I have a client who has a Section 125 Plan with Medical FSA only. For the 2004 plan year they hit exactly 100 participants. Do I have to file Form 5500? They did have a previous filing in 2001. Thanks for your input

I have fielded an inquiry from a client about a potential modification of its cash balance plan, and I am pretty sure that I have heard some IRS officials (Jim Holland maybe?) expressing some displeasure about the technique at issue. I haven't been able to find anything concrete on the topic though, and I am hoping that someone out there can help to refresh my recollection before I pull all of my hair out.

I believe the idea is this: Company maintains a DC plan and a cash balance plan. Company socks away as much as possible under the cash balance plan, a plan that incidentally has an unusually low normal retirement age (say age 40). Once participants hit the "NRA," they can receive a distribution -- even though they are still working -- and roll it over into the DC plan. I think that PWC and Bank of America have gotten sued over plan designs that used this approach (among others). I probably don't have all of the particulars correct here, but the key feature of the approach seems to be an abnormally low NRA.

Has anyone heard IRS officials questioning this type of approach? Even if every other aspect of the plans was squeaky clean, this still seems like it is just a little bit too "cute" for the IRS to countenance.

I asked this question in another form a few weeks ago and didn't receive any response. Trying again but expressing the question another way:

50+ catch-up scenario-

Example: Plan maximum percent limit on pre-tax contributions is 30%, plan maximum percent limit on after-tax contributions is 30%, and plan maximum percent limit on combined pre-tax/after contributions is 30%. Eligible participant has eligible pay of $40000 for year and contributed 20% after-tax and 10% pre-tax, 10% 50+ catch-up all year.

In other words, at year end eligible participant’s contributions total:

$4000 pre-tax

$8000 after-tax

$4000 intended 50+ catch-up

Is the $4000 “intended” 50+catch-up accepted as 50+ catch-up?

This eligible participant did not reach the IRS pre-tax max ($14,000). Did he/she reach the plan maximum percent limit on pre-tax contributions?

If you interpret the plan maximum percent limit on pre-tax contributions as the stated limit (30%), then the answer would seem to be “No” and therefore the $4000 intended 50+catch-up presumably would be returned the eligible participant. Is that correct? Would seem to not be an administrative nightmare and not the spirit of the law.

If you interpret the plan maximum percent limit on pre-tax contributions as the resultant limit given the eligible participant’s after-tax contribution rate (30% total – 20% after-tax = 10%), the answer would seem to be “Yes” and therefore the $4000 intended 50+catch-up presumably would be accepted as 50+ catch-up.

I have never seen anything in writing related to guidance on this issue when plan includes pre and after.

Sorry if this question has been asked and answered thousands of times.

I have two situations with EOY valuation date. In both, there is no prior credit balance.

Situation 1:

A plan has assets of $250k @ 12/31/2004 which include advance contribution of $100k made during 2004. For S412, the interest credit on the advance contribution using the funding rate is $2,000.

So, the funding assets are: S412: 250-100-2= $148k; S404=250-100=$150k.

Normal costs under the individual Agg. method are: S412: $91,300; S404: $91,000.

EAN NC + AL @ EOY for S412 and S404 = $201k.

So the FFLs are: S412: 201-148 = $53k; S404: 201-150= $51k.

What would be the maximum deductible contribution? $53k or $51k?

----------------------------------------------------

Situation 2:

A plan has assets of $332k @ 12/31/2004 which include advance contribution of $165k made during 2004. For S412, the interest credit on the advance contribution using the funding rate is $3,000.

So, the funding assets are: S412: 332-165-3= $164k; S404=332-165=$167k.

Normal costs under the individual Agg. method are: S412: $173,000; S404: $172,500.

What would be the maximum deductible contribution? $173,000 or $172,500?

----------------------

Higher numbers feel wrong but I cannot explain to myself why except that why should making advance contribution increase the deduction?

In an acquistion situation, an existing 401(k) plan allowed for investment in employer stock. If the acquirer terminates the plan, can the participants who receive stock in their distributions use the net unrealized appreciation rule? It appears that Code section 402(e)(4) provides for distribution upon separtion from service but does not mention termination of a plan.

Also, am I correct that "separation from service" would still be interpreted under the old same desk rules since a) it is not part of section 401(k) and b) is separation from service and not severance of employment?

Thanks

Okay... maybe it's not a "must-read" question, but I was wondering whether a plan can require that participants only receive benefits via direct deposit. The practical effect would be that all participants would be required to open a bank account. I looked for guidance in connection with Code sections 410(b), 411(d) and 401(a)(4), but couldn't find anything relevant except for the rule in Treas. reg. 1.411(d)-4 that "administrative procedures for distributing benefits," are not a protected benefit. Any thoughts?

