We found a prospect with a money purchase plan (10% of pay). They want to add a DB plan, provide large HCE benefits and small NHCE benefits in the DB by cross-testing the DB with the money purchase plan to pass 401(a)(4).

We've only used volume submitter cross-tested Profit Sharing plans with gateway language for this thus far. Is it allowable to use a money purchase plan for this? If so, is extra plan language needed to allow it (such as gateway language)?

Lately, I've been struggling with the two-year rule for SIMPLE IRA rollovers (i.e., the prohibition on rolling over amounts in a SIMPLE IRA to a plan other than a SIMPLE IRA within the first two years). Is anyone aware of any waiver of this rule where the SIMPLE IRA is terminating because the employer is disolving? For employees who are younger than 59 1/2, this rule kicks the early distribution penalty up to 25%. These employees end up losing a quarter of their accounts in a forced distribution, because the plan had to be terminated based on a dissolution they had no control over. This doesn't seem fair, but I can't find anything that would alter the result. Any thoughts?

In recently was asked the following what if scenario:

Doctor owns a corporation and has a current profit sharing plan with one other employee. Doctor also owns real estate in a living trust, has his real estate license and manages the properties. Cash flow from properties is $150-200 k annually.

Generally real estate income is not considered earned income and therefore no contributions to a qualified plan are allowed.

Can a plan be set up as a sole propreitor to shelter some of the real estate income?

I know there are a number of issues here, but the two I am having trouble with are: the real estate being held in a trust (but income and taxes go to individual), and the earned income issue.

Any insights would be appreciated. Thanks.

Has anybody delt with the issue of hardship distributions due to hardship of primary beneficiary? I have read PPA and Notice 2007-7. It says that if a plan permits hardship distributions of elective contributions for safe harbor reasons, the plan can permit distribtuions for a few reasons for hardship of a primary beneficiary. What I am having trouble with is what sources are allowed for the hardship of beneficiary. Is it just elective contributions or all sources allowed by the plan?

Thanks

I saw in the preamble to the 415 final regs that stated that government plans still have to amend for 415(b)(2)(E)(ii) even though gov't plans are not subject to 417 and it says "the final regulations provide that these rules also apply to plans that are not subject to the requirements of 417." However, I could not find that in the actual regs. themselves. Does anyone have any further guidance or authority on the applicability of the PFEA amendment to 415(b)(2)(E) for gov't plans?

Thank you and I hope you are having a nice holiday season this year.

In IRS Notice 2005-5, a footnote indicates that the CIP compliance pursuant to the Patriot Act is not required at the time an IRA is established when a trustee forces a participant out of a plan. I do not see a similar note regarding OFAC compliance. Does anyone know if the OFAC screening is necessary or if this can also be deferred until the individual decides to claim the funds? It would make sense that this is deferred too, but I can't find information to that effect and know better to assume things work the way I think they should.

A company would like to change the Plan Sponsor of a 401(k) Plan, and the former Plan Sponsor will also become one of the Adopoting Employers of the Amended and Restated Plan.

Is is possible to change the Plan Sponsor without terminating the exsisting Plan?

Would we have to merge the old plan into a new Plan?

Any help would be greatly appreciated.

ALEX

BOB ARCHITECT, 12/4/2008:

Stay tuned over next 2 to 3 weeks for further guidance re 1/1/2009 effective date regarding requirement for written 403b plan document and perhaps a RAP (remedial amendment period).

New control group rules for tax exempt entities take effect 1/1/2009, and apply to all employee benefit plans sponsored by such entities, including 403b plans.

Rev Proc 2007-71 with "model" plan language for use by public schools, "sample" plan language for other 403b eligible employers. There will be no further model/sample plan language to address any other issues, such as employer contributions.

IRS is prepping a 403b prototype plan document program (expected sometime in 1st half of 2009), and a determination letter program for individually designed 403b plan documents (later). The IRS will publish 65-70 pages of suggested language, first for the prototype plans and then for individual designs, as part of a Rev Proc--hopefully in the next few weeks (hopefully before the end of 2008). Such will address Roth deferrals and tax-exempt orgs structuring non-elective matching and non-matching contributions from the ER. There will be a 45 day public comment period.

EPCRS (Rev Proc 2008-50) will be updated for 403b plans, for failures to comply with the new 403b regs taking effect 1/1/2009. None of the current EPCRS procedures apply to failures re the new 403b regs.

