who heads up 4. Should Walk-in CAP (or perhaps all of the programs) continue to have a the VCR program at the IRS, to discuss the structure of the John Doe or “no names” feature? qualified plan remedial programs after the restructuring is Fred Reish argued that it should, pointing out that there are specific complete. The session included five benefits practitioners who cases in which John Doe discussions work actively in the remedial programs, all of whom are are very valuable. Examples are: ref- lawyers (though one, Mike Pruett, owns a pension administra- ormation CAP (because the IRS has retained broad discretion to reject tion firm in Anchorage, Alaska). During the session, they cases with complex fact situations); discussed the following issues: cases where the correction methodology is not clear; and so on. While 1. Should the voluntary correction pro- cases. A second reservation was not entirely clear, it seemed that the grams be handled by the IRS in the that, notwithstanding the local practitioners agreed on this issue. But, field or in a centralized location? All working of the cases, there was a it is difficult to tell what the IRS’ of the practitioners agreed that they desire for national uniformity, es- thinking is on this point. should be handled in the field. Our pecially for corrections. The final direction the new Tax Ex- best guess is that the programs will 3. Should the remedial programs be have a national coordinator, and per- empt and Government Section (which placed in the Examinations Branch replaces the Employee Plans/Exempt haps a few personnel, in Washington, or in the Rulings Branch? Gener- Organizations Division) will take on D.C. Each region will have a CAP ally speaking, the feeling was that Coordinator who will work with rev- these issues is unclear. What is abun- they should be placed in the Rul- dantly clear, however, is that the IRS re- enue agents in the field. Those rev- ings Branch; however, those opin- mains committed to the voluntary enue agents will be dedicated to the ions were not strongly held. The remedial programs and will not have correction programs, and that is good sentiment seemed to be that, if the news for practitioners and their clients. any other duties. programs were placed in the Rul- 2. Should all of the voluntary correction ings Branch, it would give the best programs be combined in a single pro- appearance of fairness and would C. Frederick Reish, APM, Esq., is a gram? That is, should Walk-in CAP, eliminate the appearance of audit founder of and partner with the Los VCR, SVP and APRSC be, in effect, risk to plan sponsors. Based on Angeles law firm Reish & Luftman. He a single program? All of the practi- speeches by IRS officials, it appears is a former cochair of ASPA’s Govern- tioners agreed that it should be, al- the IRS may be leaning in the di- ment Affairs Committee and currently though some reservations were ex- rection of placing the program in the chairs the GAC Long Range Planning pressed. One reservation was that the Rulings Branch. Committee. Bruce L. Ashton, APM, National Office should not manage the Interestingly, one of the advantages Esq., a partner with Reish & Luftman, is program in great detail. That is, the of placing the function in the Ex- cochair of the Government Affairs Com- field should have some discretion in amination Branch would be that the mittee, and serves on ASPA’s Board of handling the unusual and complicated Audit CAP and Audit APRSC pro- Directors.

6 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 Withholding Ain’t That Hard – Here’s How To Do It! by Lawrence C. Starr, CPC, EA, CEBS

he Unemployment Compensation Act of 1992 (UCA) dom saddled our clients (and us) with changed the world for the plans of most of our small this new complicating wrinkle. T The new mandatory withholding business clients. Prior to this law, withholding on pension rules meant that our clients would distributions was voluntary. An employee receiving a distri- now have to deal with withholding from lump sum distributions on a bution from his or her plan could elect to not have withhold- much more frequent basis. More im- ing apply. Of course, they would still be required to pay taxes portantly, it meant that we could no longer push the responsibility for the on any income that was not properly rolled over, but with- withholding off to someone else be- holding at the plan level was rarely invoked as employees cause the new rules separated out receiving distributions were “encouraged” to elect no with- payroll withholding from non-payroll withholding, with retirement holding and simply file estimated tax returns to cover the benefits coming under the latter cat- liability (if any). This was particularly useful because egory. We also got a new IRS form (Form 945) that would be used to employees generally had 60 days to decide if they would pay report and reconcile withholding taxes or defer by rollover to an IRA within that 60 day period. from retirement plans. It is interesting to note that the Form 945 is also In those situations where we to figure out how to get the withhold- used to report several other withheld could not “convince” the participant ing into the IRS. In other words, taxes, including those on gambling, to forgo the withholding at the plan withholding just wasn’t our prob- retirement pay for service in the U.S. level, Announcement 84-40 gave a lem! Oh, for the good old days! Armed Forces, and backup withhold- number of options for how the with- UCA changed all that. In what ing under IRC Section 3406. holding could be handled and re- many consider an absurd fiscal ma- So, the new law required that if ported. In those days, we commonly neuver, withholding became manda- a participant was getting a distribu- suggested that clients should select tory withholding and was somehow tion that was eligible to be rolled the option where the withholding was to be used to finance increased un- over, but was not directly rolled, that reported under the employer’s own employment compensation. Of distribution would be subject to a Employer Identification Number course, no one has ever explained withholding rate of 20%. More im- (EIN). The employer aggregated the how an increase in withholding portantly, there is no allowance for withholding from the plan with the (which is not an increase in actual claiming exemption from this with- withholding from wages for its own taxes) could provide additional dol- holding, even if the employee’s li- employees and reported it on the lars to fund increased unemployment ability for taxes would actually be same tax return (the Form 941) that something less than the 20%, or even was used to report tax withheld on benefits when, at best, all it would do is accelerate the payment of the nothing at all. When the trustee(s) such wages. By using this option, of the plan make that distribution, we could generally just refer the cli- taxes due by a few months. Never- theless, Congress in its infinite wis- ent to “whoever does your payroll” Continued on page 9

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 7 lar the increases in the section C ONTINUED FROM PAGE 1 401(a)(17) compensation limit and the section 415(c) dollar Washington Update limit. • The fact that the catch-up con- sage, and, surprisingly, a few Re- ernment shutdown, although in my tributions for older workers are publicans voted against the bill. view that is ultimately unlikely. exempt from the nondiscrimina- In the face of a certain veto, Everyone generally agrees that the tion rules (i.e., ADP/ACP tests). Republicans chose not to send the key to a deal on tax cuts is a deal bill to the President, but rather, on Medicare, including some kind • Certain changes in the top-heavy hold it until they return in Septem- of prescription drug coverage. rules, namely the repeal of fam- ber. This was done to prevent the However, given the short time ily attribution and the provision President from gaining a political frame, (the government’s fiscal deeming the matching contribu- advantage by vetoing the bill in a year ends September 30), the most tion 401(k) safe harbor, as sat- public ceremony while Republi- popular scenario right now is for isfying the top-heavy rules. cans are not in town to respond. Congress and the Clinton Admin- • Treasury would prefer raising Meanwhile, Republicans have istration to reach a short-term deal the 25% of compensation limi- been trying to drum up support for to extend government operations tation to 50% of compensation the tax bill back in their home dis- until early next year. This deal instead of 100% of compensa- tricts. They have been highlight- might include some minor tax tion as provided in the tax bill. ing the major themes covered by changes such as the extension of • Treasury has raised concerns the tax bill. One of the major certain expiring tax provisions about the provisions providing themes being emphasized is the (e.g., the R&D tax credit). During for Roth 401(k) and Roth 403(b) pension reform provisions. In fact, this extended period, the hope plans. on August 14th Representative Rob would be that a deal on Medicare • Treasury presently objects to re- Portman (R-OH) gave the national could be arranged, allowing for the pealing the multiple use test. Republican radio address and dis- opening of negotiations on tax cuts cussed the importance of enacting with the complete deal being final- These are viewed as the major the pension reform provisions in ized next spring. differences right now, but others order to enhance retirement sav- This is, of course, only one of are certain to develop during the ings opportunities for working several different possible sce- negotiations. ASPA GAC will be Americans. This is the first time narios. By next week the popular fighting to keep as many of these since ERISA was enacted that ei- consensus could easily change. provisions as possible in any final ther the Republican or Democratic ASPA GAC will certainly keep you negotiated tax package. However, leadership has placed so much em- posted. it will be an uphill battle, and we phasis on employer-sponsored re- If and when serious negotia- need your help. You should be retirement plans. It is a testament to tions on the entire tax bill begin, it ceiving shortly (in fact, you may the years of effort by ASPA’s Gov- would appear all but certain that have already) an e-mail describing ernment Affairs Committee (GAC) pension reform will be an impor- how you can contact your Congres- and other members of the Retire- tant part of these negotiations. You sional representatives and let them ment Savings Network educating can find a complete side-by-side know how important pension re- members of Congress on the dire summary of all the pension reform form is for the retirement security need for pension reform. provisions that will be considered of working Americans. Your par- When Congress returns, it is in the “What’s New” section of ticipation will make a difference unclear whether they will send the ASPA’s web site (www.aspa.org). and will be greatly appreciated! tax bill to the President or hold it Some of these provisions are likely pending possible negotiations. In to be the subject of some intense the meantime, Congress will turn negotiations. Treasury has already Brian H. Graff, Esq., is executive director of ASPA. Before joining its attention to federal appropria- informally raised objections re- ASPA, Mr. Graff was legislation tions and Medicare. Believe it or garding the following provisions: counsel to the U.S. Congress Joint not, there is some concern that we • Treasury is concerned about all Committee on Taxation. may be heading for another gov- of the limit increases, in particu-