Questions regarding the 457 model amendments.

I am wondering how literally everyone is taking the 457 model amendments. Is everyone using the model amendments word for word? For example, I have the following questions and am wondering how others in the industry are writing their plans.

1. Is it really necessary to define an Employee as a natural person, whether appointed or elected, employed by the Employer as a common law employee? The list of required modifications for master and prototype plans defines an Employee as any employee of the Employer. Wouldn’t employee normally be interpreted to mean a natural person employed as a common law employee?

2. We have plans that cover independent contractors. No wording is provided in the model amendments. Is anyone else including independent contractors?

3. We have plans that provide for nonelective contributions. These contributions count towards the maximum deferral limit but are accounted for separatly in the plan document. Does anybody else write plan documents that allow for nonelective contributions? Are you concerned that the model amendment did not address?

4. Why was Includible Compensation changed to include the compensation limit under section 401(a)(17) of the Code? Should the definition say that it is determined without regard to any community property laws?

5. Does Compensation have to be cash compensation?

6. Why do the model amendments not include provisions for termination of the plan when the final regulations did allow for it?

7. The model loan provisions specify an interest rate 1% above the prime rate as published in a plan-specified nationally recognized newspaper. Do you feel that the plan has to specify the interest rate to be used or could the plan simply state that a reasonable rate of interest would be applied? The list of required modifications for master and prototype plans allows those plans to just state that a reasonable rate of interest will apply.

8. While the loan provisions seem to follow the loan rules applicable to qualified plans, there are two provisions regarding participants who have defaulted on a loan that do not follow the qualified rules. The first is the limitation on contributions prior to the first payroll period that follows by 12 months the date of repayment in full. The second is the limitation on new loans for participants who have previously defaulted. Are these required, and if so, why are the requirements for a 457 plan more restrictive than the requirements for a qualified plan?

9. Since contributions to an unrelated 457(b) plan which cause the participant to exceed the 457 plan contribution limitations will not cause the plan to lose its tax-favored status, why are the participants required to provide the plan administrator notice about their participation in other 457(b) plans? Why were the model amendments not written like the qualified plans where the participant has to claim an excess if it results from participation in an unrelated plan? Should the model amendments have included wording to say what would be considered a plan maintained by the Employer?

10. If the plan provides for distributions to be made in the form of an annuity, what wording would be needed to satisfy section 401(a)(9) of the Code?

11. Does a plan actually have to say that separate accounts will be established for multiple beneficiaries? Or was this wording in the plan to simplify the wording needed to comply with section 401(a)(9) of the Code?

12. What is the latest date permitted under § 457(b) for the required provisions? If the plan had loan provisions that appeared to meet the requirements of the regulations but didn’t have the limitations for those who defaulted, could the effective date for those provisions be a current date? What would be the latest date permitted? Could the plan be restated as of the first plan year beginning after December 31, 2001 but include wording saying that some provisions are effective as of a later date?

Thanks!

Client failed to withhold deferrals from an ee's pay. Will now be making up the missing deferrals following one of the EPCRS self-correction methods. The plan allows forfeitures to be used to reduce employer contributions and QNECs are listed as Employer Contributions. So, the QNEC contribution will come from the forfeiture account. The question is: can monies in the forfeiture account also be used to cover the lost investment earnings that need to be credited to the deferrals? Or would this be considered a prohibited transaction?

thinking about a owner plus spouse db plan terminated but never distributed and never amended, etc. how to fix? insignificant operational failure in failing to payout, so self-correction? plan document failure must go vcp ... and what about delinquent 5500s? any help will be appreciated.

Assume a plan starts in 1971. In 1991 it adds a suspension of benefits provision. Does 2005-23 require that the suspension of benefit provision not apply to accruals before 1991, or does 2005-23 just state that once set forth, the suspension of benefits provision can only be modified on a prospective basis?

Company X is a Fortune 100 company maintaining both a defined benefit plan and a 401(k) plan for the benefit of its employees. A few years ago, Company X acquired Company Y, which had similar plans for its employees and merged Company Y's defined benefit plan into Company X's defined benefit plan and merged Company Y's 401(k) plan into Company X's 401(k) plan. Company Y's defined benefit plan allowed employees to make voluntary after-tax contributions to it, but this feature was frozen a number of years before Company X acquired Company Y. Company X wants to eliminate the voluntary after-tax contribution feature.

Among the options being considered are the following: (1) spinoff the voluntary employee contribution feature of the Company Y defined benefit plan into the Company X 401(k) plan (which also allows after-tax contributions); (2) terninate the voluntary employee contribution feature and allow affected employees to make distributions from their voluntary employee contribution accounts; or (3) purchase an annuity contract to hold the voluntary employee contribution feature outside of Company X's defined benefit plan.