MYTH BUSTING: MYTH #1: Info Sharing Agreement-if ER doesn't have an ISA in place with the vendor of an EE's 403b contract, the 403b contract will be taxable or subject to other problems. ISAs only appear in one reference in the new Treas Reg § 1.403(b)-10, in addressing 90-24 in-service, under age 59 1/2 exchanges. Only a 403b plan that permits such exchanges would need any ISAs from vendors approved to receive such exchanges.

Section 6.04(a)-(d) of the model plan language (Rev Proc 2007-71) is an example of in-service exchanges. A 403b plan need not allow such in-service exchanges. If a 403b plan does not, then that 403b plan needs no ISAs.

Treas Reg § 1.403(b)-3(b) allows a 403b plan document to specify the allocation of compliance responsibilities. The ER can infuse such allocation language in an ISA, but it could be by other agreements and documents.

MYTH #2: If an ER is parsing down the # of vendors incident to its compliance efforts, some 'approved' vendors are sending EEs letters that they must exchange their 403b contracts to an 'approved' vendor by 12/31/2008 or else their 403b contracts will be taxable. Truth: Only future contributions need to go to an 'approved' vendor to avoid income taxation.

MYTH #3: Public schools (K-12 and public colleges, universities) will become ERISA fiduciaries and must file f5500s. Truth: State or local law, possibly, but not under ERISA.

MYTH #4: An ER that freezes contributions (not terminate the plan) does not need a written 403b plan. Truth: A written 403b plan document is needed for a 403b plan on the effective date of the new 403b regs. This is true even if the 403b plan has only previously accepted salary reductions.

MYTH #5: The 403b regs restrict EEs' right to rollover their benefits. Truth: In-service exchanges are now limited (as 90-24 exchanges were made obsolete by the new 403b regs), but rollovers following an access event remains the same.

MYTH #6: Treas Reg § 1.403(b)-11, delayed effective dates apply to any church or to any public school with a CBA. Truth: the only time a church 403b plan effective date only is delayed if the 403b plan is a product of a church "convention" (not for independent churches). Only public schools with a CBA in place on 7/24/2007 that called for the maintenance of the 403b plan by the public school get the delayed effective date.

LOOMING PITFALLS

Adopting 403b plan document. Memorializing in writing the formulation or putting into effect the plan. There needs to be language and signatures by which the ER adopts the plan document.

Bad Terminations. For the first time, the new 403b regs describe favorable tax consequences of terminating a plan 'if you can go down that road'. Plan termination is administratively and timely liquidation and distribution of all plan assets. Problem for 403b plans with individual custodial accounts (403b7 accounts): the ER is not in a position to require the payout of the assets held in those custodial accounts. The ER may have no power to force the payout, and ALL of the plan assets must be liquidated/distributed in order to terminate the 403b plan. What is the favorable tax consequence of being able to terminate a 403b plan? It makes eligible for rollover the 403b contract benefits of those active employees under age 59 1/2. If you cannot terminate, those active employees under age 59 1/2 may not roll their 403b benefits outside the context of a 403b contract. Section 8.03 of the model plan language (Rev Proc 2007-71) reflects this reality that termination is subject to the terms of the individual 403b contracts. 'Your structure of 403b plan may not permit you logistically to pursue a termination.'

The big 403b unique advantage: 403b permits the ER to make non-elective ER contributions into a former EE's 403b contract for five years after employment terminated, up to the 415c limit (e.g., $49,000). This must be non-elective by the EE. E.g., EE cannot receive such contributions in lieu of unused vacation pay at the time of termination. That would be a cash or deferred election by the EE, and that is not possible to do so post-employment. The 5-year provision is limited to non-elective, ER contributions.

Q&A:

#1: Large ERISA plans are subject to audit.

#2: SD has 4 vendors, not going to use any of the 4 after 2008. Going instead with a new vendor for 2009 and beyond. What are 403b plan document requirements re the 4 disenfranchised vendors? Section 8.01 of Rev Proc 2007-71. As to vendors 'dismissed' in 2004-08, ERs need to make a minimalist, 'reasonable, good faith effort' (whether successful or not) by exchanging contact info between the ER and vendor. That brings the vendor within the 'new, shiny plan'. Plan need not list the vendors, but may simply refer to separate listing that is updated as needed.

