Having worked for several PEO including CNA and having access to a large 401k administrator (CNA Trust) and legal support, the real challenge is understanding that PEO's operated different styled 401k plans, with matching features and testing across all the co-employees. The IRS found this to be not to their liking and issued a ruling requiring PEO's to operate as MEWA's and fall under that guideline. (MEWA = Multiple Employer Welfare Arrangements. The other issue is co-employment is not codified in any laws and the US DOL recently issued guidance saying from their view point and purposes the client of the PEO is the common law employer, primarily because the PEO may have paper control, but the worksite employer has day to day control.

The PEO business model is a great idea for small employers and can deliver complex programs at a lower tranaction cost. The 401k can be delivered at a lower cost, but the PEO now has to do a little more work. Darrin has done a great job on covering this issue and I have called and discussed the PEO industry with him over the last few years. There is no easy way for you to transition your clients to a new 401k plan. Your current plan must stop....sooner the better. You must get with a provider that has experience in this area...Transamerica comes to mind...that can give the PEO a program in the Multiple Employer arrangement as required by the IRS. The PEO industry is lucky the IRS did not rule that those single plans were disqualified.

Sorry for the long dialogue. The point is you need to seek expert advice. There is no easy way to do what needs to be done.

Hello,

We are in the process of amending one of our DB plans to a floor offset plan to satisfy the “meaningful benefits” memorandum that Paul Shultz of the IRS came out with last year.

Prior to the amendment, the DB plan (#002) had very small but nonzero benefits solely to pass 401(a)(26). The 401(k) plan then had the 7.5% minimum gateway contributions needed to pass 401(a)(4). Obviously, we are general-testing both plans and don’t care about meeting any safe-harbor plan designs.

For 2003, we will have the plan sponsor adopt a new PS plan (#003) with a 7.5% anticipated contribution for all non-HCE’s. This will be identified as the DC offset plan.

Question #1: Can the 401(k) plan (#001) continue to permit the two HCE’s to get PS allocations in this plan, not plan #003, and therefore not have their plan #002 benefits offset by any projected account balance? The plan sponsor will probably have enough room to not violate the overall 25% deduction limit, even though the two HCE’s have 100% benefit formulas in plan #002. We would aggregate the 12/31/02 balances of plan #001 with the 1/1/03 DB accrued benefits for 401(a)(4) testing, then next year aggregate both the 401(k) plan #001 and the PS plan #003 balances at 12/31/03 with the 1/1/04 DB accrued benefits and test all 3 plans for 401(a)(4).

Question #2: For plan year 2003, I’d like to do a beginning of year 1/1/03 DB valuation. Can I project a DC plan #003 account balance at retirement for all the non-HCE participants, even though the first contribution won’t be made effective until 12/31/03? I realize that if a participant terminates without an actual vested DC account balance that there would be no offset, but I’m talking about projected benefits for funding purposes, not accrued benefits.

P.S. I'd like to ask Norm Levinrad for his opinion, but I can't find his email address on BenefitsLink. So, does anyone else care to answer?

Regarding a governmental DB plan, I have a question about the 415(B)(1)(A) annual benefit limit of $160,000.

I'm not an actuary, so I'm only trying to get a basic understanding of what this limit means to an employee who has been in a DB plan for many years and has a relatively high income. For example, a public university faculty physician where the university does not have a separate faculty practice plan, i.e., both teaching and clinical practice income are paid by the university on one check.

For example, assume one has worked for the university for 30 years, and the state teachers' retirement system general retirement benefit formula is 2% for each year of service. Assume a $300,000 average annual salary over the last 3 years (assume pre-'96 employment so not subject to the $200,000 annual compensation limit). The general benefit formula would result in a $180,000 annual retirement benefit. This is clearly in excess of the current limit of $160,000, so would the plan have language limiting the benefit to $160,000?

And what of the requirement that each employee contribute 5% of his/her salary to the plan? Would the employee still be required to contribute 5%, even though the retirement benefit being "purchased" by this contribution, as a percentage of average salary, is less than one whose retirement benefit is under the 415(B)(1)(A) limit?

