katieinny

I saw no problem in telling the employer that they could force direct rollovers for their active employees from the terminating profit sharing plan to the company's 401(k) plan, until I realized that the PS plan has several distribution options, including annuities. Now I'm not so sure. Are they safe to force the rollover if the 401(k) plan offers the same annuity options? If the 401(k) doesn't have the same annuity options, I would assume that they can only offer the direct rollover as an option, but not force it.

I was hoping to get some thoughts under "plan corrections," but nobody responded, so I'm giving it a shot here. We know the property has to come out of the plan. The HCE participant is over 70, so we're thinking that perhaps he can take a distribution of the property and pay tax on the market value. But, we'd like some thoughts on whether taking the distribution would be a prohibited transaction.

We already know that non-U.S. property should not be in the profit sharing plan and we know it needs to come out. Of course, the plan could sell the property to someone who is not a party-in-interest at market value, which would avoid the prohibited transaction penalty. However, if there isn't a buyer, we're thinking that another option might be to distribute the property to the participant (he is over age 70 1/2) and have him pay income tax on the full value as another option to avoid a P.T. Has anybody run into this before?

Oh, for Heaven's Sake! Of course. Thanks for getting me back on the right track.

I feel pretty silly asking this question, but my old brain isn't functioning as well as it used to. Does the ER have a 25% of compensation contribution limit to a 403(b), similar to a profit sharing plan?

Okay! Especially good news that the tax-free benefit is not lost even if the assets have to pass through the plan before getting to the spouse. Thanks for definitively answering the "who should the beneficiary be" question. Now, we'll have to find out if the check was payable to the employer or the plan -- and if to the ER, is there a PT as MoJo suggested. I hadn't thought of that possibility.

Excellent! Thanks for your help, GMK.

At some point, a key employee may want to sell his one or two shares of employer stock (owned outside the plan) to the company's ESOP. I can't think of any reason why the ESOP couldn't purchase the shares from him at normal fair market value, but thought I would toss this out there in case I'm missing something.

I've often read articles about how much insurance can be in a plan, how PS 58 costs are handled, etc., but this is the first time I've run into a case where a participant actually died with a life insurance policy in the plan. I don't know any details about whose idea it was, how the premiums were paid, etc. What I do know is that the spouse expected to receive the proceeds from the policy, but instead they were paid to either to the employer or the plan (that's still being sorted out, I guess). So it seems that somebody didn't set up the policy correctly. If she had been the beneficiary, at least some of the proceeds would have come out to her tax free. If the proceeds went into the plan, I'm thinking that she will still get the proceeds, but they will have to be rolled over to keep them tax deferred, but ultimately tax will be paid at some point. If the employer was the beneficiary, she'll never see a dime. I guess the choice of beneficiary is determined by who is putting the policy in place. If it's the employer, the employer is expecting to get a benefit when the participant dies, so the employer is named as beneficiary. If it's the participant, he or she is probably expecting a loved one to get the benefit, who, hopefully, will not have to pay tax on the entire distribution. I would like to get some feedback from my peers on life insurance beneficiary designations when the policy is in a qualified plan. Since I mostly deal with deferred compensation plans, let's stick with those. Thanks for your help.

The employer last updated their 5305-SEP in 2002 (revision date 3-2002), which is considered to be updated for EGTRRA. Now that we are doing a VCP submission due to contribution errors, I'm wondering if the IRS will say they should have updated onto the 5305-SEP with a December 2004 revision date, or is the 2002 version okay to submit with the filing? If they do have to adopt the 2004 version, does that increase the filing fee since we would be adding on a non-amender problem along with the contribution errors?

I was hoping for that answer. Thanks for your responses. I'll start looking under 318 for something to show the client.

A small S-corp is establishing an ESOP and the question came up about the employees' new ownership in the company due to the ESOP making them ineligible to participate in the cafeteria plan. I hope there's an exception in cases where the ownership is due to the ESOP. Can someone point me in the right direction?

Thanks, ERISA, for taking time to respond. It helps to get my thoughts confirmed. Others in the office don't do plan work, so I can't bounce things off anybody.

A former executive continues to receive an annual W-2 based on income he is receiving under a salary continuation agreement. He retired a couple of years ago. I don't think he is eligible to continue getting SEP contributions based on that continued salary, even though it looks like he is getting wages just like every other employee, because it's not based on active employment. However, the question came up recently, so I want to be sure. Similarly, a different former executive's spouse has been getting W-2 income, presumably because she continues to get a portion of his income after he died. She would also not be entitled to a SEP contribution for the same reason -- there is no active employment taking place -- correct?

A not-for-profit has been operating a SEP plan for many years. The director left a couple of years ago, but continued to receive W-2 compensation under a salary continuation agreement. Should SEP contributions have continued based on her continued salary?

