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Guest rfemmons

Exclusion of eligible employees in small employer plan

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Guest rfemmons

Small business owner adopted MPPP when he was the only employee and adopted a benefit formula equal to the lesser of 25% of compensation or $40,000. Great for when he was the only employee, not so great when he hired 3 new employees and did not know that he needed to contribute for them as well. I have looked through EPCRS and understand what the standardized correction should be, ie contributions for the excluded employees plus interest. However, his payroll for these 3 employees is $100,000 - he will not be able to finance this. Has anyone seen any provisions that may suggest that there is sometype of other correction available?

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The plan sponsor can't afford this.... hmmmm, did the plan administrator give timely information on the required contribution? Has the plan sponsor been informed of the cost of dis-qualification, excise tax on minimum funding, etc? Maybe I'm not being sufficiently sympathetic here, but I would explain the cost of failure, insist the funds be deposited (even if the business owner must make a loan from their own account), and advise that a proper plan administration should be done each year.

This wouldn't happen to be one of those horror stories of "do-it-yourself" broker sponsored plans, would it?

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I am also guessing that the plan administrator did not file a 5500 since he thought he was the only participant. Or, at best, maybe he filed the EZ. That's an additional problem.

Also, he will be subject to underfunding penalties, which will be quite a lot.

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I do not have an answer but some thoughts came to mind.

Is there an eligibility requirement that these new employees might not have satisfied?

Are there any conditions or qualifiers that have not been satisfied by the business, which could negate the contribution requirement?

What would be the cost of "freezing" or discontinuing the plan for year 2004 compared to disqualification etc?

Since the 2004 tax returns etc have not been done and also possibly any 5500, Can the plan still be discontinued for 2004? Is the plan year still open for changes? What would the penalties be?

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That was 1 of my questions (last item in post).

Considering that the books, tax returns, contributions and 5500 etc most likely have not been done as yet, couldn't it be possible? If so, What are the penalties or consequences? If not, Why not?

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For one thing, a 204(h) Notice must be provided at least 15 days (for small plans) before the effective date of the plan amendment that reduces the rate of accrual under a plan.

I believe the excise tax is $100 per day per participant if the notice is not issued properly.

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Guest Pensions in Paradise

Because it would be a cutback on accrued benefits (Code Section 411(d)(6)). You can't retroactively freeze a plan (or amend a plan) after the participants have accrued a benefit. I'm very shocked and surprised that you are asking this type of question GBurns.

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But have they accrued the benefit as yet?

Are there any eligibility requirements or conditions etc that might not have been met?

rfemmons is looking for a way out or the most affordable way out of this situation for the client.

rfemmons,

Are you sure that these new hires are eligible etc etc?

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Guest Pensions in Paradise

refemmons - based on the limited information you've provided, the short answer is that the plan sponsor has to make a contribution for the employees who were eligible for the plan and 5500's have to be filed. Otherwise the plan sponsor risks large penalties and possible plan disqualification.

Going forward, the plan should either be frozen or converted into a discretionary profit sharing plan. If the plan is on a standardized document, and if it is on a calendar year, you need to act quickly before participants accrue a benefit for 2005 (i.e., before they complete 501 hours of service).

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For a MPPP, are the hours counted from date of employment or from date of eligibility? What does the Plan say regarding entry etc?

A new hire starting July 8 2004, with entry being 1st of the month after completing probation period of 3 months. The probation period would start July 8 and end October 8, thereby giving an entry date of November 1st. However working 40 hours per week for November and December would only be about 320 which is less than the 501. To work 501 hours this new hire would have had to be eligible and enter before October 1st which means hire date would have had to be probably before June and even May.

That is why I questioned whether the benefit really had been accrued since it was stated that these were new hires. And how much has been accrued.

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If the owner cannot make the required contribution do to a lack of funds then the only course of action is to terminate the plan without making any contribution and take your chances that the IRS will not audit the plan before the s/l expires.

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Guest Pensions in Paradise

mbozek - it's comments like those that really make our industry look bad. Heck, why not just tell the client to go rob a bank to get the money to fund the plan. You seem really fond of telling people to forget the rules and take the chance of not being audited. Did you ever work for Enron or Worldcom?

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I would think that it makes the industry look even worse by getting Plan Sponsors into this sort of situation in the first place.

The rules are going to be broken anyhow, so the most pragmatic thing is to evaluate the paths that minimize the penalties the most. Playing audit roulette is something inherent in almost every tax return, anyhow.

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Someone might privately suggest to their client how much risk there is in audit. If GBurns made that point, there would be no problem.