Thanks,

Ken Davis

For a 15 person company the employer pays 100% of the employee-only health insurance cost of the group health plan but there are five employees who receive health insurance through a spouse's plan so for these five the employer pays nothing because they have waived coverage. This obviously saves the employer money and somewhat short-changes the five employees who have opted out.

Is it legal and/or appropriate for the employer to pay these five employees the amount of the health insurance premiums as additional salary? Or would that create problems and other issues? Perhaps these employees could deposit the extra salary into a cafeteria plan to use for some other purpose. Any ideas?

Help!!

We cut ADP/ACP refund checks on March 14, 2003. We delivered the checks on the 18th. Client is now saying that since they didn't received the checks prior to the 15th, that the distribution should be taxable in 03 rather than 02. I don't know why they are questioning this since it will be subject to excise tax (other than they may have already filed personal returns).

Can anyone refer me to a document which states that the funds have to be paid out but the checks do not have to be received by the 15th.

Thanks in advance.

-AGS

Man, if I'd only known what I was getting into ... just kidding. But seriously...my boss wants me to create a portrait statement with three sources - match, deferral and profit sharing. I haven't a CLUE as to how to go about this. Any suggestions? Classes? On-line tutoring? :confused:

Plan Sponsor failed to make ADP refunds for 2001 calendar year by Dec. 31,2002.

2001 was the first plan year and the 3% first yr (prior year) was used for the 2001 ADP test. (They resisted but are safe harbor now)

If they make the 1-1 correction who should share in the QNEC??? The way I understand it- if the ADP refunds were based on prior yr NHCE's it is the prior year NHCE's (who are still employed) that share, but the plan did not exist in the prior year (2000)? In addition there may not be any NHCE's who would have been eligible for the plan in 2000 that are still employed, even if it existed. What do you think? Should we allocated to the 2001 NHCE's??

This is a very small doctor group.....(but you probably guessed that already).

Plan uses a Prototype document. Plan year is the calendar yr.

Since there is a remedial amendment period for adopting EGTRRA changes, the EGTRRA amendments were not adopted by 12/31/2002.

For computing S404/412 Cost (especially 404 Cost) for 2002, can the EGTRRA's provisions be taken into account?

A Prototype DB plan was effective 1/1/94, say. The plan's benefit formula was amended 1/1/97, 1/1/1999 and 1/1/2002.

The plan is being restated for GUST, effective date of which is 1/1/97.

The adoption agreement has room for only one formula. I am told I will have to complete 3 adoption agreements to accommodate the 3 formulas.

Question:

What are the potential problems with the following approach.

Complete one adoption agreement with the 1/1/97 benefit formula in it and then add an addendum showing the benefit formula effective 1/1/99 and 1/1/2002.

Thanks for your help.

Assume company X and company Y enter into a joint venture (X and Y are not in the same controlled group). At that time, X entices a few employees from Y to work for X in order to make the JV work (i.e. for a bona fide business reason). Can company X include these employees under their DB plan using all years of service with Y and X for benefit accrual service? If so, must they carve out benefits earned under company Y's DB plan?

Thanks in advance!

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

Ishi, the last of his tribe

Companies A and B are members of a controlled group. Several years ago, they created a VEBA to fund self-insured health and LTD benefits for their employees. The VEBA also paid premiums for a group life insurance policy. Company B was named as the trustee. The trust fund has always consisted entirely of employer contributions.

After a few years, Company B stopped participating in the VEBA's life and LTD plans and set up its own, fully-insured plans for those benefits outside the VEBA. Thus, currently, Company A contributes to the VEBA to fund health and LTD and to pay the life insurance premiums on its employees. Company B participates only in the health plan under the VEBA. Company B is still trustee and charges Company A administrative fees.

The VEBA contains approximately $300,000 relating to Company A. One Company A employee currently receives monthly LTD benefits. Those payments will continue for another 20 years or until she dies, if sooner.