8 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 liability for the year is less than $500, C ONTINUED FROM PAGE 7 the amount due can be sent with the filing of the Form 945. However, Withholding Ain’t That Hard for reasons to be explained later, we still recommend that you de- they are now required to withhold many of us represent often have a posit the funds with the financial 20% of it and, somehow, get that personnel, accounting, and human institution anyway. money into the taxing authorities on resource department all wrapped up All payments are made to the a timely basis. Failure to make pay- in one person, who is usually also AFI using a Federal Tax Deposit ment of withheld taxes on a timely responsible for buying the donuts and (FTD) Coupon - Form 8109 or basis can result in substantial penal- making the morning coffee! I’m sure 8109-B. The FTD coupon must be ties and personal liability to those this is not the only methodology that an IRS original - photocopies are who are charged with making those will make our lives bearable, but it is not acceptable. They are optically payments. the one that we developed and has scanned forms printed in a special The vast majority of our clients been used successfully for 7 years color ink. You might think that you do not do their own payroll process- now by us and many other pension can order blank FTD Coupons from ing; they use various payroll services firms around the country. the IRS forms “800” number; you to take on the responsibilities of mak- As I said earlier, you can’t just would be wrong! The Service ing sure the withholding is properly send the withheld funds to the IRS. tends to guard these forms and handled and deposited with the gov- In fact, payment of withheld funds makes it difficult to get blank ones. ernment. How could they manage is made to an “authorized financial But there is a way to get a quantity this new, irregular withholding pro- institution” (AFI) or a federal reserve of the blank forms (which is spe- cess? Their payroll companies were bank. In this process, we will make cifically the 8109-B). You can not involved with the payment of re- the payments to the financial institu- write to the IRS Eastern Area Dis- tirement plan distributions and gen- tion. I would note that if the total tribution Center for small quanti- erally did not want to hear about non-periodic withholding responsibilities that did not derive from the Sample Letter Requesting 8109-B Forms payroll process. Our client clearly had to deliver the withheld retirement Pension Plans, Inc. money to the Feds, but the method 123 Any Street of getting withheld taxes into the IRS Any Town, MA 01101 is anything but simple. You can’t just (555) 555-5555 send it to the IRS! (Actually, you can, but this would be foolish because you will incur a penalty if you pay Date the IRS directly.) Our clients looked to us to make this problem go away - IRS Eastern Area Distribution Center to simplify the process so that even P.O. Box 85074 they could handle it. Richmond, VA 23261-5074 The process that we developed and which I am about to explore with RE: Form 8109-B you is one particular solution that was Please send us 50 copies of Form 8109-B. Our firm assists clients in the developed to make dealing with re- preparation of their tax returns. Please send the forms to the above tirement plan withholding as simple address. as possible for clients who are not themselves sophisticated in this area. If there are any questions feel free to contact us. Large employers will have a person- Sincerely, nel, or human resources, or accounting department that would be able to handle this process as a routine pro- Joe Pension Administrator cedure. But the small businesses that

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 9 ties of Form 8109-B (See sample let- tory, that is the logical account to use The deposit is due at the depository ter). for the withholding check. either on a monthly or semi-weekly ba- Deposits to the AFI are supposed Most clients do not have a check- sis. Generally, if you report $50,000 or to be made using the IRS generated, ing account, or it is not with the de- less of withholding per year, you are and pre-printed FTD Coupon (8109). The pository. Often, if there is a checking will remain a monthly depositor. Dis- 8109-B (B stands for blank) is sup- account, it is a mutual fund account tributions subject to the 20% withhold- posed to be used only to start the pro- with check writing privileges. ing would have to exceed $250,000 cess the first time. Local IRS offices The withholding is, by law, the during the year for the plan to flip over will send out an 8109-B after you give obligation of the plan administrator. to semi-weekly reporting status. The them the information for the IRS to pro- Where the employer is the named plan vast majority of our plans will be on a duce a pre-printed book of 8109 FTD administrator (which is the way all of monthly deposit schedule. Most small Coupons. our plans are set up), the employer is plans will withhold less than $50,000 The IRS uses an outside contractor obligated for the withholding. There- and thus will be monthly depositors, to produce 8109 coupon booklets un- fore, I believe the following example even if the plan sponsor is a semi-weekly der a system known as AUTOGEN - gives you a process that makes life depositor, as long as the EIN used by The Automated Generation of FTD easiest and works best: the retirement trust when paying the tax Coupons. The 8109 booklets are de- Example: A lump sum distri- is different from the EIN of the em- signed to automatically trigger produc- bution of $10,000 with 20% ployer. The IRS Publication Circular E tion and mailing of new booklets as the withholding ($2,000) is to be has detailed instructions that should be old ones are used up. We have been made. The trustee orders two reviewed, particularly for larger client told by the head of the IRS national of- checks from the mutual fund; plans, to make sure you are on the cor- fice FTD Team - Return Processing that one for $8,000 made payable to rect schedule. the submission of an 8109-B also trig- the participant (or trustee, if de- Monthly depositors must deposit gers the AUTOGEN system if there was sired or required by the fund), (using the FTD Coupon) taxes withheld not a recent coupon book produced. and one for $2,000 made pay- on payments made during a calendar Therefore, the submission of an 8109-B able to the trustee. The trustee month by the 15th day of the following will produce an 8109 coupon book. Keep endorses the withholding check month. Semi-weekly depositors must this in mind, since it is important to con- to the employer (yes, TO THE deposit taxes withheld on payments sider where these coupon books will be EMPLOYER!). The employer made on Wednesday, Thursday, and/or sent and what will happen to them. I will then deposits that check and Friday by the following Wednesday. discuss recommendations for handling concurrently writes out a com- Amounts accumulated on payments this later in this material. pany check (written on an ac- made on Saturday, Sunday, Monday, OK, so now you have a properly count acceptable to the and/or Tuesday must be deposited by the filled out 8109 or 8109-B. Now you depository) which is deposited following Friday. (If the deposit day is need a check for the withholding pay- with the FTD coupon. not a banking day, you have until the ment. The authorized depository Some might wonder if the depos- close of the next banking day to make (where you take the FTD Coupon) must iting of a plan check in the the deposit.) accept cash, a postal money order employer’s account would give rise There is also a special $100,000 drawn to the order of the depository, or to a prohibited transaction. I am con- One-Day Rule. Once you accumulate a check or draft drawn ON AND TO vinced that the answer is no. Remem- $100,000 in withholding, it is due by the THE ORDER OF the depository. ber, the employer is, by law, close of the next business day. You can deposit taxes with a check responsible for the withholding. When When the year is over, Form 945 drawn on another financial institution the trustee endorses the check over to must be filed by January 31 to reconcile only if the depository is willing to ac- the employer, the employer is taking the payments withheld and made using cept that form of payment. Generally, that money as the agent of the govern- the FTD Coupons. However, if you they are NOT! The Feds get their ment and must deposit it with the de- made deposits on time in full payment money the evening of the deposit, so pository within the appointed time of the taxes for the year, you may file the bank can’t wait for the check to frame. That money does not belong by February 10. The form is very easy clear through the normal banking pro- to the plan at that point but rather to to fill out since it needs only one line cesses. If you have a checking account the Feds; thus, there is no dealing with filled out showing the income tax within the name of the plan with the deposi- plan funds by the employer. held and the summary schedule showing

10 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 each month for which payment was made books that are produced will be sent to withholding process has been a real time and the amount for each period. If the us. There is no other address provided. consuming ordeal, I would suggest that plan is a semi-weekly depositor, Form We do not want coupon books for the you might want to try the process ex- 945-A must also be filled out. This is plans being sent to the clients. It is plained above and see if that does not give simply a larger schedule showing the much too easy for them to either use your clients and you some needed relief monthly tax liability on a day-by-day those coupons with their own em- from Congress’ legacy of funding ex- basis. ployee withholding (which will roy- tended unemployment benefits in 1992. The administrative procedure that ally mess up everything) or to simply we use that allows the client to get a FTD fill out their own coupon incorrectly Coupon is quite simple. When we do and bypass our tracking system for pur- Lawrence C. Starr, CPC, EA, CEBS, is the distribution forms for a participant, poses of making sure that the Form 945 President of Qualified Plan Consult- we include in the employer’s package a is prepared in the following year. The ants, Inc. (QPC), a West Springfield, Federal Withholding Deposit Coupon cover letter that goes with the 8109-B Massachusetts firm providing pension Request form. This simple form is filled explains again to the client how the and profit sharing plan consulting, ad- out by the client and faxed to us when- check to the depository is to be handled ministration, and actuarial service on a ever they are making a distribution where and reminds them that we will be pre- fee-for-service basis. Starr is also a withholding is being done. On the form, paring the Form 945 for them early the partner and operator (Sysop) of a na- the employer identifies the month and following year. tionwide electronic pension bulletin year of the distribution and lists the par- Adopting this process has allowed board system called The Pension Infor- ticipants for whom withholding will be us to make the withholding require- mation eXchange (PIX). A holder of a deposited, along with the exact amounts ment much less onerous on our clients. graduate degree in Economics and Fi- of the withholding. From this form, our We can walk them through the with- nance, Mr. Starr has served as ASPA’s administrative staff will produce an holding process over the phone in just Vice President, on the board of direc- 8109-B FTD Coupon and mail it to the a few minutes and refer them to the tors, and Education and Examination client, usually the same day that we get material that they have been sent with Committee. Mr. Starr is currently Com- the fax. The coupon is completely filled the participant distribution packages. munications Chair of the Government out, including the name of the plan, but Many pension firms have adopted Affairs Committee and serves on ASPA’s the address that we use is always in care these same procedures and modified Communications and Technology Com- of our company with our address. We them as appropriate for their operations mittee. He is also a frequent lecturer do this so that when the 8109-B is pro- with equal success. If you have found and speaker and has participated in cessed by the Service, any 8109 coupon that walking your clients through the many seminars across the country.

