I have a client that allows thier members to drop coverage that is under a Section 125 plan for any reason. Example, they have an employee that is covered under AFLAC per tax, and if an employee decides that they dont want it anymore, they are allowing the member to drop with a 30 day notice. Is this allowable under section 125?

The regs require that a plan designate only one time and one form of payment for a distribution event. Based on a strict reading of this rule, it is arguably a problem to provide a benefit (which is clearly subject to 409A) at separation from service with 33% of the benefit payable with the first payroll followng the separation (essentially a partial lump sum) and 66% of the benefit payable in equal monthly installments for five years beginning the first day of the month following termination. This looks like a lump sum and installment payment, which are two forms of payment. However, I interpret the regs to allow this type of a payment, looking at the payment "package" as the form of payment. Instead, it would not be permissible under this rule to provide that if you separate from service on Monday, you get the 33%/66% structure but if you terminate on Friday, you don't get the 33% but take all in monthly installments. Do you agree with this interpretation or do you think the rule requires the strict construction?

Can a plan switch in mid year from calculating the s/h match on a payroll basis to an annual basis, retroactively effective to 1/1/07? As a result, the s/h match already deposited in 2007 will be applied to the final year-end s/h match that would be determined. I think the answer is "no", but wanted to check if anyone knows otherwise.

Also, if a s/h match is determined annually, can the employer make s/h match deposits on a regular basis during the year anyways? Assuming the employer "plays it safe" and makes sure no one would accidently receive more via these deposits than they would when the final match total is calculated, I can't see where that would be a problem.

Thanks

I have a highly compensated individual who will remain employed but will lose coverage under a self-insured health plan because of his limited hours. He is 60 and will need coverage beyond the regular COBRA limit. Can we offer to continue his COBRA coverage beyond the normal COBRA limit, assuming we receive approval from the stop-loss carrier, without running afoul of the 105(h) nondiscrimination rules? I'm thinking that we can as long as the he pays the premiums on an after-tax basis, but would appreciate anyone else's views on this. Thanks in advance.

Suppose you have an existing profit sharing plan with a 1/31 year end.

You can amend the plan to add safe harbor provisions as long as it is done more than three months before the plan year end (we are getting close). Do safe harbor notices still have to be provided 30 days prior to this or is there an exception for a plan conversion?

A large 401(k) plan uses Fidelity's daily valuation platform. Participants can access their accounts through a Fidelity telephone number or their website. A participant who terminated in a prior year and is eligible for a distribution has been trying to "time the market" and take a distribution when his account balance is high. We made the decision to request a distribution on a particular date but was unable to do so because the plan sponsor's records did not initially show that he had a termination date. By the time things were sorted out, about two weeks later, the participant received his entire vested account balance (which, by then, was about $5,000 less than it had been two weeks earlier). You guessed it, the participant now wants the plan to compensate him for the $5,000 he "lost" due to the delay in his distribution.

Has anyone seen any articles or case law on this issue (or have any opinions--informed or otherwise)? There is nothing in the plan document or SPD that suggests a participant will receive the value of his vested account balance as of any particular date.

Thanks for any guidance.

Odd situation... 19-year old employee, should be covered thru State program by DHS and foster care system. Coverage was wrongly terminated in August. She is now in process of getting reapproved and was told by DHS to not take our insurance during annual enrollment.

My question: Suppose she's denied in a couple months. (I wouldn't expect her to be denied but just thinking ahead while we're still in open enrollment.) Is that denial of coverage a sufficient change in status at that time? I know if she was actively covered and lost it, then it would be. But what about where the State's rules say she should be covered and DHS said not to take it and is then denied?

If you fail an ADP or ACP test, you have 12 months to make a correction. If you don't make a correction within the 12 month prescribed correction period, then you have a failure on your hand. You can use the One-to-One Correction Method, which involves the refunds being made and a QNEC allocated to the NHCE's.

