How is the 404 limit determined if the LLP has three partners each with $300,000 of income? Is $600,000 the compensation amount for determining the 404 limit or is compensation reduced by the adjusted net business income fraction? Thanks

If an Employer files under Chapter 11, how does this affect the 401(k) plan? Are there any circumstances when a participant's account can be used to pay legal fees? If so, is there a cap on how much can be deducted from a participant's account? If fees can be deducted from a participant's account, can the account be held hostage until all bankruptcy work had been completed and all fees are paid? If there a governmental agency that can give some guidance on this please advise which agency.

Thanks.

I have a DB plan that was restated in 2000 and, according to the first page of the plan, does not include RRA 98 or CRA. Are there any amendments required for RRA 98? Can I just adopt the 132(f)(4) amendment and not restate the entire plan? I am submitting to the IRS.

Can a child of a deceased participant in a 401(k) plan Rollover the money to an IRA or must they take the entire distribution.

A recent thread on the Cafeteria Plans board noted the informal IRS position that an employer whose only employees were HCEs could not have a cafeteria plan because it would fail the non discrimination test. Has anyone considered whether the same reasoning might apply in the case of a self-insured medical expense reimbursement plan or MERP?

IRC Section 105(h) and the underlying regs seem to require a non discrimination analysis based on the terms of the MERP, rather than an operational test. The BNA Tax Management Portfolio #389 also takes this approach, stating that "Discrimination is determined by reference to benefits available under the plan, not to amounts actually paid." However, after another review of the regs, I'm not so sure.

In our case we have an employer with only HCEs and a MERP that, by its terms, provides the same benefits to all participants and has the same eligibility requirements for all employees. Obviously, I'd like for BNA to be correct. Any thoughts?

Thanks.

 Termination of an Underfunded DB Plan

Here is the fact pattern: Sole practitioner, the only employee, retired two years ago so little or no income is generated on Schedule C. The DB plan is underfunded just before termination this year, so $50,000 is required to be funded but is not deductible under 404(a)(8) because of the income limitation on sole proprietorships. The $50,000 represents the final contribution under the minimum funding standards of 412 for the year of termination. The Code and the Regs specify what cannot be deducted, but not what happens to the amounts that are required, but not deductible.

The benefits attorney has suggested two options:

Alternative One: Do not make the minimum funding contribution for the 2002 plan year. Proceed with the plan termination. As sole participant in the plan, and as a "substantial owner", agree to waive enough of the accrued benefit so that the plan assets equal the reduced benefit liabilities. The actuary will calculate how much will need to be waived. At the same time, request a waiver of the minimum funding requirement for 2002. When the plan is submitted to the IRS for a favorable determination letter on plan termination, disclose what is proposed. The attorney feels the IRS would be agreeable. Any reaction?

Alternative Two: Deposit the 2002 contribution requirement of $50,000 by the funding deadline of 9/15/03. Proceed with a standard termination of the plan and submit it to the IRS for review. Once a favorable determination letter is received, distribute the plan assets and treat the non-deductible contribution as "tax basis" and report this amount as a non-taxable distribution on the 1099-R. Can the non-deductible amount become a basis in the assets in the DB trust, or is it lost forever?

Now that this is in place... what about current plan years? Can participants begin to claim OTC's now? Can they go back to service dates earlier in the current plan year or only service dates on or after the announcement date?

I have a potential client that wishes to install a DB plan for 2003. The DB contribution would exceed 25% of total payroll. The company has one owner and one employee. The problem is there is an existing 401(k)/PS plan which has a safe harbor 3% non-elective contribution. The 401(k)/PS plan is a calendar year plan. The intention is to turn the 401(k) plan into a deferral only plan once the DB is adopted. Is there any way to amend out the 3% safe harbor requirement for 2003 or at least have the owner waive the 3%? Any input is appreciated.

We are establishing a new cash balance plan that provides for full and immediate vesting and immediate benefit accruals. Also, some participants will have opening account balances based on previous service. For the initial short plan year the beginning asset balance will be zero even though the plan will be fully funded by the end of the plan year with respect to accrued liabilities.

