It's fairly common for a self directed plan to have an "open brokerage" feature that allows participants to direct investments into literally hundreds of different investments. The truth is that it's impossible for plan fiduciaries to review all of these investments to make sure that they are appropriate, but I never hear talk about maintaining 404© compliance with an open brokerage feature. Does 404© protection extend to an open brokerage feature?

I have in my head that the a qualified plan's definition(s) of compensation must explicitly state the 2 1/2 month rule in 1.415©-2(e)(3) in order to be considered compensation within the meaning of 415©(3). But looking at the regs, this doesn't appear to be the case. The regs do not use the language "a plan must provide...." There are a number of things listed in 1.415©-2(e) that a plan "may provide," but nothing that a plan "must" or "shall" provide. It seems as though a plan document can pass muster without specifically mentioning any of the timing rules in the regs; and if a plan takes that approach, the regs set out a number of default rules and the mandatory 2 1/2 month rule that will apply without any explication in the plan document.

Has the IRS said somewhere that qualified plans must contain language reflecting the 1.415©-2(e)(3) rule about compensation paid after termination of employment, or did some sort of excessively-verbose-plan-document-loving elf plant the idea in my head? Has anyone received comment from the IRS on their cycle B filings requiring this language?

This question must have come up a zillion times before but I believe a recent reg has changed it

Can someone defer a % of their total compensation, even if over the Comp limit?

Happy Friday. I received a governmental excess plan question. Client was wondering if participants could delay distribution once they are retired. These plans are not subject to 409A but 415(m)(2)(B) says the participant shall include in income as if such qualified governmental excess benefit arrangement were treated as a plan for the deferral of compensation which is maintained by a corporation not exempt from tax under ...section 401.

Do you think the plan should follow 409A rules or do you think they could follow what most nonqualified plans did standardly before 409A which was to allow the delay of a distribution if elected prior to the retirement date?

Thanks

A plan's participant count will soon exceed 120. Sponsor wants to avoid Audit requirement.

The plan has immediate participation for purposes of deferrals only. (The plan is not Top Heavy.) Very few participants with less than 1 year of service have signed up to defer. So, the plan has around 80 participants with no account balance.

I know the plan can be amended to add a service requirement of up to 1 year, but Can the Employer amend the plan to remove previously hired "participants" who have not signed up to defer? I recall an IRS ruling in which they permitted an amendment removing participants as long as the amendment doesn't reduce accrued benfits. I can't find that ruling any more. Can anyone provide a citation one way or the other?

Thanks for any feedback.

If I'm reading the new 2008 PBGC premium rules and deadlines correctly you must value the unfunded vested benefits (for variable rate purposes) as of the Valuation Date that falls within the premium filing year (not prior plan year EOY Val).

While the deadline appears generous being 16 months after the start of the 2008 premium year (e.g., 4/30/09 for 2008 filings) how many 2008 EOY valuations for Sole Props/LLCs will have their self-employment earnings to you before 4/30/09 (some, but many go on extension).

So how does one file the 2008 PBGC premium based upon the 12/31/08 Valuation which uses the 2008 self-employment earnings that might not get done until say August 2009 (via tax return extension). Do we need to put these people on notice that they can't extend their tax returns since we need the Net Schedule C (or net k-1 income) before 4/30 to do PBGC filings ? Is there any relief that I am missing ?

Under 2007 rules we could use the "snapshot" Val date as of 1 day before premium year (or 1st day of premium year) giving you 8.5 months to get data and get it done.

Thoughts anyone ? Another provision forcing us into BOY vals ?

I have several questions regarding a SEP (not SARSEP). I want to insure we do everything correctly in the future and identify anything we may have done incorrectly in the past. I believe we are okay as to plan operation and intent. These questions concern the details of "proper documentation". A SEP is supposed to be a "simplified" plan; hopefully, someone can provide specific confirmation that small companies don't have to "go overboard" in these areas.

1. Must employees who terminated their employment in a prior plan year (no longer eligible for contributions) receive copies of various required notices in future years, such as amendments and contribution statements? I would assume the answer is NO, but I want to make certain. I would like to think that, beginning in the plan year after termination, we can treat them as if they never existed for EVERY future action, unless they become re-employed.

2. Must employees receive a statement of contributions in years when the contribution is zero? I have seen various language that seems to go both ways for this requirement, so we have been providing them. Seems needless to me.

3. After a plan is established, must a corporate resolution be adopted to make each contribution, or is that purely a management prerogative like most other expenditures?