However, this is a public forum and people get upset to hear about what is probably fraudulent practice. So you understand, I know the difference between privately counseling someone of the risks and I will do so when appropriate. BUT, I don't like to see fraudulent practice openly discussed here.

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There is a big difference between doing things that are not deductible or which have penalties and things that are fraudulent. Since the issues do not involve attesting to things on a tax return etc, I do not see where "fraudulent practices" even deserves mention.

Not operating a Plan accordance with its PD could cause disallowance and penalties, but even if tax returns are filed, there is usually no fraud. If corrections are done befors tax returns are filed, there definitely is no fraud.

I think that there probably are more posters who are upset that the industry still puts employers in these positions and then do not have the ethics/conscience to solve the problems created and leave these clients (who paid good money) floundering.

Why hide inappropriate service and sometimes even incompetence from public scrutiny?

And, if we do not discuss these things in public forums, How will many people even find out about the pros and cons of these issues and the pros and cons of whatever might have been suggested in private probably even by a party with a particular bias?

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Guest Pensions in Paradise

GBurns - How did the industry put the employer in this situation? More than likely the employer listened to a broker who told him that he could sign some 2 page adoption agreement and then contribute a lot of money without having to worry about any kind of administration. We have all seen this situation. Then fast forward a few years and it's discovered that the plan wasn't operated properly.

Prior posts have informed the employer how to properly correct the situation. If the employer decides to ignore this advice and break the law, so be it.

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PP- my post was a response to the facts of the original post where it was stated that the client could not afford 25k cost of contributions for the 3 employees which eliminates any means of fixing the problem under IRS rules. You dont seem to have the advocacy skills necessary to advise clients who have difficult situations and should not be critical of others who can understand the issues and give risk oriented advice. I think your reference to fradulent advice is inaccurate- giving a client an accurate analysis of the risk for non compliance and the limitations on liability is the essence of being a professional advisor. I did not suggest that you give such advice but the client is entitled to know what the options and risks are in order to make an informed decision. I will no longer respond to any of your posts.

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PP

The proper course of action for any advisor to any client requires that ALL avenues be considered and ALL options explored and ALL consequences and benefits weighed. This therefore includes all sorts of advice and pros and cons.

Regarding "How did the industry put the employer in this situation?"

Simple.

The industry consists of the concept designers, the document writers, the package providers, the enrollers, the investment plans, the Trustees, the record keepers, the actuaries, the TPAs, the legal advisors to any party and the sales reps who represent each of the forementioned parties, along with others who do not come to mind right now. Brokers are sales reps. Sales reps sell products and services for various providers of whatever is used that is related to Pension and Retirement Plans.

The broker representing a provider sold this employer (PS) on using a package created by a "package" provider using that design and documents prepared by a document provider, and the money was put into an investment vehicle promoted by a "broker" (does not have to be the initial broker). During the years this PS invested hard earned money with this investment provider and misc fees including fees to record keepers and other service providers. ALL of these providers comprise the industry. ALL happily took his money.

Brokers do not magically appear, the are sales reps representing various service providers.

I do not know what you think the industry is but as far as the law and logic goes the broker IS part of the industry.

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I am glad that you noticed this strange trend? Will you be next or will you continue being in denial?

Didn't someone post the thought ,about 2 weeks ago, that we might be connected?

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I only agree with you guys when you are right. :o Though, I do think that the client should be advised of all courses of action and the consequences of each. Some like audit roulette, but like Russian Roulette, there is a bullet in the chamber sometimes. As an actuary there are some courses of action that will cause me to fire the client because I will not certify to something incorrect.

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If think if the sponsor can't make the contribution required under the plan, the only recommendation you should provide him is to apply for a funding waiver. Now, he did contribute 25% for himself (or maybe I missunderstood,) so it would not seem fair in the eyes of the IRS or anyone else that he gets to keep his contribution and not give anything to the employees. Reallocate his share of the contribution to the staff, you get a much better chance of obtaining a waiver if the only one affected by the reduction is the owner of the business.

As far as the rest of the comments on fraud and hiding stuff from regulators, that's really a question of ethics. As a service provider, your duty upon finding an error, such as this one, is to notify the client of the error and the proper course of action to correct it. If the client doesn't follow your advice, that's his problem, you've done your part. I personally would not want to keep a client who is playing audit roulette. Now, if you're trustee, you have other fiduciary responsibilities that would prevent you from ignoring such problems and if the sponsor refuses to correct the problem, I don't think you have any other choice but to report him to the DOL.

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