DB plan with top 25 restriction provided large accrued benefit to owner, who then retired and also got divorced.

Full benefit (at 415 limit when owner retired) assigned by QDRO to former wife, who started collecting in as a life annuity with the intent to convert to lump sum when plan is sufficiently funded.

Now the plan sponsor (company is now run by the son) wants to terminate and fully fund the plan. Mom has been receiving a large pension monthly for several years now.

How is the amount payable as a lump sum to be determined considering the payments received since the 415 regulations have this section "reserved"? Must the old 415 limit be used and the lump sum reduced by the pv of the monthly payments?

Any suggestions to avoid a cutback to Mom other than to have the plan buy Mom an annuity of select a reduced lump sum?

Can we put Mom on the payroll for 1 hour and then take advantage of the current 415 limit? Or can we use the current 415 limit regardless?

I have a dental practice with a calendar year PS/401k with a 3% non-elective SH contribution. On 12/1/09 a Safe Harbor notice was given to the employees stating a 3% non-elective contribution would be made for them in 2010.

The doctors now say they don't have the money to fund a 3% SH for 2010 due to their economic situation. I prepared an amendment to cease their SH non-elective contribution on 1/6/10. The SH non-elective will be funded through 2/5/10 and we'll use ADP testing for the 2010 plan year.

This plan is also top heavy and there is not much 401k participation with the staff. This severely limits the doctors to what they can contribute to the 401k.

Now the doctors are talking about starting a SIMPLE IRA for their company. Since the PS/401k will be funded through 2/5/10 with a SH contribution, doesn't this prevent them from starting a SIMPLE IRA during 2010?

Also they are asking if they can retroactively terminate their plan as of 12/31/09 to avoid making contributions for the 2010 plan year. I don't think this would work either.

Any other suggestions of what can be done?

A 401(k)/PS plan is still on a GUST document. They intend to terminate the plan in March 2010, so they have no intention to restate the document.

If they restated to an EGTRRA document, they can submit their 5310 after April 30, 2010 and ask for a D letter on the termination - no problem.

But, if they do not restate for EGTRRA (they adopt interim amendments only), and they want their Form 5310 accepted, must the 5310 be submitted by April 30, 2010?

Currently we have our software set to sixty month maximum loan duration. We have a concern that we are setting up the loan to exceed the five year limit from the start. We are considering changin the maximum to 59 months. Is anyone doing this?

401(a)(37) as amended by the HEART act seems innocuous enough. But the devil is in the details.

It's clear enough that someone who dies while performing qualified military service would become 100% vested if the plan provides for 100% vesting at death.

What happens when you have a Profit Sharing plan that provides for life insurance? While the Code itself says nothing about this, the JCT explanation includes the term "ancillary life insurance" benefits. So, must an employer continue to pay premiums for any person who is in qualified military service?

Let's assume the answer is yes. Is the premium deductible as a contribution under 404? And if the participant never returns to qualified reemployment, is the increase in value then treated as a forfeiture?

The same basic issue could apply to a DB plan as well, I suppose, modified due to the differences in benefits vs. account balances.

And another thing - I have an impression that perhaps not all life policies pay the full face amount for death due to war/military service? If so, then this could require some pretty fancy plan language to make sure the plan itself doesn't incur a huge liability for which it doesn't receive the requisite face amount from the insurance company.

I've seen a big fat nothing in terms of IRS discussion/guidance. Does anyone with "contacts" there know if they are considering this issue?

Top Heavy Plan with NRA of 55 amends NRA to 62 because 55 cannot be statistically supported.

Two employees were accruing top heavy 2% for five years. Assume regular formula was 1.2% x YOP.

Does the top heavy minimum simply become 2% x YOP max 20% payable at age 62, or is some type of conversion of the top heavy accrued benefit also needed to avoid a cutback and that becomes a grandfathered benefit, which in effect substantially reduces future top heavy accruals? Anybody dealt with this issue?

(This is a real situation but I don't know what was done, so I cannot answer "What does the document say?" I am trying to determine what was required to be done.)

Thanks for any comments.

Company has SIMPLE IRA.

They do not want to fund any match for 2009 and they have never given out notices to the eligible employees.

They want to terminate the plan but have already withheld from the 3 participants' first paycheck in 2010.

They seem to think they do not have to fund a match if it is not "feasible". I told them the must fund at least 1%.

I don't know how you terminate a SIMPLE IRA. Just stop making contributions?

I told them they should refund the amounts already withheld from the participants wages but she couldn't figure out how to do that because of the taxes, etc.

I guess I have 2 actual questions:

1. Must they fund a match for 2009, and since they never told the participants they were getting anything, may it be 1% instead of 3%?

