I have an odd situation that maybe someone has had before and can provide some advice on how to proceed.

A small business was started in November, 2003. When the company began, there was the owner and 2 other salaried employees. On March 31, 2004, employee #2 left, leaving just the owner and employee #1, and it has stayed that way since. Employee #1 will make over $90,000 in 2004. Employee #2 did not make over $90,000 (and would not have even if still employed).

The owner would now like to start a DB plan for the business, effective 1/1/04. The plan is intended to cover only owner and employee #1. I want to arrange eligibility to keep employee #2 out. Can the plan require a year of service, but allow for immediate entry for employees employed on 4/1/04?

Alternatively, if there is no way to keep employee #2 out of the plan, then the next question is keeping him from getting a contribution. Since there are no other NHCE's, I would need him to work 500 or less to be able to keep him out of the 410(b) test. But him leaving on 3/31/04 is right near the 500 hour breakpoint. How should hours worked be counted for him? If we use 37.5 hours as a standard work week, that would produce 487.50 hours worked (37.5 * 13). If we use 40 hours, then we get 520 hours worked (40 * 13). I have a hunch that I should not be able to arbitrarily pick between 37.5 vs 40, but if they are all salary ee's, how should hours be counted?

Thanks

I would appreciate your thoughts on two questions:

1. Does A-18A© allow a plan covering several employees to be terminated as to less than all the employees?

2. Would amending a plan to delay the deadline to elect to defer 2005 compensation from December 2004 to January 2005 (as permitted in A-21) be a material modification as to pre-2005 deferrals?

Company name originally Smith Jones Animal Hospital. For whatever reason it was changed to Animal Hospital of Gotham. Corporate return (1120) now filed under new name, but the blank 945 sent out annually by the IRS still indicates Smith Jones Animal Hospital. Is there an IRS form I can use to change the company name associated with a federal tax ID number? I searched the IRS website and got a couple thousand hits.

Thanks.

I have a business owner who is defering the maximum amount in a 401(k) plan that is sponsored by another employer for which she has NO interest of affiliated service.

Can she set up a SEP with the maximum of $41,000?

My sense is YES b/c the 415 limit is an employer limit and the salary deferral is an individual limit and of course no salary deferalls are being made to the SEP

Please advise - Thanks Ed

For the plan year ending 12/31/02 Company A has one Key employee. The Key employee is the only participant deferring and receiving an employer match. Consequently, the ADP/ACP test fails and all deferral monies have been returned plus earnings and the match will be forfeited. The plan is top heavy. Does Plan have to make a top heavy contribution for 12/31/02 since all contributions were returned for that year? Any suggestions are appreciated.

If a plan is not qualified under any section of the Code, but is covered under Title I of ERISA, then the plan would not appear to be subject to 401(a)(31)(B). However, since DOL issued the corresponding regs under the fiduciary responsibility rules it would seem that these would apply, but not as part of a requirement, only as a safe harbor guideline. Accordingly, should this plan not comply with the regs, while still protecting and guaranteeing benefits, it would not automatically mean they have run afoul of any requirements. Any thoughts?

What are the advantages and disadvantages of letting an employee pay for the cost of supplemental life on a pre-tax basis?

What are the advantages and disadvantages of letting employees pay for the cost of supplemental life insurance on a pre-tax basis? Thanks

Hi,

I converted 50K from IRA to a new ROTH this year (both accounts are at Fidelity).

But, I now believe that ROTH conversions may not be a good solution for me.

And, so I am considering recharacterizing some of that money back to my IRA.

Unfortunately, I moved 20K of that 50K to a credit union (CD).

So, a full recharacterization is not possible, I believe.

The ROTH account has 32K (2k gains) now.

One plan is to recharacterize 25K of that 32K back to my IRA.

Since this is a partial recharacterization, I would have to calculate

the increase in value of the CD and the ROTH account and prorate

the amount to recharacterize. Something like 27K now would

represent 25K at conversion. Does this sound reasonable?

It would save about $2,500 in taxes now.

regards,

gordon

I have a new client that has introduced an HSA as the only option. The deductible is $2000 and the employer is contributing $500 in January and $500 in July. They have asked me to put in a limited FSA for dental, vision and preventive.

The question is - if an employee, who elects employee only coverage, is married to someone who works for another employer and that employer offers a non-high deductible plan, where does that leave the employee? The employer didn't even tell me that their health plan was an HSA plan - I found out in the open enrollment meeting and did an abrupt about face for the FSA.

A law firm client has asked to raise the cap from $15,000 (they do pass their discrimination tests) to $75,000. I have told them no, based on the fact that they have many employees who do not earn at least $75,000. Therefore, that benefit would not be available to those employees. The law firm is not buying it. Any help or ideas here? Thank you.

Hi,

I would appreciate any comments on a question on IRA/ROTH strategy.

I have about 900K in my traditional IRA.

And, for the past two years, I have been making ROTH conversions.

Today, I redid some calculations, and ROTHs seem much less desireable

than before due to the 15% cap gain and 15% qualified dividend fed taxes.

And, there is a chance that when I retire I would move from Calif to

Nevada (a no income tax state). Assuming the rates stay the same, that would

reduce my effective overall tax rate from:

.25 - .25 x .093 + .093 = .32

to:

.25

That is a 7% decrease in overall taxes!

As a result, I am considering no more ROTH conversions, which would save

me some money now that would otherwise be used for taxes on ROTH

conversions.

If I knew for certain that I would be moving, it would make sense to

keep the traditional IRA intact (no conversion), right?