ASPA’s First Summer Conference Receives Rave Reviews

It was a sell out crowd at education, learning, and net- 401(k) Audits, Participant ASPA’s first Summer Confer- working opportunities. Loans, Y2K, and the DOL En- ence! The Conference, a The Conference included an forcement Proceeding. Also combination of the former opening session that provided in- featured was a vendor exhibi- Eastern and Western Regional sight into the status of pension tion of 20 booths displaying the Seminars, proved to be a great and social security reform legis- latest technology and products success. The July 11-14 Con- lation in the current Congress. for the industry. ference coincided with North- Another highlight was the “Ask All in all, the 1999 ASPA ern California’s summer heat the Experts” general session on Summer Conference was a wel- wave, and attendees found Tuesday that provided attendees come addition to the ASPA pro- themselves in the midst of with a chance to have their ques- gram calendar. Mark your unanticipated 90 degree heat tions answered by experts in the calendars now for the 2000 in San Francisco, the City by legal, TPA, and actuarial fields. ASPA Summer Conference the Bay. The weather did not, The bulk of the conference con- scheduled for July 16-19, 2000 however, keep ASPA members sisted of 30 concurrent work- in San Francisco. away; over 300 attendees were shops on a variety of topics on hand for the continuing including EPCRS for the TPA,

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 11 tial. Also, the Joint Board may take C ONTINUED FROM PAGE 2 disciplinary action where the ABCD may not consider the situation action- An Interview with Patrick McDonough able, such as a suspension from practice for failure to file tax returns or tax evasion, which is not an actuarial ability of an individual to represent a of actuarial disciplinary cases, my client before the IRS on tax matters, office acts independently of the Joint matter. In instances where the ABCD with or without the taxpayer’s pres- Board, at least in the first three phases has taken disciplinary action against ence and prepare and file necessary - discovery, discussion with the ac- an actuary, and the Joint Board has documents with the IRS on behalf tuary, and representation before the requested further information for its of a taxpayer. Circular 230 grants administrative law judge. The full own review, the ABCD has refused this right to all attorneys and CPAs, Joint Board only gets involved in the to share information and cited its own and to Enrolled Actuaries with re- fourth phase, which is appeal. confidentiality rules. spect to certain sections of the Inter- As Director of Practice, my of- The Joint Board recently com- nal Revenue Code. In addition, the fice is involved in all disciplinary pleted the recent reenrollment IRS has an Enrolled Agents program, cases, not just those involving actu- cycle for actuaries. There were where an unlicensed individual can aries. Usually, disciplinary case re- some problems, particularly with take an exam administered by my ferrals come to us from field agents, the timing of the return of office and apply for an Enrolled and involve issues like a practitioner reenrollment letters. What do you Agent status. falsifying or backdating documents, think can be done to improve the What is your role in the Joint or the biggest area for disciplinary process? The Joint Board will be Board as its Executive Director? action, non-filing of tax returns by reviewing the reenrollment process There are various areas that I am practitioners. The law says you have to see what can be done to avoid the responsible for with respect to the Joint to be in compliance with your own problems. Staffing for the administra- Board. tax and filing obligations to represent tive processes of the Joint Board is an First of all, I oversee the adminis- clients before the IRS. You would issue, as we currently have limited staff tration of the Joint Board, such as the be surprised at how many cases we to carry out all of the functions neces- writing of documents governing the get where practitioners are not in sary. We are working on the staffing operations of the Joint Board, compli- compliance. problem, but government procedures ance with the Federal Advisory Com- One actuary tried to claim he may slow this process. Also, the Joint mittee Act with respect to the Advisory could still sign a Schedule B even Board will now be focusing on audit Committee (volunteers who actually though he was suspended from prac- of the reenrollment forms. Once audit prepare the EA examinations), and act tice for failure to file tax returns, but of the selected reenrollment forms has as the representative of the Joint Board that is not the case. As Roland Cross been completed, the Joint Board will at meetings of pension actuaries, pro- says, you have to have “clean hands” be considering ways to improve the fessional actuarial organizations, and to practice before the IRS as an ac- process. agencies of the federal government. tuary (or an attorney, CPA or En- There have been some complaints I also advise the Joint Board on rolled Agent). about the speed or responsiveness legal aspects of commonly encoun- How do the activities of the Actu- of the Joint Board on answering tered situations, usually involving ac- arial Board for Counseling and questions. Can you comment on tions, which may result in an actuary’s Discipline (ABCD) affect your of- that? Honestly, we get more ques- not being able to practice. It could be fice? We do not actually receive re- tions and requests from the 4,500 denial of an application for enrollment, ferrals from the ABCD, although the Enrolled Actuaries than we do from late filing or not meeting requirements ABCD has suggested that informa- the 40,000 Enrolled Agents. Re- for reenrollment, reinstatement of a tion be exchanged on actuarial dis- sponding to their questions is a full disenrolled actuary and questions on ciplinary cases. The problem is that time job, and we currently have only exams, such as when an answer is not there are confidentiality issues, for limited staff to accommodate them. in accord with an IRS position. instance, if information came from They are a sophisticated group, so we What role do you play with respect the examination of a taxpayer’s tax often have to respond to congres- to disciplinary cases? In the case return, that information is confiden- sional inquiries on specific questions.

12 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 Circular 230 is currently in the will be incorporated. The next step examination. I want to expand the process of revision. Why is it be- is to prepare a draft for public com- Enrolled Agent program to apply re- ing revised? Circular 230 is updated ment, then incorporate the comments view standards like the Joint Board every five to six years. It was last in the final draft. We would like to does for Enrolled Actuaries. One updated in 1994, so it was time to publish the draft for public comment area of reform I am working on is review it again. There has been new in the spring of 2000, so that the fi- the waiver of the Enrolled Agent ex- legislation, court decisions and tech- nal regulations can be in effect by the amination for former IRS employees nology which need to be reflected. summer of 2000. who were employed by the IRS for more than five years. Review of the What steps have been taken so far Currently, Circular 230 does not area of employment needs to be done in the revision process, and what allow an actuary to practice before before such a waiver is granted. Such additional steps are necessary be- the IRS on sections 415 and 416 of review was not always done in the fore the final version is published? the Internal Revenue Code, clearly past where an IRS employee re- So far, preliminary notice was given areas which should be allowed. quested a waiver. to several groups, like the ABA, What can be done at this point to On the disciplinary side, we are AICPA, the National Association of add these sections to the EA prac- seeing more referrals about abuse Enrolled Agents, and some govern- tice section of 230? Comments can of IRS field agents by practitioners, ment departments. These groups still be submitted to me, and I will such as hounding an agent in and submitted 70 or so suggestions re- pass them on to the working group, out of the office, physical abuse, but they should get them in body checking, throwing eggs at an Circular 230 is a collection of here soon. Those seem non- agent’s house or car and other un- controversial, so there should professional conduct. This is the regulations on practice not be a problem getting them clearly disreputable conduct by a before the IRS. Information added. In particular, 416 is not practitioner, and suspension is be- on Circular 230 can be found included because the section ing enforced for this type of behavior. in IRS Publication 947, which dealing with actuarial practice was written before 416 was put With respect to the Joint Board, may be downloaded from into the Code, and has not been I would like to be more involved the IRS website at revised since. in the Joint Board activities. As an attorney, I have taken some actu- www.irs.treas.gov. The What do you think about arial courses with Don Grubbs and ASPA’s proposal to have a regulations contained in Cir- would like to be more involved in functional equivalent to the cular 230 may be down- the subject matter of actuarial is- Enrolled Actuary estab- sues. Also, I would like to be more loaded from the National lished for defined contribu- involved with Lauren Bloom’s of- Archives and Records Ad- tion plan certification? fice (i.e., with the ABCD). ministration website at Congress has to act first. I do Special thanks to Paulette Tino www.nara.gov/fedreg not have enough mastery of the and Roland Cross of the IRS, for subject matter to comment on (Title 31CFR Part 10, subparts their help in providing background the ramifications of this. information for this article. A-E). Clearly the addition of an enrolled DC practitioner would certainly raise administrative Sally J. Zavattari, FSPA, CPC, EA, garding areas of 230 which need re- issues. is president of Actuarial Services vision. What direction do you see for your Group, Inc., in Dallas, Texas. Ms. This is clearly an unworkable future activities as Director of Zavattari serves as ASPA’s liaison amount, so a working group was Practice and as Executive Director with the Joint Board for the Enroll- formed, with Deputy Chief Counsel of the Joint Board? In the office of ment of Actuaries. Also, she serves Marlene Gross and others, to reduce Director of Practice, I have created a on the ASPA Board of Directors this to 15 to 20 suggestions. Some federal advisory committee to write and the Long Range Planning Com- suggestions are controversial, such as the examination for Enrolled Agents, mittee and has served on the E & E defining the practice of law, but many modeled on the Enrolled Actuaries’ Committee.