4. Must corporate resolutions to adopt or amend a plan be in any special form, or use any particular wording (except for the resolution boilerplate itself)? Obviously, they must be specific enough to identify the exact documents being adopted or amended, but is any other "legalese" required to satisfy the IRS? For instance, I have seen references to "amend and restate the plan". Are these or any other specific words required or is any wording that adequately conveys the intent ok?

5. I am very confused in one area. We are considering changing plan sponsors (example: moving the SEP accounts from trustee A to trustee B). Should we (a) terminate Plan A with a resolution, then make a resolution to begin Plan B as a new plan; (b) just adopt Plan B, making no reference to Plan A and letting it "hang"? In a sense, this might be no different than adopting an amendment; the plan IS changing either way. Any very specific guidance would be enormously helpful. (See related wording question in #4 above.)

If we change to trustee B, he will let us use 5305-SEP. I prefer to do it that way instead of using his prototype as we did with trustee A. What confuses me about all this is that I don't really understand when to use "adoption", "amendment", "restatement", and what events create the need to terminate a prior "plan" and start a new one. To me, it is one plan all along, just different "suppliers". But, all the documentary possibilities are so complex, I need guidance that I have not been able to find anywhere to do this correctly.

6. We are a very small S corp, but thinking about converting to C corp. Would any of the items above be done differently for either of these corporate forms?

7. Are questions like this answered "very explicitly" in the SIMPLE, SEP, SARSEP Answer Book? If so, I will purchase it today.

Thanks for a great site! The Q's and A's here have already been enormously helpful to me.

I am proposing adding a loan feature to our plan, and have received a couple of questions about setup that I'm not 100% sure (very creative boss):

1. Can a portion of the loan processing fee charged by the recordkeeper be given back to the plan sponsor for plan use, such as education programs? My first instinct is NO - and not a good employee relations issue either when they find out a portion of the fee went back to their employer

2. Can we set a maximum allowable loan request, less than the $50k cap? I know there's a minimum allowable threshhold of $1,000 but not sure about a maximum.

Thank you and Happy Friday!

I have a question - I have an employer whose plan fails 401(k) testing and is questioning everything about the test - including the definition of an HCE. We provided a definition of HCE for which he came back with the following information:

[color="#8B0000"]The Pension Protection Act of 2006 has changed the definition of a highly compensated employee. There are now four considerations:

1) owning more than 5% of the stock (old)

2) has compensation in excess of IRC %414(g) limitation (old)

3) is among the highest paid 35% of all employees following the rules of IRC %105(h) (new)

4) is among the top-5 highest paid officers of the company (new)[/color]

I can't find where he is getting items #3 & #4 above - Is this correct? I could not find any information on this in the ERISA outline book - does anyone know what he is referring to?

We are adding a roth 401(k) to our plan. When a partcipant hits 415 limits they automatically go on Non-qualified plan. I am trying to figure out how to design the plan if a participant hits 415 before 402g and the participant wishes to contribute the remaning 402g contributions to the roth 401(k). If it were the case that he wanted to just make 401(k) contributions, those contributions and the corresponding match would go to the NQ plan, but in the case of the roth, would these after tax nq contributions ?

Thanks for your help ?

A PS sharing plan that was merged with a past MP plan several years ago.

Participant loans are allowed.

Is it not true that we can use the MP account balance to calculate maximum loan amount, but when it's time to make the loan distribution, we must only take it from the PS source.

Is this true?

We have a new client that would like to discontinue their SIMPLE IRA and begin a 401(k). We intend to make this transition on 1/1/09 to avoid maintaining 2 plans in one year. However, how do you actually go about terminating the SIMPLE IRA? Is it simply a board resolution or amendment? What are the notice requirements? Once the sponsor terminates his sponsorship of the SIMPLE, participants can then rollover their accounts to a 401(k) - so long as their first deposit was at least 2 years prior, correct? Thanks!

The phrase "voluntary employee contributions" seems a misnomer, which would more accurately get conveyed as "voluntary participant contributions".

I have seen some people note that in a retirement plan, even the person who owns the company counts as an employee, even if that person files a schedule C to his or her 1040 instead of an 1120 or an 1120S.

I imagine some people have tried to equivocate about this by saying "I own the company, therefore not serving as an employee, I can make voluntary contributions while my subordinates cannot".

Can anyone provide me with a citation to an official source which clarifies the above?

Does changing a PY requires IRS approval?

