Comments on LRM #25B

Cross-Tested Profit-Sharing Plans

 July 18, 2005

Department of Treasury
Internal Revenue Service

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The American Society of Pension Professionals & Actuaries (ASPPA) recognizes and applauds the various “partnering initiatives” of the Service in recent years and believes that significant improvements have been made as a result. In that regard, ASPPA is especially pleased to have the opportunity to provide feedback before finalization of the Service’s proposed cross-tested Listing of Required Modifications (LRM).

ASPPA is a national society of retirement plan professionals. ASPPA's mission is to educate pension professionals and to preserve and enhance the employer-based pension system. Its membership consists of approximately 5,500 actuaries, plan administrators, attorneys, CPAs, and other retirement plan experts who design, implement and maintain qualified retirement plans, especially for small to mid-size employers.

ASPPA appreciates the work the Service has done in drafting the cross-testing LRMs and acknowledges the challenge of developing this new application for Master and Prototype (M&P) Plans. ASPPA’s members have the opportunity to work with employers on a daily basis and feels their experiences can greatly assist the Service in developing a workable M&P solution.

ASPPA’s primary concern with the LRMs as currently drafted is their lack of flexibility. Because the LRMs are so restrictive, ASPPA believes that the majority of existing cross-tested plans will be unable to utilize a prototype plan document, thus effectively rendering the cross-tested prototype unusable. This lack of flexibility and its impact on both the Service and employers is explained in more detail below.

Service Resource Limitations

ASPPA recognizes that the Service is faced with ongoing budgetary constraints and resource limitations, and believes these challenges will be more difficult to address if the LRMs are not relaxed to provide more flexibility. As currently written, most employers that maintain cross-tested plans will be unable to use prototype plans for their EGTRRA restatement if they wish to continue to maintain their current cross-tested formulas. Employers that continue to use cross-tested formulas and use the LRMs as written will need to amend frequently, often times annually, to retain the current flexibility they have. This, in turn, will increase the level of review work for the Service. Alternatively, the limited cross-tested LRM will lead to increased use of volume submitter and individually designed plans, the latter of which is contrary to the Service’s stated goal of promoting the use of pre-approved plans.

Increased/Sustained Costs to Employers

As stated above, use of the LRM as written would force many employers to continue to using volume submitter or individually designed plan documents. Employers would continue to bear the costs associated with such plans (or move to a less expensive prototype but have to bear the expense of a multitude of amendments). Because most employers that maintain cross-tested plans are small employers, the added or sustained costs of such plans are likely to encourage employers to terminate existing plans and discourage the ongoing establishment of new plans.

Recommendations

ASPPA recommends including the following provisions in the LRMs to provide the flexibility needed by employers, maintain appropriate compliance, and alleviate additional resource and budgetary burdens on the Service that will ensue if the LRMs are finalized in their proposed form.

• The ability to provide for a discretionary contribution to each allocation group to be allocated to members of such group pursuant to a pro-rata allocation formula. (The requirement of a stated formula in the draft LRM basically precludes discretionary profit sharing plans from using a cross-tested prototype. This limitation would require an employer to amend its plan, possibly each year, to accommodate different contribution levels.)

• The inclusion of an additional section permitting the practitioner to define allocation groups.

• The ability to define allocation groups by class, as opposed to a specified allocation rate. Flexibility is needed in the following areas:

• Defining employee allocation groups that contain both HCEs and NHCEs;
• Defining different allocation groups within the NHCE employee population (currently, the LRMs group all NHCEs together);
• Providing that all NHCEs get the minimum gateway, regardless of any other allocation formula under the plan. In other words, the gateway should be an override to any other allocation rate;
• Defining different allocation groups of employees within the HCE population; and
• Providing a pro-rata allocation formula within an allocation group.

• Flexibility in defining the length of allowable service bands. Currently the LRMs require each band be exactly five years in length when they can be five years or less.

• Flexibility regarding testing. The plan language should not be required to specify how IRC Section 401(a)(4) will be satisfied (just as it is not required to specify how IRC Section 410(b) coverage will be satisfied). The plan language should not be required to mandate the gateway being used, nor should it have to define testing compensation. If there is concern about compliance, a better approach might be to require a warning to adopting employers that using a non-safe harbor allocation method may require complex testing and that cross-testing seems to be required (sometimes the same percentage is allocated to each group and, in that case, cross-testing should not be required). The employer should be able to elect a contribution and allocation for a given year that, by its terms, meets the defined contribution safe harbor, thereby negating a need for general testing.

• Addition of an age-weighted allocation formula.

These comments were prepared by ASPPA’s Plan Document subcommittee of the Government Affairs Committee, Michael J. Finch, CPC, Chair, and primarily authored by Kathy M. Roland, QPA, QKA. Please contact us if you have any comments or questions regarding the matters discussed above. Thank you for consideration of these comments.

Sincerely,