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 13 standing the fees and costs in 401(k) C ONTINUED FROM PAGE 3 investment products. Current Developments Update on PWBA’s Investigation As a result of the testimony given of 401(k) Fees at the PWBA’s 1997 hearings, and of information gathered during the and disclosure of fees and expenses in the plan, and provides participants PWBA investigations of the expenses charged to 401(k) plans? If action with 10 questions to ask their employ- in 401(k) investment products, it was is necessary, what information ers about the plan’s services, invest- determined that, in addition to the should be required to be disclosed? ments, and fees. In addition, the guidance given to the participants Would a uniform format for such brochure instructs participants that through the booklet, there was a need disclosure be helpful to partici- their employers have fiduciary respon- for a standardized disclosure form to pants? sibilities under ERISA to understand assist plan fiduciaries in understand- Shortly thereafter, the DOL initi- the plan fees and to determine whether ing 401(k) fees. After discussions ated approximately 50 field investiga- they are reasonable relative to the ser- with representatives of the various tions around the country for the vices purchased: constituencies in the 401(k) invest- purpose of gaining a greater under- “You should be aware that ment marketplace, the PWBA asked standing of the fees being charged to your employer also has a specific associations representing the insur- 401(k) plans and for discovering obligation to consider the fees and ance, mutual fund, and banking in- whether there were abusive practices expenses paid by your plan. dustries to collaborate in the in that area. While the PWBA has not ERISA requires employers to fol- development of a “universal” form announced the results of those investi- low certain rules in managing for the disclosure of 401(k) fees and gations, we do know that all of the in- 401(k) plans. Employers are held expenses. The American Council of vestigations have been completed and to a high standard of care and the results have been sent to the PWBA diligence and must discharge The PWBA asked asso- Headquarters in Washington, D.C. We their duties solely in the inter- believe the information learned from est of the plan participants and ciations representing the investigations will soon be infor- their beneficiaries. Among mally reflected in speeches by PWBA other things, this means that the insurance, mutual officials — and possibly in formal employers must: fund, and banking in- PWBA guidance. • Establish a prudent process On July 1, 1998, the DOL pub- for selecting investment al- dustries to collaborate lished a 401(k) fees brochure for plan ternatives and service pro- participants entitled A Look at 401(k) in the development of a viders; Plan Fees. In addition, the PWBA re- "universal" form for dis- leased a study of 401(k) costs prepared • Ensure that fees paid to ser- by an outside consultant entitled vice providers and other ex- closure of 401(k) fees “Study of 401(k) Plan Fees and Ex- penses of the plan are penses.” The Study is a lengthy and reasonable in light of the and expenses. detailed analysis of the types of ex- level and quality of services penses charged in connection with the provided; Life Insurance (ACLI), the Invest- investment and administration of • Select investment alternatives ment Company Institute (ICI), and 401(k) plans. Both the booklet and the that are prudent and adequately the American Bankers Association study can be found at the PWBA’s diversified; (ABA), prepared a fee disclosure form and provided it to the PWBA. website at www.dol.gov/dol/pwba. • Monitor investment alterna- In the participant booklet, the On July 15, 1999, the PWBA pub- tives and service providers once PWBA discusses the importance of lished the worksheet, together with selected to see that they con- fees and their impact on retirement a brochure for employers, and a press tinue to be appropriate choices. benefits, describes the types of fees that release. Copies of all three docu- are charged in 401(k) plans, instructs Thus, the PWBA places squarely ments can be obtained from the participants on where they can obtain on the shoulders of the employer the PWBA’s website at www.dol.gov/ information about fees and expenses fiduciary responsibility for under- dol/pwba.

14 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 The form provides for full dis- Fees to be reported in column of fees paid to TPAs for participat- closure of all investment-related ex- (d) represent payments by insur- ing in the sales process as a finder penses including, for example, front- ance carriers to agents and bro- (e.g., introducing the plan sponsor to end loads, annual asset-based charges kers for items other than a broker) and receiving a fee or oth- (such as investment management commissions (e.g., service fees, erwise assisting in the sales process fees, 12b-1 fees, trailing commis- consulting fees, and finders and receiving payments related to sions), and rear-end charges (such as fees).” those services. The most obvious of contingent deferred sales charges and However, for 1999, the DOL has those situations would be a fact pat- back-end loads). In addition, it calls prepared a draft Schedule A with a tern where the TPA receives a perfor disclosure of other expenses as- significant change. The draft Sched- centage of the broker’s commission. sociated with the operation of a ule A moves the question to line 2 While it is not clear whether all 401(k) plan, such as plan document and is changed to request: “Insurance payments to TPAs must be reported costs, annual administration ex- fees and commissions paid to agents, on the new Schedule A, the trend is penses, compliance testing, and so brokers, and other persons.” toward greater disclosure, and there on. The instructions have also is a good chance that, in future years, It is likely that the disclosure changed. They now read: full disclosure will be required. worksheet will become the industry “Line 2 column (d) - Fees to Conclusion standard. If so, that would encour- be reported represent payments The 401(k) marketplace has age more plan sponsors to better by insurance carriers to agents, grown increasingly competitive for evaluate the fees and costs in their brokers, and other persons for both service fees and investment ex- plans, which would ultimately drive items other than commissions penses for plans of all sizes. As a down the costs for plan investments (e.g., service fees, consulting result of that competition and of the and recordkeeping. This would be fees, and finders fees). Fees DOL activities, the trend is toward particularly true for small and mid- paid by insurance carriers to greater disclosure of all fees and costs sized-employers who now lack the persons other than agents and — and of the recipients of those fees. staff and the technical sophistication brokers should be reported here, While that is good news for 401(k) for identifying and analyzing the NOT in Parts II and III on plans and their participants, it also costs in 401(k) investment packages. Schedule A as acquisition costs, raises the danger that the cost of ser- In addition, it could provide an op- administrative charges, etc.” vices will be given more weight than portunity for third party administra- (The underlining was added.) the quality of the services, which tors (TPAs) to provide this kind of Thus, the broad category of could ultimately hurt participants. analysis to their 401(k) plan clients. “other persons” has been added to the For some TPAs, there are business In addition to the creation of a group for which fees must be re- opportunities to assist employers in disclosure form, the DOL has fo- ported. While it seems that Sched- selecting investment providers by cused on payments from 401(k) plans ule As are generally being properly evaluating the performance, services, by revising the Schedule A for its prepared for insurance commissions and costs of the competing provid- Form 5500 for 1999. In 1998 and paid to licensed brokers and agents, ers. prior years, Schedule A, Part I, line there appears to have been little in 3, asked for “Insurance fees and com- the way of reporting fees paid by in- missions paid to agents and brokers.” surance carriers to “other persons.” C. Frederick Reish, APM, Esq., is a The Schedule A instructions pro- Since many TPAs now receive pay- founder of and partner with the Los vided: ments from insurance carriers related Angeles law firm Reish & Luftman. “Line 3 — Report all sales com- to plans they administer, it appears He is a former cochair of ASPA’s missions in column (c) regard- that additional reporting will be re- Government Affairs Committee and less of the identity of the quired of the carriers for plan years currently chairs the GAC Long Range recipient. Do not report over- beginning after December 31, 1998. Planning Committee. Bruce L. ride commissions, salaries, bo- Unfortunately, neither the question Ashton, APM, Esq., a partner with nuses, etc., paid to a general nor the instructions are complete Reish & Luftman, is cochair of the agent or manager for managing enough to clearly define where the Government Affairs Committee, and an agency or for performing reporting line is drawn. However, a serves on ASPA’s Board of Direc- other administrative functions. fair reading would require reporting tors.

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 15 ances. A defined benefit plan is top- C ONTINUED FROM PAGE 5 heavy when the present value of accrued benefits of key employees Top-Heavy Plan Rules exceeds 60% of the present value of total accrued benefits determined as of of the minimum contribution or mini- • an employee owning more than 1% the most recent valuation date that is mum benefit that must be provided in who earns more than $150,000. within a 12-month period ending on multiple plan situations. It also raises The ownership attribution rules of the determination date. Account bal- the possibility of a resurgence of small Code §318(a) apply in determining ances and accrued benefits include defined benefit plans. A problem for whether the spouse or family member employer contributions, employee pre- administrators is that the IRS has not of a key employee who has an owner- tax elective deferrals, employee after- updated either its regulations interpret- ship interest is a key employee. How- tax contributions (with the exception ing Code §415 or Code §416 to take ever, a key employee’s compensation of qualified voluntary employee con- into consideration these changes in the is not imputed to family members. The tributions which were allowed from law. spouse or family member of a key January 1, 1982 to December 31, Basic Concepts of employee who is a key employee only 1986), investment earnings, forfeitures, rollover contributions from a related Top-Heavy Plans because he or she is an officer does not become a key employee by attribution or predecessor employer’s qualified or aggregation. Whether an individual plan, and rollover contributions re- What is a Top-Heavy Plan? is an officer is determined by the func- ceived from any qualified plan before A qualified retirement plan is tion performed, rather than the title of January 1, 1984 but excluding unre- top-heavy when it primarily ben- lated rollovers after December 31, efits officers, owner-employees, 1983. Distributions that occurred shareholder-employees, partners, When a plan becomes within five years of the determina- self-employed persons, and other top-heavy, the law re- tion date are included; however, ac- employees who meet the definition count balances for former key of a key employee. A plan primarily quires that special pro- employees and employees who did benefits key employees if they have not work at least one hour during the accumulated more than 60% of the visions in the plan five-year period ending on the de- benefits or contributions that the plan favoring non-key em- termination date are excluded. It is provides. There are also lookback important to remember that contri- rules, which require the inclusion of ployees override exist- distributions from prior years. butions made to a profit-sharing plan ing plan provisions. after the end of the plan year are not Who is a Key Employee? taken into consideration for top- Generally, a key employee is any the position occupied. When a key em- heavy status. However, contribu- employee who, at any time during the ployee no longer meets the definition tions to a money purchase pension plan current plan year or any of the previ- of key employee, he or she is dropped are included, even if they are contrib- ous four plan years, was: from testing rather than being treated uted after the end of the plan year. • an officer earning over 50% of the as a non-key employee. Excess deferrals, excess contributions, dollar limit for defined benefit plans excess aggregate contributions, and When and How is Top-Heavy (for example, $65,000 in 1998 and excess annual additions are not in- 1999 [Note: This limit does not in- Status Determined? cluded in determining the participants’ crement in $5,000 brackets]); Whether a defined contribution account balances. plan is top-heavy is determined as of • one of the 10 employees owning the the last day of the preceding plan year When Do Plan Aggregation Rules largest interest in the employer (a (the determination date). The determi- Apply? minimum of ½ of 1% ownership nation date for a new plan is the last In determining whether a plan is and compensation greater than day of the first plan year. A defined top-heavy, all plans of the employer $30,000 is required for this category contribution plan (including a 401(k) that cover the same key employee must to apply); plan) is top-heavy when the aggregate be aggregated. Two or more plans also • an employee owning more than 5% account balances of key employees must be aggregated if they cover a of the employer; or exceed 60% of the total account bal- common key employee, and the plans