I probably will not need the money for 20 years or so.

But the calculations I have done indicate that the 7% tax penalty

is more than the ROTH conversion benefit.

regards,

gordon

The circumstances are this:

Non-profit organization has had a 403(b) plan arrangement since about 1998. It provides for elective deferrals, 100% match on the first 5% of deferrals and a 10% “basic” contribution to all non-excludable employees.

The organization wants to set up a new defined benefit plan qualified under 401(a) retroactively effective to 1/1/04. The plan is designed to be a non-safe harbor floor offset arrangement (the benefit formula is not uniform for all employees). The offset would be for benefits attributable to 403(b) basic contributions made on or after 1/1/04.

The question: Is it clearly permissible to aggregate the 403(b) plan and the 401(a) DB plan for purposes of satisfying 401(a)(4)? If so, can you provide any citations supporting this position?

The 401(a)(4) regs do not exclude 403(b) plans in the definition of plans to which it applies.

403(b)(12) indicates that such plans with employer contributions are subject to the requirements of 401(a)(4).

IRS Notice 89-23 V. (Definitions) B. (Aggregated 403(b) Annuity Programs) provides that

“In addition, an employer may decide, in testing its aggregated 403(b) annuity program to include any one or more of the employer's plans described in section 401(a), annuity plans described in 403(a), governmental plans described in section 414(d) and church plans described in section 414(e) to which the employer contributes, to the extent that any such plan covers the employer's employees, so long as each plan that the employer decides to include in the program satisfies sections 410(b) and 401(a)(4). A plan that satisfies sections 410(b) and 401(a)(4) only when considered together with one or more comparable plans may be included in an employer's aggregated 403(b) annuity program only if the employer also includes the comparable plans such plan relied on in satisfying sections 410(b) and 401(a)(4) in the aggregated 403(b) annuity program.”

This seems to indicate that if the TSA plan is not passing the non-discrimination requirements, it may be permissibly aggregated with one (or more) 401(a) plans to pass providing that the 401(a) plan(s) pass 401(a)(4) and 410(b) on their own.

Extending this logic in reverse, it seems logical that a 401(a) plan could be permissibly aggregated with a 403(b) program provided the 403(b) program would pass the non-discriminatory coverage and benefits/contributions tests on its own.

If an employer has a SARSEP that they defer money to during 2004 - can a Safe Harbor 401(k) plan be established for them for the short plan year 10/1/04 to 12/31/04? It was erroneously already established effective 1/1/04 but now they want that changed to 10/1/04.

I should add that the sole prop is the only participant in his plan, and that this plan is paired with a profit sharing plan, where he is also the only participant. He says he thought that EGTRRA would let him contribute to the profit sharing plan alone.

Is he still bound by the minimum funding requirement? His plans are not Title I plans - would that have a bearing?

Thanks!

A DB plan does not provide for the use of a retroactive annuity starting date (RASD) and requires that distributions begin at normal retirement date (65). Plan also requires that participants apply for benefits. If a "missing" participant shows up at age 67, the plan currently calculates the amount of the participant's benefit by using the first day of the month following his 65th birthday as the annuity starting date and pays the participant the missed payments. The plan does not pay interest on the back/missed payments.

Does this practice constitute use of a RASD under the Section 417 regulations? (If so, I know what to do.) If not, should the plan be paying interest on the back amounts?

Thanks.

I have a plan using hours for eligibility and vesting. They would like to change their eligibility of 1-yr of service requirement to 3 months. With regards to plan entry, what is the minimum hours of service that can be used for the 3 months period of time?

I have a calendar year PS 401k with a Basic Safe Harbor Match. The plan was effective 1/1/02. They have a 6 year graded vesting schedule. Up through 2003, the Safe Harbor Match was the only employer contribution deposited. They plan to have an Discretionary Employer Contribution for 2004 which will make the plan top heavy for the 2005 plan year.

The owner is trying to do what she can to keep the vesting % down on HCE 2. HCE 2 was employed 7/1/03. Vesting is measured over the plan year, so at the end of 2004 HCE 2 will have 2 years of vesting service (20% vested).

The owner's financial planner is telling her she should go on a 5-year cliff vesting schedule. That would not work for 2005 when the plan becomes top heavy. If they implement a 3-year cliff effective 2005, HCE 2 will have 3 years of vesting service at the end of 2005 (100% vested) compared to 40% if they stay on the same vesting schedule. The owner thinks that since she has never made an Employer Discretionary contribution that she can retroactively change the vesting schedule. Am I correct that the vesting schedule cannot be amended back to the beginning of 2004?

Also the financial planner is telling the owner that she should start measuring service for vesting based on the 12-month period ending on each employee's anniversary date instead of using the plan year. This is an option in the plan document. I think this would be a nightmare to keep up with. And how in the world would you change midstream? Would you have an overlapping vesting period?

I'm about ready to jerk a knot in this financial planner's tail!

We have a client that had late deposits in 2003. This was reported on the 5500 and the appropriate 5330 filed and excise taxes paid. They have now received a letter from the DOL suggesting that they should submit an application under VFCP. Anyone else seen this happen? What might be the consequences of not filing under VFCP? Audit?

Is it correct to assume if a 1099R is issued in error, but mailed out, an amended 1099R would be sent with zero dollars? The investment company(ING) refuses to withdraw the 1099R from their system even after us informing them the distribution(failed adp) was done in error. They are accepting the check back and reinvesting in the participant's account. Thank you.