2. How do they terminate this plan?

Thank you.

Kate Smith

For purposes of IRAs, is there any real distinction between trustee or custodian?

1. A "bank" may be either a trustee of an IRA under IRC section 408(a)(2) or the "bank" may be a custodian of an IRA under section 408(h).

2. A "person" (a non-bank, i.e. brokerage firm, insurance company, etc.) may apply to the IRS to be a trustee of an IRA under IRC section 408(a)(2) or a custodian of an IRA under section 408(h).

3. IRC section 408(h) treats a custodial IRA as an IRA trust, and the IRA custodian as an IRA trustee.

4. The "Specific Instructions" for both form 5303 (IRA Trust) and 5305-A (Custodial IRA) both state that: "Article VIII and any that follow it may incorporate additional provisions that are agreed to by the grantor/depositor and trustee/custodian to complete the agreement. They may include, for example, definitions, investment powers, voting rights, exculpatory provisions, amendment and termination, removal of the trustee/custodian, trustee/custodian’s fees, state law requirements, beginning date of distributions, accepting only cash, treatment of excess contributions, prohibited transactions with the grantor/depositor, etc. "

With that in mind, why would a "bank" set up a Custodial IRA, for example, for an IRA CD, and in the trust/investment department of the bank set up its accounts as IRA Trusts?

Given the Specific Instructions regarding Article VIII, do I understand correctly that either an IRA Trust or a Custodial IRA may be used for a self-directed IRA or a managed IRA?

For IRA purposes, do the terms "trust/trustee" or "custody/custodian" carry much of any of the conventional meanings as they are understood beyond there usage in the IRC?

If there is a meaningful distinction, in what situation might a brokerage firm prefer to apply to become an IRA trustee instead of an IRA custodian?

We have looked for an answer on this but have not found it.

A plan clearly has more than 5% of its assets invested in non-qualifying assets. Therefore, to be exempt from the small plan audit, they will purchase a bond "equal to 100% of the value of non-qualifying assets".

Is the value of non-qualifying assets equal to the net value of non-qualifying assets?

For example, suppose you have a plan with just a real estate investment with a market value of $900,000 but a mortgage payable of $500,000.

Must the bond be for $900,000 of coverage or $400,000 of coverage?

Thanks a million.

The sole owner of a plan sponsor, who also participates in the plan and is the trustee, would like to lend her sister money from the plan. The sister is not involved at all with the sponsor or the plan, however, the concern is whether she would be considered a "joint venturer" under the party-in-interest/disqualified person definitions because she and the trustee are 50/50 owners of a rental property. The rental property has nothing to do with the sponsor or the plan. Is "joint venturer" meant to be only in relation to the company sponsoring the plan, or does it apply to anything they're both invested in? All help is greatly appreciated.

I looked at the 5305-a-Sep and the rules, and a SARSEP document from American Funds. They all seem to say that the allocation to an individual is limited to the LESSER of 25% of pay or $49,000.

I thought this was changed in 2002 with EGTRRA, and in fact 1.408-1(d) says the limits are from 415. This of course is now 100% or $49,000. Is there another reg that limits SARSEP, or is everyone not updating (including the IRS!) because they cannot be established since 1997?

Note this limit is NOT mentioned in the 5305-SIMPLE forms.

We received notice from the DOL that they are examining our 401k plans. They I've been advised they will come onsite in a couple of months for a interview that will last a couple of hours. I've never been through a DOL examination for a 401k plan, so I just wondered if anyone had any tips or insight on what we should expect, or suggestions on how best to prepare. I've been through DOL audits of other plans (welfare and pension) but they never included an onsite visit.

This posting hopes to get a quick refresher for myself and others on the "primary issues" of returning Excess Deferrals and Excess Contributions. I am posting below my understanding on rules that would apply to 2009 Contributions that would be returned in 2010. Thanks for any and all comments.

Excess Contributions (and Excess Aggregate Contributions) are monies that need to be returned given failure of ADP / ACP Testing; assuming that recharacterization, catch-up, and QNEC/QMAC is not applicable. In all cases, the participant is taxed on net value of contribution value plus/minus allocable investment return in the year of receipt. A Form 1099R is used to report this income (2010). If paid after 2 1/2 months from the plan year end, a 10% excise penalty tax applies. This tax is based on the contribution value, and is paid via Form 5330 within 15 months of plan year end.

Excess Deferrals are computed on the calendar year, and result from exceeding the IRC 402(g) Limit of that calendar year. If paid before the April 15th that follows the close of that calendar year, the deferral amount is taxed in the year of deferral and the allocable income is paid in the year of receipt. A 1099R is only used for the allocable income, since the Excess Deferral would be picked up as taxable on the person's 1040. If paid after April 15th, the contribution value is taxed in both the year of deferral and the year of receipt. This is done by including the contribution value on the 1099 that was used for the allocable income.