16 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 are dependent on each other to pass ber of hours worked. The contribu- Compensation for top-heavy con- the coverage and nondiscrimination tion must be equal to the lesser of 3% tributions and benefits calculation is tests of Code §410(b) and §401(a)(4), of compensation or the highest actual limited by the maximum compensa- respectively. If one plan in the man- percentage allocated to any key em- tion limit in effect for the year (for ex- datory aggregation group is top-heavy, ployee. Allocations to key employees ample, $160,000 in 1998 and 1999). all plans in the group will be top-heavy include their own elective deferrals; This benefit must be provided to all as long as they are top-heavy as a however, deferrals by non-key employ- participants who have not separated group. However, if the group does not ees are disregarded in determining from service before the end of the plan exceed the 60% standard, none of the whether they have received the mini- year, regardless of the number of hours plans will be deemed top-heavy. The mum contribution. of service performed if that plan is pro- employer has the option of permissi- Comment: The IRS’s top-heavy viding the top-heavy minimums. As bly aggregating a plan it maintains that regulations predated the large- noted previously, gross compensation has no common key employee, if the scale growth of 401(k) plans. (including elective deferrals) is the benefits or contributions are compa- Under the regulations, since elec- current basis for determining the re- rable, and the aggregated group passes tive deferrals by key employees quired top-heavy contribution. the 410(b) and 401(a)(4) nondiscrimi- are considered employer-pro- Comment: The employment on nation tests. Permissive aggregation vided benefits, this has resulted the last day of the plan year re- may be a valuable option since it may in a trap for some employers. quirement may raise allocation lower the key employee percentage to These employers are those who issues for a standardized defined less than or equal to 60%. The result amended their existing profit-shar- contribution prototype plan. A in this situation is that the entire per- ing plans into a 401(k) plan with participant who leaves before the missibly aggregated group is consid- contributions limited to elective end of the plan year after com- ered not top-heavy, and the obligation deferrals in order to avoid making pleting 501 hours of service re- to provide a minimum contribution or further employer contributions. mains entitled to receive an benefit is avoided. If the aggregate balances of allocation of the employer’s con- Comment: Plan aggregation is their key employees exceed tribution. However, this entitle- a consideration when mergers 60%, and any key employee ment does not extend to and acquisitions occur since the makes an elective deferral, an entitlement to the top-heavy mini- acquired company’s plan may employer-provided top-heavy mum. For example, a standard- impact the parent’s top-heavy sta- contribution will still be re- ized 401(k) plan may require 501 tus and vice versa. quired. This should be a factor hours of service for entitlement in designing new small plans to a matching contribution. A What Minimum Benefits or since it may affect employer participant makes elective defer- Contributions Must a Top-Heavy costs and the ability to make rals and leaves employment be- Plan Provide? employer matching contribu- fore the end of the plan year after When a plan becomes top-heavy, tions. Generally, employer completing 600 hours of service. the law requires that special provisions matching contributions may not If the plan is top-heavy for that in the plan favoring non-key employ- be used to satisfy top-heavy plan year, then the employer is re- ees override existing plan provisions. minimums. Pending legislation quired to make a contribution of This is done so that the top-heavy plan might include: counting match- 3% of compensation to all non- remains qualified. The special provi- ing contributions for top-heavy key employee participants em- sions that apply are the requirements minimums, reducing the five- ployed on the last day of the plan to provide minimum contributions or year lookback rule to one year year. The participant is entitled benefits, and, if necessary, to acceler- for distributions to former em- to a matching contribution due to ate the plan’s existing vesting sched- ployees, removing the require- the completion of 600 hours of ule. ment for frozen defined benefit service assuming the plan allows Top-heavy defined contribution plans to make minimum accru- for this. However, since the par- plans (including 401(k) plans) are re- als, eliminating the requirement ticipant separated from employ- quired to provide a minimum contri- for using the aggregation rules, ment before the last day of the bution for each non-key employee and repealing the top 10 owner plan year, then there is no entitle- participant employed on the last day portion of the key employee defi- ment to the employer’s top-heavy of the plan year, regardless of the num- nition. minimum.

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 17 Top-heavy defined benefit plans the last day requirement. The em- der the defined contribution plan. With must accrue a benefit equal to 2% of ployer need only be concerned about the repeal of Code §415(e) after 1999, compensation for each year of service highly compensated non-key employ- the requirements for lowering the com- until the accrued benefit equals 20% ees. bined plan multiple and augmented of compensation if that plan is provid- top-heavy requirements as the concept What Vesting Requirements ing the top-heavy minimum. This of super top-heaviness will apparently Apply? minimum benefit is compared to the cease to have meaning going forward. Top-heavy plans must vest more plan’s normal accrued benefit for a However, IRS guidance is needed to rapidly than non-top-heavy plans. given year, and the employee is entitled explain how plans will make transi- Acceptable vesting schedules include to the larger of the two benefits. All tions taking into account the repeal of 2/20 graded vesting and three-year non-key employees in a defined ben- Code §415(e). “cliff” vesting. Full vesting is always efit plan who have at least 1,000 hours required if a plan has a two-year eligi- Comment: This change may of service must accrue a minimum bility requirement. have an impact on the funding of benefit regardless of whether they are defined benefit plans because the employed at year end. Where an em- What is a Super Top-Heavy Plan, contribution will not be limited ployer maintains multiple plans, there and Does This Concept Have by either the 1.0 or the 1.25 rule. are rules (discussed below) that coor- Meaning After the 1999 Plan It may also affect defined contri- dinate which plan provides the top- Year? bution plans, since cutbacks were heavy benefit and the amount of When the aggregate balances for traditionally made under these minimum benefit. the key employees exceed 90%, the plans. Top-heavy minimums may not be plan is considered “super top-heavy.” satisfied by employee after-tax contri- When this occurs, limits are placed on Top-Heavy Coordination butions or elective deferrals by non- benefits that can be provided by com- Where There Is More Than key employees, or employer bined defined contribution and defined One Plan contributions to Social Security. Em- benefit plans, and the top-heavy minimum contributions and benefits must ployer matching contributions may not How Does One Coordinate the be increased for non-key employees be counted, if they are used to satisfy Minimum Contribution or Benefit who participate in both the defined Code §401(k) or (m) antidiscrimina- Requirement If There Are contribution and the defined benefit tion testing requirements. Multiple Plans? plans. Comment: Prototype plans are Often an employer maintains For plan years before the 2000 not permitted to use matching more than one qualified plan. The plan year, Code §415(e) coordinates contributions to satisfy the top- employer need only select one of the situations where an employer main- heavy minimum contribution re- plans to satisfy the top-heavy require- tains both a defined contribution plan quirement. (Note: Elective ments to prevent a doubling of the top- and a defined benefit plan. Under this contributions made by key em- heavy minimum. However, there are section, the current maximum annual ployees are taken into account for unique problems if the employer’s benefit limit for defined benefit plans plans have different eligibility require- determining the top-heavy mini- ($130,000 in 1999) and the contribu- ments and the plan supplying the minimum.) tion limit for defined contribution plans mum contribution has the more An employer may satisfy the mini- ($30,000 in 1999) are multiplied by restrictive eligibility requirement. mum contribution requirement by 1.25 to set the combined limit on ben- making a qualified nonelective contri- efits and contributions. The current Which Plan Gets The Top-Heavy bution to non-key employees. Since super top-heavy rules require the low- Minimum? the 1998 plan year, a 401(k) safe-har- ering of the factor to 1.0. This 1.0 limi- The need to coordinate top-heavy bor nonelective contribution of 3% of tation can be avoided only if the total contributions occurs in situations compensation made in accordance cumulative benefits and accounts of where either the employer maintains a with the rules described in IRS Notice key employees are not more than 90%, combination of a defined benefit plan 98-52, may also be used to satisfy top- and the employer provides all non-key and a defined contribution plan or heavy requirements. Since the safe- employees covered under both plans multiple defined contribution plans. harbor contribution goes to every with either a 3% benefit (to a limit of When two defined contribution plans non-highly compensated participant 30%) under the defined benefit plan, are involved, it is usually a profit-shar- eligible to defer, it automatically meets or a 7.5% minimum contribution un- ing and money purchase pension plan