Questions:

If Option (1) is selected:

(a) would the Company X 401(k) plan have to track the voluntar contribution feature to make it comply with the QJSA/QPSA requirements under the tax law?

(b) since the right to make ongoing contributions to the voluntary employee contribution feature was frozen several years ago, would Company X have to issue a notice to participants under Code Section 4980F?

© are there any other issues to be considered before implementing the spinoff?

If Option 2 is selected:

(a) Would the termination of this feature have any impact upon the remainder of the Company X defined benefit plan from a qualification, ERISA or PBGC perspective?

(b) If a participant's account balance under the voluntary employee contribution feature exceeds $5,000, what can Company X do to get it out of the plan?

If Option 3 is selected:

(a) Are the Joint Guidlines prescribed by the IRS, DOL and PBGC in the early 1980s still effective? If so, would this require that Company X fully vest all Company X defined benefit plan participants in their accrued benefits?

(b) Are there any other issues from an IRS, DOL or PBGC perspective that Company X should be aware of?

A participant established a Single Life w/ 10 year guarantee annuity from a 403(b) plan. The participant died and the surviving spouse is the beneficiary. They have the option of receiving the remainder of payments in the guarantee period as the participant was OR the actuarial equvilant as a single sum. If the surviving spouse receives it as a single sum, is this an eligible rollover distribution?

I have a ROTH account with a full service brokerage firm. Does it cost me anything to sell and buy stocks or mutual funds on a regular basis. Do i pay my broker to make these transactions in my account. Do i pay any commissions when buying stocks in this account or selling. Thanks for the clear up.

Do contributions to a pension plan have to be in cash? Can they be in securities? For example, if the employer is a sole proprietor can he contribute securites held in his stock portofolio without first having to redeem them for cash?

Sad that my 1,000th post should be something this boring. To all you BoSox fans, shouldn't I get a couple of Green Monster seats for this post?

Situation is this: participant terminated employment, and was properly reported on a SSA. Two years later, participant is rehired. Do you:

A. Report on a SSA with a code B, and change benefit to zero?

B. Report on a SSA with a code D?

C. Something altogether different?

I lean toward D, but I'm not really certain. Any opinions? Thanks!

Schedule C requires us to list "service providers", but the form's instructions don't define the term.

I believe that Schedule C is for reporting services to the plan, not to the participants. For example, a plan that offers employee legal service benefits will report its own attorney's fees, but not the expense of providing legal service benefits to plan participants.

And, how broad is the term "service"? Do you include the janitorial company that cleans the plan's office suite every night? What about the caterer who serves food at enrollment fairs? Is Schedule C limited to reporting only "professional" services?

Company with SIMPLE paid one-time bonus to EE's a few months back. Apparently the executive director deferred a good chunk into his SIMPLE without executing a deferral agreement. Also the rank & file were not informed of their ability to defer any of their bonus. A few questions:

1. Is it permissable to execute a separate SRA to deal with deferral of a one-time bonus?

2. If so wouldn't it have to be done in conjunction with the plan's election periods (in this case calendar quarter)?

3. If done outside the allowable election period does the deferral need to be returned to ER & run back thru payroll?

4. Since the rank & file weren't informed of ability to defer does that fact invalidate the ED's deferral? Or the fact that no SRA was executed?

Any assistance is appreciated. Thank you.

I'm testing a 7/1/2003-6/30/2004 (large) plan and trying to determine who are HCEs. Under the plan's terms, service is measured on a plan year basis but compensation is defined as calendar compensation.

For 7/1/2003-6/30/2004. I seem to be able to use calendar 2002 pay to determine the HCE threshhold by using the calendar year data election of IRS Notice 97-45. There does not seem to be any documentation or amendment requirement to use this, except for consistency among plans and that the election, "once made, applies for all subsequent determination years unless changed by the employer."

Questions:

(1) Am I right that I would use calendar 2002, not 2003?

(2) This is still an option, right?

(3) How does an employer make such an election, i.e. is there any documentation requirement that I have not found and am unaware of?

Thanks for any help.

I have one of these books from 1998, and I was talking to my current employer about this book yesterday. she emailed me today, asking "where can we order these?" and I cannot find this book anywhere. The edition I have was published in 1997 by Investors Press, Inc.

Does anyone know where I can get some of these books? There are some clients who really need to have these! When I worked at BISYS Plan Services, we used to give them out to clients (they also had the BISYS logo on them).

when an exec compensation package includes "welfare benefits" in its definition, what welfare benefits are being referred to (in general)? Where would I find this information?