I have a client who failed their 2003 ADP test. The test was completed in 2/2004. They did not properly process the distributions. Now it is 2007, they want to make the proper distributions. We told them that they could still make the distributions to the HCEs (with the applicable earnings), but they would also have to make the 1-to-1 QNEC to a group of the NHCEs. We reviewed the original corrective distribution calc, brought forward with earnings and told them how much needed to be distributed. We then attempted to calc the 1-to-1 QNEC. When we did so, we came up with an HCE who gave us some problems:

HCE: He terminated in 1/2004. He rolled over his funds in 2/2004. For his situation, he would still need to be notified of the corrective distributions and need to get some of the funds out of his rollover vehicle. Our questions/comments are as follows:

1) Since he took his funds prior to 3/15/2004, the employer would not have to include him in the 10% excise tax for the late distributions. (if he took his dist after 3/15/2005, then he would need to be included in the 10% tax calc. Correct?)

2) He would need to receive a 1099R in 2007 showing the taxable distribution. Correct? Do we need to provide that to him or should that be issued by his IRA based on our letter?

3) Since the funds were taken from his account prior to 12/31/2006, does he need to be included in the 1-to-1 QNEC calculation? I believe that he should because even though all of his funds were distributed, the distribution was not done properly. Does anyone agree? Can anyone please provide a cite?

Any replies are greatly appreciated.

We are being told that our network instability issues are due to the fact that we use both Datair and Relius. Is anyone else experiencing this?

Plan Sponsor is a Corporation, of which client is sole owner. A partnership has also adopted the plan. The corporation generates losses.

He is over age 59.

Let's assume his DB plan allows a distribution from the plan.

Here's what he wants to do:

Put in his required contribution. Deduct it on page 1 of his 1040, not his corporate return.

Then take a distribution of approx. twice that amount into his Roth plan. So page 1 will show 0 earned income. a $200 k distribution from Retirement Plan, and a $100k reduction for Retirement plan contributions.

Yes? No?

Plan Sponsor is a Corporation, of which client is sole owner. A partnership has also adopted the plan. The corporation generates losses.

He is over age 59.

Let's assume his DB plan allows a distribution from the plan.

Here's what he wants to do:

Put in his required contribution. Deduct it on page 1 of his 1040, not his corporate return.

Then take a distribution of approx. twice that amount into his Roth plan. So page 1 will show 0 earned income. a $200 k distribution from Retirement Plan, and a $100k reduction for Retirement plan contributions.

Yes? No?

Other than the IRS letter forwarding service, what services have you used for attempting to locate lost participants? Were they easy to use? Were they expensive?

Greetings-

I am aware that the IRS prohibits the use of the standard 5305-SEP if you want to set up a fiscal year end. My current investment group (BofA) does not seem to have a prototype SEP Agreement available to accommodate our 6/30 year end. FYI: Wamu seems to have a prototype SEP IRA plan that accommodates the Fiscal Year end based on my review of their SEP Application that references a box to check for plan year: "The 12-consecutive month period which coincides with the Adopting Employer’s fiscal year".

I know it is not a deal breaker if I set up the plan on a Calendar Year when our Fiscal Year is 6/30. I read previously in a post on this forum that it would just impact the timing of the contribution. IRS Pub 560 gives a pretty good example of a situation where this would apply.

But: would it be an advantage to set the new SEP IRA on a fiscal year end?

We have until the due date of this extended IRS 990 to contribute for our 06/07 tax year. If we make SEP contributions for this 06/07 year what tax year would the contribution go to? 2006 or 2007? Would the answer to this question be different if we were on a Fiscal Year Plan as opposed to a Calendar Year?

Thanks for your insight.

It is clear that in order to calculate a partners net earned income, his share of non-partner contributions must be subtracted from his gross income. Most illustrations I have seen show a profit sharing contribution being subtracted, some also discuss match. My question is does that subtraction include non-partner (employee) deferrals? Sal Tripodi's treatise says that the deduction should include the partner's share of employee deferrals (plus match and PS, if any.) While I believe that makes sense, I haven't seen that anyplace else. That could have a major impact on partner compensation. Any insight would be appreciated.

Can Davis Bacon contributions made to another qualified plan (multiple employer plan) be used to satisfy the minimum gateway requirement in another employer sponsored plan? In the past these contributions were used to offset the integrated profit sharing allocation, and now the employer is looking into a cross tested allocation. I want to make sure the davis bacon contributions can be used to satisfy the minimum gateway requirement, the rate group testing and the ABT.