At a recent conference, during one of those off the topic conversations between the panel members, I heard some reference to changing a plan year and then Jim Holland chimed in saying, you will need to obtain an approval from the IRS to change the PY.

Brand new plan with short PY for the first year.

Is one required to pro-rate charges/credits as is the case on plan termination (Rev. Rul 79-237)?

To my thinking, one is calculating annual contributions payable from the valuation date over the working lifetime of the partcipants. So for an EOY val on 12/31 say, one is calculating annual contributions payable from 12/31, and it is irrelevant if the plan is a full or short plan year?

What if the plan year is changed for an exsiting plan?

Are the old Pre-PPA Funding Notices (RPA CL / Assets) required for the 2007 plan year or, since PPA changed the requirements do we have a one year exeption as long as we report the 2007 funded percentage on the 2008 notice.

Does this site apply?

Effective date. This provision generally applies to plan years beginning after December 31, 2007. However, the repeal of the ERISA Sec. 4011 notice to participants of funding status applies to plan years beginning after December 31, 2006 (Act Sec. 501(d)(1) of the Pension Protection Act of 2006). A special transition rule applies to the ERISA Sec. 101(f) requirements to report a plan's funding target attainment percentage or funded percentage. For any plan year beginning before January 1, 2008, this reporting requirement will be treated as met if the plan reports (1) for plan years beginning in 2006, the plan's funded current liability percentage for that plan year, and (2) for plan years beginning in 2007, the funding target attainment percentage or funded percentage determined using methods of estimation provided by the Secretary of the Treasury (Act Sec. 501(d)(2) of the Pension Act).

401(k) PSP, 3% SHNEC, calendar year 2007.

We received a Schedule K-1 for the partners that list Guaranteed payments (line 4) of $50,000 and Self-employment earnings (line 14) of zero. When calculating the partner's NESE, is our starting point $50,000, less contributions for staff, less 1/2 SE tax, etc. or is it zero? If Line 14 was a number greater than zero (e.g., $10,000), what would our starting point be?

Any input on this would be greatly appreciated.

Thanks!!

What is the proper correction method when a plan allows a participant to contribute prior to their actual entry date? If error is discovered in the following plan year, does this change the correction method? Thanks.

Our client had a 403(b) plan with an insurance company which was amended and restated during January 2007 as a 401(k) plan. The plan was not terminated. It’s character simply changed. In connection with the change, the assets were transferred from the insurance company to a local bank to administer the 401(k) plan.

During January 2007, prior to the switch to the bank, the insurance company processed several distributions which had related forfeitures Those FF’s were never transferred to the bank, but instead, were refunded directly to the ER on 1-22-07. The refund check characterized it as a “Refund of contributions-premium refund”. An accompanying cover letter says “This check represents a refund of premiums received by (the insurance company) on 1/18/2007. This money has been returned to you in view of the fact that at the time of your remittance, sufficient credit was available to offset a portion, if not your entire bill.”

In a 1-31-07 fax from the insurance company to the ER, the insurance company wrote, “This was additional forfeiture credit that was available and not taken on the final contribution bill for December.” I suspect the reason was that the insurance company had already pulled the plan off of their online system and the insurance company had to manually enter the final payroll and just overlooked applying the FF suspense account against it. The ER had no knowledge of the FF’s and just paid what the insurance company told them to pay into the plan. The ER did not request a refund of the FF’s. It was initiated solely by the insurance company.

The insurance company’s product was a group annuity insurance contract. My concern is that the FF suspense account should have remained in the trust and been wired along with the other trust funds to the bank. The old plan document called for FF’s to reduce ER contributions, which is fine, but I think paying the FF’s to the plan sponsor may be a prohibited transaction. ERISA section 406(a)(1)(d).

I’ve done a little research and couldn’t find anything exactly on point, but did see Rev. Ruling 71-149 that dealt with terminating plans (which I know we don’t have here) and IRS said there, that the FF’s could not revert to the ER. An argument could be made that this is a mistake of fact due to a mathematical error in the calculation of the final contribution payment. Therefore, they can refund the premium/contribution as they should have given them the credit for the forfeitures.

Your opinions are welcome. Is this a prohibited transaction or a mistake of fact?

For a 401(k) plan that permits non-owners to postpone RMDs beyond the traditional RBD of age 70 1/2, can employees who continue to work make 401(k) elective deferrals? What if the plan forces distributions at the traditional RBD? Can employees who continue to work continue to make contributions? I would assume not. Cites? Thanks