18 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 combination. The employer must des- eligibility requirements. If they do tribution combinations. Defined ignate in the respective plan documents not, additional coordinating provi- contribution plans must provide the which plan will be responsible for sup- sions must be added to the plan docu- top-heavy minimum to participants plying the top-heavy minimum con- ments. who were employed on the last day tribution to avoid having to provide regardless of the numbers of hours Example: An employer main- multiple minimums. Frequently, the of service completed. Defined ben- tains both a frozen defined ben- employer selects the defined benefit efit plans must provide a top-heavy efit plan and a profit-sharing plan plan or the money purchase pension minimum if the participant com- that are top-heavy in the aggre- plan to provide the contribution. The pletes 1,000 hours of service (501 gate. The defined benefit plan defined benefit plan often is chosen hours in a standardized plan) regard- has no eligibility requirement, because participant turnover and actu- less of employment status on the last while the profit-sharing plan has arial funding considerations may re- day of the plan year. Thus it appears, a two-year eligibility provision. sult in a lower cost for the employer. using the above example, that the The profit-sharing plan was des- Where there is a profit-sharing and defined benefit plan would have to ignated to provide the top-heavy money purchase pension plan combi- supply a top-heavy minimum for a minimum. nation, the money purchase plan usu- mid-year terminated participant if the ally is selected because the employer Unfortunately for this employer, hours requirement is met. This re- is already legally obligated to make an the two-year eligibility provision of mains true even if the defined ben- annual contribution. the profit-sharing plan will cause the efit plan was not frozen. The regulations assume that the plans to fail to satisfy the top-heavy Employers who maintain a defined benefit minimum benefit is requirements because frozen top- money purchase pension plan and a more valuable than the defined contri- heavy defined benefit plans must 401(k) plan combination can have bution minimum contribution, and they provide a top-heavy benefit accrual problems, too. The most common permit covering the top-heavy require- (and fund that benefit, if necessary). problem occurs if the money pur- ment with the defined benefit mini- Employees who had not completed chase plan (which is to provide the mum only. In this situation, the top-heavy minimum) has a service prescribed 2% minimum accrual per- the profit-sharing plan’s eligibility eligibility provision, and the 401(k) centage increases to 3% until a maxi- requirement could not be provided plan permits elective deferrals to start mum 30% accrual is reached. with a top-heavy minimum under earlier or even immediately. The However, the defined contribution plan that plan, but remain entitled to a top- employer’s reward for its liberality may satisfy the top-heavy minimum heavy benefit due to their participa- is a top-heavy minimum contribution requirement instead. If this occurred tion in the defined benefit plan. for all those eligible to make elec- and a defined benefit plan was the other (Although the defined benefit plan tive deferrals who are employed on plan, the minimum contribution per- is frozen for benefit accruals, partici- centage of 3% was required to increase pants still must enter the plan if they the last day of the plan year. The fact to 5% or 7.5%. The 7.5% rate was re- meet the eligibility requirement. In that a participant was ineligible for quired to allow the continued applica- the example, the plan had no service an employer contribution or made no tion of the 1.25 limitation under Code requirement.) In this situation, the deferrals is irrelevant. Again, plans §415(e) in a plan that was not super defined benefit plan must provide the facing this situation must be admin- top-heavy. The defined contribution top-heavy minimum. With proper istered properly, and reciprocal docu- 7.5% contribution rate and the defined planning, each document should mentary language added to the benefit 3% accrual rate will apparently have been drafted with reciprocal affected plans so the plan in which become unnecessary in the 2000 and provisions detailing how the other the participant has satisfied eligibil- later plan years due to the repeal of plan would provide the benefit for ity requirements provides the top- Code §415(e). Further IRS guidance persons who had not satisfied the heavy minimum. should clarify that even the 5% rate will relevant eligibility provision. not be necessary in plan years after What Occurs if a Participant Steven R. Oberndorf, Esq., is an at- 1999. Leaves Mid-Year in a Multiple torney with, and Richard Hochman, What occurs if the plans have Plan Situation? APM, is president of McKay different eligibility requirements? When participants leave mid- Hochman Company, Inc., a Butler, Coordination works well as long year, additional complications arise New Jersey, employee benefits con- as the combined plans have the same for defined benefit and defined consulting firm.

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 19 Actuaries. He is a Principal with C ONTINUED FROM PAGE 4 Towers Perrin in its Chicago office and is that firm's Director of Actu- Professionalism – It’s Up to Us! arial Practice for Health and Wel- fare. Mr. Falk graduated from Does that mean that the rest of the actuarial professionalism won’t Michigan State University with a actuaries agree with what has been change unless we all reflect the Code BS degree in 1970 and spent his drafted? Of course not! It is, I sus- in our daily actuarial activities. We first six years working for CNA pect, an indication of the level of must think about how our actions af- Insurance before joining Towers interest individual actuaries have in fect the profession. Above all we Perrin as a pension actuary. In professional matters. Most com- must live the code’s requirement that addition to serving as CCA Presi- ments discussed specific wording we “perform professional services with dent, he is the CCA representative concerns, especially with regards integrity, skill and care.” on the Joint Committee on the Code to Annotation 1.3 (about convic- I am proud to be an actuary and of Of Professional Conduct that is cur- tions for criminal acts). Signifi- the skills actuaries have that can be rently working to update the Code. cantly, in light of the recent applied for the benefit of society. I am unfavorable publicity, some com- continually reminded of the tremen- Opportunity for ments took the committee to task dous talent existing in the profession. for eliminating specific reference We must all strive to improve the pub- Presenters to serving the public. lic image of actuaries by acting pro- The Conference Committee is The Committee will review the fessionally and supporting the inviting proposals from potential comments we have received, evalu- professionalism activities of the actu- presenters of our one-day work- ate them, and incorporate many of arial organizations. Professionalism – shops. If you are interested, the suggestions into the next draft. It’s up to us! please contact Daily Valuation But without the active support of workshop chair Rajean Bosier, members, the Code’s effect on pro- QPA, at (512) 343-0418, or De- fessionalism is far less than it ought William J. Falk, FSA, FCA, MAAA, fined Benefits seminar chair to be. Even when the revised Code EA, is currently serving as the presi- Cynthia Groszkiewicz, MSPA, is adopted, the public’s views of dent of the Conference of Consulting at (770) 859-2552.

W ELCOME NEW MEMBERS

Welcome and congratulations to ASPA’s new members and recent designees. August — September 1999.

MSPA Lea M. Aune-Johnson Susan Kaltenbaugh Carol L. Wheeler Robert D. Ganus Kelly J. Bass Angel L. Kirby Nancy K. Whitney Robyn Giannattasio Joseph F. Hicks, Jr. Dawn V. Birk Kristine A. Konters Tracey Williams Darrell L. Hannaway CPC Todd R. Bleichrodt Andrew B. Ledewitz APM Robert F. Johnnene John F. Dumont Rebecca L. Darrow Christopher R. Elizabeth A. Kincaid Michael K. Fischer Maureen J. DeSensi McDonald Brad Arnold Ailene M. Limric William G. Davis Robert H. Imrie Maureen A. Dempsey Kirk P. Nellans Melissa V. Meadows Patricia J. Larson Kelley S. Edwards David S. Rowe Affiliate Nancy M. Michael Jean E. Stuart Kimberly A. Foutty Paul J. Shortier Beth A. Oates Kip Adams Helen K.M. Zan Philip J. Germani Dawn Smith Clarence W. Pate Judith Lynn Bingler Tamara L. Grover Michelle D. Stagner Shelly S. Richardson James A. Black QPA Kevin Burke Haskell Christopher R. Thixton Brenda M. Schachle Francis P. Gallagher Michelle L. Adams Martin D. Jantzen Miguel A. Vazquez Michael F. Shearon Jacqueline A. Albee Carolyn D. Johnson

20 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 1999 – 2000 Education & ASPA Exam Results Posted Online Examination Exam results for the June Program Catalog Now 1999 C-1, C-2(DB), Available! C-2(DC), C-3, and C-4 exams are now posted by Contents: candidate name at • a syllabus for ASPA and EA www.aspa.org/ courses aspaedu.htm. • registration forms and infor- A list of candidates who earned mation about ASPA’s exam and the Pension Administrators certification programs Certificate effective August • registration forms for ASPA’s 31, 1999 will be available on weekend and virtual study groups the site in November. • publications’ information and order forms • an ASPA education calendar • ASPA membership benefit information and applications (703) 516-9300 or e-mail All ASPA members and cur- [email protected] with your rent exam candidates were request. You can also access mailed a catalog in August. If and download portions of the you need additional copies, catalog on ASPA’s web site, please contact the ASPA office at www.aspa.org. Are you an ASPA member who is interested in We’veWe’ve becoming more involved with ASPA? MovedMoved We would like to hear from you! In an effort to expand our vol- You can fax or mail the en- ASPAs National Office moved across the street on September unteer base and to evaluate the sta- closed survey to the ASPA office 13, 1999. Our new address is: tus of current volunteers, ASPA is or access and submit the survey conducting a volunteer survey. If directly from our web site. The 4245 North Fairfax Drive, you are an ASPA member and are survey is available in the “What’s Suite 750 Arlington, VA 22203-1606 interested in serving on an ASPA New” and “Membership” sections committee or subcommittee, or at www.aspa.org. We will respond Our phone number, fax num- working as a committee volunteer to every survey that is returned and ber, e-mail, and website address doing occasional tasks, please will use the information to main- are the same. complete the survey enclosed in tain an ongoing list of interested this issue of The Pension Actuary. volunteers. We welcome your in- We are also interested in the com- put and look forward to hearing ments of current committee mem- from you! bers and volunteers!