I think it is clear that we must pay a variable rate premium as well as the flat rate premium for the initial plan year. Does anyone agree or disagree? Are there any exceptions I am missing (the plan is not a 412(i) plan)?

Thanks for your help.

May a participant loan be assigned to an alternate payee pursuant to a QDRO? The participant is an active employee and the alternate payee is the soon-to-be former spouse. The plan does not require repayment of the loan upon termination of employment.

Temp employee worked for an employer through a temp agency for a couple of months and then became an actual employee of the employer. What date should be used as her hire date, the date she actually went on the employer's payroll or the date she started as a temp employee?

We have a situation where we have some full-time employee that wish to become part-time, but only if we are able to continue providing health benefits. We currently do not permit part time employees to participate in our health plan and do not want to open the plan to all part time employees, just those part time employees who are currently full time. We envision that these individuals will not have a set number of hours to work in a week, just on an as needed basis. Does anybody have any suggestions?

Participant has a 401k loan. He filed for Ch 13 bankruptcy in June. We recieved notice of his filing in August. We stopped payroll deductions for the first paycheck after we received notice. Participant wants a return of payments from June to August. Should we do that? Can we do that?

What are you all going to use as the third party substantiation?

The only concern that we have had with regard to using the computerized cash register receipts is that no name appears anywhere. It would be so easy for someone in danger of losing money to get slips from an ineligible person and submit them.

Or are all of those claims just blanket-approved?

Thanks for your insights.

An attorney with Mullen & Henzell in Santa Barbara, CA, recently received a Compliance Statement on an Employer Eligibility Failure under Revenue Procedure 2003-44. The IRS did NOT impose the additional 10 percent fee on the "Excess Amount" (elective and matching contributions made over a 4-year period) that were permitted to be retained (remain) in the SIMPLE IRAs (subject to IRC Sec 408(p)). The attorney made a very convincing argument as to why the penalty should not apply. FFI, the attorney's name is Christine P. Roberts (805) 966-1501.

I have a client who has an employee eligible to start deferring into the 401k as of 7/1/03, however the employee has already made $200,000 in comp by 7/1. The payroll company & 401k provider have said he cannot defer into the plan once he reaches $200,000.

My question is, if he has just become eligible and has not hit the $12,000 limit (or any other plan imposed limits) why can't he defer? What am I missing?

Thanks in advance!

I'm looking for guidance (more of a confirmation, really) on the definition of the term "employee" as used in the regs. for VEBAs. We have a client who has let in non-bargaining unit employees. After several years, the non-bargaining employees exceed the 10% limit. This is a bad thing, right?

Is a possible solution setting up a second VEBA within the same trust? A non-bargaining unit VEBA and a bargaining unit VEBA? If that is the case, then what's the big deal with letting the non-bargs in in the first place? Aren't they employees?

Thanks!

We filed our 5500 by the 7/31 deadline and now must issue SAR's to participants and beneficiaries by 9/30. We are unclear if we are obligated to only provide a SAR to those deemed participants or beneficiaries as of a specific date. What date is appropriate? 12/31/02, 7/31/03 or 9/30/03?

It might be really confusing if a former associate terminated employment after 12/31 and is no longer a participant once we file. Any guidance is appreciated.

Anybody have a IRS cite corresponding to the requirements for "meaningful benefits" in DB plans? Something like a .5% of final pay benefit? I need to read up on this quickly.

A draft order provides for the segregation of a fixed $ amount for the alt. payee - w/o any adjustment for earnings/losses between the valuation date and the segregation date. The recordkeeper segregated a larger amount for the alt. payee stating that the amount transferred must represent the historical cost basis of the assets pursuant to IRC sec. 72(m)(10). I'm a bit confused as to how this Code section dictates that the participant's investment in the contract trumps the Order which directs that a fixed amount as of a date certain be segregated. Am I missing something - either obvious or subtle?