The situation is this: Plan of a small sole proprietor is being wound down as the sole proprietor has retired. One of the assets it holds is life insurance on the sole proprietor, a plan participant. Normally, the sole proprietor's spouse ignores the premiums on the life insurance when they come due, simply allowing the premium to be assessed by the insurance company against the investment portion of the policy.

Spouse is out of town when a quarterly premium statement comes to their home in 2007. The sole proprietor simply writes out a personal check for the quarterly premium to the insurance company. There are no earnings for 2007, so there can be no 'contribution'. And it was not claimed in any way as a contribution.

Looks like a prohibited transaction, personal assets of a disqualified person being used to benefit the plan being an "extension of credit", and anticipating (a) repayment (with interest) and (b) filing a Form 5330. Section 6.09 of Rev Proc 2008-50 provides that PT's cannot be corrected using EPCRS.

Anyone else dealt with a similar situation?

Comments and suggestions regarding this situation will be appreciated.

Folks:

We were discussing recently whether an excecutive who was 85 years old could voluntarily waive his retirement benefits.

Can someone direct me to that discussion?

The reason I have an interest is a paper I am reading on whether employees who have been misclassified as independent contractors can sue for lost benefits, even though they signed up as (misclassified) independent contractors who voluntarily waived the benefits?

In one of the IRS or DOL rulings, as I remember, it stated something to the effect that voluntarily waiving a contracted for retirement benefit was not an option for the employee.

Don Levit

Can you retroactively change the Plan's definition of compensation to the beginning of the plan year for a plan using safe harbor match? Doesn't seem right since participants should know by January 1 what compensation will be used for purposes of the cap on the match.

I know that there are no regs for maximum deductions under PPA, but I have an interesting situation.

A one man DB plan is significantly overfunded. Selected results as follows:

Target Normal Cost: $12,000 (because of significant credit balance, TNC is only partially offset due to funding surplus).

Carry over balance: $138,000

Undeducted contributions from 2007: $56,000

404(o) maximum: $0 (this is from the TNC + FT + cushion amount less assets

If I don't use the credit balance to offset my minimum required contribution under 430, and I made the $12,000 contribution, it would be deductible. So even though I have undeducted contributions in my plan, I still have the ability to contribute and deduct a $12,000 contribution? If I didn't offset the minimum by the credit balance, I would have an obligation to make a contribution under 430, so there's no way for me to apply any of the undeducted contributions towards meeting this minimum.

Am I going crazy, or is there something that's just wrong about this situation?

May an employer stop Automatic Enrollment Safe Harbor contributions during the Plan year with adequate Notice and amendments? They can with a regular Safe Harbor Match. I haven't seen anything written specific to the Auto Enroll Safe Harbor Match. Can someone offer assistance???

I have a client with a Safe Harbor 401(k) plan where we're still testing a select population of employees. I've spoken with a friend in the industry who thinks there's away around this testing, and wanted to bounce it off of people here to see what the reaction was...

Plus, it's a fun little thought exercise.

Plan Facts:

401(k) Deferral: immediate eligibility

Match eligibility; 1 year of service

Match Formula - Assume statutory minimum safe harbor amounts, 100% of first 3%, 50% of next 2%

Eligibility service measured by elapsed time.

Matching Contributions calculated on a payroll basis

Current Testing Treatment

Group 1: Satisfied 1-year eligibility requirement prior to commencement of current plan year. They are elgiible for the safe harbor match for the entirety of the current plan year. Thus, no testing is performed on this group.

Group 2: Hired during the current plan year. They will not satisfy the 1-year service requirement by the end of the plan year, thus are statutorily excludible. These employees are tested, albeit separately in their own group with no HCEs (because none have any prior year compensation).

Group 3: Hired during prior plan year. These employees will attain 1-year of service during the plan year. Thus, by the end of the year, they are non-excludible and must satisfy testing. Further, because their matching contributions were made for only part of the plan year, they do not satisfy the safe harbor design and must be tested.

Each year, we test group 3 separately, and invariably there's always one or two employees who were hired early enough in the prior plan year to earn enough to reach HCE status. This testing regime was built into the plan document, as well, so any deviation on a go-forward basis would require a plan amendment.