GAP Income applies to neither.

Again, thanks for your comments.

If a 401k plan elects in the PPA amendment to permit in service qualified reservist distributions, then is this a protected benefit? If the plan changes vendors and the new vendor is mapping over the PPA elections, can this provision be dropped or is it protected once added to the plan?

There appears to be a difference between correcting for a missed match when it is due to 1. excluding an employee whereby there is then a missed opportunity to defer and receive the match versus 2. a payroll glitch where suddenly matching contributions are not submitted on behalf of an employee who is deferring at a known rate, such that match is missed for say 6 months. It appears that the way to correct for situation 1 above is covered in EPCRS Rev Proc 2008-50, however a missed match when there has been opportunity to defer is not really discussed in EPCRS. If I am reading the Rev Proc correctly, Appendix B states a method for correcting matching contribution failures when the employee is precluded from deferring. In this correction, it appears you base the corrective contribution on the ADP % for the employee's group and then calculate the match based on the formula in the plan by using the ADP %. However, you would only correct after the ADP and ACP tests had been performed and passed, and the amount of match for an HCE could only be up to the ACP cap for that group. This way you do not have to re-run the ACP test. Is this correct?

On the other hand for a missed match under situation 2 above, when it comes time to submit the missed match, you know what is due the participant, and once submitted I assume you would re-run the ACP test, because you are submitting a missed match late and want to make put all the participants in the same position they would have been in had the match been made timely and included in the original ACP test. So it seems that situation 1 is easier to correct because you do not have to re-run the ACP test, could you apply this same correction for a missed match under situation 2?

Employee had money taken out for dependent daycare from Jan - Mar 09. Child did not start attending daycare until May 09. Employer is denying reimbursement because service was not provided during time employed. Says money is forfeited and goes back to employer. Is this correct? Seems like a way to steal money from employees - terminate before they use their balance.

A couple of nervous employees are pressuring their financially strapped employer to terminate their deferred compensation plan and pay them out immediately. They are essentially saying "we'll take the current tax hit and pay the additional 20% tax, because 80% of a loaf is better than none if you go under." It's completely contrary to the 409A-compliant plan document, so the document would either have to be amended or ignored for this to happen. Either way, the violation of 409A would be intentional/knowing on the part of the employer, and not only consented to but encouraged by the participating employees.

I recognize that a plan termination isn't permissible under 409A when it is "proximate to a downturn in the financial health of the service recipient," and distribution following termination is supposed to take place at least 12 and no more than 24 months following the termination. Nevertheless, what other than the 20% additional tax keeps the employer from terminating a deferred compensation plan and paying the benefits in spite of 409A? (Putting aside, for the moment, any penalties and interest for underpaying tax in a prior year, if that would even be applicable here.)

I recognize that such a maneuver undermines the intent and spirit of 409A, and I'm loathe to recommend to an employer that it intentionally and/or knowingly run afoul of a tax code requirement, but really, in such a circumstance, doesn't the 20% tax operate as nothing more than a haircut provision?

There are a few things which I can think of that should make the employer and employees think twice: (1) if the employer does go under, other creditors of the employer could argue that they were defrauded by the collusion of the employer and the employees; (2) properly reporting the violation potentially opens them all up to a lot of scrutiny (audits and the like); and (3) IRS could argue (although I think the facts ultimately would show otherwise) that the whole plan was a sham from the get-go and that the plan's benefits should have been included in income in the year of the deferral, so penalties and interest apply.

What else am I missing here?

I received this Summary Plan Information which said it is a new report being supplied pursuant to PPA. It talks about the contribution schedule and benefit formula. On the second page it has contribution information for the past several years and then a "withdrawal liability pool" and the withdrawal liability amount of the contributing employer if they were to withdraw from the plan. Is this the Withdrawal Liability Statement. If not, does anyone have a sample or could tell me what this Statement should contain?

Thank you.

A calendar year DB (beginning of year) plan terminates 1/31/2009.

There will be no Target Normal Cost because no participant would have worked 1,000 hrs one month into the year.

There will be a shortfall amortization payment of $40,000.

My understanding is that the contribution would be $40,000 x 1/12 = $3,333 (adjusted for interest at effective rate).

In other words the full TNC (provided participants will accrue a benefit) plus the pro-rated shortfall amortization payment.

Agree?

Thanks.

Plan says employee can elect to $100 of income (already earned) either this year or next.

Is this a deferred comp plan?