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 21 19991999 ASPASPAA AnnualAnnual ConfConference…erence… BiggerBigger && BetterBetter ThanThan EverEver OctoberOctober 2424 –– 27,27, 19991999

The 1999 ASPA Annual Con- The workshop sessions cover popular band ference, ERISA – The First 25 Years a variety of topics including: that entertained and Into the New Millennium, is Plan Documentation; Welfare at the 1998 con- shaping up to be the biggest and Benefits; Impact of Corporate ference. If you best ever. The conference is so big, Mergers and Acquisitions; Pen- prefer a quieter in fact, that two hotels are required sion Reform Legislation; atmosphere to house all of the attendees, ses- Recordkeeping; Correction of Fi- with more abil- duciary Breaches; 401(k) Invest- ity to talk and unwind after a long ment Products; The Impact of day of sessions, there is also a chat Technology and Electronic Com- room available with a selection of munication; and many others. desserts and coffees. The workshops are scheduled The newly expanded exhibit concurrently starting on Monday, hall includes three areas of booths October 25 in the afternoon and displaying the latest products and finishing on Wednesday, October services needed in our industry. 27 in the morning. Coffee breaks will be held in the In addition to countless oppor- exhibit hall, providing ample time tunities for education, this year’s for vendors and conference attend- conference will include visits to ees to meet and review their needs. Capitol Hill. ASPA has set aside There will also be door prizes three hours mid-day on Tuesday for awarded in the exhibit hall sions, and exhibits. Sessions will attendees to meet with their repre- throughout the conference. be held at both the Grand Hyatt sentatives on the Hill to discuss the Make your plans now to attend Hotel and the Marriott Metro Cen- issues important to pension profes- the 1999 ASPA Annual Confer- ter Hotel. The hotels are conve- sionals. ASPA will make the ap- ence. For more information visit niently located across the street pointments and provide transpor- our web site at www.aspa.org or from each other. The conference tation and box lunches, leaving par- contact us at (703) 516-9300 to re- agenda includes 52 interactive ticipants to concentrate on this op- quest a brochure. workshop sessions on a diverse portunity to have their voices We look forward to seeing you range of topics. In addition, the heard. there! general sessions will feature the The ASPA Annual Conference latest information on government promises lots of opportunities to affairs, Q&A with the IRS and De- socialize and network with col- partment of Labor, and an update leagues and old friends. A high- of the activities of the Pension Ben- light on Monday will be the efit Guaranty Corporation. conference luncheon and a performance by the Capitol Steps. The Capitol Steps are a local improvi- sational troupe that satirize the in- ner workings of Washington and the federal government. Tuesday night will feature the ERISA 25th Anniversary Party and Reception. This is a great occasion to enjoy cocktails and hors d’oeuvres with your colleagues and dance to the music of Leggz, the enormously

22 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 ASPA Announces the Educator ‘s Award and Martin Rosenberg Academic Achievement Award Winners David Farber, 16 years. On the basis of his many sion and employee benefits admin- EA, MSPA, ASA achievements, ASPA is proud to istration and oversees all pension has been selected honor and present him with the 1999 administration operations of her firm. by ASPA’s Educa- Educator’s Award. Anneli E. Schalock has been tion and Examina- APSA proudly recognizes two employed at Milliman & Robertson, tion Committee’s recipients of the Martin Rosenberg Inc. since August divisional chairs as Academic Achievement Award for of 1997. She is the recipient of the the December 1998-June 1999 aca- currently working 1999 Educator’s Award. Farber is demic year, Anneli Schalock, in the in the De- currently an instructor for the jointly Milliman & Robertson, Inc., Port- fined Contribution sponsored ASPA/SOA/JBEA courses land, Oregon; and Connie D. Husley, Department. Ms. and a speaker at ASPA conferences. Haslauer, Husley & Hall, Inc., Schalock was born He served as the exam chair for the Metairie, Louisiana. and raised in Swe- E&E Committee and as ASPA’s di- Connie D. Husley is a co-owner den, and com- rector of technical education. Farber of Haslauer, Husley pleted her B.A. in International made significant contributions to the & Hall, Inc., a pen- Business at Linfield College in Or- Actuarial Cost Methods, A Review re- sion administration egon, receiving the Delta Mu Delta vision in 1999, and is a popular week- and consulting firm Scholarship for the senior with the end instructor, helping to prepare in the New Orleans highest GPA. candidates to take ASPA exams. area. Ms. Husley ASPA wishes to congratulate all Farber has been involved in has over ten years of the winners on their hard work and ASPA’s education program for over experience in pen- excellence! Harry T. Eidson Founders Award Recipient

ASPA is pleased to announce that largely responsible for the success it stature, not only within the actuarial Howard J. Johnson, MSPA, has been has achieved. In the early 1970s, he community, but also in the eyes of gov- selected as the 1999 Harry T. Eidson was the principal architect of the entire ernment officials. Award recipient. Howard J. Johnson, ASPA educational program of courses Mr. Johnson will be presented with MSPA, Vice Chairman of and examinations — a pro- the award at the 1999 ASPA Annual Merrill Lynch Group Em- gram that became the foun- Conference. The 1999 nominees repre- ployee Services, is past dation of ASPA’s ultimate sented a group of well-deserving candi- Chairman and Chief Execu- recognition as a true actu- dates ASPA would like to thank tive Officer of Howard arial organization. everyone who submitted a nomination. Johnson & Company in While serving as Presi- The Harry T. Eidson Award rec- New York, NY. An Enrolled dent of ASPA in 1975, ognizes exceptional accomplishments Actuary and a Member and Howard worked toward that contribute to ASPA, the private past President of ASPA, ASPA’s recognition as a pension system or both. The award is Howard is a frequent speaker on ben- co-equal sponsor (with the SOA) of given in honor of ASPA’s late founder, efits matters at professional meetings the Enrollment Examinations, and Harry T. Eidson, FSPA, CPC. Previ- and has testified before Congress and the recognition of ASPA actuaries as ous winners of the Eidson award are regulatory agencies on pension laws a grandfathered class for initial En- as follows: Andrew J. Fair, APM in and regulations. rolled status. He worked tirelessly 1998, Chester J. Salkind in 1997, John Howard played a vital leadership toward this result, which has proven N. Erlenborn in 1996, and Edward E. role in the early years of ASPA, and is to be the crucial ingredient of ASPA’s Burrows, MSPA, in 1995.

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 23 ASPA Benefits Councils’ Calendar of Visit the Hill and Upcoming Events Speak Out Date Location Event At the 1998 ASPA Annual Con- October 5 Atlanta Breakfast Workshop: In the ference, more than 80 ASPA mem- Trenches bers visited Capitol Hill to meet their Panel: Ilene Ferenczy, LLM CPC and Cynthia Groszkiewicz, Congressperson or Senator and de- MSPA, QPA of Altman, Kritzer & Levick, PC and David Levin liver ASPA’s views on important leg- of Kilpatrick Stockton LLP islative issues. October 14 Cleveland To Be Announced Here is what they had to say about the experience: October 20 North Florida Meeting: Benefits Issues in (Jacksonville) Mergers & Acquisitions “[The staffer] was knowledgeable, Speaker: Ilene Ferenczy, LLM, CPC, Altman, Kritzer & Levick, PC attentive, and took notes. He related personally to the issues we November South Florida Panel Discussion: ASPA addressed.” (date tba) Conference Follow-up “Staffer was very interested in November 9 Central Florida The Terrible Truth about what we had to say….I plan to (Orlando) Investing: How to be a follow-up with her on the ASPA Savvy Investor issues.” Speaker: Bruce Temkin, author, educator, and expert on retire- “Staffer seemed well receptive to ment decision-making our meeting. She took extensive November 11 Cleveland To Be Announced notes and had prepared questions for discussion.” November 18 Atlanta Luncheon Workshop: Current ERISA Developments “This was an interesting and en- Speaker: Brian Graff, Esq., ASPA Executive Director joyable experience. They are ea- ger to learn from us, and it is en- December New York Members-Only Cocktail couraging to be listened to.” (date tba)Party “It was just great!” For more information or for the name of a local contact, please This year there are more reasons for an even larger group to take call the ASPA office at (703) 516-9300. ASPA’s views to the Hill! For the first time, ASPA will devote conference time to Visits to the Hill. For three hours during lunch, ASPA will arrange to have participating mem- wwwwww.aspa.org.aspa.org bers bussed to the Hill. Lunch will be provided. Let ASPA take care of the details while you take care of the Check out the Meetings message! Webpage to download Take advantage of the fact that information, brochures, the 1999 ASPA Annual Conference and registration forms is in the Nation’s Capitol and plan now to visit your federal legislators! for upcoming More details to come! conferences, including the 1999 ASPA Annual Conference.

24 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 FOCUS ON ASPA PERF funds, government organizations and service firms (including actuarial firms, employee benefit consulting PERF Supports firms, law firms, accounting firms, and investment management firms). EBRI’s comprehensive program EBRI of research and dissemination cov- by Curtis Huntington, APM ers health, retirement, and related economic security topics. This program includes policy forums, round ne of the activities that ASPA PERF participates on tables, briefings, and interviews. behalf of ASPA is paying the annual membership Major surveys include the annual O Retirement Confidence Survey. The dues to the Employee Benefit Research Institute (EBRI). EBRI Databook on Employee Ben- efits is regularly updated as a re- Established in 1978, the Em- ing the employee benefit system, source, augmented by monthly EBRI ployee Benefit Research Institute so that decisions affecting the sys- Issue Brief studies and monthly EBRI (EBRI) is the only non-profit, non- tem may be made based on verifi- Notes (which summarize major data partisan organization committed ex- able facts. releases, public policy activity and clusively to data dissemination, • The members of EBRI determined new studies). policy research, and education on that their common business inter- ASPA PERF’s Board of Direc- economic security and employee ests will be furthered by having tors is pleased to pay the annual benefits. EBRI develop and disseminate membership dues so that ASPA can The mission of EBRI is to con- such information. be a Contributing Member of this tribute to, encourage, and enhance EBRI has earned widespread re- most important organization. the development of sound employee gard as an organization that “tells it benefit programs and sound policy like it is,” based on the facts. In ad- through objective research and edu- dition, EBRI has declared that in all Curtis E. Huntington, APM, is a pro- cation. its activities, it shall function strictly fessor of mathematics and director of EBRI was founded with a decla- in an objective and unbiased manner the actuarial program at the Univer- ration of three principles: and not as an advocate or opponent sity of Michigan (Ann Arbor). He is • Employee benefit plans serve an of any position. a member of ASPA’s board of direc- essential function in the U.S. Membership dues, grants, and tors, serves as the quality control economy by providing citizens contributions fund EBRI. EBRI’s fi- chair of ASPA’s Education and Ex- with opportunities to achieve financial base includes a cross section amination Committee, and is a mem- nancial security. of pension funds, businesses, asso- ber of the ASPA PERF Committee. • An ongoing need exists for objec- ciations, labor unions, health care tive, unbiased information regard- providers, insurers, banks, mutual

Recent ASPA Government Affairs Comment Letters Available on the ASPA Web Site, www.aspa.org

....to the Treasury regarding the procedures for permit- ....to the U. S. Department of Labor on the computer ting restorative payments to qualified retirement scannable versions of the New Form 5500 plans ....to the IRS regarding Revenue Procedure 99-13 ....in support of Carol Gold’s application for the posi- All these letters and information about Safe Harbor tion of Director of Employee Plans 401(k) Guidelines, 1999 Limitations Adjustments for ....to the Pension Benefit Guaranty Corporation regard- Qualified Plans, and the DOL’s response to ASPA’s con- ing the proposed rule on payment of premiums, the cerns are available on the “What’s New” page. Alternative Calculation Method.

