I have two separate clients who have now become an affiliated service group. The first employer [Company A] has 2 owners, age 57 and 34 and one rank and file employee, age 25.

The second employer [Company B] has 2 owners, age 27 and twelve employees ranging in age from 26 to 30. The rank and file salary range is fairly high, with the lowest being $48,000 and the highest being $90,000. The owners earn $120,000 each.

Company A had a profit sharing plan which allocated 5% to employees under age 30, 10% to employees under age 40, and 30% to employees age 50 and older. It passed all of the coverage and benefits tests.

For 2003, the owners of Company B were the only eligible employees and they contributed $40,000 each to a Profit Sharing Plan.

In 2004, there are seven eligible employees in Company B in addition to the owners.

If I were designing this plan without regard to Company A, I would have recommended a 401(k) Plan in January of 2004 with a safe harbor matching contribution and possibly a supplemental employer contribution (allocated with permitted disparity) to maximize the owners. However, I wasn't brought into the discussion until a week ago, so it's too late to consider a 401(k) for 2004.

Because both of my owners in Company A are exactly the same age as the rank and file employees I won't get a plan to pass the 401(a)(4) tests. Even one percentage point higher in the contribution to owners will blow out the test.

Does anyone have thoughts about the best approach for 2004? I've already suggested getting a 401(k) plan in for 2005. With the relationship between the employers, we have to get something in place for the employees this year to preserve Company A's contribution scheme. I just want to be sure that whatever I recommend is the best possible option for both employers.

How would you design it?

Thanks so much!

Also posted the following in the General Retirement Plans section.....

Am I right in thinking that an amendment to a safe harbor 401(k) plan during the plan year is OK (i.e., won't adversely affect the 401(k) safe harbor) assuming what's amended is not 401(k) safe harbor related? For example, if e/er wanted to add or take away loans, it could amend during the plan year to do so and just issue a summary of material modifications to the participants. Since nothing affected the 401(k) safe harbor, the fact that the safe harbor 401(k) notice given out prior to plan year did/didn't mention loans is not a problem..... ??

Am I right in thinking that an amendment to a safe harbor 401(k) plan during the plan year is OK (i.e., won't adversely affect the 401(k) safe harbor) assuming what's amended is not 401(k) safe harbor related? For example, if e/er wanted to add or take away loans, it could amend during the plan year to do so and just issue a summary of material modifications to the participants. Since nothing affected the 401(k) safe harbor, the fact that the safe harbor 401(k) notice given out prior to plan year did/didn't mention loans is not a problem..... ??

I recently noticed on my employer's enrollment form that part of the agreement they make you sign states that if you should terminate employment during the year any "negative" balance that you may have in your Health Care Reimbursement Account will be deducted from your final paycheck. Is this legal?

I used to do administration on these plans 10+ years ago and I remember that, at the time, you could not do this. I'm wondering if this has changed.

Thanks for your response.

SR

I searched for this topic and am still a little confused. corp formed April 1, 2004, fiscal year is calendar. Plan year will be calendar, first plan year is 4/1/04 - 12/31/04. If limitation year is set to calendar year and compensation defined as "compensation while a participant" is it correct that niether 415 or 401(a)(17) need to be pro-rated for initial plan year?? If not, please advise. Thanks.

Can anyone weigh in on how the term or concept of "employment" is defined under ERISA? Specifically, that "employment" is always meant to exclusively refer to the employment relationship between the participant and the employer sponsoring the DB plan, and not some other employment relationship.

The reason is as follows: DB plan permits a disability retirement payout if a participant terminates "employment" on account of a disability. A former employee is requesting a disability retirement benefit but it appears that she terminated employment with the plan sponsor for reasons other than disabilty, but later became disability.

Presumably, the term "employment as used in this context means only "employment" between the plan sponsor and the participant. But what statute, regulation, or published opinion supports this assumption?

Any and all comments appreciated.

I have had a lot of sales guys ask me recently if it is possible to put in a 412(i) plan combined with a DC plan. I assume that it is possible, I'm just not sure what the potential issues would be concerning cross-testing for the two plans.

Assuming that cross testing is possible with this arrangement, and that all employees are in both plans, how does the overall 25% of compensation deduction limit apply? If the 412(i) contribution exceeds 25% of comp by itself, does that mean that any contribution to a DC plan would not be deductible? Or is there some exclusion for 412(i) plans?

Hi - kind of an obscure question...

Under Sarbanes-Oxley, accounting firms that perform client audits cannot also do tasks that would be "acting as management" for the client. Does the preparation of a Summary Annual Report fall into this category?

I think that prep of the SAR is a direct function of the prep of the 5500, which is tax work, so I'm inclined to say there is no conflict. However, when we prep an SAR, we're drafting, reviewing and editing a document that the company will put on their letterhead and send out to plan participants. Has anyone heard of this being a SOA conflict?

10. Tell em that for a living you disaggregate component plans, impute permitted disparity, and normalize most valuable accrual rates.

