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I have a small S-corp consisting of 2 employees, my wife and I plan is to retire in 5-6 months at age 62. Currently I have a defined benefit plan administered by a large firm.  Due to significant market gains over the last few years, the plan will be over-funded by about 800K to 1M at the time of termination.  Both employees are at 415 limits.  From what I can find, a 401(h) plan seems to be my best option. I plan to roll over all excess assets into the 401(h) plan at the time of termination as per Code 420(F)(C)(i)(2).  Unfortunately I am  having trouble finding someone to set up this plan and take over administration of it.  A local pension firm suggested I use this forum to perhaps find someone with experience in this area.  If anyone has experience in this area please let me know.

Thanks,

 

 

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3 hours ago, JimK said:

Code 420(F)(C)(i)(2)

 

The above code section doesn't appear to exist.

No matter who says what, make sure you get an opinion from an ERISA lawyer because I don't see how you can get by 420(e)(1)(E).

If you want to have a discussion with somebody about your options, send me a private message.

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I think you may be referring to 420(e)(1)(E), regarding exclusion of key employees?

401(h)6 just says key employees must have separate accounts. Alternatively, since my wife could be considered not a key employee, I could be covered as her spouse.

 

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401(h) is downstream of the 420 transfer you are talking about.  If the 420 transfer amount is zero then there is nothing to go into a 401(h) account, whether separate or not.  You need to find the definition of key employee because I think you'll find that both of you are defined as key.

I'll back away at this point because you know, by now, that I don't think you can take advantage of 420 in any way, shape or form and maybe if I've backed away somebody with something more hopeful to say will come forward.

I repeat, though, my suggestion that if you do find somebody willing to go down this path with you that you confirm with an ERISA lawyer that the path is genuine.

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416(i)(1) describes key employees,  but 416(i)(3) states that self-employed individuals shall be treated as "employees".             (not key-employees)

It seems illogical for them to describe how to handle key employees accounts if they won't allow transfer of funds into the account.

What do you think?  Or, should I just keep my wife's salary under $130K to stay under the 416(i)(1) limits?

Also, the main reason for this posting was to see if there was any firm that has experience in 401(h) plans. Has anyone set one of these up before?

Thank you for your insights.

 

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5 hours ago, JimK said:

416(i)(1) describes key employees,  but 416(i)(3) states that self-employed individuals shall be treated as "employees".             (not key-employees)

Don't take this the wrong way, but those of us who have had to deal with the strange way that the Internal Revenue Code goes about its business are chuckling right about now.  While it is not illogical for you to have reached the conclusion above, it works the other way around.  That is, self-employed individuals (such as sole props and partners in a partnership) are considered to be "employees" even though they don't receive a W-2. Once they are an "employee" then, if they satisfy additional criteria, they can be considered "key". While a lowly partner in a 200-partner law firm might not be considered a "key" employee (because his ownership percentage wouldn't be large enough), you can rest assured that you and your wife are both considered "key".

It seems illogical for them to describe how to handle key employees accounts if they won't allow transfer of funds into the account.

You  have tunnel vision.  420 isn't the normal route for funding 401(h) accounts.  Instead, the more normal route is in conjunction with annual contributions through a qualified plan. 420 just piggy backs into 401(h) through qualified transfers.  Unfortunately for what you are attempting to do, the limitations of 420 make it clear that the largest qualified transfer is ZERO in your case.

But the Internal Revenue Code and ongoing advice from the IRS is beyond complicated, so while I'm not willing, at this point in time, to say anything that implies what you want to do is doable, I'm also mindful that it is possible you might find somebody who can point to some sort of exception.  If you do, and you can find an ERISA lawyer to bless the concept, more power to you.

What do you think?  Or, should I just keep my wife's salary under $130K to stay under the 416(i)(1) limits?

I don't think your wife's salary matters because I don't think you can do it. So you don't want advice from me, one way or the other as to what your wife's salary should be.

I am aware of at least one firm that purports to understand and advocate for 401(h) accounts. [Surely you can find them with a little google searching.]  I am not aware of whether their advocacy extends to seeding 401(h) accounts with qualified transfers under 420.  What I am aware of is that the practitioner I'm thinking of "advertises" that it is not necessary to establish separate accounts under 401(h) for key employees [as required by 401(h)(6)].  They make similarly outlandish claims regarding the disposition of 401(h) funds after the death of the principals.  [Ask them what happens to the moneys if you are successful at establishing a 401(h) account with $1MM in it and both you and your wife get in a fatal car accident the next day.] But some clients gravitate to those advisors who claim to have a singularly successful formula, without consideration of the horrific tax results that await them if and when the IRS gets involved.  So a few words of caution: (1) make sure whatever is presented to you satisfies the scrutiny of an independent ERISA lawyer; and (2) please be aware that the Internal Revenue Code provides the ultimate in what might be described as a level playing field - hence, very few of us can claim to do things that others in the field just can't do - so make sure there are at least TWO providers who can offer you whatever shiny object looks good to you!

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@jimK please consider very carefully what  @Mike Preston detailed in his answer, he knows what he is talking about.  The last part is especially important, and I cannot highlight it enough:

18 hours ago, Mike Preston said:

(1) make sure whatever is presented to you satisfies the scrutiny of an independent ERISA lawyer; and (2) please be aware that the Internal Revenue Code provides the ultimate in what might be described as a level playing field - hence, very few of us can claim to do things that others in the field just can't do - so make sure there are at least TWO providers who can offer you whatever shiny object looks good to you!

 

 

 

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JImK, you need to understand that you DON'T understand the provisions you are discussing.  Mike has been very generous with you as his time does not come cheaply.  He is right, you did give us a nice chuckle when you gave us your legal interpretation of the code.  

So many things to cover:

1) If you are working with a "big pension firm", why aren't they advising you on this issue (they should be able to).

2) Why didn't you big pension firm PREVENT you from having the excess assets problem?  We monitor that issue for our small, big benefit DB plans extremely closely to avoid just this problem; Looks like you were not served well by your prior advisors (hint: these types of DB plans should not be invested in assets that can have such significant, unexpected returns. Short term bonds make the most sense in maximizing situations though there will be some of my friends who might disagree with me). 

3) You are right to look for a good consulting firm that can answer your questions and explain why what you have decided can be done is not actually available to you.  Reminds me a sticker I had on my elementary school text book: Brain Surgery: Self Taught!

Good luck.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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