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 25 FOCUS ON E&E An E&E New Offering – The Daily Valuation Course by Gwen S. O’Connell, CPC, QPA

SPA’s Education and Examination Committee (E&E) daily recordkeeping services or work is very pleased to introduce a new ASPA course. At with outside daily recordkeeping ser- A vice providers. This course provides the 1999 ASPA Annual Conference, the Daily Valuation valuable training for those individu- Course will be available for attendees to review at the E&E als to help them understand the processes and the terminology Booth. associated with the daily The Daily Valuation Course will in the Pension Administrator’s recordkeeping world. provide employees of all experience Course and will certainly be consid- The course contains an exam, levels the knowledge that is needed ered of higher difficulty. It is more and upon successful completion, to master the ins and outs of the daily likely that a pension administration candidates will earn a Daily Valua- valuation process. The manual in- firm will use this course as training tion Certificate. cludes information on the impact of material for experienced staff, in- The E&E Committee is very daily trading; the processing of trans- cluding consultants and salespeople, pleased to have this new course avail- actions; converting plans from the rather than for support staff. An able. We think that it will be a valu- balance-forward environment to a employee with either pension admin- able addition to the education daily valuation system; types of in- istration or recordkeeping duties, courses that ASPA already offers. vestments suitable for plans that are however, should be able to grasp the For more information about the valued daily and the appropriate fees material if they are familiar with the course or to obtain an order form, and expenses; and the fiduciary li- concepts presented in the Pension contact the ASPA office at (703) 516- ability when participants choose Administrator’s Course. While the 9300 . their investments. Daily Valuation Course is not a com- The project was spearheaded by panion to the Pension Administrator’s Janice M. Wegesin, CPC, QPA, Course, it might be considered to con- Gwen S. O’Connell, CPC, QPA, is President of JMW Consulting, Inc., sist of topics and be written at a level Principal of Summit Benefit & Actu- Palatine, Illinois. Janice won ASPA’s that is somewhere between that of the arial Services, Inc. in Eugene, Or- 1998 Educator’s Award, largely in Pension Administrator’s Course and egon. Ms. O’Connell currently serves recognition for her work on the Pen- ASPA’s “C” courses.” on ASPA’s Executive Committee as sion Administrator’s Course and for Most service providers today its secretary, is a member of the her 401(k) presentations. Janice has that work in the 401(k) environment Board of Directors, and is the gen- said, “The subject matter presented are exposed to daily valuation issues eral chair of the Education and Ex- in this course builds on that presented either because they provide in-house amination Committee.

26 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999 C ONTINUED FROM 1999 CALENDAR OF EVENTS P AGE 28 ASPA CE Credit Pix Digest Oct. 7-10 EA-2 Class, Denver, CO † 20 computer selecting the returns for examination. Another user actually had Oct. 15 Early registration deadline for ASPA’s fall exams called the IRS on this question and was advised that this question was Oct. 16-19 EA-2 Class, Chicago, IL † 20 not meant to apply to mutual funds. Oct. 21-24 EA-2 Class, Washington DC † 20 To read the entire thread, download 20pct2.fsg Oct. 24-27 1999 ASPA Annual Conference, Washington, DC 20 Currently in testing, PIX’s ex- Oct. 25 ASPA Annual Meeting and Vote on New Officers clusive software, WOD, will en- Nov. 1 Late registration deadline for ASPA’s fall exams able you to upload and download your messages via Nov. 6-7 ASPA Weekend Courses, Denver, CO 15 your regular internet connec- C-1, C-2(DB), C-2(DC), C-3, and C-4 tion. No more long-distance Dec. 1 C-1, C-3, C-4, and A-4 examinations * phone calls or tricky modem configuration strings. Simply Dec. 2 C-2(DC) examination * establish your internet connec- Dec. 3 C-2(DB) examination * tion and tell WOD to get your messages. For users with 24x7 connections in their offices, PIX 2000 CALENDAR OF EVENTS messages will be just one click away! Of course, traditional dial-up access will still be avail- May 7-10 Business Leadership Conference, San Diego, CA 10 able. May 8-9 Midstates Benefits Conference, Chicago, IL 15 The new software will also feature automatic handling of files July 16-19 2000 ASPA Summer Conference, San Francisco, CA 20 attached to e-mail messages, May 13-14 ASPA Weekend Courses, Denver, CO 15 faster message processing, and C-1, C-2(DB), C-2(DC), C-3, and C-4 other improvements. August 31 PA-1(A) and PA-1(B) submission deadline ** Stop by the PIX booth during the Annual Conference to get your beta-test copy of the new PIX! * Exam candidates earn 20 hours of ASPA continuing education credit for passing exams, 15 hours of credit for failing an exam with a score of 5 or Ideas? Comments? Questions? 6, and no credit for failing with a score lower than 5. Want to write an article? ** PA-1A and B exams earn 5 ASPA continuing education credits each for a The Pension Actuary welcomes your views! passing grade. Send to: † ASPA offers these courses as an educational service for students who wish to sit The Pension Actuary for examinations which ASPA cosponsors with the Society of Actuaries and the ASPA, Suite 750 Joint Board for the Enrollment of Actuaries. In order to preserve the integrity 4245 North Fairfax Drive Arlington, VA 22203 of the examination process, measures are taken by ASPA to prevent the course (703) 516-9300 instructors from having any access to information which is not available to the or fax (703) 516-9308 general public. Accordingly, the students should understand that there is no advantage to participation in these courses by reason that they are offered by a or e-mail [email protected] cosponsor of the examinations.

SEPTEMBER-OCTOBER 1999 ■ THE PENSION ACTUARY ■ 27 ever, that the plan not be considered “terminated”, or this combined testing is not available. To read the entire thread, down- PIX DIGEST load the thread kmerge2.fsg. Form 5500 Questions Correction of ADP, vs. Reality [Thread 78849] ACP and Multiple One of the Form 5500 questions asks if the plan has more than 20% of its assets in a single investment. Use Tests If so, the amount must be entered. The appropriate answer to the question is not clear when the plan is in- [Thread 78578} Finally, to really complicate mat- vested in mutual funds. Presumably, This thread began with a user ters, it was pointed out that ultimately the purpose of the question is to flag asking for advice in correcting a plan all of this will have to be spelled out plans that may not be appropriately di- with failed ADP, ACP and multiple in the plan document when restated versified. However, since a mutual use tests, considering the post-SBJPA for GUST. fund represents shares in a generally dollar-leveling correction method. To read the entire thread, down- well-diversified portfolio, many prac- As pointed out in the thread, load the thread adpmut2.fsg. titioners believe this question should since the dollar-leveling correction be answered “No” even if a mutual methodology does not result in Aver- 401(k) Plans & Mergers fund is over 20% of the plan assets. age Deferral or Contribution Percent- [Thread 78361] However, when asked about this, the ages for Highly Compensated This thread was started by a user Department of Labor has indicated that Employees that actually pass the tests, who had a client that was purchased this question should be answered the corrected numbers are not used for during the year. The buyer plans to “Yes”, even if the underlying asset is a the multiple use test. Instead, the theo- merge the plans as of September 30, mutual fund. retical aggregate contribution refund is and the sponsor’s auditors have re- Taking this to the next level, con- calculated on a percentage-leveling quested two ADP tests, one as of Sep- sider a plan with its investments held basis, then allocated on a dollar basis. tember 30 to cover the period when entirely in four mutual funds, each with In the example being discussed in the plan was separate from the 25% of the plan assets. Assuming a this thread, the plan, after corrections buyer’s plan, and a second test to good choice of funds, this is probably for ADP and ACP, still failed multiple cover the last quarter of the year a fairly well-diversified portfolio. use, so a further reduction in contri- based on the merged plans. However, based on the DOL’s guid- butions was necessary. It was Most of the PIX users who re- ance, the 20% question would have to pointed out that it could be more ad- sponded felt that one test for the year be answered affirmatively. How much vantageous to correct the multiple was sufficient. Another user agreed, does one enter for the amount? The use failure entirely from the match- however, he pointed out that it did total of all four? The instructions are ing contributions. The plan had a not seem appropriate to do just one silent. If one did enter the sum of all matching formula of 50% on the first test for a year in which the two spon- four funds, the 5500 form would then 6% of compensation deferred. soring entities were separate employ- appear to indicate that 100% of the Bringing down the deferral to cor- ers for a substantial part of the year. plan’s assets might be in a single in- rect multiple use would bring down Finally, Section 1.410(b)-7(c)(4) vestment. the match pursuant to this formula. of the regulations was noted. This Several practitioners indicated By correcting the multiple use failure section discusses a merged plan be- that they do in fact enter the total, from the matching side, no further re- ing considered a continuation of the but typically will footnote the ques- duction is necessary as the corrected original plan, and allows testing on tion on the form. Of course, foot- matching contributions are now less the plan based on its status at the end notes do not get keypunched into the than that called for by the plan. of the plan year. It is important, how- Continued on page 27

28 ■ THE PENSION ACTUARY ■ SEPTEMBER-OCTOBER 1999