Two sole proprietors each of whom maintained a 401(k) - Uni-K. They have since formed a new S-Corp and now want to establish a new 401(k) for the S-Corp and its employees.

Question - do you think it best to terminate those Uni-K plans and do a direct rollover to the new S-Corp 401(k)? Or merge the existing 2 Uni-K plans into the new S-Corp plan? I understand the net effect will be the same for the former SPs but everything communicated to me so far has been "merging" the plans but I'm a little leery about the shape (document/amendment wise) of those two Uni-K plans and would rather suggest establish the new plan, make sure the existing Uni plans are compliant, terminate them and affect rollovers to the new plan? Any thoughts either way? Thanks

What are small plan actuaries doing in anticipation of 2008 higher minimum funding requirements under PPA 06 (higher if you've been using weaker funding assumptions than the anticipated PPA rates/mortality table).

Anyone looking to freeze some plans or cut back formulas for 08 before the 08 accrual occurs ? With small sponsors it's tricky to anticipate their future 08 income so I'm contemplating a reduction in the formula to reduce Min Funding requirements, but then if they end having a good year they'll want the new Max Funding option which cannot take into account benefit increases for HCEs in past 2 years if we then move the formula back up for 08 late using the 412©(8) option.

Practically speaking, if a plan was frozen for 08, but then unfroze within 412©(8) time frames, it seems possible that some might not have a 404 larger than 412 (or whatever the new code sections are now) if they can't use the new accrual for HCEs in the max funding (if plan unfrozen in late 08), and if the 150% of the UCL at beginning of year (12/31/07) isn't large enough to produce a higher max contribution than the minimum funding. Does that seem like a possible scenario for some plans ?? (412=404; forgive the old code cites). Any thoughts out there ? Just trying to think things through and would be interested in other thoughts.

Client wants to establish a new 401(k) plan with a matching contribution and a profit sharing option. Deferrals would begin in 2008 but he would like to make a profit sharing contribution for 2007. Would it be acceptable to have the plan's effective date be 1/1/07 even though the doc won't be signed until the end of the year? In other words, can the adoption date be later than the plan entry dates (1/1/07 and 7/1/07) even if all of the employees have been asked on several occasions over the past year and have indicated that they would not defer given the chance? The opportunity for a match was explained to them. He and the few employees he has would all be eligible for a 2007 PS allocation.

Although it can't be considered a safe harbor plan for 2007 since a SH notice wasn't issued, could the plan be considered safe harbor for 2008 if it's drafted effective 1/1/07 to contain a regular matching contribution provision in the same amount as a safe harbor contribution, and a 2008 safe harbor notice is currenlty issued? Can this work without a safe harbor amendment since there weren't any deferrals for 2007?

Have a situation where the employees will retire and the employer will pay them a severance pay that consists of a % of their unused accumulated sick leave. The employees have the option to take a lump-sum payment now or to defer the severance pay until the next year. There are a couple of other requirements, but assuming that the employee(s) satisfy those, and the employee(s) defers until the next year, must the amount of the severance pay be included in the employee's current year taxable income? I could easily be wrong, but I do not see this as a severance pay plan, as this severance pay is tied directly to the employee having accumulated sick leave and meeting a few other requirements.

Also, are there any possible consequences to the employer if they do pay the severance pay in the next year?

Thanks

A plan was sponsored by an ineligible organization for a couple of years and they just realized the error of their ways. They sent a participant a letter stating that he should include contributions and earnings in income, and that he can't roll over the account.

Just to make it interesting, he's already terminated and rolled over the money to an IRA. My experience with IRA custodians is that there's no way they're going to just return the money and not report it as taxable income, so if he does the right thing and picks up the income from when he made the contributions, he'll wind up with double taxation, or at least the appearance of it, if he takes the money from the IRA and it is reported on a 1099-R.

Any thoughts on both legal and practical approaches (by practical I don't mean illegal, just good ideas)? Obviously if he's going to take money from the IRA and not have it reported as taxable income, there must be a code for disgorging an ineligible rollover, but I can't find it.