CROSS-TESTED DESIGN A CODA?

Just got back from the Mid-Atlantic Employee Benefits Conference. To the consternation of a number of people in the audience Shultz and Holland said that the following plan designs raise impermissible CODA issues.

Two Groups--One group is the sole director and shareholder of a corporation and the other group is everyone else. Corporate formalities are followed at the end of the year and corporate minutes reflect the allocation to be given to each group. Shultz and Holland commented that this may be an impermissible CODA on behalf of the owner.

Multiple Groups--Each shareholder is in his or her own group and everyone else is in a final group. Each shareholder informally expresses his or her recommendation on how much he or she wants for an allocation for his or her group and the Board adopts the recommendation with formal corporate action. Shultz and Holland commented that this may be an impermissible CODA for the shareholders.

Shultz commented that this may be an area deserving some "soft guidance."

The non-Service people on the panel commented that if this raises impermissible CODA/qualification issues, you will probably have a number of doctors out there with plans subject to disqualification.

I don't think may of us will find this surprising. I think it is surprising why this hasn't been raised before by the IRS. It's been raised a number of times as a potential issue on this board. I think Blinky was the first to raise it.

But they DID NOT say it was impermissible, they have NOT issued any kind of announcement that it is wrong.

Why?

It doesn't matter whether they think it is wrong or not, it is permitted under reg and law and their opinion isn't worth a hill of beans.

My recollection was that one of the panel members commented that given the views expressed by Shultz and Holland, people may not want any guidance on this issue whether it is soft or hard. Shultz's comment was that maybe people will feel different if "Preston" comes to call on their client (Presumably Preston Butcher the director of employee plans examiniations).

Well, we've got a Preston too, to defend all those "one Doctor only" class Doctors. Just email Mike.

I'd love to be a fly on the wall in such a discussion on this subject between our Mike and a typical IRS auditor.

Already I miss Dick Wickersham.

Why, because his answer one year was the complete opposite of his answer the following year, so you've always got a 50% shot of being in compliance?

Doesn't it seem odd that we are in a business where the rules and regulations are often so ambiguous and incomplete that our decisions on how to operate plans can be based on what one guy says and that he may change his mind a month later?

I guess I would much rather have them speak their mind and share their thoughts than be silent on an issue.

It is a fine line you have to walk between RCline's position--who cares what they say--and a position where you change what you are doing based on a few informal comments. I don't think that I would tell a client, based on a Q&A session with IRS and Treasury folks, that they have an impermissible plan design if I found support for what they were doing in the Code. However, I probably would tell the client that the issue has been "noticed" by those at the IRS and Treasury primarily responsible for issuing guidance and that it is not completely free from doubt.

There were a number of scenarios posited with this Q&A (such as if the individuals in each "group" set the allocation rather than the company itself settling the allocation--is this form over substance?) and the reliance you could have on a determ letter.

Did they take any questions on this issue? For example, did Mr. S. or Mr. H indicate how a pre-approved plan with "each participant in their own group" language is to determine relative allocations amongst the groups without being potentially deemed an impermissible CODA?

If not, doesn't that create a situation where use of a pre-approved IRS document might be deemed impermissible?

I guess I should order the tape. I do recall a question about reliance on the determ letter. However, I think the question was phrased with regard to a strange variation--a plan that actually allowed the single participant in the group (not the employer) to set the allocation for the group. This does not make a lot of sense to me and I can't imagine plans were written this way--almost an invitation to find an impermissible CODA.

However from a "real world" standpoint when you have a Doctors' group, this is arguably the reality (each participant setting his or her own allocation) although the Plan should still provide that the emloyer sets the allocations and not the participant.

What was the specific title of the session?

I tend to agree. A document that specifically allows the individual participant to establish his or her own level of contribution is indeed something that might rise to the level of an impermissible CODA. In fact, I would think that it would if the amounts exceeded the 402(g) limit.

But that is a far cry from a document that gives that authority only to the Plan Admnistrator or Plan Sponsor. As to exactly how the Plan Sponsor decides on the breakdown, I am just incredulous that an informal, non-binding indication from a participant could be a negative. If I wanted to get into hyperbole I might be talking First Amendment issues!

This was a Q&A session: The actual question that started the discussion and its "variations" was:

A cross tested profit sharing plan covers 3 HCEs and 3 NHCEs. Each HCE is in his/her own allocation class. All NHCE's are in a fourth class. Is there anything inherently or potentially wrong with this plan design? What if, in a given year 1 or more HCEs get no allocation. Is this permissible, or will the plan be deemed a CODA?

I believe that is when Holland and/or Shultz started asking for more information on the input that the HCEs would have as to their own allocations. (Which then raised the question of the sole director who would always be responsible for deciding the amount for his or her allocation "group.").

McCarthism lives! There's a commie behind every door! Or now is it the Holland conspiracy theory???

Yes its nice to know what they are thinking. But remember they tried to kill grouped plans not more than 4 years ago? (my how time flies!) And they had to retract it?

Then they put in the 5% gateway? Folks, they just can't kill grouping and all that it implies without a COMPLETE rewrite of the 401(a)(4) regulations. And that just isn't gonna happen soon.

OF COURSE if the owner is in his own group he sets his contribution as the employer. Big deal. He ALWAYS sets his own contribution in ANY profit sharing plan!!! Think about it!!! And there is no move afoot to declare every profit sharing plan of every small employer in the country a 'deemed CODA'.

(Said with a smile) - Or all of you abandon Grouped plans, please. Mike and I would like the extra business.

Was there only 1 Q&A Session at the conference? I'm trying to pin it down so I can order the tape.

Thanks

Yes--Session 13, Question and Answer Panel

Thanks

Just so everybody can be clear on this one, the question was composed in the context of a Corbel/Relius vs profit sharing plan with their standard tiered alloction language. No special language as to employees setting their own allocation, just the usual discretion that the empolyer, i.e. the business owners, always have as to deciding on a ps contribution.

The question was prompted by an earlier post on this board where the responders seemed to be leaning toward the position that a 0 allocation was tantamount to a "nonexcludable not benefiting" scenario for 410b which became a non-issue for HCEs. Quite honestly, that was the answer I was expecting from the panel. Silly me. Anyway, if it's a CODA let them issue something that says it's a CODA. What's next after that- a minimum gateway for HCEs?

I really wouldn't have been surprised by the comments in the context of "each HCE" as his or her own group in a context where you might have 15 to 20 groups, I was surprised, however, that, in the discussion, they took this down to the sole shareholder situation. I always thought that under the examination guidelines whether there was a "deemed CODA" was a facts and circumstances test.

I admit that where you draw the logical line between two groups (in the case of a sole owner) and twenty groups in the case of a larger medical practice (not to pick on Doctors) is tough, but the sole shareholder situation just does not seem to have the same "hubris" as the fifteen to twenty groups situation.

I think Blinky posted on this Board in another thread (either yesterday or today) that he though that the two group design with the sole shareholder as his or her own group was "very conservative" and that there was "not a chance" that it would be found to be a CODA. I would have been inclined to agree before these comments...and am probably still inclined to agree afterward.