The Proposition

The fix proposed by my friend is to, for the sake of testing each participant's matching contribution against the safe harbor standard, to look at deferrals of compensation where compensation is defined as only compensation while elgibible for the match. So, a participant hired 10/1/07, for example, would be excludible for 2007. In 2008, he would receive a matching contribuiton starting 10/1/08. When we look at matching made on deferrals of compensation for the period 10/1/08-12/31/08, the rate would meet the Safe Harbor formula, and no testing would be required.

The Authority

The closest thing I can find on this topic is Treas. Reg. 1.401(k)-3(b)(2) which, for safe harbor purposes, allows you to define compensation as compensation only during an employee's period of participation. The potential problems I see with this are as follows:

1) 1.401(k)-3(b) pertains specifically to nonelective contributions, and I'm unsure if we could apply it in the case of this plan which uses a matching safe harbor contribution.

2) The language merely says "period of participation." My initial reading of that provision (and all examples I've seen on the subject) interprets this to mean participation in the plan as a whole, which in this case would be triggered at hire as eligibility for deferral purposes is immediate. This provision seems to be addressing the case where all participants are eligible for the contribution, but participation in the plan requires 1-year of service. In those scenarios, paricipation in the safe harbor contribution and the plan as a whole occur at the same time. By contrast, in the plan at issue, participation in the plan, generally, precedes the match participation by a year. I haven't seen anything specifically permitting carving up participation on a benefit-by-benefit basis for this purpose.

Any thoughts? Does this proposed interpretation make sense, or is my friend halucinating regulations that don't exist? Would it be possible to treat this transition group as satisfying the Safe Harbor requirements, or is a plan being punished for extending participation for deferral purposes to excludible employees?

Thanks for the feedback.

IRS proposed reg. 1.430 (august 31, 2007) described the requirements for waiving, and documenting, a credit balance. I saw nothing in the recent legisation (Worker, Reitree, and Employer Recovery Act of 2008) that would impact the possible waiver and documentation. Anyone agree or disagree?

Our nongovernmental 457(b) plan suffered an operational failure where one participant contributed in excess of $15,500.

This has been caught by the IRS on audit. The IRS is stating that the Plan will be disqualified for this small operational error.

Voluntary compliance is not available under EPCRS, do you guys know of any way to correct this error without disqualifying the plan?

I have a small law firm client that just made a guy a non-equity partner. All I can find is that he is treated as a self employed person (which coincides with what they are telling me that he will take draws).

Is this guy a Key EE?

Is he a 5% owner (of his own Schedule C?) making him a 5% owner and making it an affiliated service group somehow?

Is this guy an HCE? I can't figure how he is an owner but if he is he would be HCE regardless of income, which was not that much last year, and not part of top 20%.

Thanks for any comments.

I got a call from a participant who is trying to put together his election for the upcoming plan year. His chirporactor told him that if he provides the patient with a note of medical necessity, that it may be able to be run through his flex plan.

This sounded fine at first, but then I asked around the office and it became more complex. It was noted that maybe a home appraisal before and after the hot tub is put into the property may be required. I do not know if he owns or rents. Any thoughts on this?

Thanks

(We're a TPA)

The IRS model language for public school 403(b) plans includes an option for automatic enrollment for new employees. But won't they run into state wage withholding issues? Preemption of conflicting state regulation was added to ERISA section 514. But because the public school is a governmental employer, it is not subject to ERISA.

Facts:

* A 12-31 year end 401(k) plan is amended to cease accrual of benefits on 12-01-2007 - with the intent to terminate the plan.

* The final distributions for the plan occur on 07-01-2008.

Question:

Are employees who were considered participants but never had any balance in the plan becuase they elected not to participate and the employer never made contributions on their behalf - still active participants as of 12-31-2007? What about 01-01-2008?

Situation - plan had 650 participants in 401(k) but only 40 ever had a balance. So for the 5500, is an audit required or not for 2008 based on the definition of "Participant" in line 6 of the 5500 instructions. Should the 610 or so participants who never had a balance and would never have a balance be considered "Active" participants at 12-31-2007 or 01-01-2008?

Are they still covered by the plan after the amendment is signed on 12-17-2007?