Company A now wants to set up fully-insured LTD and AD&D plans for its employees. The new LTD policy will not cover the existing LTD claimant. In addition, it has found a cheaper life insurance policy than the one in the VEBA. As in the past, no employee contributions will be required.

To the extent possible, Company A would like to get out of the VEBA, primarily to avoid paying the administrative fees to Company B for the plans under which only Company A participates.

Because Company A's new life, LTD and AD&D benefits will be fully insured and paid entirely by Company A, there is no real need for a VEBA with respect to those benefits. However, the $300,000 in the VEBA must be used up without causing prohibited inurement.

Here are the alternatives I have come up with:

1. Approach the LTD claimant with a settlement offer of a lump sum or the purchase of an annuity in exchange for a waiver of her claims. Use whatever is left to pay premiums on the new life, LTD and AD&D policies until the funds are extinguished.

QUESTIONS: (A) is the settlement an allowable use of VEBA funds? (B) would the use of VEBA assets to pay the premiums on the new policies be prohibited inurement since Company A is getting an indirect benefit? © would the new policies have to be issued to the VEBA? (D) if so, could the policies be removed from the VEBA when the funds are extinguished?

2. If either the settlement alternative is not allowed or the claimant does not agree to it, use the VEBA funds to continue making the monthly LTD payments to her and to pay premiums on the new life, LTD and AD&D policies. Also, amend the VEBA to name Company A as trustee with respect to Company A's benefits (all except health) to eliminate the administrative fees to Company B.

QUESTIONS: Same as (B), © and (D) under 1. Also, could the VEBA have 2 trustees - Company B for health only and Company A for everything else?

Anyone have any thoughts? Is there another, better alternative that I'm completely missing? Thanks.

A client is a two person 401(k) Profit Sharing Plan. The trustee of the plan (Owner and Participant #1) would like to use the assets of the plan to purchase a building. The owner would locate the corporate offices of his two companies in this building paying lease payments (market value equivalent) back to the plan. It is my understanding that this is self-dealing and impermissable under IRC 4975©. Am I correct in this assumption? Or is it permissable since there is no benefit to the employer other than finally receiving a reasonable return on his assets inside his 401(k) plan. Would the same ruling hold true if the assets of the owner's spouses IRA would also be used in the purchase of the asset thus making it a partnership interest in the real estate?

I'd like some basic information regarding taking loans from a 457 governmental plan.

Thanks

Is a multiemployer health plan required to have a plan document, spd, and trust agreement, under ERISA? Or, is an spd sufficient to meet the requirements of ERISA for health plans?

Are there any notice requirements for a DB plan disability benefit payment where there is no optional form of benefit (i.e., life annuity until reaches NRD, then can elect a form of benefit)?

Hello -

I know there have been a number of discussions regarding when the 401(a)(17) compensation limitation needs to be prorated. However, I would still like to pose the following question and see if anyone has any advice.

We have a plan that provides a benefit based on "average compensation," which is the average compensation of a participant's 5 consecutive completed years of service. A Year of Service is the 12 month period of Service, beginning on the date of hire. Therefore, if a participant terminated employment on July 1, 2003, the plan would look back 5 years to June 30, 1998 to determine average compensation. We have a number of highly compensated individuals who participate in the plan and we are faced with a situation where we are not sure whether we need to prorate the comp. limit.

For example, suppose a participant makes $400,000 a year and therefore easily surpasses the current $200,000 comp limit. Suppose this participant earned the same salary the past 5 years, and suppose she decides to quit on July 1, 2003, having already earned $200,000. We look back to June 30, 1998 (the beginning of the 5 year period) and during that 6 month calendar period she met the 401(a)(17) comp. limit as well. Therefore, here are the 401(a)(17) limits in question, which this participant exceeded each period.