Need more please quick!

I have a portion of Plan A that spun off mid-2004 to an unrealted employer. Employee's assets were transferred to the new Plan B. The Plan A did not do the 2003 ADP test before the spin off. Plan A failed the 2003 test and there was one HCE in that group whose assets were transferred to Plan B in 2004.

How does the HCE's ADP excess from Plan A get corrected? Does the Plan A plan adminstrator request the plan adminsitrator from Plan B to do the distribution OR is Plan A stuck with doing a QNEC to correct?

Thanks!

DC plans generally had to be amended by last day of 2003 plan year to comply with final 401(a)(9) regulations. Plans that failed to timely amend for final 401(a)(9) regulations are already hitting my desk.

Questions:

1. Can failure to amend be corrected under VCP? I think yes. (IRS techline thought no, but is checking further.)

2. Is determination letter application also required. I think no if model amendment (with only minor modifications) is used.

3. Is 50% reduction in vcp fee for nonamenders that submit within one year of end of remedial amendment period available for 401(a)(9) nonamender. 12.03 is not clear in its reference to not amended for "tax legislation changes." However, I am willing to proceed on basis that 50% reduction applies, because (1) intent was to encourage early correction, (2) 401(a)(9) regulations implement tax legislation changes, and (3) worse that could happen (barring a return of the submission and an interim audit) is that more money would be needed to buy the compliance statement.

Comments? Thanks.

Can the husband of an HSA-eligible individual contribute to his wife's HSA through the husband's cafeteria plan which is sponsored by a different employer than the wife's employer?

Employer has safe harbor plan providing for employer contibutions. Employer wants to add to the plan "union" employees who will not recieve the safe harbor employer contribution. Can this be done? Can you have a group receiving employer contributions and a group not receiving employer contributions in the same plan? IRS guidance seems to imply that the entire plan be a safe harbor plan, but perhaps the union ees can be disregarded?

An employer (S-Corp with 2 equal owners) wants to start a PS plan for 2004 and would like to exclude as many non-owners as possible, at least for 2004 and 2005. We are considering a 2 year of svc requirement to enter the plan, which could keep everyone hired 7/2/2003 or later out of the plan until 1/1/06. Employer has a mixture of "regular" employees and leased employees. All of the current regular employees started either in late 2003 or in 2004. Leased employees started performing services in 08/2003, which is when the leasing agreement the company was enacted.

This may be too simple, but for these leased employees, is the day they started performing services for this employer considered their date of hire for plan purposes? Given the leasing date of 08/2003, that means their date of hire could not be earlier than this day, correct?

On line 7G does anyone know if I should include terminated participants that are 0% vested in this count? The question reads: Number of participants with account balances at the end of the plan year? Any info would be greatly appreciated! Thanks

Todays NY times (page C1) carries an article on IBM closing its cash balance plan to new participants after 04 and substituting a 401k plan. According to the article fixing up CB plans to eliminate the age discrimination aspects is very costly. It may be that CB plans will be a speciality type of plan like 412(i) plans for small employers not subject to ERISA.

I have an 82-year old client, who has been in pay status for a number of years, whose COL adjusted annual benefit is $135,000, or $11,250 monthly under IRC Section 415(b)(1)(B). His limitation year is 12/1 through 11/30.

He want to take out his entire $135,000 maximum annual benefit in one amount in January, '05. I guess that is okay, so long as he does not take anything out in December, '04. Does anyone disagree?

The much more important question, though, is this. I gave him a lump sum maximum, based on the $135,000 and age 82, using the '94 GAR Mortality Table and 5.5% interest. It came to roughly $776,000. When I quoted this latter amount, I assumed that this year's $135,000 would be included in the lump sum.

The client wants to do both the $135,000 and the unreduced lump sum. I don't think he can. There is absolutely no reason to jeopardize the tax qualification of this plan and his potential rollover by doing this. At least, that's what I think.

Am I right or wrong? Any thoughts or ideas would be appreciated. Thanks in advance.

Just trying to confirm - was there legislation this year which stated that an active participant over age 70 1/2 (not a 5% owner) no longer needs to make an election not to receive their MRD? Can a client not even offer them the option?

If an election is required from the participant, is it only to defer? Does a participant who wishes to begin receiving benefits have to formally make that election?

Thanks.

When does a plan have to be amended for Post-EGTRRA? It is my understanding that it was for the plan year beginning or after January 1, 2003.

What exactly are the mandated changes that have to be made. Is it just 401(a)(9)? Or are there other provisions.

Can someone please give me some insight on these questions?

Thanks!

I know that many employers providing retiree health coverage are imposing caps on employer contributions in order to limit FAS 106 liability. Are there any special requirements for imposing such a cap? How does the cap become "official" such that an accountant may properly determine that it really exists and calculate FAS 106 liability accordingly. Does it need to go in the SPD? A Board action imposing the cap? A memo to the file? Practical implementation suggestions are much appreciated. Thanks.