Lou: Maybe the fact that the 2 principals from Company B are now partners in Company A is messing me up, but I am definitely confused. My brain tells that a controlled group exists, despite that fact that this was an asset purchase. I'm told that Company B still exists and that employees are still getting paid by Company B. But I'm also told that Company A controls Company B. So while I've confirmed that it was an asset sale, it seems to have the characteristics of a stock sale. Company A is trying to figure out what its obligations are to Company B employees. If there is no controlled group, and Company B continues to pay the employees, that would imply that Company A has no obligations to the Company B employees, ever.

Corporation A buys the assets and goodwill of Company B. Company B still exists, but Company A controls it, so a parent/subsidiary controlled group now exists. Company B has a deferral only plan that I think should be terminated. Since a controlled group was created, Company B should be an adopting ER under Company A's Safe Harbor 401(k) plan (by when should they do that?). I understand that there is a transition period for coverage testing, but I'm confusing myself with all the other things that are involved and my brain is going circles. Maybe I'm making it more complicated than it needs to be. For example, when a company's assets are purchased, the EEs of that company can be considered as brand new EEs and not be included in the purchaser's plan until they meet eligibility. So, company B becomes an adopting ER of Company A's plan, but Company B's EEs will not receive a benefit for X number of months (unless Company A decides to be generous and include them immediately). Am I on the right track?

An employer realized that he has consistently been using compensation from the prior year when calculating the annual SEP contribution. For example, when he made the contribution for 2010 in early 2011, he used 2009 compensation. This has been going on for many years -- using comp from one year earlier than he should have. In mulling this over, I thought that since the contribution is discretionary from year to year, and nothing has gone out to participants stating that "you will be receiving a 6% contribution this year," the compensation that was used might not be an issue. The employer says that typically, wages have increased slightly each year, so instead of getting a 6% contribution based on 2010 compensation, the employee probably got a 5.25% contribution. Any thoughts from my peers?

Gary: Does a frozen DB plan preclude a small not-for-profit from setting up a SEP, as long as they don't use the 5305? They also have a non-ERISA 403(b).

jpod -- you were right -- it was rejected.

Bird: I see your point. I will suggest that they allocate any remaining assets on a pro-rata basis at the end of every year. Thanks for your input.

This seems pretty straightforward to me, but I would feel better getting confirmation from others in the industry. A plan has been getting income as a result of a Revenue Sharing Agreement with their TPA. They have set up a separate account to receive the income and have used the account to pay administrative expenses. However, the assets now exceed the amount of the expenses, so I'm thinking they should simply allocate whatever's left over to plan participants, probably on a per capita basis. They should probably do that at the end of every year. Sound reasonable?

In this case, the employer switched providers sometime during the 2008/2009 plan year (plan year is 10/1 -- 9/30), so the effective date of the restatement reverted to the first day of the plan year, 10/1/08, which happened to be just 3 weeks after the employee was rehired. Of course, there are differences between the two prototypes. I'm betting that nobody even thought about how the language in the underlying basic plan document might differ from the prior document's language. Typically, the focus would be on making the right selections in the adoption agreement. Who knows if the employer was even thinking about restating the plan when the employee was rehired. The subject might not have come up for several more months. I agree with GMK's response to follow the plan document in effect at the time the employee was rehired, but since that means that the employee would not enter the plan on his rehire date, and would not get a contribution for the 2008/2009 plan year, I was looking for some support. I would like to find something in the regs that would support that position as well, but it seems like such a unique set of circumstances that I'm afraid I won't be able to find anything that definitively says the document in place at the time of rehire prevails.

There's more to the rehired employee question that came up last week. I didn't have all the information then. An employee is rehired after an 11 year separation in September 2008. He was a participant when he left in 1997, but 0% vested. The current plan document (effective date of 10/1/08) says rehired employees who were participants when they left shall enter the plan immediately on the rehire date. The prior document that was in effect when the employee was rehired says that anyone gone 5 years or more shall have to meet the eligibility requirements (1 year of service) again. The current document took over just 3 weeks after the rehire date. Naturally, the employer's position is that the document that was in effect on the rehire date should prevail. It turns out that the extra year's contribution is several thousand dollars, so I would like to get some thoughts from my peers. Thanks for your help.

The plan is a 401(k) plan. The employee was first hired in 1995, term'd in 1997 and was then rehired in 2008. He met the eligibility requirements when he term's in '97, but was 0% vested. I don't have a lot of first hand information other than e-mails passed along to me by the investment advisor (with permission). The employer says the TPA wants them to put $15,000 into the employee's account to restore his balance. They are not happy about that. I'm guessing that $15,000 was forfeited due to a deemed distribution following the termination. I have a copy of the adoption agreement, but not the basic plan document. The employee has met the one-year/1000 hours requirement since his rehire and has re-enterd the plan. Whether or not the plan uses the one-year hold out rule or the rule of parity, wouldn't the 5-year break-in-service rule wipe the slate clean?