1998 (June 30 - December 31 - 6 months) - 160,000

1999 (full year) - 170,000

2000 (full year) - 170,000

2001 (full year) - 170,000

2002 (full year) - 200,000

2003 (January 1 - July 1 - 6 months) -200,000

Now, can we take these six amounts (as they total five completed years) and divide the total by 5 to get average compensation? We would get average compensation of $214,000. Can this be done? Or would this be violating the 401(a)(17) comp limit? If so, would we instead need to prorate the comp limit for the 6 month period in 1998 and the 6 month period in 2003 (therefore 80,000 in 1998 and 100,000 in 2003)?

I know this is LONG, but I would appreciate any advice. I have been unable to find clarification in the regs. Thank you!

I have a one man straight profit sharing plan. (The employer is an S-Corp.) The employer contributed $46,200 to the profit sharing plan. The contribution was put in before the end of the plan year. What options are available to him to correct this? Also, where would this be shown on form 5330, if excise tax is applicable? (Also, someone had told me that the deductibility limit for a one man plan is the lesser of 25% of pay or $40,000...is this true?)

Thank you for all your help!

If an employer receives demutualization proceeds from an insurer and uses the proceeds to implement a premium holiday for its employees, do the participants have any sort of vested right to the premium holiday? For instance, if an employer implements a premium holiday and a participant leave, does he or she have a claim with respect to the remainder of the demutualization proceeds attributable to him or her? Is there any guidance on this?

Thank you in advance for your insight!

Here's some stuff I received via email -- looks like good information/advice:

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The next time you order checks have only your initials (instead of first name) and last name put on them. If someone takes your check book they will NOT know if you sign your checks with just your initials or your first name but your bank will know how you sign your checks.

When you are writing checks to pay on your credit card accounts, DO NOT put the complete account number on the "For" or "Memo" line. Instead, just put the last four numbers. The credit card company knows the rest of the number and anyone who might be handling your check as it passes through all the check processing channels won't have access to it.

Put your work phone # on your checks instead of your home phone. If you have a PO Box use that instead of your home address. If you do not have a PO Box use your work address.

Never have your SS# printed on your checks (DUH!) -- you can add it if it is necessary. But if you have it printed, anyone can get it.

Place the contents of your wallet on a photocopy machine, do both sides of each license, credit card, etc. You will know what you had in your wallet and all of the account numbers and phone numbers to call and cancel.

Keep the photocopy in a safe place. I also carry a photocopy of my passport when I travel either here or abroad.

We've all heard horror stories about fraud that's committed on us in stealing a name, address, Social Security number, credit cards, etc. Unfortunately I, an attorney, have firsthand knowledge because my wallet was stolen last month. Within a week, the thieve(s) ordered an expensive monthly cell phone package, applied for a VISA credit card, had a credit line approved to buy a Gateway computer, received a PIN number from DMV to change my driving record information online, and more.

But here's some critical information to limit the damage in case this happens to you or someone you know:

We have been told we should cancel our credit cards immediately. But the key is having the toll free numbers and your card numbers handy so you know whom to call. Keep those where you can find them easily.

File a police report immediately in the jurisdiction where it was stolen, this proves to credit providers you were diligent, and is a first step toward an investigation (if there ever is one).

But here's what is perhaps most important: (I never even thought to do this).

Call the three national credit reporting organizations immediately to place a fraud alert on your name and Social Security number. I had never heard of doing that until advised by a bank that called to tell me an application for credit was made over the Internet in my name. The alert means any company that checks your credit knows your information was stolen and they have to contact you by phone to authorize new credit. By the time I was advised to do this, almost two weeks after the theft, all the damage had been done.

There are records of all the credit checks initiated by the thieves' purchases, none of which I knew about before placing the alert. Since then, no additional damage has been done, and the thieves threw my wallet away this weekend (someone turned it in). It seems to have stopped them in their tracks.

The numbers are:

Equifax: 1-800-525-6285

Experian (formerly TRW): 1-888-397-3742

Trans Union: 1-800-680-7289

Social Security Administration (fraud line): 1-800-269-0271

Can someone tell me the latest news regarding required minimum distribution calculations from Defined Benefit plans?? Have regs been finalized yet?? Thanks.