Are they earning service under the plan?

Are they retaining service under the plan?

This is an expensive determination for the plan sponsor and one I cannot find clear guidance on. Any suggestions would be appreciated.

I wonder what people think of this. Document allows catchup contributions. Employer is thinking about simplifying his life by stopping everyone ate $16,500 in 2009. Is it ok to make this kind of administrative decision or should we amend the Document?

Hi all,

I apologize if this is not the appropriate location to ask this question. I am a soon to be graduate and will start work for an accounting firm next month. One of my directors will want me to work with him in comp and ben on a few assignments. My only experience with this kind of work is doing research for him on Section 83b elections, Black Scholes model, and some due dilligence work. I would not say I am proficient in those areas, but I am at least familiar with them in a relatively small capacity. My primary line of work will be in Tax(accounting). Would ERISA Basics and ERISA Facts 2008 from this page http://benefitslink.stores.yahoo.net/erisabasics2.html be a good place to get familiar with ERISA or does anyone have suggestions for other books that may be more comprehensive but not too overwhelming for a novice. Thanks in advance.

D.N

I need to complete Form 5307 to be filed with a Volume Submitter plan document. My question concerns line 3c, where the number of amendments is indicated for the submission. Since there were required amendments after the execution of the plan (e.g. EGTRRA, 401(a)(9), etc.), I would imagine I need to total these amendments, plus any other discretionary amendments and put this amount into 3c?

Now, if I was preparing a submission for a Standardized Adoption Agreement and if the regulatory amendments were prepared on a Sponsor Level, would I still be including these amendments in the line 3c?

Is an amendment an "amendment" for 5307 purposes regardless if Sponsor or Employer level? I appreciate any thoughts on this.

If someone files a 1040 with a schedule C, when discerning the limit of annual additions for the owner, must this person reduce earned income by half of the self-employment tax? What about the 20% limit?

Paired plans; if you have both a profit-sharing plan and a money purchase plan, even if you do not make any contributions to the profit-sharing plan, does a limit remain for the money purchase plan, and if so, what percentage does that limit stand at?

If not inconvenient, please give a specific reference for this.

Problem: Man and woman get married. During the marriage, man changes gender. The women get divorced. Now comes time to prepare the QDROs. Some plans are getting sticky about assuring that the QDRO is valid under federal law as a transfer between spouses/former spouses as those terms are defined by DOMA (specifically, that one party is a man and the other a woman.) Some administrtors (e.g., Fidelity) require that the parties make a sworn statement that they meet the DOMA requirements.

How do I finese this issue, given that the parties are no longer man and woman? Anybody with experience

We match on after-tax and matc on pre-tax up to 6%

We cap the pre-tax match to 5175 for 2008 due to someone hitting the Comp limit of 230K for 2008

But can we put in more than the 5175 for 2008 with the addition of the after-tax match?

We match each paroll which is weekly and we do not true-up at year-end

Please tell me if I am nuts but only after you read the referenced revenue ruling carefully. In Rev Rul 2007-65 the IRS was aiming at abusive welfare benefit plans and VEBAs that provided only pre-retirement death benefits. In a nutshell it prohibited the deduction for contributions to WBPs and VEBAs that provide death benefits funded with life insurance. It was concerned that certain abusive plans cropped up that took excessive deductions in inappropriate ways. The IRS got to its holding by applying sec 264(a)(1) that says no deduction is allowable for premiums on a life insurance policy if the employer paying the premium is directly or indirectly a beneificiary.

On its face, the ruling says this holding, based on sec 264, applies in the case of cash value life insurance; it also says it does not matter if the policy is held directly or in an irrevocable trust. But here is the rub. Nothing in sec 264 limits the application of sec 264 to cash value insurance. In other words, if the IRS is right--that sec 264 applies under those facts--then it applies to ALL life insurance, including group term held in an irrevocable trust, like a VEBA or a sec 79 plan. It does not have to be held for pre-retirement death benefits either.

So if I am right no company in the country--no matter the purpose of the plan or how small or large a company--can deduct the cost of life insurance for employees if it holds the policies directly or in a trust. Am I right? Did the IRS overshoot its target? Or is this a non-issue since companies are not taking this deduction anyway.