#3: Post-2008 contract exchanges. Contract from non-approved to an approved vendor. EEs may certainly do so. Section 6.04 of Rev Proc 2007-71.

#4: What is a church "convention"? Periodic meetings, such as once or twice a year, and the delayed effective date is to accommodate possible meeting schedules.

#5: Consequences of failure. Treas Reg § 1.403(b)-3 Plan-wide failures; individual employee failures.

INFORMATION DISSEMINATION "TOOLS"

Two resources. www.irg.gov, then Retirement Plans Community, then Types of Plans, then 403b Plans.

Newsletter: Employee Plans News, www.irg.gov, then Retirement Plans Community, click on newsletters and then subscribe.

Individual terminated employment from Co. A less than 100% vested, forfeiture then created and rolled over the distribution to Co. B's plan.

Individual is reemployed by Co. A and wants to buy back and restore his account, recontributing the amount of the distribution ('ER $).

When the individual recontributes to Co. A's plan is that amount placed in the employer contributions source? Or would it be considered a rollover from Co. B's plan and placed in that source and would it satisfy the buy-back?

Do the regs define what "immediate" need is? We have always used the "must have bill or threatening letter in hand" approach, but does the law further address what an immediate financial need is?

Company got bought out - there is no income in 2008 for owner and employee (2 person plan). They want to terminate the plan.

They do not want to make premiums in 2008 - just cash in the insurance and annuity products.

Is the contribution required on a 412(e) plan? Can they just take what they got accrued in the insurance policies?

Since they did not have any income - they would not be able to deduct the premiums.

Thanks

1/1/2008 AFTAP certified as 81%. Amendment to freeze benefits adopted 10/1/2008. Husband/wife only plan.

the 81% is good until 4/1/2009 and is then dropped to 71%, unless the 2009 AFTAP is certified before then. With the drop in the market, it is unlikely a 2009 AFTAP is greater than 80%. Can the plan be terminated and paid out prior to the magic 4/1/2009 date or would the 2009 AFTAP have to be certified before the termination/payout can occur?

it is kind of late notice, but it is possible that the termination and payout could occur before 12/31 since there aren't any notice issues to deal with other than the 30 day notice, which can be waived, or am I missing something?

Sorry forgot to add: Does it violate an actuarial standard to not certify the 2009 AFTAP fairly early when this is a small frozen plan, assets are easily determined early in the year and knowing they want to terminate and pay out?

Please consider these facts. Calendar year plan. 2008 AFTAP >100%. 2008 minimum has been contributed prior to 12/31/2008. Assets 12/31/2008=3,600,000; FT=4,800,000; TNC=400,000. FSCOB=2,000,000. 7 Yr amortization factor = 6. Plan is ongoing and pays lump sums. Forget about interest adjustments and quarterly contributions -- they only apply in the real world.

AFTAP (w/o CB) = 3,600,000/4,800,000 = .75 so plan must subtract FSCOB to determine AFTAP. Then,

AFTAP= (3,600,000 - 2,000,000)/4,800,000=.33.

Alternative 1, get an 80% AFTAP. (a) burn FSCOB and contribute in 2009 before 4/1/2009 for 2008 (.8 - .75) x 4,800,000 = 240,000. Do not add 240,000 to prefuding balance. 2009 Amortization = (4,800,000 - 3,840,000)/6=160,000. 2009 Contribution = 400,000(TNC) + 160,000 = 560,000, and total contribution = 240,000 + 560,000 = 800,000

(b) contribute in 2009 before 4/1/2009 for 2008 (.94 - .75) x 4,800,000 = 912,000. Do not add to prefunding balance. FSCOB is preserved. AFTAP=4,512,00/4,800,000=94%. 2009 contribution = 400,000 (TNC) but may use FSCOB to reduce to 0.

Alternative 2. Forget about 80% AFTAP. We are required to burn enough of FSCOB to get to 60%. 60% of 4,800,000 = 2,880,000. So, 3,600,000 - x = 2,880,000 ==> x=720,000. We must burn 2,000,000 - 720,000= 1,280,000. 2009 amortization = (4,800,000 - (3,600,000 - 720,000))/6=320,000. 2009 contribution = 400,000 (TNC) + 320,000 = 720,000. Part of FSCOB is preserved but benefits are restricted.

Q1: Agree with the mechanics?

Q2: Any other options I may have overlooked?

