The IRS review of New Comparability and Cash Balance Plan conversions continues with final resolution still several months away.

New Comparability is the concept which allows employers to make different levels of contributions for different categories of employees. An IRS announcement early this year stated that this concept "may not be appropriate in all cases." Recent comments by IRS spokespersons indicate that the IRS’ concerns are that a) employees are receiving too low a share of the total contribution, and b) the ratio of contributions for highly compensated employees is too high when compared to non-highly compensated employees. The most extreme example being a situation where the owner of a company receives the maximum allocation of $30,000, while all other employees receive the minimum allocation of 3% of pay. The same spokespersons have also stated that they expect new comparability to survive in some form and that all changes to the law will be prospective, not retroactive. Accordingly, we are continuing to administer and install New Comparability plans while making sure our clients are aware that some changes in law may be in store beginning in 2002.

Cash Balance Plans are defined benefit plans which base a participant’s benefit on his "theoretical account." This account is created through allocations based primarily on compensation and service, thus eliminating the age bias that exists in traditional defined benefit plans. The methods used by many consultants for converting traditional plans to cash balance plans have resulted in many older employees receiving no additional benefits after the change. This is the aspect which upset workers at IBM and is now being taken up by Congress. It is important to note, however, that newly implemented Cash Balance plans are not under similar scrutiny and, where appropriate, CAI is continuing to install new Cash Balance plans for our clients.

A recent survey by the American Society of Pension Actuaries (ASPA) demonstrated that New Comparability Plans have become a vital part of the private pension system. The survey showed that without the ability to differentiate between different classes of employees, many employers would not offer any retirement plan benefits at all. CAI will keep you up to date on developments in both of these critical areas.

5500 FORMS: Due to the extensive changes made in the 5500 form series for 1999, the government has announced that all calendar year plans will have until October 15, 2000 to file. We expect to have our software for generating these forms in place by early July and have hired additional staff to make sure that all forms are completed on time.

"GUST" AMENDMENT AND RESTATEMENT OF RETIREMENT PLANS: In order to conform to laws passed subsequent to 1995, all retirement plans must be amended and restated. Initially the deadline for these restatements was the end of the 1999 plan year. That deadline was initially extended to the end of the 2000 plan year and has now been extended to the end of the 2001 plan year.

Imagine a legal system in which the penalty for all crimes is death. Whether an individual is found guilty of premeditated murder or jaywalking, the result is always the execution of the lawbreaker. This concept has generally resided primarily in the domain of science fiction writers but until recently, it was also a key part of the pension sections of the Internal Revenue Code.

Retirement plans "Qualify" for their tax advantaged status only if they comply with all pension related provisions in the Internal Revenue Code. The loss of that status results in the immediate taxation of all plan assets plus, in most cases, the payment of interest and penalties. When you add all of that up, it becomes easy to see why plan "Disqualification" is the retirement plan equivalent to capital punishment.

With the penalties being so strict, IRS agents, perhaps surprisingly, frequently took pity on sponsors and rarely took the step of disqualifying plans. As a result, the IRS realized that a "kinder, gentler" approach would actually result in a higher level of compliance with the law. The result is a set of provisions known collectively as the Voluntary Compliance Program.

Under this program, the type of correction depends upon the severity of the crime. In some situations, sponsors are permitted to fix mistakes without even disclosing them to the IRS. An example of this would be inadvertently leaving an employee out of a plan. In other situations, a submission to IRS with a set user fee is called for. This might be done when a plan fails the 401(k) test without correcting in a timely manner. More egregious violations will involve negotiating a solution and a penalty with the IRS.

It is important to note that all of these approaches will ultimately result in lower penalties than what would be charged if the mistakes were uncovered during an IRS audit. By giving sponsors so many ways to correct their mistakes, the IRS now feels justified in imposing stiffer penalties when correction has not been made. If you believe that a mistake has occurred with your retirement program, please notify your Senior Consultant immediately so that we can assist you in determining the best way for your retirement plan to avoid the "Death Penalty."