Q3: My particular client at least for now is highly profitable so I will be recommending (1)(b). Any disagreement?

Q4: Has anyone figured out the odds that the client would understand this?

My P.S. for the day: Much of the confusion of PPA is attributable to the application/nonapplication of credit balances. For many plans -- especially those that pay lump sums, the recent Armegeddon will cause most if not all of the FSCOB to be burned.

A loan policy permits a max of 2 loans outstanding. Due to a pay-off with a NSF check, a third loan was permitted to a participant.

One of the loans must go. Which one?

Is this a default situation where the plan must wait for a quarter before defaulting?

Or, can this be corrected immediately and, if so, how? Could a distribution of a one of the loans be made...... and, if so, which one?

OH MY!!! (because controls have been added this will not happen again, but the situation at hand must be corrected)

How have others handled this? I've examined EPCRS and it seems silent as to this type of problem.

Hello,

I come to you for advice.

I, and a partner, are owners of a small business that is an LLC filing as a partnership. All income is pass-through. Each partner has a 50% stake in the venture. We have 7 employees/contractors. During the 2008 year, business made a large-ish profit where tax exposure is quite considerable. During that time partner A was paid lets say $40k (straight cash - no tax withheld or declared to IRS assuming all will get calculated in April) and partner B got $0 (nothing). Neither partner is on W-2. All profits were re-invested back into the business.

We are looking to diminish our tax exposure for the year by creating 401k accounts and contributing to it to the maximum. Is this allowed based on tax law. We are getting conflicting advice from various sources. Our accountant states that as partners we are not w-2 but as K-1, and since we are not w-2 and get "guaranteed payments" instead of salary, are not allowed to contribute to 401k. Fidelity, ING, and other phone support people beg to differ and want us to contribute full amounts with their institutions. They are claiming that LLC is same as anything else and can write off 401k contributions from the K-1, for partners, employees or whatever and we can contribute regardless.

Please share your experience in this matter. Links to relevant supporting documentation would be greatly appreciated.

A client has one IRA. Since 12/31/08 the stock held in the IRA has become worthless. The RMD calculation, based on the 12/31/08 account balance is greater than the IRA value, which I understand to be zero at this point. Nothing to distribute. Is there a regulation or other official guidance that addresses this situation?

I feel like I'm missing something that is probably quite obvious to most - Guidance is appreciated!

ER has a 'private' investment account with brokerage house where ER also has a profit sharing plan. The day before the due date for the ER's income tax return, ER gives written instruction to broker to sell $30,000 worth of the investments in the 'private' account and add them to profit sharing plan account. ER takes a $30,000 deduction for the contribution.

Later, it is discovered that the brokerage house liquidated shares in the private account, raising $30,000 that automatically were money market funds under the private account. The brokerage however failed to move the $30,000 to the profit sharing plan account. This failure was not discovered until 45 days later, well after the due date for and the date that the ER's tax return was filed claiming the $30,000 deduction.

Is the deduction proper? May the brokerage house now remedy the situation simply by moving the $30,000 into the plan's account?

I am looking for suggestions on the appropriate handling of a somewhat hypothetical situation.

What if an employer processed an electronic funds transfer (e.g. ACH) for contribution purposes and the recordkeeper immediately invested the contribution (per its normal procedures) as instructed by the employer. However, two days later it turns out there was insufficient funds to cover the ACH and the custodian demands reimbursement. In the meantime the recordkeeper sells the exact shares that were purchased by the insufficient funds "Buys" but because the market has dropped the proceeds are less than the value of the initial purchases.

Let's say the Service Agreement(s) are silent about such an event. Is there an implied right of the recordkeeper or the custodian to liquidate additional plan assets in order to reimburse the shortfall on behalf of the custodian? What options are generally available to the recordkeeper or custodian to collect the shortfall?

Thanks in advance.

Can reload options be exempt from 409A if they are designed in the same manner as exempt NQSOs? My concern is that in order for a NQSO to be exempt, the number of shares subject to the option must be fixed on the date of grant and this isn't the case with a reload. However, the formula used to calculate the number of reload options would be fixed. Any thoughts would be appreciated.

Employee has a post-2005 employment agreement with deferred comp provisions. He and the employer have agreed to terminate the agreement (with no deferred comp being paid out) before 12/31/08. Does the plan need to be amended to comply with IRC 409A?